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Will Economic Challenges Hurt Fossil (FOSL) Q1 Earnings?

Fossil Group Inc. FOSL is set to report first quarter 2016 results after the market closes on May 10.

Last quarter, this global consumer fashion accessories maker and distributor posted a positive surprise of 34.88%. In fact, the company has delivered positive surprises in all the four quarters, with an average surprise of 31.91%.

Let’s see how things are shaping up prior to the announcement.

Factors to Consider

Product innovation and continued momentum of the Fossil brand have been the company’s growth catalysts. Fossil’s foray into wearable technology allows it to bring smartwatches to its customers, shaping the fusion of fashion and technology. Though connected wearables and smartwatches are expected to bring a unique branded experience to customers, Fossil expects competition from traditional watchmakers like Swatch and LVMH's Tag Heuer who are also developing smartwatches to cater to rising demand.

However, Fossil also expects several challenges in the near term, which would hamper its operations. Softness in watch sales as a result of a decline in its multi-brand licensed watch portfolio, weak comps in the U.S., sluggish performance in key international markets and unfavorable currency have been weighing on the stock.

The company is witnessing massive change in consumer shopping behavior and therefore has adopted a cautious stance in the U.S. Internationally too, Fossil is battling economic challenges in many key markets, including China, Europe, Russia and Greece, and thus does not expect much international growth. The company’s performance in Europe and Asia are decelerating, which again is a concern. A soft macroeconomic condition in China is also slowing the company’s growth in Asia.

Currency is also expected to significantly hurt the company’s operations in the to-be reported quarter.

For the first-quarter of fiscal 2016, Fossil expects earnings in a range of 5 cents to 20 cents per share. This will include 23 cents per share of currency impact, 9 cents of charges related to the Misfit acquisition and restructuring gain of 16 cents.

The company expects net sales to decline in a range of 7% to 10% due to currency headwinds of 230 bps. On a constant currency basis, sales are expected to decline between 4.75% and 7.75%. The company expects operating margin in a range of 1% to 2.5% for the first quarter, which includes 190 bps negative impact from currency and 90 bps from Misfit acquisition expenses.

Earnings Whispers?

Our proven model does not conclusively show that Fossil is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: The ESP for Fossil is 0.00% as both the Most Accurate Estimate and Zacks Consensus Estimate stand at 18 cents.

Zacks Rank #4 (Sell): We caution against stocks with Zacks Rank #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stocks to Consider

Stocks in the broader consumer staples sector that have both a positive earnings ESP and a favorable Zacks Rank are:

Cinemark Holdings, Inc. CNK, with an Earnings ESP of +2.13% and a Zacks Rank #2 (Buy).

Carnival Corporation CCL, with an Earnings ESP of +5.26% and a Zacks Rank #3 (Hold).

Nike, Inc. NKE, with an Earnings ESP of +10.42% and a Zacks Rank #3.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
CARNIVAL CORP (CCL): Free Stock Analysis Report
CINEMARK HLDGS (CNK): Free Stock Analysis Report
FOSSIL GRP INC (FOSL): Free Stock Analysis Report
NIKE INC-B (NKE): Free Stock Analysis Report
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