In an effort to turn around the consistent declining revenue and sales, watchmaker Fossil Group is shifting its focus to smartwatches and trackers, effectively trying to rebrand itself as the leader in the industry by embarking on what executives called an “unprecedented launch.”
During a second quarter earnings call with investors and analysts, Fossil CEO Kosta Kartsotis said over the next three months, the company will have eight wearable brands across three product categories – hybrid, smartwatch and activity tracker – comprising 100 stock keeping units, available in 40 countries in 20 languages. While this has historically been a smaller segment of Fossil, it now appears to be the primary means by which Fossil aims to turn itself around, accounting for most of the growth in the company.
“On that front, we are well on our way to launching connected accessories across more of the brands in our portfolio and are on track to deliver this product in the third quarter,” said Kartsotis. “Weaker performance in our wholesale channel, particularly in the US, where the business is most challenged, is likely to continue. However, we believe the innovative products launched later in the year can begin to re-energize the channel.”
Ever since the company acquired wearable technology company Misfit last year, Fossil has been on a mission to pick up and rebrand itself as the premiere company that blends fashion with technology, offering several hybrid and smartwatches as well as analog watches with activity trackers. At the 2016 CES event in January, Fossil announced it would launch more than 100 connected devices, and the company plans to deliver on that with a gradual rollout in the third quarter, accelerating through the fourth for the holiday season.
“You’ll see that in two waves,” Kartsotis said. “The first will be Fossil and Michael Kors smartwatches on Google’s Android Wear platform. Those will hit the market at the very end of August and early September."
Starting at the end of this week, consumers will be able to preorder some of Fossil’s new products. There will be nearly 30 SKUs across five different product platforms, across two brands – Michael Kors and Kate Spade – which Kartsotis referred to as “fashion-forward.”
The second wave will be later in September, October, and some in early November with the release of hybrid smartwatches and trackers across eight brands – Fossil, Michael Kors, Kate Spade New York, Armani, Diesel, Misfit and Chaps by Ralph Lauren.
The company anticipates the traditional watch category will continue to decline, especially as the market becomes increasingly driven by millenials, who, as Kartsotis pointed out, grew up without watches and rely instead on smartphones for, among everything else, timekeeping.
“With consumer shopping patterns continuing to evolve as reflected in weaker wholesale channel trends recently, it is important that our digital capabilities and omni-channel platform are best-in-class,” said Kartsotis.
To promote the launches, Fossil will be pulling out all the stops, with PR, advertising, advertising, celebrity input, social media, digital and video promotions.
“It's going to be very significant, and we're expecting that could change the direction pretty quickly,” said Kartsotis. Additionally, he said the company expects stores selling their products globally will shift their watch departments into wearable departments. “We’re positioning this as a game-changer.”
Second quarter performance was inline with overall expectations – declines in both sales and earnings goals. Overall, second quarter reported net sales decreased by seven percent to $685 million, with traditional watches driving the overall decline. Gross profit decreased to $356 million. While the company did not quantify the wearables growth, they considered it good enough to potentially offset the losses from other segments.
“With respect to wearables, we remain very encouraged by Fossil Q's performance, even though our wearables rollout thus far has been relatively small,” said Fossil CFO Dennis Secor during the call. “We and our license partners are very excited about these amazing new products…These are generally the operational assumptions that support the upper-end of our guidance.”
Secor said, for the full year, Fossil expects sales to decline in the range between one and a half to five percent, which includes roughly one percentage point headwind due to currency.
“Assuming no further significant erosion in traditional watches, wearables should start to offset, though not completely, the sales headwinds in the third quarter,” said Secor. “We anticipate third quarter gross margins will decline compared to the prior year, but we don't expect a headwind as large as we experienced in Q2.”