Fossil Group stock dived by more than 27% to as low as $29.06 per share after the watchmaker posted results that were worse than expected. Sales tumbled 9% to $659.8 million, missing the consensus estimate of 667 million. Earnings came in at 12 cents per share, compared to the consensus of 14 cents and management’s guide of 5 cents to 20 cents per share. And as if those misses weren’t enough, management also significantly cut their guidance for the year.
Fossil struggles with wholesale softness
Analysts have been debating the threat posed by wearables like the Apple Watch and other smartwatches for quite some time, and Fossil management said they expect the second half to bring recovery as they roll out their own line of wearables. For now though, analysts are concerned about the fact that they significantly lowered their guidance for sales and earnings, slashing 150 basis points off the former and 250 basis points off the latter.
Piper Jaffray analyst Erinn Murphy noted that the reduction in guidance stems from pressure in the wholesale channel as retailers reduce buying in traditional watches. She also said Fossil’s gross margins are being pressured by higher off-price channel sales because inventory levels are higher, and it is dealing with higher operating expenditures as it plans the wearable launches for later this year.
Fossil management also explained that wearables are stealing share from them in the traditional watch category, although they’re confident that their own line of wearables will offset these share losses. They plan to emphasize the fashion element associated with their brand over the fitness element highlighted by brands like Fitbit.
Murphy sees downside risks for now, however, so she reduced her price target from $29 to $25 per share and reiterated her Underweight rating on Fossil stock.
Fossil to launch 100+ new products
Cowen and Company analyst Oliver Chen and team also cut their price target, pushing it down from $41 to $30 per share while maintaining their Market Perform rating on the stock. They note that management said consumers have been responding well to the limited launch of the Fossil Q collection so far. They said the Fossil Q Founder and other new wrist devices are the top two best-selling SKUs right now.
The company has a busy year planned with more than 100 wearables products planned in 40 countries by the time this year’s holiday shopping season rolls round.