Can Fossil Fight Extinction In Competitive Wearable Climate Change?

The market hasn't much confidence in Fossil Group Inc FOSL. Shares have trended steadily downward from $129 in 2013 to under $10 per share, and Bank of America analysts don’t anticipate much improvement.

Heather Balsky and Lorraine Hutchinson reiterated an Underperform rating with a $7 price target Wednesday, a day after Fossil reported a 3.4-percent sales miss and 32.6-percent earnings-per-share miss.

“Weak traditional watch sales, exacerbated by wearables execution risk, and deflationary pressures are key concerns,” Balsky and Hutchinson said. The stock was down more than 23 percent at $9.09.

What’s Wrong?

Fossil posted less-than-expected growth in wearables driven by weakness in traditional watches and lost ground in jewelry and leathers. The firm chalked the underperformance up to design flaws and lack of understanding surrounding electronic wearable trends.

Analysts worry the problems persist.

“We remain wary about execution and margin risk as FOSL makes pricing adjustments, enters new channels and battles for share with new entrants,” Balsky and Hutchinson wrote, modeling sales below guidance.

Elevated levels of off-price sales and promotional activity were seen to diminish second-quarter margins, and the analysts expressed concern about Fossil’s reliance on off-price channels.

Still, they see potential redemption in Fossil’s efforts to reduce wearable costs, which buffered quarterly margin erosion.

“Sourcing benefits are expected to accelerate as the year progresses,” they wrote.

As Fossil continues to feel out the industry, management lowered guidance for annual wearable sales, reflective of second-half improvements from product launchings, marketing boosts and distribution growth.

Related Links:

Oversaturated? North America Drowning In Michael Kors, Analyst Downgrades Stock

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