By Lindsay Rittenhouse
As TheStreet‘s sister publication The Deal reported, Moody’s Investors Service downgraded Fossil’s secured credit facilities on Wednesday, citing weakness in its traditional watch business. Fossil holds about $636 million in debt. A month ago, Fossil reported a 7% slip in fourth quarter sales, driven by declines in leather accessories and traditional watches.
CEO KostaKartsotis said fourth quarter sales, although weak, were driven by the Fossil brand and smartwatches it makes via a license arrangement with Michael Kors (KORS) .
To offset slowing traditional watch sales, Fossil said that it was making a “big bet” on tech wear, adding some 300 new stock-keeping units in the second half of the year. In 2016, Fossil launched 100 wearables for Alphabet‘s Google (GOOGL) Android Wear 2.0 platform.
“Fossil brand’s smartwatches – both its touchscreens and its hybrid smartwatches – are selling incredibly well,” a Fossil spokeswoman told TheStreet.
A host of groups aren’t so sure of that.
“While pivoting into wearables could be the only option (traditional watches down double-digits while wearables up double-digits), competition is growing quickly in a market driven by a vendor push rather than consumer demand,” wrote Oppenheimer analyst Anna Andreeva. The analyst is particularly concerned about the erosion in Fossil’s profitability metrics.
In the U.S., Andreeva points out, Fossil lost money in the U.S. last year. Pre-tax profit margins in the U.S. have plunged 1,500 basis points over the past two years.
“Overall as a segment, (wearables) is not one that has seen a huge growth,” says Melissa Gonzalez, CEO and founder of experiential retail pop-up shop agency The Lion’esque Group.
Gonzalez thinks Fossil needs to figure out how to “differentiate themselves”, and she’s not sure wearables can be its “game changing” product given that Apple (AAPL) dominates the category.
Moody’s said in its downgrade that Fossil will have a hard time competing against Fitbit (FIT) . That’s alarming, considering Fitbit issued preliminary guidance on Jan. 30 that warned investors it will probably not meet fourth quarter revenue expectations due to a drop in demand for its fitness trackers.
Apple and Alphabet are holdings in Jim Cramer’s Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells AAPL or GOOGL? Learn more now.
The unfortunate reality may just be that Fossil’s products fall into a grey area.
Consumers either are young millennials searching for a bargain fitness tracker or older, wealthier individuals with large disposable incomes, who “if they can afford luxury,” they will buy a Rolex. Fossil doesn’t fit into either category, said Corali Lopez-Castro, partner at KozyakTropin& Throckmorton’s bankruptcy and commercial litigation practice group.
Lopez-Castro noted that brand loyalty doesn’t exist anymore, a serious problem for Fossil. “I remember when every young girl had a Coach (COH) purse,” Lopez-Castro said. “All of a sudden they decided it wasn’t cool anymore.”
Lopez-Castro said she believes the consumers who want a smartwatch, won’t care if they’re designed by Fossil – they’ll just buy the Apple Watch because it offers the best technology.
“The retail industry as a whole is undergoing challenges,” the Fossil spokeswoman said. “However, we feel our investments in omni-channel and our connected strategy well position us for the future.”
Kartsotis said on the fourth quarter earnings call that Fossil’s “e-commerce business is thriving,” despite it being a small portion of its retail business. Still, dwindling mall traffic contributed to a 7% slip in Fossil’s comparable store sales.
For now, Fossil’s stock could keep winding down as it works through its challenges.
Click here for the original article.