A month has gone by since the last earnings report for Fossil Group (FOSL). Shares have lost about 14.2% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Fossil Group due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Fossil Beats Q3 Earnings Estimates, Sales Miss
Fossil Group released third-quarter 2018 results, wherein the bottom line improved significantly from the year-ago period and also marked its sixth consecutive beat. However, the top line remained soft, owing to persistently soft traditional watch sales. Also, sales in the leather and jewelry categories failed to impress.
Q3 in Detail
Fossil's adjusted earnings came in at 19 cents per share, which fared much better than the Zacks Consensus Estimate of a loss of 11 cents. In the year-ago period, the company posted a loss of 11 cents, which included restructuring charges of 8 cents per share. Further, Fossil's year-over-year bottom-line growth was hurt by currency movements by 1 cent. Otherwise, bottom-line growth was fueled by improved margins and lower interest expenses.
Net sales of $608.8 million declined 11.6% year over year and also fell short of the Zacks Consensus Estimate of $633 million. Currency hurt net sales by $7.2 million. On a constant currency (cc) basis, worldwide net sales tumbled 11%. Results were largely impacted by store closures and business shut downs. Further, the company witnessed lower watch sales in Americas and Europe, partly offset by a slight rise in Asia sales.
Underlying weakness in the company's traditional watch category across all geographies along with soft leather and jewelry business marred the top-line performance. Nevertheless, connected watch sales grew across all regions and surged 30% year over year, largely gaining from Generation 4 product's successful launch across several brands. In fact, smartwatches constituted nearly 18% of the company's total watch sales, up from 13% in the year-ago period.
Fossil progressed quite well in the digital space, as global direct e-commerce sales increased double-digits yet again this quarter. However, the company's direct-to-consumer sales (e-commerce plus retail stores) fell 3% due to soft outlet sales.
Global retail comps went down 3%, owing to softness across all categories. Region wise too, comps declined in Americas and Asia, owing to Fossil's outlet stores. This was somewhat made up by higher comps in Europe.
Moving on, gross profit increased 2.1% to $326.5 million. Gross margin expanded 720 basis points (bps) to 53.6%, courtesy of lower markdowns and promotions, improved mix, favorable year-over-year comparison related to an inventory valuation reserve, currency movements, and margin enhancement efforts stemming from the company's New World Fossil ("NWF") plan.
The company posted an operating income of $22.6 million against a loss of $0.5 million incurred in the year-ago quarter. The upside was backed by lower operating expenses, enhanced gross profit and positive effects from currency movements. This was somewhat negated by lower sales.
Performance Based on Business Categories
Category wise, sales in the watches segment declined 11.8% to $486.5 million in the quarter. Sales in the jewelry and leather businesses also fell 12.8% to $66 million and 12.4% to $41.8 million, respectively.
Region wise, sales dropped 12.7% in the Americas to $269.1 million, mainly driven by weak sales in the United States.
Sales fell 16.1% in Europe to $207.5 million. The downside was mainly caused by weak Eurozone sales, and softness in Eastern Europe and the Middle East distributor markets. France, Germany and the U.K. witnessed maximum downsides.
Net sales from Asia slipped close to 1% to $132.2 million as improvements in China, India, Hong Kong and South Korea were countered by double-digit declines in Australia, Japan and Taiwan.
At the end of the quarter, the company had cash and cash equivalents of $236.1 million, long-term debt of $269.1 million and shareholders' equity of $529.6 million. Additionally, the company expects incurring capital expenditures of nearly $20 million in 2018.
Fossil operated 485 stores as of Sep 29, 2018, including 232 full-priced accessory stores, 9 full-priced multi-brand stores and 244 outlet stores. Out of all Fossil stores, 217 are located in America, while 173 and 95 are located in Europe and Asia, respectively.
Management is focused on strategic initiatives directed toward accelerating business transformation and positioning Fossil for long-term growth. Also, the company is on track with its goals of achieving growth through innovation in the connected and traditional watches portfolio. Further, the company continues to stay focused on increasing digital capabilities to drive e-commerce. Fossil also aims at achieving cost reductions and efficiencies through the ongoing New World Fossil plan, which is expected to generate profit improvement of another $60 million in 2018 through gross margin enhancements and SG&A efficiencies.
However, negative impacts stemming from store closures and business exits are likely to dent the top line in 2018.
Fossil now expects net sales to decline 9-7% compared with a 10-6% decline projected earlier. The updated guidance includes 5% adverse impact from business exits and about 1% positive impact from currency movements.
The company expects gross margin to be 52-53% now, up from 51-52% projected earlier. Operating margin is envisioned to be 2-3% compared with the previous range of 1-3%.
Management projects adjusted EBITDA between $205 million and $230 million.
For fourth-quarter 2018, the company expects net sales to decline 16-10%, considering the negative impacts of business exits of approximately 5% and unfavorable currency movements of 1%. Gross margin is predicted to be 51.5-53.5%, whereas operating margin is envisioned to be 8-10%. Adjusted EBITDA is forecasted to be $90-$115 million.
How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -5.24% due to these changes.
At this time, Fossil Group has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Fossil Group has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.