Fossil's Bear Case Is Playing Out, Leading Oppenheimer To Lower Estimates

Fossil Group Inc FOSL reduced its FY16 guidance, reflecting a sharp deceleration in the sales of traditional watches in the Americas and Europe in recent months. Oppenheimer’s Anna Andreeva maintained a Perform rating for the company, saying that the bear case appeared to be “playing out.”

Destocking Reduces Visibility

Analyst Anna Andreeva mentioned that Watches, which constitute 75 percent of Fossil’s product mix, were down 8 percent in constant currency terms in 1Q16, versus a 2 percent decline in 4Q15. The company’s reliance on off-price channels to move through inventories in 2016 is expected to exert further pressure on profitability.

The company’s 2016 sales guidance of a 5 percent downturn indicates a recovery in the second half, with 40-50 percent of the watches/wearables annual sales taking place in December. Andreeva considers the slower adoption of Apple Watch as a positive for Fossil’s smartwatches. A lower AUR, which was reduced from $349 to $299 in March, may heighten competitive pressures.

The diluted EPS estimates for FY16 and FY17 have been reduced from $3.10 to $2.05 and from $3.50 to $1.50, respectively.

“Wholesale de-stocking in Americas and now internationally makes visibility murky with wide range of EPS if de-stocking in traditional watches continues and ROI in wearables doesn't materialize; with $10 in net debt/share (1/3 of valuation), free cash flow characteristics deteriorating,” the analyst wrote.