It takes a lot for the market to push a stock down more than 34% in a single trading day. However, that is precisely what happened last week with shares of Fossil Group (NASDAQ:FOSL). The specialty watch maker's stock lost more than a third of its value recently after projecting a dismal outlook for its full-year sales. Fossil now expects fiscal 2015 earnings in the range of $4.15 to $4.75 per share, down from its prior guidance for profits in the range of $4.80 to $5.60 per share.
This blow to the company's profitability comes on the heels of disappointing third-quarter results. And that's putting it nicely, considering Fossil posted a 45% decline in quarterly earnings last week. For the period ended Oct. 2015, Fossil reported a profit of $1.19 per share, down from $1.96 per share in the year-ago period. The company blamed weak watch sales of its namesake brand for the shortfall.
"Our branded jewelry and leathers business increased but were more than offset by a decline in our watch business, reflecting general weakness in the category," explained Kosta Kartsotis, Fossil Group's chief executive officer. Watch sales plummeted 17% in the quarter. This, in concert with the company's bleak outlook for its fiscal 2015 year, sent investors running for the exits.
Fortunately, all is not lost. In fact, the recent sell-off could offer long-term investors an attractive entry point into a promising turnaround story.
A turnaround in the works
Admittedly, Fossil's biggest setback in the quarter (outside of currency headwinds) was its watch business. "The traditional watch category remains sluggish, as tech-enabled devices offer consumers additional choices," according to Mr. Kartsotis. This makes sense given the influx of connected watches, including big-ticket products such as Apple's (NASDAQ:AAPL) Apple Watch.
The tech titan hasn't disclosed sales figures for its Apple Watch, but estimates from Canalys suggest Apple may have shipped around 7 million units since launching the device six months ago. Wearable devices such as smartwatches are still a small market, but they are growing at a fast clip. To Fossil's credit, the company has already rolled out a plan to break into the wearables space.
In fact, the watchmaker announced plans last week to acquire connected device maker Misfit for a cool $260 million. This is a smart move for Fossil because it will give the traditional watchmaker a "scalable cloud and app platform, a world-class software and hardware engineering team, a native wearable technology brand and a pipeline of innovative products."
Fossil plans to scale Misfit's wearable technology across its more traditional brands over the year ahead. Down the road, this could also give Fossil a direct channel into new addressable markets, including potential enterprise partnerships in the areas of music and fitness.
Ultimately, this is a proactive move by the company to tackle its weaknesses and lay out an actionable plan for turning around slumping sales in its core business. Therefore, I believe the double-digit sell-off last week was overblown.
Bargain hunters rejoice
With Fossil Group's stock barely trading above its 52-week low, this is a perfect time for bargain hunters to scoop up this retail name at bargain bin prices. Shares are trading around $34 apiece following last week's sell-off. However, the stock looks particularly cheap considering its price-to-earnings growth rate of 0.49, which is well below the industry average PEG ratio of 2.03 today.
Moreover, shares of Fossil are currently trading at just 6 times next year's earnings. For comparison, Fossil's competitor Guess Inc's (NYSE:GES) stock trades at roughly 18 times future earnings. Shares of Guess also boast a pricey PEG value of 3.54 -- significantly above both Fossil and the industry average.
This tells us that Fossil's stock is cheap today. The recent sell-off therefore creates a favorable entry point for long-term investors who believe in the company's management and its freshly inked deal with Misfit. Ultimately, these catalysts could help reignite watch sales for the retailer, and help revive the stock in the year's ahead.