Fossil Group Inc.’s stock shot nearly straight up Wednesday as better sales and some smartwatch traction brought some investors back into the fold (and had others who bet against the firm scrambling to cover their “short” positions).
But chairman and chief executive officer Kosta Kartsotis still has plenty of hearts and minds to win over in the world of wearable tech. In addition, Fossil has giant smartwatch competition from Apple to contend with, as well as all the ills of retailing — the company is closing about 60 stores this year, giving up $60 million in sales, but also offloading roughly $10 million in losses.
For at least a day, Fossil soared. Its stock rose 88 percent to $16.97 Wednesday.
That was fueled by better-than-expected fourth-quarter sales and also the wearables business that doubled last year to $300 million in sales and grew more profitable as Fossil gained scale and experience in the category.
Still, there are still plenty of challenges the company must face.
Wells Fargo analyst Ike Boruchow noted: “While we acknowledge that the stock is likely to rally meaningfully in the near-term given the stock hasn’t had any type of good news in well over a year, valuation had compressed meaningfully (to 4.5-times earnings before interest, taxes, depreciation and amortization) and shares have massively underperformed over the past 12 months.”
Fossil’s stock fell 70 percent last year, as the S&P 500 perked up 20 percent, he noted.
Boruchow also pointed out that Fossil initially expected wearable sales to hit $450 million — $150 million more than what actually came in.
“The smartwatch threat is here, and it’s real,” the analyst said, pointing to a recent survey. “The most troubling findings were the fact that customers who are interested in a smartwatch were nearly 10 times as likely to prefer a tech-branded smartwatch (e.g. Apple) over a fashion-branded wearable (e.g. Fossil), and that 50 percent of interested consumers said they’d buy fewer traditional watches if they bought a smartwatch.”
The Apple Watch business is big enough to, on its own, be a Fortune 500 company, with sales estimated at $6 billion-plus, which Boruchow contrasted with Fossil’s business, at one-twentieth the size.
But to listen to Kartsotis tell it, there’s still lots more room to grow.
The ceo told analysts on a conference call: “The overall wearables category is very robust in creating a significant opportunity for the company. Industry research shows that it was a $17 billion business overall last year and will grow to $32 billion by 2020. It is clearly a younger customer and largely a female aspirational fashion customer that loves brands and the innovation that we launched last year with slimmer cases, brighter displays and new functionality. And this year’s watches will have…additional features and looks that we think will be very compelling. With the ongoing enhancements of technology, the product and experience will get better and better.”
Still, wearables are only about 20 percent of Fossil’s total watch sales, making last year’s growth a move in the right direction for the company but still just part of what seems to be a much longer journey.