Fossil shares soar on earnings beat, as watchmaker sees stronger demand for wearables

Key Points
  • Shares of Fossil surge more than 90 percent after the company reports a surprise jump in demand for wearables.
  • Analysts still caution that the core watch business is troubled.
Fossil shares surge after strong earnings beat

Shares of Fossil Group skyrocketed Wednesday, after the company reported earnings and sales that topped analysts' estimates because of a surprise jump in demand for wearables.

The stock rallied more than 90 percent by Wednesday afternoon, almost doubling in price and trading around $17.50.

Same-store sales climbed 2 percent in the fourth quarter, Fossil said Tuesday, as the company rolled out new hybrid and display smartwatches across 14 brands. E-commerce sales were up 31 percent during the period.

Sales of wearable devices nearly doubled last year to over $300 million, and the category now accounts for 14 percent of Fossil's overall watch revenue. Similar to the Apple Watch and Fitbit devices, Fossil aims to sell more smart products that monitor heart rates and track steps.

"With wearable launches ahead of holiday, we significantly improved the trajectory for Michael Kors watches and drove a double digit increase in fourth quarter Armani watch sales," CEO Kosta Kartsotis said in a statement.

"Our priorities are focused on delivering innovative wearable and traditional watch styles while improving performance in the handbag and jewelry categories and driving increases in digital sales," Kartsotis added about initiatives in fiscal 2018.

Total sales globally fell 4 percent to $921 million during the fourth quarter, but analysts surveyed by Thomson Reuters were expecting revenue of $890 million.

The company reported a net loss of $80 million, or $1.65 a share, compared with net income of $50 million, or $1.03 per share, a year earlier Excluding one-time items (a charge related to new tax legislation in the U.S.), Fossil earned 64 cents a share, while analysts were calling for 40 cents.

"The company finally was able to deliver some good news," Wells Fargo analyst Ike Boruchow said in a note to clients, "with plans to recognize meaningful cost savings and significant [gross margin] expansion."

However, he cautioned that the company is "seeing no stabilization of the traditional watch category," which has always been at Fossil's core. "We would still contend that the fundamental story here remains extremely challenged."

Including Wednesday's gains, Fossil shares have fallen about 22 percent from a year ago.