Fossil Stock Skyrockets in 6 Months: Wearables a Major Driver

Fossil Group Inc.FOSL is gaining momentum on the back of its robust efforts to expand in the fast-growing wearables category. Apart from this, the company's New World Fossil Plan, E-commerce capabilities, diversification and restructuring actions have pushed the stock higher, outpacing the industry in the past six months. Shares of Fossil have surged 90.5%, significantly outperforming the industry 's and S&P 500 index's growth of 9.6% and 3.1%, respectively. Let's delve deeper into the factors that are driving the company's performance.

Growth in Wearables Unit Boost Stock

Fossil's wearable category has helped the company to maintain its position in the market. In fact, this global design, marketing, distribution and innovation company has been able to expand its brands and offer customers new functionality with products such as activity trackers, hybrid watches as well as smart watches, following the introduction of the wearable technology.

Furthermore, Fossil is benefiting from Android's popularity and Google's technology in its watches. The company recently launched approximately 14 new hybrid and smartwatches across several brands. In the second quarter 2018, connected watch sales surged 91% year over year. Also, wearables represented roughly 20% of the company's total watch sales. Strength in wearables drove online sales, ultimately leading to a 25% rise in the company's global retail comps.

The company expects the wearables business to grow by $32 million by 2020. Additionally, it intends to add three new smartwatch formats in 2018, with a view to enhance Fossil's portfolio. It should be noted that the wearables market provides an opportunity to combine fashion and technology as well as introduce exciting products to cater to consumers' evolving needs for tech-enabled advanced connected gears. Currently, the company's wearables segment comprises renowned brands such as Diesel, Emporio Armani, Fossil, Michael Kors and Misfit.

New World Fossil Plan Bodes Well

In 2016, Fossil initiated a restructuring program called New World Fossil, which aims to transform the company, fuel efficiencies, improve margins and enhance the overall operating structure of the business to drive profitability. The company is well on track with its New World Fossil plan and has initiated the second phase of this transformation plan. Accordingly, it now focuses on prioritizing consumer market and channel opportunities, revenue optimization, delivering gross margin and productivity savings. Back by this initiative and other strategic plans, Fossil expects to achieve gross profit improvement of $200 million by 2019 end.

E-commerce Capabilities and Licensing Agreements

Fossil has been making several investments to improve digital marketing and boost online sales, both for the company's website as well as other online wholesale partners. In fact, during the second quarter of 2018, e-commerce sales soared close to 17%, buoyed by 82% growth in Asia, 18% in the United States and 13% in Europe. Further, management is optimistic regarding the company's expansion plans in the smartwatch and other digital offerings category, and expects such moves to bolster online sales, moving ahead.

Additionally, Fossil has signed various licensing agreements with several brands to further expand its size and offerings. Recently, the company announced Puma and BMW as its new licensed watch brands and plans to start their distribution in 2019. Moreover, with the renewal of Fossil's global licensing agreement with Michael Kors and Emporio Armani through 2024, the companies are able to expand the extensive line of watches and jewelry and explore other opportunities in the accessories category. It signed the global licensing agreement with Kate Spade & Company, Diesel, Ralph Lauren Corporation and many others as well, which should enhance its watch portfolio.

Factors Weighing Down Performance

Although Fossil's wearables unit has been performing impressively, softness in the traditional watches category remains a hurdle. Also, increased competition and rising demand for tech-savvy watches has been limiting traditional watches sales. Due to such factors, the company's watch sales dropped 4% in the second quarter. Further, sales of leathers and jewelry have been weak since past few quarters on account of soft demand. This trend persisted in the second quarter as well, wherein jewelry and leather business sales decreased 5% and 29%, respectively.

Bottom Line & Valuation Perspective

Fossil's solid growth in its wearables business, digital expansion and restructuring actions are expected to aid the company in mitigating the aforementioned obstacles in the long run. Additionally, some valuation metrics seems to indicate that Fossil has enough room to run on bourses.

Fossil with a price to sales ratio of 0.5 compared with that of industry's 0.8 indicates that the stock has enough upside potential. The stock also looks attractive with respect to price-to-book (P/B) multiple of 2.5x versus industry's 4.7x. A more-or-less similar picture emerges when comparing EV/EBITDA ratios. Fossil holds the edge here with an EV/EBITDA ratio of 6.1, slightly lower than 6.9 for the industry.

Currently, the company has a Zacks Rank #3 (Hold) and a VGM Score of A.

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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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