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Fossil Explodes Higher on Renewed Turnaround Hopes

By Dan Caplinger - Feb 13, 2018 at 5:40PM

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Find out why the watch company sees itself being smaller but stronger in 2018.

Fossil Group (FOSL -0.40%) has worked hard to try to figure out how to get past the difficult conditions that have plagued both the retail industry at large and the watch business in particular. Strategic moves have been a necessity to get Fossil moving in the right direction, but they've also been painful for investors who've hoped to see more concrete evidence of a recovery from the watchmaker.

Coming into Tuesday's fourth-quarter financial report, Fossil investors were ready to see revenue and earnings declines, but they still wanted evidence that the watchmaker could reinvent itself in a sustainable and profitable way. Fossil's results were better than many had feared, and it offered an upbeat message that could spur further growth. Let's look more closely at Fossil Group and what's ahead for the watchmaker in the near future.

Outside of a Fossil store looking in.

Image source: Fossil Group.

Fossil gets wound up

Fossil Group's fourth-quarter results offered hope that the worst might finally be behind the watchmaker. Revenue was down 4% to $921 million, but that wasn't as bad as the more than 7% decline most investors were looking to see on the retailer's top line. Substantial one-time hits from tax law changes and various restructuring and valuation charges resulted in a GAAP loss, but adjusted net income of $31 million resulted in adjusted earnings of $0.64 per share, far above the $0.40-per-share consensus forecast among those following the stock.

Tax reform had a substantial impact on Fossil's financials. The company saw an $86.4 million charge from repatriation taxes of foreign earnings, although that figure was offset by a $52.8 million release of deferred tax liabilities for future foreign earnings. Revaluation of deferred tax assets also led to a $28.9 million charge, and valuation allowances against deferred tax assets resulted in a $44.2 million expense.

Much more important was how Fossil performed operationally. Sales declines were fairly balanced across product lines, with watch revenue down 3%, leather products seeing 6% sales drops, and jewelry and other items seeing double-digit percentage declines. Yet global retail comparable sales were up 2% from the year-ago quarter, as gains in watches outweighed the downward impact from other products.

Geographically, Fossil also saw reasonably well-balanced performance. Sales in the Americas were down 14%, with the U.S. market causing most of the damage for the company. Revenue was down more modestly in Europe and Asia, both of which reported 3% declines on particular weakness in Eastern Europe, the Middle East, and Japan.

Can Fossil bounce back?

Even with the declines in key fundamentals, CEO Kosta Kartsotis remained confident. "While sales and earnings were challenged as expected," Kartsotis said, "we generated progress toward our objectives that include driving growth in wearables across our portfolio of powerful brands, leveraging our scale to lower supply chain costs, increasing our digital capabilities, and continuing the transformation of our business through New World Fossil." The CEO pointed to doubled revenue from wearables products.

Looking ahead, Fossil expects to be leaner but meaner. In Kartsotis' words, "Our priorities are focused on delivering innovative wearable and traditional watch styles while improving performance in the handbag and jewelry categories and driving increases in digital sales." North America will likely remain difficult, but the company is hopeful that other considerations will offset headwinds.

Fiscal 2018 guidance points to a slow recovery. Sales will probably fall 6% to 14% this year, but the company expects its pre-tax bottom line to be between a loss of $60 million and a profit of $40 million. First-quarter results will still be ugly, with sales declines of 6% to 12% and losses of $45 million to $70 million.

Yet Fossil investors seem to be happy with the news, and the stock has soared more than 50% in after-hours trading following the announcement. Apparently, shareholders believe that a transition toward wearable technology is the best path forward for Fossil, and despite the obvious competitive pressures in that niche, the watchmaker will at least have the chance to make a stand by staying true to its core brand and product lines.

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