Fossil Q Wander smartwatch

Fossil is reinventing with an increased focus on its smartwatch business.

Harper Ewing

Moody’s Investors Service has revised the outlook for Fossil Group Inc. to “Negative.”

Prior to the change, Moody’s outlook was at “Stable.” The ratings agency said all other ratings were affirmed, including the Baa3 senior unsecured rating.

Mike Zuccaro, Moody’s credit analyst, said, “The outlook change to “Negative” reflects Fossil’s declining sales and earnings, which have led to weaker credit metrics and cash flow expectations from 2016.”

He said that while the company’s cash flow remains strong, the outlook change also reflects in part the company’s need to “address debt maturities ahead of obligations becoming current in May 2017.”

The analyst said, “The rise of smartwatches and other wearable technologies have pressured sales of traditional watches. Fossil has only recently entered the market following its acquisition of Misfit in December 2015. At the same time, weaker mall traffic has intensified sales declines within Fossil’s wholesale customer base, particularly within U.S. department stores. “

Zuccaro explained further that as the watch firm’s wholesale customers take a more conservative approach to managing inventory, “Fossil’s margins will likely remain under pressure [as] it relies more on off-price and outlet stores to drive sales and manage its own inventory levels.”

He noted that the firm continues to make progress on strategic initiatives, including the development and launch of connected products using its Misfit platform.

Moody’s said its affirmation of the company’s Baa3 rating considers the firm’s still-solid credit metrics, despite recent weakening, and adequate liquidity.

Fossil said on Tuesday that net income for the first quarter ended April 2 dropped 84.8 percent to $5.8 million, or 12 cents a diluted share, from $38.1 million, or 75 cents, a year ago. Net sales declined 9 percent to $659.8 million from $725.1 million.

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