Consumer spending in the U.S. has somewhat slowed, in the last couple of months, as people become conscious of their spending once again. Although the holiday season was good for most of the retailers, it was not so pleasant for many of them. Some of them witnessed lower store traffic as higher promotions by the rivals attracted customer attention.
Fossil (FOSL, Financial) is one of those retailers who failed to match up to the Street’s expectations, despite an increase in both the top line and the bottom line. Its fourth-quarter numbers did not please the investors, resulting in a sharp fall in its share price. Let’s take a look.
Snapshot of the numbers
Revenue for the quarter was flat at $1.07 billion, over last year. This was below the analysts’ estimate of $1.12 billion. Although addition of new stores and comparable store sales growth of 7.7% added to the top line, headwinds such as unfavorable currency fluctuations offset the gains. The North American market was quite challenging. However, demand in the international markets increased.
Fossil is a global lifestyle brand and sells a variety of products to the customers, ranging from watches and leather products to jewelry. The jewelry category registered a growth of 13%, over last year, as people continued to spend on new jewelry. However, the watch segment is one of the largest business categories, which posted a decline of 1% in sales. Also, sales of leather products slipped 2%, mainly due to higher promotions by the peers.
Going by the segments, the wholesale net sales rose 4%, driven by strength in Asia and Europe. However, it was partially offset by currency movements of 3%. The direct to consumer category also increased by a whopping 12% as the same store sales increased 7.7% during the quarter.
The gross margin of the company dropped to 56.8% from 57.4% last year, mainly because of increased competition which made the company spend on promotions. Nonetheless, the bottom line surged 12% to $3 per share, as compared to the previous year. But it was below the estimate of $3.07 per share as the company provided higher discounts to attract more customers.
What now?
Although demand for leather goods is on a decline, sales of watches and jewelry are on the rise. Fossil’s attractive new designs continue to attract customer attention. Further, the watch retailer plans to expand its presence in the international market, where it is experiencing higher sales.
Also, Fossil will be spending higher on marketing in order to promote its offerings. It is building relationships with brands such as Intel (INTC, Financial), Google (GOOG, Financial) and Kate Spade (KATE, Financial) in order to provide a better product to its customers. In fact, it has entered into a 10-year deal with Kate Spade to design and distribute Kate Spade New York watches until 2025 and the first collection of the new entity will be launched next year.
Moreover, in addition to the 12 new stores opened in the last year, the company plans to add 10 new stores in 2015. These stores will mostly be in the international market. However, the biggest threat for the company is the release of Apple (AAPL, Financial) watch for $350, which is taking away all the customer attention.
Final thoughts
Although Fossil is making the right moves to lure customers, the launch of the smartwatch by Apple should affect demand for traditional watches. Nonetheless, the company is working to overcome such hurdles and expand its reach through expansion and new strategic partnerships. However, a lowered the outlook for 2015 is something which disheartened the investors. Hence, one should stay on the sidelines and wait for the right time.
