Fossil (FOSL) Could Fall Another 30%, Says Goldman Sachs; Rating Cut to 'Sell'

(Updated - December 18, 2015 9:21 AM EST)

Goldman Sachs downgraded Fossil (NASDAQ: FOSL) from Neutral to Sell with a price target of $26. Shares are already down 65% year -to-date, but analyst Lindsay Drucker Mann thinks the stock could fall another 30% as the watch industry comes under pressured.

Goldman Sachs lowered FY16 and FY17 EPS estimates to $2.86 and $2.47, about 20% and 28% below consensus, respectively.

"We see FOSL at the intersection of three sources of top-line pressure: (1) the natural end of a multi-year fashion watch trend, (2) a related headwind, the advent of smartwatches and wearables, which are drawing consumers away from traditional watches, and (3) slowed momentum in the Michael Kors brand, FOSL’s most important licensed watch brand," said Drucker Mann.

The analyst continued, "We expect organic sales to decline mid-single digits on average over the next two years – 3Q organic sales fell high-single digits on the back of Michael Kors brand declines and with limited offset from the balance of FOSL’s portfolio. FX an added pressure on the business – We expect the expiration of favorable hedges to be a 10pt drag to EPS growth in FY16. Margin pressures amplify revenue declines. We estimate FOSL will lose $0.60 of profit for every $1.00 of lost sales in FY15, adjusting for FX and other exogenous factors."

Mann added, "While cost control is likely to help offset some of the deleverage we anticipate in FY16, FOSL has stated it intends to invest in its brand and its nascent wearables platform to drive the business long term, which could weigh on the bottom line. Limited balance sheet flexibility – We model FY15 lease-adjusted net debt to EBITDAR of 3.7X, above levels FOSL has traditionally been comfortable with."

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 $37.80 yesterday.

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