4 Key Points Will Determine How This Year Goes For Fossil Group

Analyst Erinn Murphy said she believes Fossil's fashion brands would have a place, although a smaller one, in the new world, given that 70 percent of its customer base is female. The company still believes its total addressable market is now 30 percent larger than in 2014, the analyst noted.

However, the analyst said she remains cognizant of the increased level of competition in the evolving industry, citing Apple Inc. AAPL's nearly two times year-over-year improvement in watch sales in its March quarter.

The analyst thinks Fossil's portfolio may not have the same degree of relevance it had pre-2014/2015, given how significantly the deck is stacked against the company's current business model.

2. Manageability Of Michael Kors Brand Decline

Noting Michael Kors Holdings Ltd KORS brand, its largest licensed brand, declined 11 percent in 2015 and 16 percent in 2016, Piper Jaffray said Michael Kors brand momentum has yet to stabilize. The firm expressed worries the fourth-quarter wearable lift could prove unsustainable if it was driven by over-zealous buyers on a couple strong initial months of takeaway.

Even with Michael Kors' declines going forward, the firm thinks it would go a long way in helping Fossil achieve consensus revenue forecasts over the next two years. That said, the firm believes the brand would continue to remain a thorn in Fossil's side.

3. Reaching Scale In Hybrids To Generate Appropriate Go-Forward Margins

Piper Jaffray wasn't too sure whether Fossil can reach necessary scale in hybrids to generate appropriate go-forward margins, as it sees enough time and know-how from the Misfit acquisition to drive sourcing/manufacturing costs down by fiscal-year 2019.

"We do not see ~5M units by FY18/FY19 as an overly aggressive target given the significantly expanded TAM," the firm said.

4. Potential For Cost Reduction

The firm believes there is potential for cost reduction and sees strong potential for additional store closures and corporate layoffs being announced in the coming quarters. The firm thinks Fossil has a few hundred bps reduction opportunity on corporate overhead margin relative to the peer group.

Outlook

Piper Jaffray estimates first-quarter revenues of $588 million, down 10.8 percent year-over-year, below the consensus estimate of $591 million. The company expects gross margin of 51.4 percent, above the Street's 51.1 percent and an operating loss estimate of $42 million compared to Street's operating loss estimate of $13 million.

Meanwhile, updating its segment revenue build and gross margin analysis for management's price investment, the firm lowered its numbers for the balance of the year. The firm reduced its 2017 gross margin estimate by 100 basis points to 48.8 percent but maintained its revenue estimate, which calls for a 2.2 percent drop.

"We continue to see the most opportunity in the 2H, where wearable sell-in should intensify (particularly in Q3) commensurate with incremental distribution opportunities," the firm said.

Piper Jaffray also reduced its operating income estimate to $7.1 million from $36.7 million. Additionally, the firm rolled out its 2019 estimates, which call for moderate top line declines, year-over-year gross margin improvement and operating income of $157 million.

Extreme Outcomes Plausible

The firm firmly believes more aggressive restructuring measures will prove necessary and are concerned with the company's over-exposure to Michael Kors, accounting for 22.7 percent of revenue.

"Bottom line, we believe traditional watch trends in Q1 were volatile, monitored weaker customer reviews for Fossil's wearables, and see risk to GM," the firm said.

"As it relates to the stock, we see plausibility for extreme outcomes in both direction."

Piper Jaffray has a Neutral rating and a $18 price target for the shares of the company.

At last check, Fossil shares were up 1.16 percent at $17.48.