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Shares of Fossil tumble 20 percent as wearables aren't all they're cracked up to be

Shoppers walk by Fossil store in Zeil, Frankfurt, Germany.
Horacio Villalobos | Corbis | Getty Images
Shoppers walk by Fossil store in Zeil, Frankfurt, Germany.

Shares of Fossil tumbled nearly 20 percent in early trading Wednesday, after the watchmaker missed Wall Street's fourth-quarter sales and profit expectations and provided a soft outlook for its 2017 fiscal year.

The company's stock was last trading at $18.57.

"Fossil's fourth-quarter print was in and of itself, 'not much worse than feared'; however the implications on the go-forward operations leave us with a growing list of concerns on a business that is caught in the crosshairs of an evolving category amid shifting consumer
preferences," Wells Fargo analyst Ike Boruchow, who downgraded the company's shares to "underperform" from "market perform," told investors.

Those concerns include the company's top line miss, which came despite its "much-hyped" push into wearable technology. Fossil had to lower prices on these products to get consumers to bite, and plans relaunch the category in the third quarter with lower prices. That will eat into the category's profitability, Boruchow warned.

Fossil's investments in wearable technology have also sent its debt levels and interest expense higher.

"It will be critical that the second-half sales acceleration implied by [Fossil's] guidance materializes to keep the company in the black," Evercore ISI analyst Omar Saad said.

Yet despite investors' skittishness, Fossil CEO Kosta Kartsotis remains optimistic about the category.

"Even with overall fourth-quarter sales at the low end of our expectations, we began to observe new emerging trends to support our thesis that wearable technology can be the catalyst to drive growth in the watch category," he told analysts on a conference call Tuesday.

During the fourth quarter, Fossil earned $1.03 a share on $959 million in revenue. Wall Street had been expecting the company to report earnings of $1.18 a share on $977 million in sales.

On an adjusted basis, Fossil expects to earn between $1 and$1.70 per share in fiscal 2017, down from $1.80 adjusted last year.

Fossil shares are down more than 30 percent over the past year.