Fossil (FOSL) Best in Class but the Class is Shrinking - Cowen
Cowen analyst, Oliver Chen, published a note on Fossil (NASDAQ: FOSL) following results noting the worrisome state of watches.
Mgmt commented that traditional watch category growth remains sluggish as smartwatches/wearables continue to disrupt the space, while tough compares from outsized success of the Michael Kors brand also weighed on FOSL's performance in 3Q. In wholesale, mgmt noted trends were down y/y, largely driven by continued softness at U.S. department stores, with trends expected to continue into 4Q as wholesale partners manage tighter inventory levels.
FOSL saw the biggest sequential change in Europe where trends decelerated sharply in 2Q and continued into 3Q, with growth expected to remain challenged in 4Q, especially in wholesale. Meanwhile, in Asia, most markets continue to be slow given a tough macro backdrop.
FOSL announced plans to acquire Misfit, maker of wearable activity trackers, for $260mm, with deal expected to close by end of 4Q and will be funded through a combination of cash & bank debt. FOSL plans to integrate Misfit’s technology platform to its Fossil and SKAGEN brands, and has the opportunity to do the same across its multi-brand portfolio. Near-term, the acquisition is expected to be dilutive to FOSL’s margins & EPS in FY16.
Cowen lowered its price target to $42 (old $51), assuming a P/E of ~10x on 2016E EPS. FOSL is inexpensive with P/E of ~9-10x vs. sector avg. of ~16-17x; however, downside risk remains, as mgmt confirmed the smartwatch/wearables disruption is putting pressure on FOSL's core fashion watch business. The company's foray into connected accessories is still in the very early innings and it is late to the game. The firm maintained a Market Perform rating.
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Shares of Fossil closed at $51.01 yesterday.