Jefferies Cuts Fossil To Hold Amid Several Factors

• The share price of Fossil Group Inc FOSL declined 68.47 percent through 2015, falling to a low of $31.87 on November 16.
• Jefferies’ Randal J. Konik has downgraded the rating on the company to Neutral, while lowering the price target from $68 to $40.
• Konik observed that although the company had once been a near monopoly with an “enviable portfolio of brands, Fossil Group has been seeing slowing category trends and increasing competition.

Analyst Randal Konik mentioned that the watch category had “slowed dramatically from its once double-digit growth rate to a low-single percentage growth rate expected over the next few years, at best.”

Konik observed that growth in the watch category was driven more by fashion than function, which made the market vulnerable to changing fashion trends, thereby leading to a prolonged downward swing with the waning of the most recent trend cycle.

Watch sales began to slow meaningfully across the globe at the end of 2014, declining 3 percent year-on-year in 2015. Konik expects Fossil Group to see subdued growth in this category over the next five years.

On the other hand, competitors have been launching their own digital watches, while Fossil Group’s watch has not been a “blockbuster success.” In addition, the launch of smart watches and ones that can track daily fitness activity, the demand for more traditional offerings has weakened.

In addition, the exposure to Michael Kors Holdings Ltd KORS's Michael Kors brand is now a problem area, with sales slowing, margins being compressed and the risk to Fossil Group’s long term competitive position rising.