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Fossil (FOSL) Tops Q4 Earnings, Stock Down on Weak Sales

Fossil Group Inc.FOSL delivered better-than-expected earnings in the fourth quarter of fiscal 2016, but sales lagged the Zacks Consensus Estimates. Shares dipped 0.5% after the market closed on Feb 14, as Fossil Group's results did not meet expectations.

In the fourth quarter of fiscal 2016, Fossil reported adjusted earnings of $1.36 per share, which exclude restructuring charges of 21 cents and purchase accounting costs associated with Misfit, Inc. of 8 cents per share. Adjusted earnings declined 23.2% compared to last year's adjusted earnings of $1.77, largely due to lower sales, gross margin and currency headwinds. The bottom line however surpassed the Zacks Consensus Estimate of $1.21 per share by 12.4%.

Fossil Group, Inc. Price, Consensus and EPS Surprise

Fossil Group, Inc. Price, Consensus and EPS Surprise | Fossil Group, Inc. Quote

Quarter in Detail

This global consumer fashion accessories maker's net sales of $959.2 million in the fourth quarter lagged the Zacks Consensus Estimate of $972 million by 1.3%. Net sales decreased 3% from the prior-year quarter, primarily due to currency headwinds, a decline in the company's multi-brand licensed watch portfolio and challenging environment for the traditional watch category.

The sales decline was in line with the company's expectation of down 2% to up 4%. Adverse currency movements had a negative impact of $18.3 million on fourth-quarter sales. Category wise, the company witnessed declines in leather and jewelry business.

Despite a challenging and a disruptive environment, Fossil and Skagen brands both grew during the quarter. The wearables product category also had a steady stream of customers which drove growth.

On a constant currency basis, net sales declined 2%. While sales declined in Americas and Europe, it gained in Asia. Total watch business declined 2%, while it remained flat in constant dollars compared to last year.

Of late, Fossil has been witnessing general weakness in the watches category. The company noticed that tech-enabled watches have been significantly affecting traditional watch sales. The company benefited from newer brands such as Kate Spade, New York and Tory Burch during the quarter. While overall launches declined in the quarter, the sequential trend improved significantly with the expanding wearables offering. The company continues to expect weakness in this category.

Sales of Jewelry and leathers both declined 5%, on a constant currency basis. Notably the sales of leathers have persistently been weak as customer response to the assortment continues to put pressure on results.

Global retail comps dropped 7% year over year during the quarter with declines in all product categories. Positive comps in Asia were more than offset by declines in Europe and the Americas.

Gross margin declined 200 basis points (bps) to 51.0% due to unfavorable currency impact and higher promotional activity, primarily in the outlet stores and higher mix of lower-margin product.

Moreover, operating margin declined to 6.9% in the quarter, down 210 bps from 9.0% in the year-ago period, primarily due to lower sales and gross margin, currency headwinds, despite lower operating expenses.

In fact, Fossil's shares have been underperforming the Zacks categorized Retail-Apparel/Shoe industry over the past one year. The stock declined 39.1% in comparison to the industry's fall of 13.2%. Notably, the industry is part of the bottom 5% of the Zacks Classified industries (242 out of the 265). Even the broader Retail and Wholesale sector is placed at the bottom most of the Zacks Classified sectors (16 out of 16).

Other Financial Update

At the end of the fourth quarter, the company had roughly $297.3 million in cash compared to $236 million in the preceding quarter, and debt of $610 million compared to $723 million in the preceding quarter.

Fiscal 2016 Results

Fossil reported adjusted earnings of $2.27 per share, which exclude 16 cents per share benefit from real estate transactions, offset by 43 cents per share restructuring charge and purchase accounting costs associated with Misfit, Inc. of 37 cents per share. The bottom line surpassed the Zacks Consensus Estimate of $1.92 by 18.2% but plunged 49.7% from the prior-year figure of $4.51 per share.

Net sales of $3.042 billion in the fiscal 2016 lagged the Zacks Consensus Estimate of $3.064 billion by 0.7%. Net sales decreased 5.8% from the prior-year quarter. Adverse currency movements had a negative impact of $45.4 million on full-year sales.

Fiscal First Quarter Guidance

For the first-quarter of fiscal 2017, Fossil expects loss in the range of 10 cents to 25 cents per share, compared with adjusted diluted earnings per share of 11 cents for fiscal 2016.

The company expects net sales, on a constant currency, to decline in the range of 8.0% to 11.5%. Adjusted operating margin in a range of (2.0%) to 0.0%, compared with adjusted operating margin of 2.2% for the first quarter of fiscal 2016.

Fiscal 2017 Guidance Updated

Fossil continues to expect a challenging retail environment and pressure on the traditional watch category to persist. Currency will continue to remain a headwind in 2017.

The company now expects adjusted earnings in a range of $1.00-$1.70 per share for fiscal 2017, compared with adjusted diluted earnings per share of $1.80 for fiscal 2016. Sales, on a constant currency basis, are expected in the range of a decline of 4.5% to up 2%. Adjusted operating margin is now estimated in the range of 3.5% to 5.0%.

Zacks Rank & Key Picks

Fossil carries a Zacks Rank #3 (Hold).

Some well-ranked stocks in the apparel industry include The Children's Place, Inc. PLCE , Genesco Inc. GCO and Zumiez Inc. ZUMZ .

The Children's Place sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Both Genesco and Zumiez hold a Zacks Rank #2 (Buy).

While The Children's Place carries an expected long-term earnings growth of 10.3%, Genesco and Zumiez have an expected earnings growth of 9.5% and 15.0%, respectively, for the next three to five years.

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Fossil Group, Inc. (FOSL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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