Shares of Fossil Group Inc. ( FOSL ) declined around 13% in aftermarket trading on Feb 17, as the company reported lower-than-expected fourth quarter and fiscal 2014 results due to significant currency headwinds. The company also forecasted lower-than-expected fiscal 2015 guidance.
In the fourth quarter of 2014, Fossil reported earnings of $3.00 per share, which missed the Zacks Consensus Estimate of $3.10 by 3.2% but remained within the company's guided range of $2.91 - $3.21 per share.
Earnings increased 12% from the prior-year earnings of $2.68 per share driven by improved operating income, lower outstanding share count and a non-operating gain associated with the Skagen acquisition (2012). However, currency pulled down fourth quarter earnings by 23 cents.
Quarter in Detail
This global consumer fashion accessories maker reported net sales of $1.065 billion in the fourth quarter, which missed the Zacks Consensus Estimate of $1.12 billion by 4.9%. Net sales were flat from the prior-year quarter and missed the company's guided growth range of approximately 3% to 6%. Currency had a negative impact of $32.5 million on fourth quarter sales. On a constant currency basis, net sales increased 3% to $1.097 billion in the quarter, reflecting sales growth in the company's direct to consumer segment offset by a slight decrease in the company's wholesale channel.
The increase was driven by growth in the multi-brand global watch portfolio as well as growth in the Fossil and Skagen brands. The company also witnessed significant gains in jewelry, with improvement in the leather business. The performance of watches were weak in the quarter.
Gross margin declined 60 basis points (bps) to 56.8% due to higher promotional activity, primarily in the outlet channel and unfavorable currency impact. However, this was partially offset by a favorable distribution mix.
Moreover, operating expenses decreased during the quarter, largely due to a reduction in incentive compensation, partially offset by expansion of the company's retail store and concession base, advertising royalties and investments in brand building activities.
Operating margin expanded 30 basis points to 20.9% in the quarter due to a decline in expenses. Operating margin was also within management's expectation of 19.8% to 21.3%.
The company's net sales comprise wholesale net sales (including North America wholesale, Europe wholesale, Asia Pacific wholesale) and direct to consumer sales (including company-owned retail stores, e-commerce sales and catalog activities).
Wholesale net sales , on a constant currency basis, declined 1% to $774.4 million in the fourth quarter, as increases in Europe and Asia Pacific were offset by a decline in North America.
Net sales from the North American wholesale segment declined 10% year over year on a constant currency basis to $358.4 million, primarily due to a decline in watches and leathers, partially offset by higher jewelry sales. The decline in wholesale shipments to major department stores in the U.S. along with a reduction in sales to off-price partners led to the decline.
Net sales in Europe grew 8% year over year on a constant currency basis to $296.4 million, driven by growth in watch and jewelry categories, partially offset by a decline in leather. Strong performance in the United Kingdom, Germany and distributor markets boosted, partially offset by declines in Italy and Spain.
Net sales in the Asia-Pacific segment increased 10% on a constant currency basis to $119.6 million, driven by double-digit increases in the company's watches and a slight increase in the leather business. Almost every market contributed to sales, with India, Japan and Australia contributing significantly.
Net sales of the Direct-to-Consumer segment grew 16% year over year on a constant currency basis to $322.9 million, primarily attributable to global retail store sales growth as well as an increase in global comparable store sales, with an increase in all three regions of Europe, North America and Asia Pacific. Comp sales also increased 7.7% with increases in these three regions.
Full Year Results
Earnings of $7.10 per share in 2014 missed the Zacks Consensus Estimate of $7.20 by 1.4% but increased 8.2% from the prior-year figure, driven by operating income growth and lower outstanding share count, partially offset by currency headwinds. Earnings were within the company's guided range of $7.00 - $7.30 per share.
Net sales increased 8% year over year to $3.51 billion. Net sales missed the Zacks Consensus Estimate of $3.57 billion and the growth rate slightly fell short of the company's guided growth range of 8.5% to 9.5%.
Partnership with Kate Spade & Company
In the fourth quarter, Fossil signed a global licensing agreement with Kate Spade & Company ( KATE ) for the design, development and distribution of kate spade new york watches through 2025. The first collection of watches will be launched in 2016 and will be available in kate spade new york stores as well as key retail stores globally.
Fossil has issued disappointing guidance for the first quarter and fiscal 2015.
First-Quarter 2015 Guidance
For the first-quarter of 2015, Fossil expects earnings in the range of 73 cents - 83 cents per share, where currency will negatively impact earnings by 17 cents. The guidance fell short of Zacks Consensus Estimate of $1.25 per share.
The company expects sales to decline in the range of 7.5% to 5.5%, which includes currency headwinds of 600 basis points (bps). The company expects operating margin in the range of 6% to 7% for the first quarter, which includes 200 basis points negative impact from currency.
Full Year Guidance
Fossil expects earnings in the range of $5.80 - $6.40 per share, lower than 2014 earnings of $7.10 per share. Currency translation will negatively impact 2015 earnings by $1.20 per share. The guidance fell short of Zacks Consensus Estimate of $7.54 per share.
Fossil expects sales to be down 3% to up 1% versus an 8% increase in 2014. Operating margin is likely to be in the range of 12% - 13% in 2015 versus 16.1% in 2014.
Fossil carries a Zacks Rank #4 (Sell).
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