February 15, 2017 / 6:31 PM / 5 months ago

Fossil's smartwatch push seen eating into margins

3 Min Read

(Reuters) - Fossil Group Inc's (FOSL.O) shares plunged 20 percent to an eight-year low on Wednesday after the watchmaker's grim full-year forecast indicated that the company's push into smartwatch business would weigh on its margins.

Fossil, which also sells watches under Skagen and Burberry brands, has been investing aggressively after entering the smartwatch market in 2015 to catch up with industry leaders Fitbit Inc (FIT.N) and Apple Inc (AAPL.O).

However, analysts expressed concerns about the company's plan to discount its wearable devices to boost sales as it already is a low-margin business.

They also warned that the company's attempts to grow that business at all costs would siphon sales from its high-margin traditional watch business.

"The one category that is growing is margin dilutive and its ultimate scalability remains unproven, at the same time management is suggesting it will drop price to move units," Instinet analyst Simeon Siegel wrote in a note.

"It seems the company is stuck between a fossil and a hard place."

The brokerage cut its price target to $15 from $20, but maintained its "neutral" rating.

Wells Fargo analysts said chances of Fossil's fortunes changing in the second half are slim as people would stick to buying their Fitbit and Apple smartwatches regardless of Fossil reducing its prices.

The brokerage downgraded the stock to "underperform" from "market weight".

Slowing industry demand for smartwatches and fitness bands could also pressure earnings.

The global wearables market grew by a measly 3.1 percent in the third quarter of 2016, tumbling from a growth of more 219.7 percent in the year-earlier quarter, according to market research firm IDC. Data for the latest quarter is yet to be released.

Years of falling mall traffic - a trend that is likely to continue this year - is also likely to further pressure sales of Fossil's products.

The company's shares were down 17 percent at $19.02 in afternoon trading on Tuesday, after touching a low of $18.10. they have fallen about 31 percent in the last 12 months.

Reporting by Gayathree Ganesan in Bengaluru; Editing by Anil D'Silva

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