Fossil shares in free fall as watchmaker trims sales outlook, CFO departs

Key Points
  • Fossil's stock has tanked, dropping more than 61 percent over the past 12 months.
  • The watchmaker says it now expects revenues to fall as much as 8.5 percent in 2017, having previously forecast that sales would fall no more than 6 percent.
  • CEO Kosta Kartsotis says Fossil still has "traction" in the wearables space even though its traditional watch business has fallen out of fashion.
Fossil Q54 Pilot watch at CES 2016
Harriet Taylor | CNBC

It's beginning to sound like a broken record for this retailer.

Fossil Group shares are plunging after the watchmaker reported a sharp loss on Tuesday, and announced the departure of Chief Financial Officer Dennis Secor.

Shares fell 26 percent in early trading Wednesday, following steep sell-offs in the past two quarters as business continued to deteriorate.

Fossil reported Tuesday that it swung to a second-quarter loss of $344.7 million, or $7.11 a share, from a profit of $6 million, or 12 cents a share, a year earlier.

Global retail comps, including e-commerce sales, fell 11 percent year over year, with declines in all product categories and all regions, Fossil said.

The watchmaker also handed Wall Street a weaker outlook to digest. Fossil said it now expects revenues to fall as much as 8.5 percent in 2017, having previously forecast a decline of not more than 6 percent. The company said the adjustment reflects "updated expectations of [its] wearables rollout in 2017."

Fossil CEO Kosta Kartsotis said today's retail environment has brought "unprecedented disruption," but the company is confident that new products will excite customers to shop its brand in stronger numbers again.

"Wearables have the ability to help mitigate the ongoing softness in the traditional watch category," Kartsotis said on a call with analysts and investors. "In our traditional watch business, we are managing through uncertainty ... by focusing ... on innovation."

Increasing competition and unexpected expenses are creating "inherent uncertainty" in Fossil's business model, Jefferies analyst Randal Konik wrote in a note to clients.

"While profit improvement initiatives are tracking ahead of plan, FOSL ultimately needs to drive higher volumes to bring wearables margins at parity with traditional watches — at this point, the ability to significantly scale the category remains a question mark."

The disruption is largely coming from the Apple Watch. Recent reports said Apple will release a new version of the smartwatch this year. The updated version will be less reliant on the iPhone.

"Unless you are the most important brand in the world, the value proposition of wearables is hard to convey simply through advertising or an interaction with a salesperson," Evercore ISI analyst Omar Saad wrote in a note to clients.

Fitbit, another wearables retailer, has seen its stock fall more than 60 percent over the past 12 months, with consumers less interested in the company's product lineup than when the brand first rolled out.

For the second quarter, Fossil said its sales of wearables represented 9 percent of total revenue, compared with 7 percent in the first quarter. In its watches business, declines in traditional watches were partially offset by connected watches, Fossil added.

As of Tuesday's market close, shares of Fossil had fallen 61 percent during the past 12 months.

FOSL 12-month performance 

Source: FactSet

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