Fossil's Shares Tumble As Earnings Miss the Mark

Watchmaker Fossil posted results that fell short of the market's expectations on Tuesday, causing shares to retreat by 13% in after-hours trading. For the fourth quarter of 2014, sales of $1.07 billion were just shy of analysts' target of $1.12 billion, and adjusted earnings per share of $3 missed the forecasted mark of $3.07.


Fossil press release.

International growth is bolstering those figures, even though China "continues to be challenging" according to management. India, Japan, Australia, and the continent of Europe have strengthened in recent quarters, showing that Fossil's marquee brands are coveted even outside of the U.S. What's more is that management intends to "pivot" spending toward things like marketing now that infrastructure outlays are tapering off. This should produce a bigger bang for the buck in 2015 sales.

With regard to infrastructure, Fossil opened a net of 12 new stores, bringing the company-owned store count to 593 at quarter-end. The company aims to reduce its North American store footprint in 2015 and open a net total of 10 stores, most of which will be international.

What's ahead

Fossil's outlook for the next few quarters is uninspiring, which is another reason the stock sold off heavily. Management cited currency headwinds as the most daunting challenge at this point. From Secor:

That much larger 2014 headwind will now expand further as we move into 2015, given most of our earnings growth will come from our international businesses and our gross margins will be further affected by the rapid strengthening of the U.S. dollar. Based on prevailing exchange rates, we estimate that the net impact on our 2015 results, inclusive of hedging program offsets, will be roughly $1.20 per share.

As a result, Fossil expects 2015 first-quarter revenue to be down between 5.5% and 7.7% and earnings per share to be in the range of $0.59 to $0.69. For the year, revenue projections are in the range of between a 1% increase and 3% decrease. Earnings per share are projected to come in between $5.45 and $6.05. The latter figure compares to analysts' expectations of $7.59 in earnings per share before the closing bell on Tuesday.

For investors, it's important to note that predicting or precisely hedging currencies is a next-to-impossible art for a management team, and it's the underlying business drivers that we should focus our attention on. Currency headwinds aside, management stated that the research firm Euromonitor believes the overall watch market should grow at a 6% clip over the next few years. Fossil, in turn, should achieve at least that growth figure based on volumes and potentially reach into double-digit territory.

Let's get digital

In the midst of a challenging retail market, Fossil finds itself pushing the gas pedal on overseas expansion. Meanwhile, the company that took the mobile phone market by storm, Apple , is disrupting the primary industry in which Fossil competes with the soon-to-be released Apple Watch. Like the inner workings of a clock, there are a lot of things in motion right now for this company.

Yet Fossil CEO Kosta Kartsotis seems to be making smart moves with an emphasis on long-term success. On Tuesday, his company announced a 10-year deal with Kate Spade to design, develop, and distribute Kate Spade New York watches through 2025. And Kartsotis is looking to where the industry's headed, stating on the call that he's thinking about how every Fossil product could have technology like sensors or communications capabilities embedded. To accomplish this, he's chosen to work with Google and Intel, perhaps the best two tech companies one could find for this type of wearable computing futuristic project.

Fossil's latest quarter shows that the company will hit some speed bumps as it goes global, downloads new technology, and invites new partners into its portfolio. But these are the steps it needs to take to become the lifestyle brand it aims to be.

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The article Fossil's Shares Tumble As Earnings Miss the Mark originally appeared on

Isaac Pino, CPA has no position in any stocks mentioned. The Motley Fool recommends Apple, Fossil, Google (A shares), Google (C shares), and Intel. The Motley Fool owns shares of Apple, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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