The retail industry has gone through tough times, but for high-end watchmaker Fossil Group (FOSL 1.97%), the problems have gone beyond the economic environment. Fossil Group knows it needs to change its strategy in order to return to success, but it's another thing entirely to be able to do something to make a positive change.
Coming into Tuesday's third-quarter financial report, Fossil investors were prepared for more downbeat results and tepid guidance. Fossil's results did have a few positives, but for the most part, the watchmaker goes into the holiday season knowing that a repeat of last year's disastrous results could prove to be an extinction event for the company. Let's take a closer look at Fossil Group to see what its latest numbers say about the watchmaker.
Image source: Fossil Group.
Fossil runs down
Fossil Group's third-quarter results once again showed how hard it has been for the company to gain traction, but they weren't as bad as some had feared. Net sales dropped 7% to $688.7 million, which was less extreme than the 12% decline that many of those following the stock had anticipated. Net losses of $5.4 million worked out to $0.11 per share, but that was a less extreme loss than the consensus forecast among investors for $0.28 per share in red ink.
Fossil finally got a positive contribution from foreign currency impacts. After years of a strong dollar hurting its bottom line, weakness in the greenback this quarter boosted sales by more than $10 million and pushed earnings up $0.02 per share.
In many ways, Fossil's operational numbers were similar to what we've seen in recent quarters. Sales of watches were down 3%, as strength in the new connected watch area failed to offset steeper declines in traditional watches. Leathers and jewelry both saw declines in the neighborhood of 20%, showing the particular difficulty that Fossil has had with non-watch accessories. Global retail comparable sales, including e-commerce sales, were down 6%. Fossil's gross margin was down sharply as well, falling nearly six percentage points due to lower margins from connected watches.
Geographically, Fossil saw the most difficulty in the Americas. There, sales were down 15% from year-earlier levels. Fossil particularly blamed the U.S. market in driving the decline. By contrast, Asia sales were flat compared to a year ago, and European segment top-line figures actually posted a 2% rise, aided substantially by the strong euro. Europe was helped by some early shipments that were initially planned for the fiscal fourth quarter.
What's ahead for Fossil?
CEO Kosta Kartsotis kept attention on the long-term goals for the company. "While our business and the retail environment remain challenging, we are continuing to make progress against key strategic initiatives that tell us we're on the right track," Kartsotis said. The CEO pointed to tripled sales in the wearable segment as a sign that Fossil is ready for the holiday season.
Cost reductions will be an important part of Fossil's long-term success, and the company has made gains in that area. The New World Fossil initiative has already produced 10% operating expense reductions during the quarter, and Fossil has high hopes that it can find even more savings in the future.
Still, investors have gotten used to Fossil cutting its guidance, and a new round of reductions left investors even more troubled. In the fourth quarter, Fossil sees sales declines of 3.5% to 11%, with earnings coming between a loss of $0.08 per share and a profit of $0.47 per share. For the full year, sales declines are likely to be between 8.5% and 10.5%, 2 percentage points to 4 percentage points worse than its previous projection. Full-year losses will be even worse than expected, with the range of $7.75 to $8.30 per share including $6.50 per share in asset impairments and $0.60 per share in restructuring charges.
Fossil investors didn't know how to respond to the news, and the stock nosedived again, falling 10% in in after-hours trading following the announcement. With share prices at levels last seen at the turn of the millennium, Fossil has lost the confidence of its shareholders, and only a full-fledged turnaround will restore faith in the watchmaker's future.
