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Fossil's Latest Results Point to a 2016 Turnaround

By Dan Caplinger - Feb 16, 2016 at 7:13PM

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The watchmaker posted much better holiday results than investors had expected.

Image source: Fossil Group.

Watchmaker Fossil Group (FOSL 1.86%) entered 2016 on a down note, and coming into Tuesday's fourth-quarter financial report, Fossil investors weren't sure whether the company would be able to overcome some of the hardships that have hit the luxury retail market lately. Just as Michael Kors (CPRI 1.16%) had suffered a massive slowdown in its growth trends during much of 2015, Fossil found itself facing competitive pressures from wearable technology as well as sluggishness in the upper end of the retail industry more generally. Nevertheless, Fossil's results were much better than investors had expected, and some now see the watchmaker putting together a turnaround for 2016. Let's look more closely at what Fossil Group told investors in its report and what's ahead for the watchmaker for the rest of the year.

Fossil blows out expectations
Fossil Group's fourth-quarter results weren't necessarily all that ideal on their face, but they still easily exceeded the low expectations that investors had for the watchmaker. Net revenue fell 7% to $992.5 million, but that was only about half the 13% sales decline that most of those following the stock had thought Fossil would report. Similarly, net income dropped by more than half to $70.1 million, but the resulting earnings of $1.46 per share were $0.16 better than the consensus forecast among investors.

Looking more closely at Fossil's numbers reveals some important information about the holiday quarter. The weakness in foreign currency markets once again held back Fossil's results. On a constant currency basis, sales dropped just 2%, and earnings would have been $0.28 per share higher without the dollar's strength.

Fossil's performance was dramatically different in various parts of the world. Europe saw a 3% rise in revenue on a constant-currency basis that was hit by 10 percentage points of dollar-related pressure. Sales in the Americas were down 5% in dollar terms, but Asia took the biggest hit, reporting 15% lower revenue offset by just 6 percentage points of currency pressure.

From a product standpoint, Fossil's leather products performed the best, posting a constant currency gain of 4%. Jewelry sales were flat on a currency-adjusted basis, but watches fell 2% even if you take out the impact of 5 percentage points of dollar-related weight pulling down Fossil's results. The Skagen and Fossil brands performed well, but the licensed portfolio, which includes watches that carry the Michael Kors name, offset those gains.

CEO Kosta Kartsotis put 2015 in context, looking back on the year as giving Fossil the opportunity to "remain focused on our strategic priorities to strengthen our leadership position in our core business and to extend that leadership further through our investments in wearable technology." The CEO also pointed to better digital capabilities and investments in its proprietary brands as paying off.

Can Fossil keep up the pace?
Looking forward, Fossil will continue to use its leadership in watches to expand its product lineup. It sees acquisitions playing a vital role, with Kartsotis pointing to "our acquisition of Misfit enhanc[ing] that growth opportunity, placing Fossil Group at the epicenter of the convergence of fashion and technology."

Fossil's guidance pointed to some short-term pain potentially followed by a continued rebound. The watchmaker believes that in the first quarter of 2016, sales will come in between 7% and 10%, and earnings will be between $0.05 and $0.20 per share. The earnings estimate is well below what investors had hoped to see. But for the full 2016 year, sales should be in a range of a drop of 3.5% and a rise of 1%, which is better than the current expectation for a 4% decline. Earnings of $2.80 to $3.60 per share would also be roughly in line with the $3.18 per share consensus forecast. With Michael Kors having also given favorable guidance for 2016, Fossil investors hope that the entire luxury market has finally turned and can pull up Fossil's share price to the same extent that Michael Kors investors have seen.

Indeed, Fossil shares jumped 15% within the first hour of after-market trading following the announcement. The company will still have to make efforts to execute on its turnaround plans, but the success that Fossil has shown during the holiday season gives it momentum to carry forward with growth initiatives in 2016 and beyond.

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Stocks Mentioned

Capri Holdings Limited Stock Quote
Capri Holdings Limited
$41.71 (1.16%) $0.48
Fossil Group, Inc. Stock Quote
Fossil Group, Inc.
$5.20 (1.86%) $0.10

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