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Why Fossil Group, Inc. Surged 44% in February

By Asit Sharma – Mar 14, 2016 at 3:30PM

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The owner of fashion watch brands has struggled in recent years, but enjoyed a steep stock ascent last month on stable earnings and investor endorsement of its near-term business strategy.

Image source: www.fossilgroup.com

What: Watch and wearable device maker Fossil Group,'s (NASDAQ: FOSL) shares rallied 43.9% during the month of February, according to data from S&P Global Market Intelligence.

So what: The last couple of years have not been easy ones for the Fossil. From January 2014 to January 2016, Fossil stock lost nearly 75% of its value due to declining watch sales and weaker earnings. Fossil's fourth-quarter 2015 earnings report, coupled with management's 2016 outlook, changed this narrative, at least temporarily. Fossil reported revenue of $992.5 million, a nearly 7% sales decline, and diluted earnings per share, or EPS, of $1.46, less than half of the prior year's $3.00 per diluted share. However, investors were expecting much softer performance, and the stock jumped forcefully up its price chart in response.

Overall, the fourth quarter was one of mixed fortunes, as strength in the watchmaker's two primary brands, Fossil and Skagen, was offset by foreign currency translation, as well as softer sales in the company's licensed brand portfolio, which includes Chaps, Kate Spade New York, Michael Kors, and Adidas Originals, among other well-known names.

Fossil's outlook for this year also provided investors a reason to surmise that recent selling may have been overdone. Management is forecasting 2016 diluted EPS of $2.80 to $3.60, which will be determined by the revenue outlook range of between a 3.5% decrease and an increase of 1%. By comparison, last year Fossil achieved diluted EPS of $4.51, so while these numbers aren't stellar guidance, they do represent stabilization of Fossil's financial performance.

Now what: Shareholders have coupled enthusiasm for Fossil's earnings reset with optimism about the company's strategic direction. Management reported that its new line of smart watches and activity trackers, dubbed Fossil Q, received a strong retail response in the fourth quarter. Additionally, late last year, the company acquired wearable technology start-up Misfit for $260 million.

Melding tech-infused products with Fossil's fashion acumen throughout its owned and licensed brand portfolios should expand the company's addressable market. In fact, CFO Dennis Secor pointed out on the company's earnings conference call that the wearable technology market is expected to grow at a compounded annual growth rate, or CAGR, of 36%, to reach a total of $45 billion by 2019.

To gain its fair share of this market, Fossil will have to invest considerably in its Fossil Q line as well as in the transfer of Misfit's technology into its retail watch offerings. The company has indicated that the Misfit acquisition will be dilutive to earnings in 2016 (as opposed to being accretive). And management intends to continue to give up part of Fossil's operating margin to advance both its wearables push and traditional watch sales. Judging from the recent stock rebound, Fossil's supporters don't mind the sacrifice of some near-term profits -- they seem to believe it's necessary in order for the company to prosper.

Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends Fossil. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Fossil Group Stock Quote
Fossil Group
FOSL
$4.88 (2.31%) $0.11

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