Fossil Group: Should You Bet On Consumer Discretionary In 2023?

Published on
  • Fossil Group, Inc had a rough quarter and guides for the same, but an opportunity is brewing.
  • Discretionary stocks are expected to make a comeback in 2024.
  • FOSL stock is near a bottom and could begin to reverse later this year, assuming the outlook for earnings firms.
  • 5 stocks we like better than Fossil Group

The outlook for 2023 and 2024 earnings may lead you to believe that discretionary stocks (NYSEARCA:XLY) like Fossil Group (NASDAQ:FOSL) would be a good bet in 2023, but they aren’t; yet. The outlook for 2023 is for earnings to decline in the discretionary sector by more than 21.2% and the consensus figure reported by Factset is falling.

Get The Full Henry Singleton Series in PDF

Get the entire 4-part series on Henry Singleton in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q4 2022 hedge fund letters, conferences and more


Find A Qualified Financial Advisor

Finding a qualified financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes.

Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests.

If you're ready to be matched with local advisors that can help you achieve your financial goals, get started now.

The opportunity, dubious as it is, is an expected rebound in 2024 that would put the discretionary sector at the top of the S&P 500 but there is risk in this outlook.

The consumer discretionary sector is expected to be #1 regarding earnings growth in 2024 but is also #1 regarding earnings revisions, which are moving lower. This scenario has an opportunity, but it won’t come until much later in the year; even then, it depends on the outlook.

Merchants like Target (NYSE:TGT) and Walmart (NYSE:WMT), which both list Fossil products on their websites, have indicated a shift in inventory management that can be seen in Fossil’s Q4 results.

That shift is driven by an over-inventoried environment and consumer habits, which move away from discretionary items to focus on daily items. These trends will likely continue, given the Fed’s latest stance on inflation and interest rates.

From Target’s Q4 2022 earnings press release … “Inventory at the end of the quarter was 3 percent lower than in 2021, despite an increase in early receipts compared with last year. Inventory in discretionary categories was approximately 13 percent lower than a year ago, partially offset by higher inventory in frequency categories.”

Fossil Group Sinks On Weak Results, Guidance

Fossil Group grew revenue sequentially in Q4, but that is about the best that can be said. The company reported $499.1 million in revenue, a decline of 17.4% versus last year, and the guidance is not good. Q4 sales were impacted by the wholesale segment's decline in all regions.

DTC sales, a revenue stream that more fashion/apparel makers are leaning into, grew by 8% and are accelerating but offset by a 24% decline in wholesales that is also accelerating.

Interestingly, traditional watch sales fell by 15% on a traditional versus smart-watch basis while smartwatch sales fell a more substantial 32%, suggesting weakness for manufacturers like Apple (NASDAQ:AAPL) and Samsung (OTCMKTS:SSNLF).

“The year came to a challenging close – against the backdrop of a retail landscape marked by elevated wholesale inventories and increased promotional activity, strength in our direct-to-consumer business was more than offset by soft topline trends in our wholesale channel globally,” said Kosta Kartsotis, Chairman and CEO.

The earnings news is even worse. The company logged the 3rd straight quarterly loss, and there is little reason to think that will change by the end of the calendar or fiscal year. The guidance calls for another mid-single-digit decline in net sales and operating margins in the low-single-digit range, which doesn’t leave much capital for other expenses like debt.

Fossil Group has little debt, but some need to be serviced. The company has plenty of cash, but operating in this manner (cash is down 20% YOY), that balance won’t last long.


The Technical Outlook: Fossil Group, Inc Nears Bottom

The price action in Fossil Group shares is not promising, but it is approaching what could be the bottom. That level is near the pandemic lows set in 2020, which have been tested once before. If the market can hold up at this level, it may move sideways until the end of the year.

If the wholesale situation works out and the outlook for earnings improves for the stock or the sector, FOSL can move higher. Until then, there is a risk the market will fall through support and head back down to the long-term lows near $2.00.

Fossil Group

Should you invest $1,000 in Fossil Group right now?

Before you consider Fossil Group, you'll want to hear this.

MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and Fossil Group wasn't on the list.

While Fossil Group currently has a "hold" rating among analysts, top-rated analysts believe these five stocks are better buys.

Article by Thomas Hughes, MarketBeat