Is Fossil's 80% Surge Justified? KeyBanc Says It's Just The Beginning

Fossil Group Inc FOSL impressed investors with its fourth quarter earnings report, which sent shares soaring by more than 100 percent in Tuesday's after-hours session. Is the move justified? At least one Wall Street analyst thinks so.

The Analyst

KeyBanc Capital Markets' Edward Yruma maintains an Overweight rating on Fossil's stock with a price target boosted from $15 to $25.

The Thesis

Fossil's wearables accounted for 20 percent of total watch sales in the fourth quarter and benefited from a shift from fashion watches towards wearables, Yruma said in a note. In fact, Fossil is "well positioned" to become the second-largest wearables player in the space as management is likely to introduce new brands.

Perhaps more notable, Fossil realized $80 million in cost savings throughout 2017 and appears to be on track to oversee $200 million in gross margin and efficiency benefits by 2019, the analyst said. The company also plans on exiting 60 unprofitable stores and divesting itself from unprofitable channels and product lines to generate incremental cost benefits.

Fossil's earnings report showed the company is "finally rebasing" its business as its EBITDA guidance of $150 to $200 million includes revenue of $2.5 billion, which is 28 percent lower from its peak levels seen in 2014. Yruma said the right sizing of the business should help the company achieve its high-single-digit EBIT margin target by 2020.