Fossil Group to Unveil New Brands on Wearables Platform

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Owing to the rising demand of smartwatches, Fossil Group Inc.FOSL is now geared up to enrich its wearables portfolio by adding new brands to its smartwatch line-up in 2018. These new brands will be powered by Google's Android Wear and will be compatible with both iOS and Android phones. Customers can personalize watch faces, create shortcuts to play music or monitor activity goals. These brands will add to the current portfolio of five brands - Diesel, Emporio Armani, Fossil, Michael Kors and Misfit - that will offer customers touchscreen smartwatches in fall 2017. Not only this, the company is also planning to roll out new hybrid smartwatches from Armani Exchange, Chaps, Emporio Armani, Diesel, DKNY, Fossil, kate spade new york, Marc Jacobs, Michael Kors, MICHELE, Misfit, Relic, Skagen and Tory Burch in stores during the fall and holiday season.

Notably, this global consumer fashion accessories maker has launched its 2017 touchscreen smartwatch line-up earlier this year, having compatibility with both iOS and Android phones. Their designs featured full-round AMOLED displays and were thinner, sleeker, comfortable to wear and found great appeal among female customers. Fossil Group seeks to launch more than 300 connected watch styles across 14 brands by the end of 2017.

Expansion in Wearable Space

Fossil Group has been expanding its wearables supported by Google's Android Wear since it first launched its Android Wear smartwatch in November 2015. In the last 12 months, Fossil Group doubled its distribution points for its connected devices and more than doubled its sales of wearables.

The introduction of wearable technology in watches has offered ample opportunity to the company to extend its reach of brands and offer customers new functionality with accessories, including activity trackers, hybrid watches and smart watches. Fossil Group's expansion in the wearable space is benefiting the company, as the company is getting the advantage of Android's popularity and Google's technology in its watches. The acquisition of Misfit in November 2015 has provided an opportunity to integrate Misfit's software and hardware platforms in the next generation of connected accessories, thereby advancing Fossil Group's connected accessories initiative further.

The company has also connected celebrities with the wearable brands to reintroduce customers to the Fossil brand. The company expects to increase its marketing spending by over 40% in fiscal 2017 on wearables to generate awareness for the new functionality available in these fashion-first technology accessories.

Soft Sales in Traditional Watches Pose Headwinds

We note that this Zacks Rank #4 (Sell) stock has been witnessing soft sales in traditional watches for a long time now due to increased competition. Rising demand for technology in watches have also dented the demand for traditional watches. Also, volatility in sales pattern is expected as consumer preferences evolve around the globe. Also, the success of the Michael Kors brand is overshadowing other brands' performance. Moreover, in January 2016, Burberry announced that it is exiting the watch business and does not intend to renew its license agreement upon its expiration at the end of 2017, has also hurt the company's business. The company continues to expect weakness in this category in the near term. Further, sales of leathers and jewelry have persistently been weak over the last few quarters. Decline in traditional watches and weak leather business also hurt sales in the Americas, Europe and Asia regions during the first half of 2017.

Fossil Group, Inc. Revenue (Quarterly YoY Growth)

Fossil Group, Inc. Revenue (Quarterly YoY Growth) | Fossil Group, Inc. Quote

Soft Second-Quarter Fiscal 2017 Results

Fossil Group reported narrower-than-expected loss in the second quarter of fiscal 2017 on Aug 9, while sales lagged the Zacks Consensus Estimate. We note that the company has lagged the Zacks Consensus Estimate in nine out of the last 11 straight quarters, including the current one. The watchmaker also provided a bleaker outlook and slashed its earnings, sales and operating income guidance. Adjusted loss of 23 cents per share was unfavorable from the last year's earnings of 9 cents per share, largely due to a decline in the top line, lower gross margin and currency headwinds. Though connected watches helped in growing the company's sales, overall net sales decreased 13% from the prior-year quarter, primarily due to a decline in the company's multi-brand licensed watch portfolio and challenging environment for the traditional watch category. Declines in leather and jewelry business as well as unfavorable currency also led to the decline.

Share Price Performance

If we analyze the last six months' performance of the company, we note that Fossil Group's shares have declined 54.5% as compared with the industry , which has declined around 26.4% in the said time frame. On the other hand, the broader Retail and Wholesale sector has gained 9.5% in the last six months.

Bottom Line

Though the company's watches category remains sluggish, we are impressed that the company's connected watches have helped in growing the company's sales. In fact, the company remains confident that wearables have the ability to help mitigate the ongoing softness in the traditional watch category. The company also focuses on the New World Fossil restructuring program along with growth in the company's core watch business and product expansion. Fossil Group is also looking to exit underperforming stores to generate savings and drive growth.

Key Picks

Some better-ranked stocks in the apparel industry include The Children's Place, Inc. PLCE , Canada Goose Holdings Inc. GOOS and The Gap, Inc. GPS . All the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

While The Children's Place has an expected long-term earnings growth of 9.0%, Canada Goose and Gap have an expected earnings growth of 34.1% and 8.0%, respectively, for the next three to five years.

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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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