Image: Fossil Group.
The retail industry has gone through some serious trouble lately, and watchmaker Fossil Group (FOSL +3.48%) came into Thursday's third-quarter financial report already having scared investors about the big declines it expected in sales and earnings. Even though fellow luxury-oriented retailers like Michael Kors (KORS +3.71%) have seen struggles of their own, Fossil's report included even more downbeat guidance for the key holiday season, and investors immediately reacted by sending the stock to fresh five-year lows.
In doing so, investors largely ignored Fossil's acquisition of wearable technology company Misfit, and Fossil's third-quarter results, which were actually better than many had feared. Let's take a closer look at Fossil, and why investors are so worried about its future.
Fossil keeps falling
Fossil Group's third-quarter results reflected the watchmaker's ongoing difficulties. Revenue plunged 14%, to $771.3 million, doing even worse than the 11% drop that investors were prepared to see. Net income took an even bigger haircut, plunging almost 45%, to $57.5 million, but the resulting earnings of $1.19 per share topped the consensus forecast for $1.13.
A closer look at Fossil's numbers shows how the strong dollar again hurt the company's performance. Fossil said that the dollar reduced its earnings by $0.40 per share. On a constant-currency basis, sales fell just 8%, with the impact of weak foreign currencies costing the company nine percentage points of revenue in Asia, and 12 percentage points in Europe. Nevertheless, even when you take out the impact of currency effects, net sales fell in every geographical region, with both the Americas and Asia suffering 10% declines. Europe held up better with a drop of just 3%.
Looking at Fossil's product lines, the watch category performed the worst, by far, with constant-currency sales falling 11%. Growth in the Skagen and Fossil brands wasn't enough to offset declines in sales in Fossil's licensed portfolio of brand-name watches, which includes watches bearing the Michael Kors name. By contrast, the leathers and jewelry segments posted gains of 3% each when you take out currency effects.
CEO Kosta Kartsotis wasn't happy with Fossil's results, even though he tried to put the spotlight on the positives during the quarter. "We are not satisfied with our overall performance," Kartsotis said, even as he noted how Fossil is moving to become a leader in watch-based technology.
Will Misfit fit?
Fossil's announcement that it will buy wearable-technology company Misfit is consistent with this move toward embracing smart-watch trends. According to Kartsotis, "Our acquisition of Misfit will ignite our connected accessories initiative by immediately giving us a technology platform that is scalable across our portfolio of brands, a world-class engineering team focused on developing innovative technology in the accessories space, and a brand that is native to the wearables space."
Fossil's guidance for the remainder of the year crushed any hopes that a turnaround would take place this holiday season. Fossil slashed its full-year predictions even further than it did last quarter, now expecting GAAP sales to fall 8% to 10.5%, and earnings to come in between $4.15 and $4.75 per share. Even after adjusting for the dollar's strength, restructuring charges, and other one-time items, guidance for the holiday quarter for sales to fall between 2% and 11% and produce adjusted earnings of $1.40 to $2 per share fell short of what most investors following Fossil had wanted to see.
Within minutes after the announcement, Fossil shares fell more than 10% in after-hours trading, showing just how disappointed investors were in its forward guidance. With Fossil having come so far in recent years to build itself up as a dominant brand in the watch space, its fall from grace has been surprising. For now, investors see no relief in sight, and they'll likely have to wait until 2016 at the earliest to see strategic moves like the Misfit acquisition pay off.
