Despite delivering positive results on the back of continued momentum at the Fossil brand, product innovation in the watch portfolio, and expansion in wearable technology, Fossil Group, Inc. (FOSL - Free Report) has been witnessing economic, competitive and consumer headwinds. In fact, we note that the stock has declined 28.3% year-to-date compared with the Zacks categorized Retail-Apparel/Shoe industry’s decline of 8.6%.

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Apart from weakness in the watches category, which the company has been facing since the past many quarters, the outcome of the elections  and President-elect Donald Trump’s tax plans have been a cause of concern. Analysts believe that given the high degree of imports and low gross margins, apparel retailers and footwear manufacturers as well as watch manufacturers are the most at risk sub-categories, as they will be less likely to pass higher pricing onto the consumers, as consumers have restricted their spending for the past few years.

Though Fossil delivered better-than-expected earnings in the third quarter of fiscal 2016 on Nov 3, its sales marginally lagged the Zacks Consensus Estimate. The company also narrowed its fiscal 2016 outlook due to economic, competitive and consumer headwinds. Earnings of 42 cents per share plunged 66.1% from the prior-year figure due to a decline in sales and operating income, and the impact of higher taxes. Sales decreased 4% from the year-ago quarter, primarily due to a decline in the company's multi-brand licensed watch portfolio and a challenging environment for the traditional watch category. Currency fluctuations continued to hurt the top and the bottom line in the quarter. The Zacks Consensus Estimate for the fourth quarter of 2016 declined 9% to $1.21 over the past 60 days.

Let’s delve deeper to find out what’s happening at this Richardson, TX-based designer and manufacturer of clothing and accessories.

Factors at Play

Fossil boasts a solid watch portfolio, with the Fossil brand being the key growth driver owing to its strong global distribution platform and successful innovations. Its expansion in wearable technology also remains its strength.

The introduction of wearable technology will offer ample opportunity to extend the reach of brands and offer customers new functionality with accessories, including activity trackers, hybrid watches and smart watches.

However, softness in watch sales, weak comps in the U.S. due to low traffic, sluggish performance in key international markets, including China, Europe, Russia and Greece, and unfavorable currency have been weighing on this Zacks Rank #3 (Hold) stock.

FOSSIL GRP INC Revenue (Quarterly YoY Growth)

FOSSIL GRP INC Revenue (Quarterly YoY Growth) | FOSSIL GRP INC Quote

The company has been witnessing soft sales in licensed watches over the past few quarters, due to increased competition from new entrants in the market. Decline in its multi-brand licensed watch portfolio and a challenging environment for the traditional watch category are major reasons for the slump.

The company noted two factors that have been impacting watch sales. First, tech-enabled watches are significantly affecting the sales of traditional watches. Second, the success of the Michael Kors brand is overshadowing other brands’ performance. Moreover, in Jan 2016, Burberry announced that it is exiting the watch business and does not intend to renew its license agreement upon its expiration at 2017 end. The company continues to expect weakness in this category.

Fossil also anticipates intense competition from new players. Also, evolving consumer preference across the world will lead to a volatile sales pattern. Though this should not be a problem over the long term, as the company plans to upgrade its products technologically, the near-term implications remain severe.

Stocks to Consider

Some well-positioned retailers include The Children's Place, Inc. (PLCE - Free Report) , Tilly’s, Inc. (TLYS - Free Report) and Zumiez Inc. (ZUMZ - Free Report) . All these stocks sport a Zacks Rank #1 (Strong Buy). 

The Children’s Place has an average positive earnings surprise of 36.3% in the trailing four quarters. It also has a long-term earnings growth rate of 10.3%.

While Tilly’s has a long-term earnings growth rate of 15.5%, Zumiez has a growth rate of 15.0%.