Nine months after FOSL stock plunged by 25%, after reporting abysmal Q1 results and even worse guidance, moments ago the watchmaker behind brands such as Skagen and Burberry reported another ugly quarter, which confirmed that the prevailing retail weakness continues.
As we await a bevy of retail companies to report in the next few days, Fossil's report may be a harbinger of pain for consumer-facing retail companies, not to mention "fashion accessory", but really watch company Fossil, which has cratered after hours after reporting not only a miss in Q4 EPS of $1.03 (Est. $1.17) which tumbled from $1.46 a year ago, and revenue (which at $959.2 million was 3% lower than a year ago and missed expectations of $977.2 million), but also missed comp store expectations which crashed 7% on expectations of a modest -0.4% decline.
The topline weakness was broad-based in US and Europe, although a modest rebound in Asia provided a faint silver lining:
- Net sales in the Americas decreased $35.3 million or 7% and $31.8 million in constant currency (a 6% decline) compared to the fourth quarter of fiscal 2015, with a decline in watches, leathers and jewelry compared to last fiscal year. A sales decline in the U.S. drove the decrease in the region.
- Net sales in Europe decreased $14.4 million or 4% and increased $2.1 million in constant currency (a 1% increase) compared to the fourth quarter of fiscal 2015, with constant currency growth in watches partially offset by a decline in jewelry and leathers compared to last fiscal year. Within the region, growth in travel retail and Spain was partially offset by a decline in the U.K. and Germany.
- Net sales in Asia increased $16.4 million or 13% and $14.7 million in constant currency (a 12% increase) compared to the fourth quarter of fiscal 2015, with an increase in watches, jewelry and leathers compared to last fiscal year. Within the region, an increase in India, China and Australia was partially offset by a decline in Taiwan.
Among the various reasons the company gave to justify the weakness in demand was the "stronger dollar" in Q1, an excuse we will be hearing a lot of in the coming quarters:
- In the fourth quarter of fiscal 2016, the stronger U.S. dollar negatively impacted net sales by $18.3 million. Fourth quarter fiscal 2016 net sales decreased 3% (2% on a constant currency basis) as compared to the fourth quarter of fiscal 2015. For fiscal year 2016, the impact from the strong U.S. dollar negatively impacted net sales by $45.4 million.
Earnings were impacted by a restructuring charge and purchase accounting costs tied to Misfit, the wearable activity tracker it purchased in 2015. In addition to restructuring charges and the strong dollar, FOSL also cited higher interest expenses (what already) as hitting the bottom line. In 4Q, FOSL noted declines in multi-brand licensed watch portfolio as well as leathers and jewelry, but it was all mostly the dollar's fault.
Finally, the cherry on top was the guidance: the Texas-based company forecast fiscal 2017 earnings in the range of $1.00 -$1.70 a share, as much as 58% below consensus estimates of $1.78. Worse, for the current quarter the company expects to post a loss of between 10 and 25 cents a share, relative to consensus estimates of $0.07.
Fossil and other traditional watchmakers have seen their stocks pressured from the rise of activity trackers and smartwatches like the FitBit and the Apple Watch. Fossil bought Misfit more than a year ago as it began to push into the wearables sphere. It has not been a profitable transaction. Furthermore, the company has been also pressured as a result of broad, ongoing weakness in consumer spending, something which analysts remain puzzled by in light of the so-called ongoing economic recovery.
The company previously said it plans to double its wearables production to 300 new products and add new brands this year as it tries to entice consumers looking for fashionable connectivity.
“The fourth quarter of 2016 was pivotal for Fossil Group with our wearable launches demonstrating they could be the catalyst to drive growth in the watch category,” said chief executive Kosta Kartsotis. “Delivering some stability in the watch category during the quarter reinforces our belief that with our technology capabilities, we can turn what was once a headwind into a tailwind.”
Fossil shares had dropped 11% YTD and have crashed nearly 80% over the past three years. The company's stock has briefly halted after reporting earnings, after which it has since rebounded modestly to "only" down 12%.