Goldman Sachs Starts Fossil (FOSL) at Neutral

Goldman Sachs initiated coverage on Fossil (NASDAQ: FOSL) with a Neutral rating and a price target of $113. Analyst Lindsay Drucker Mann said slowing business momentum is reflected in valuation. She also said smart watch risk is real.

"We see FOSL well positioned long term, with a leading market share position in the growing fashion watch category, a quality portfolio of licensed brands including. Michael Kors, and a distribution footprint that spans the US, Europe, and Asia. Near term, however, our enthusiasm is tempered by slowing momentum in key business drivers (Kors, Outlets, Asia), and the emerging threat of smart watches as a new source of competition. The multiple has de-rated versus history, but this looks appropriate in light of business challenges," said Drucker Mann.

"We anticipate a 10% EPS CAGR over the next 3 years, slower than the preceding 3 years CAGR of +16%. The composition of growth in FY15 will likely be lower in “quality”, with EBIT up only mid-single digits and the balance of growth below-the-line items. The big drivers of recent growth are slowing – We estimate that Michael Kors, the expansion of FOSL’s outlet store fleet, and Asia together drove 150% of FOSL’s consolidated EBIT growth in the last 3 years, while other businesses declined," continued the analyst. "These 3 drivers are now slowing off of high bases, and we see a lack of offsets. FX weighing on 2015 – 50% of sales are international."

"Smart watch risk is real – The “fashion watch” customer has already adopted wearables like FitBit, and we see risk Apple Watch could be a cannibalizing force," she added.

For an analyst ratings summary and ratings history on Fossil click here. For more ratings news on Fossil click here.

Shares of Fossil closed at $106.55 yesterday.

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