Fossil's Q1 Beat Elicits Mixed Analyst Reactions

Fossil Group Inc FOSL shares were surging Thursday after the watchmaker beat consensus estimates in its first-quarter report. 

The loss per share of 42 cents beat the estimate for a 60-cent loss, and sales of $465 million outperformed a $456.1-million forecast. 

Experts offered mixed reactions to the quarter.

The Analysts 

Wells Fargo analyst Ike Boruchow maintained an Underperform rating with an $8 price target.

KeyBanc Capital Markets analyst Edward Yruma maintained an Overweight rating with a $26 price target.

The Bull

KeyBanc Capital Markets celebrated momentum in wearables despite inventory-driven declines in connected devices. Yruma expressed optimism in the turnaround plan for watches, a category that declined 18 percent and that Fossil projects will continue falling through the year.

The analyst also praised Fossil’s aggressive cost reductions. A lower off-price sales mix, lower promotions, New World Fossil initiatives and strong product and region mix in Asia drove gross margin expansion, he said. 

“New World Fossil 2.0, ‘Transform to Grow,’ should unlock further operational efficiencies and margin improvement using a zero-based budgeting approach, as well as accelerate investment in digital and consumer-facing activities." 

The Bear

Fossil's metrics cleared low expectations, Boruchow said in a Thursday note. 

The company had guided well below Street forecasts and anticipated a top-line decrease between 16 percent and 22 percent, the analyst said. 

“Even against a low bar, 1Q results were largely in line in our view as sales were just above the midpoint of guidance while GM was slightly better than planned (less promotions),” he said. “ ... At the end of the day this remains a top-line story and we continue to be very concerned with the direction of the business.”

Boruchow emphasized ongoing headwinds in wearables, which tumbled more than traditional watches for the first time. Wells Fargo attributed the miss to supply chain and product issues.

“Now the top-line has even less visibility as the traditional watch business remains under heavy pressure and the piece of the business that was supposed to be the outlier growth category has decelerated 4 quarters in a row and just decreased 23 percent." 

Boruchow also expressed concern over a low second-quarter outlook that implies a fifth consecutive quarter of double-digit sales declines.

Price Action 

Fossil shares were trading up 15.68 percent at $14.83 at the time of publication Thursday. 

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Photo courtesy of Fossil Group.