Will Weakness in Watches Hurt Fossil’s (FOSL) Q2 Earnings?
Fossil Group Inc. FOSL is set to report second-quarter 2016 results after the market closes on Aug 9.
Last quarter, this global consumer fashion accessories maker and distributor posted a positive surprise of 42.86%. In fact, the company has delivered positive surprises in the past four quarters, with an average surprise of 32.07%.
Let’s see how things are shaping up prior to the announcement.
FOSSIL GRP INC Price and EPS Surprise
FOSSIL GRP INC Price and EPS Surprise | FOSSIL GRP INC Quote
Factors to Consider
Product innovation and continued momentum of the Fossil brand have been driving the company’s growth. Fossil’s foray into wearable technology allows it to bring smartwatches to its customers, shaping the fusion of fashion and technology. Though connected wearables and smartwatches are expected to bring a unique branded experience to customers, Fossil is facing competition from traditional watchmakers like Swatch and LVMH's Tag Heuer who are also developing smartwatches to cater to rising demand.
Fossil also expects several challenges in the near term, which will hamper its operations. Softness in watch sales as a result of a decline in its multi-brand licensed watch portfolio, weak comps in the U.S., sluggish performance in key international markets and unfavorable currency have been weighing on the stock.
Fossil missed earnings and revenue estimates in the first quarter of fiscal 2016 and slashed its fiscal 2016 outlook due to economic, competitive and consumer headwinds.
The company is witnessing massive change in consumer shopping behavior and therefore has adopted a cautious stance in the U.S. Internationally too, Fossil is battling economic challenges in many key markets, including China, Europe, Russia and Greece, and thus does not expect much international growth. The company’s performance in Europe and Asia are decelerating, which again is a concern. A soft macroeconomic condition in China is also slowing down the company’s growth in Asia.
Currency is also expected to significantly hurt the company’s operations in the to-be reported quarter.
For the second-quarter of fiscal 2016, Fossil expects the bottom line to be in a range of break-even to 15 cents per share. This will include 20 cents per share of currency impact and 9 cents of charges related to the Misfit acquisition and a restructuring gain of 10 cents.
The company expects net sales to decline in a range of 8% to 10% due to currency headwinds of 160 basis points (bps). The company expects operating margin in a range of 1.5% to 3% for the second quarter, which includes 120 bps negative impact from currency and 95 bps from Misfit acquisition expenses. The company expects lower gross margin and increases in strategic marketing funding and wearables to slightly offset declines in base infrastructure spending.
Our proven model does not conclusively show that Fossil is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.
Zacks ESP: The ESP for Fossil is -11.11% as the Most Accurate Estimate of 8 cents is below the Zacks Consensus Estimate of 9 cents.
Zacks Rank: Fossil has a Zacks Rank #5 (Strong Sell). We caution against stocks with a Zacks Rank #4 and #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Stocks to Consider
Stocks in the broader consumer staples sector that have both a positive earnings ESP and a favorable Zacks Rank are:
Wal-Mart Stores, Inc. WMT, with an Earnings ESP of +2.94% and a Zacks Rank #2.
Macy’s Inc. M, with an Earnings ESP of +25.00% and a Zacks Rank #3 .
The Children's Place, Inc. PLCE, with an Earnings ESP of +25.00% and a Zacks Rank #2.
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