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Fossil Group Beats on Q3 Earnings; Lags Sales; Lowers View

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Fossil Group Inc.FOSL comprehensively beat earnings in the third quarter of fiscal 2015. However, revenues missed the consensus mark due to significant currency headwinds. The company lowered its fiscal 2015 guidance and expects currency woes to continue. Shares fell more than 15% in after-market trading on Nov 12.

In the third quarter of fiscal 2015, Fossil reported adjusted earnings of $1.19 per share, beating the Zacks Consensus Estimate of $1.13 cents by 5.31%. Earnings however fell short of the company's guided range of $1.45 to $1.70 per share.

Earnings also declined 39.3% from the prior-year figure of $1.96 per share due to a decline in operating income and currency headwinds, which offset the favorable impact of a lower share base and lower taxes. Currency pulled down third quarter earnings by 40 cents. On a constant currency basis, earnings declined 16.3%.

Fossil Group Inc. (FOSL) - Earnings Surprise | FindTheCompany

Quarter in Detail

This global consumer fashion accessories maker reported net sales of $771 million in the third quarter, which missed the Zacks Consensus Estimate of $785 million by 1.8%. Net sales declined 14% from the prior year quarter, primarily due to currency headwinds and a decline in the company's multi-brand licensed watch portfolio. Currency had a negative impact of $55.7 million on third quarter sales.

Net sales decline of 14% was wider than the company's expectation of 3% to 8% decline, which excludes currency headwinds of 700 basis points (bps).

On a constant currency basis, net sales declined 8%, reflecting sales decline in all the three regions of Americas, Europe and Asia. However, on a constant currency basis, the company witnessed gains in leather and jewelry businesses, with each category growing 3% in the quarter. The Watches category declined 17% and was down 11% on a constant currency basis, reflecting general weakness in the category. The company witnessed two factors that are impacting watch sales. First, tech-enabled watches are significantly impacting traditional watches. Second, the success of the Michael Kors brand is overshadowing other brands performance. On a year-to-date basis, excluding Michael Kors, the watch business has been roughly flat in constant dollars.

Both Skagen and Fossil brands performed well despite a challenging environment, as a result of the initiatives in branding and innovation.

Global retail comps declined 1% year over year during the quarter as a comparable sales increase in Europe was more than offset by a decline in Asia and the Americas. A comparable sales increase in leathers was offset by a decline in watches and jewelry.

Gross margin declined 270 bps to 54.2% due to unfavorable currency impact, offset by the favorable impact of the company's price initiatives and improved product costing.

Moreover, operating margin declined 750 bps to 9.8% in the quarter primarily due to lower sales, higher operating expenses and a 330 bps impact from changes in foreign currencies. Adjusted operating margin was lower than the expected range of 13.5% to 15%.

Share Repurchase Update

During the third quarter, the company repurchased 0.2 million shares for $12.4 million. As of Oct 3, the company had $829 million remaining on its existing share repurchase authorizations.

Acquisition of Misfit, Inc.

Separately, the company announced that it is acquiring Misfit, Inc., a leader and innovator in technology known for manufacturing fashionable connected accessories, for $260 million. Fossil Group expects the acquisition to close before the end of fiscal 2015.

The acquisition will provide the opportunity to integrate Misfit's software and hardware platforms in the next generation of connected accessories, further advancing Fossil Group's connected accessories initiative.

Other Update

Last month, the company launched its first connected accessories product with the Fossil Q product line. This is the first generation of wearable technology products that combines fashion and functionality.

The company also launched a new Fossil website during the quarter that incorporates compelling brand content and stories and enhanced customer shopping experience and improved mobile capability.

Fourth-Quarter 2015 Guidance

For the fourth-quarter of fiscal 2015, Fossil expects adjusted earnings in the range of $1.40 to $2.00 per share, excluding 20 cents of currency impact, 3 cents of restructuring charges and 12 cents of charges related to the Misfit acquisition. The Zacks Consensus Estimate of $2.16 cents per share is higher than the guidance range.

The company expects net sales to decline in the range of 2% to 11%, which excludes currency headwinds of 500 bps. The company expects adjusted operating margin in the range of 12% to 15% for the fourth quarter, which excludes 250 basis points negative impact from currency, 20 bps from restructuring charges and 80 bps from Misfit acquisition expenses.

Revised Fiscal Guidance

Fossil has lowered the company's sales and earnings guidance on the back of weak third quarter results.

The company now expects adjusted earnings in the range of $5.60 - $6.20, down from the prior guided range of $6.20 - $7.00. The new guidance excludes currency impact of 98 cents per share, restructuring charges of 35 cents and 12 cents of acquisition related expenses. The Zacks Consensus Estimate of $5.08 cents per share is below the guidance range.

Fossil expects sales to decline 1% to 3.5%, which excludes currency headwinds of 570 bps and 125 bps impact of an extra week in fiscal 2014. This is wider than the previous expectation of a decline of 1% to 3%. Adjusted operating margin is likely to be in the range of 12.5% - 13.5%, lower than the previous expectation of 14% - 15%. The new guidance excludes 260 bps negative impact from currency, 70 bps from restructuring charges and 20 bps related to Misfit acquisition expenses.

Fossil carries a Zacks Rank #4 (Sell).

Stocks to Consider

Some better-ranked diversified retail wholesalers include American Eagle Outfitters, Inc. AEO , L Brands, Inc. LB and Genesco Inc. GCO . While American Eagle Outfitters sports a Zacks Rank #1 (Strong Buy), L Brands and Genesco hold a Zacks Rank #2 (Buy).

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AMER EAGLE OUTF (AEO): Free Stock Analysis Report

FOSSIL GRP INC (FOSL): Free Stock Analysis Report

GENESCO INC (GCO): Free Stock Analysis Report

L BRANDS INC (LB): 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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