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Fossil (FOSL) Disappoints Again: Will the Watchmaker Survive Retail Glut?

On Wednesday, shares of Fossil Group Inc. FOSL are tanking, down about 20% in late-morning trading after the accessories retailer reported another earnings report that disappointing analysts and investors.

Fossil reported an adjusted loss of 23 cents per share (excluding $6.88 from non-recurring items), and while this number beat the Zacks Consensus Estimate of a loss of 28 cents per share, it represented a year-over-year decline of nearly 292%.

Net revenues for the second quarter came in at $596.8 million, lagging behind our consensus estimate of $619 million and falling 13% year-over-year. The Zacks Equity Research team notes that Fossil has missed sales estimates in nine out of the last 11 straight quarters, including this current one. Looking at comparable sales, global retail comps, including e-commerce, dropped 11% year-over-year, with declines in all product categories and in all regions.

Overall, Fossil’s many segmented business divisions continue to do poorly. Watches declined 9.3% in the quarter, while jewelry and leather goods fell 22% and 25.3%, respectively. However, the company’s “connected” wearables devices reflected about 9% of its total sales in the second quarter, a 7% sequential improvement from the first quarter.

Weak Outlook

Looking ahead, Fossil expects net sales to decline in the range of 4.5% to 8.5% for fiscal 2017, which is more than the company’s previous range of a decline of 1.5% to 6%. The watch retailer also expects adjusted operating margin in the range of 2.0% to 3.5%, coming in below Fossil’s previously expected range of 3.0% to 4.5%.

For fiscal 2017, Fossil expects adjusted earnings in the range of 35 cents to $1.15 per share, compared to the previously expected range of 80 cents to $1.50 per share. The Zacks Consensus Estimate currently sits at 93 cents per share for the current year, which is in the company’s guided range.

In addition to its financial results, Fossil also announced that CFO Dennis Secor was leaving the company to relocate to California. And effective October 16, his role will be filled by Pier 1 Imports PIR CFO and current Fossil board member Jeffrey Boyer.

Fossil’s Future

While there is no doubt these quarterly results are not good, metrics like the ones above have clearly become the norm for Fossil. The company just can’t seem to escape the worst factors affecting the broader retail industry, while its main focus, traditional watches, has especially been facing weakness because of its niche quality.

The company has been investing in more tech-enabled watches, expanding their product line with smartwatches and wearable devices, but this has yet to really turnaround the retailer’s results. And, Fossil has struggled to move away from the congested pack that includes big names like Apple AAPL and Fitbit FIT.

Fossil CEO Kosta Kartsotis recognized how painful today’s retail environment has been for Fossil, bringing “unprecedented disruption,” but the watch retailer is both confident and hopeful that its new products will excite customers.

“Wearables have the ability to help mitigate the ongoing softness in the traditional watch category," Kartsotis said on a call with analysts and investors. "In our traditional watch business, we are managing through uncertainty ... by focusing ... on innovation.”

But what if customers just aren’t interested? Even Fitbit’s wearable health devices have slipped in popularity since the brand first debuted, with its stock having fallen more than 60% over the past year. The Apple Watch clearly dominates the smartwatch sector, and if the new, updated version expected to be released this year will be less reliant on the iPhone, it seems less likely that consumers will turn to brands other than the biggest in this market.

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