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According to Wikipedia, fossils (from Classical Latin fossilis; literally, "obtained by digging") are the preserved remains or traces of animals, plants, and other organisms from the remote past. The totality of fossils, both discovered and undiscovered, and their placement in fossil-containing rock formations and sedimentary layers, is known as the fossil record.
That's amazingly close to the definition I'd give the once-trendy watch and accessories purveyor turned dinosaur crap retailer, Fossil Group Inc. (Nasdaq: FOSL).
At least we can give it foresight credit for getting its name right.
Similarities include words like "digging" (as in digging its own grave) and "sedimentary layers," which are also known as piled-up crap and draw close comparison to FOSL piling its debt higher, as well as excess inventory of its watches, leather goods, and jewelry.
Why Fossil Is About to Go the Way of the Dinosaurs
Let's work backwards, as adept diggers do. Looking at Fossil's stock reveals it's been pounded down to its 2009 levels, when the world was close to facing an extinction-level event of another dimension.
How did it get down here?
Easily – it crapped on itself.
Just brushing off the first layer of dust on this rock, we see that the first quarter's revenue fell 12% to $581.8 million. That was $10 million less than analysts had expected.
On top of that disappointing news, the company's CFO Dennis Secor guided down the second quarter's sales expectations to somewhere between 8% and 11.5% lower. Ouch.
The whole quarter was crappy, but the brave CFO tried to put a positive spin on it. Frankly, it was sad.
Fossil's big push into wearables is being highlighted as a hot growth area for the company. I'm talking wearables like watches that can tell you how many steps you've walked, or your temperature, or that you're a loser if you look at one of its watches and expect it to propel the company's stock higher.
Talking up wearables as a bright spot in the company's future was, for me, like saying the sun exploding would give everyone a good tan for a second.
Supposedly, the good news was that sales of wearables in the first quarter were in line with the company's 5%+ expectation for the segment's contribution to revenue. And, wouldn't you know it, the proud CFO pointed out that, indeed, wearables accounted for 7% (or $40.7 million) of sales revenue in the first quarter.
Good stuff, right?
Nope. On a sequential basis (meaning from the fourth quarter to the first quarter), sales of wearables were down 60%. In the fourth quarter, the company sold about $105 million worth of wearables… and $40.7 million in the first quarter. That's bad.
Wearables are part of the watches segment at Fossil. So, how did watches in total do in the quarter versus a year ago? Sales were DOWN 9%.
And the other big growth segment – which for a good while was right behind watches – leather goods, well, sales in that segment were DOWN 21%.
And what about jewelry, you ask? Sales of its third principal segment of hot merchandise at Fossil were, you guessed it, DOWN 12%.
Starting to see how Fossil is starting to look like a fossil?
But it's worse.
On a sequential basis, watches were down more than 30%.
The company's gross margins were down 300 basis points. Its profit margin is less than point eighty-five. That's 0.84, if you like to look at numbers with zeroes in front of them. In fact, if its profit margin gets any smaller, we're going to need a microscope to find it.
Fossil is a problem for analysts. They say the company doesn't provide any "visibility" as far as where it's going with its push into wearables, with its merchandise mix, with its falling sales, or what it's doing about competition, about shrinking margins, about margin compression on itself from bringing in more goods that it has to discount to compete against its already stretched line-up of crappy merchandise.
At least the company's got some cash on hand (more than $300 million) for now.
Oh, wait – too bad it has almost twice that much in debt.
The only thing Fossil's stock has going for it is that the percentage of shares floating in the market is almost… Are you ready? 50%. That's only a positive because a short squeeze could take the stock higher.
I'd feel bad for Fossil if I didn't think the company deserved it.
How We're Targeting Fossil's Extinction
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
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