Fossil shares plunge as Apple Watch kills traditional watch market

Key Points
  • Fossil shares tumble after a disappointing earnings report.
  • The traditional hardware maker faces stiffer competition from Apple Watch.
  • On Tuesday, Fossil reported an earnings loss and sales that missed Street estimates, largely as the company says it's adapting to a "changing retail environment."
Fossil Q54 Pilot watch at CES 2016
Harriet Taylor | CNBC

Fossil Group's latest financials show the watchmaker is clearly hurting from Apple's encroachment into the traditional hardware sector.

Shares of Fossil closed down more than 20 percent Wednesday, following the company's dismal first-quarter earnings report.

"Our results for the first quarter ... continue to reflect a challenging retail environment and a watch category undergoing significant change," Fossil CEO Kosta Kartsotis said on the earnings conference call.

"The strategies we are pursuing in the midst of these headwinds enable us to better compete in the environment and capitalize on the growing importance of technology to the watch category. ... technology can be the catalyst needed to drive growth in the watch category."

After the bell on Tuesday, Fossil reported a greater-than-expected earnings loss and lower-than-expected revenue.

The watchmaker reported a loss of 65 cents per share on sales of $581.8 million, while Wall Street had forecast losses of 34 cents a share on revenue of $591 million, according to Thomson Reuters' analysts.

During the first quarter, Fossil's gross margin decreased 300 basis points to 49.8 percent, driven lower because of increased promotional activity in outlets, the retailer said.

Meanwhile, Apple Watch sales are gaining momentum, as Tim Cook's company continues to disrupt the traditional hardware space. In its latest earnings report, Apple said its sales from "other products" — Apple Watch, Apple TV and Beats products — grew 31 percent year-over-year.

Apple said it will be selling new watch bands in the spring with colors like berry, pollen, sapphire, azure, orange and red, offering more competition for traditional watches made by Fossil.

With Wednesday's losses, shares of Fossil have tumbled more than 63 percent over the past 12 months and are down about 44 percent for the year-to-date period.

FOSL 5-day performance

—CNBC's Anita Balakrishnan contributed to this report.