FOSL - Fossil Group Inc

[MrB]

THE FOSSIL - IT IS DEAD MAHN!

 

FOSSIL SHARES TOUCH 8-YR LOW OF $11.71 IN VOLUME SPIKE, LAST DOWN 3.1 PCT AT $11.72 - RTRS

[Scuttlebutt Plunger]

The FCF profile is very attractive, but I have gotten this wrong before and cut losses.  Doubtful that women stop wearing fashion watches altogether...  I checked out their fitness tracker device (misfit products) - very inferior to similarly priced products.  And that's a fact, not an opinion

[MrB]

The FCF profile is very attractive, but I have gotten this wrong before and cut losses.  Doubtful that women stop wearing fashion watches altogether...  I checked out their fitness tracker device (misfit products) - very inferior to similarly priced products.  And that's a fact, not an opinion

 

I don't disagree, but that does not mean there is not a market for it.

[Dalal.Holdings]

Misfit was a garbage acquisition.

 

The Q line of watches are mediocre at best, don't have full functionality with iOS.

 

How can a company that only offers second rate (at best) smart watches compete with tech titans?

 

If this is a play on jewelry, why engage in this competition with Apple and the like? They won't win with their poor products and end up damaging their own brand. FOSL could just focus on the jewelry/accessory market and downsize. At these prices, if they do have free cash, buying back chunks of stock or taking the whole thing private might be the way forward.

 

Their licensing biz (where they make watches for other brands with more cachet like Burberry--who is not renewing and Michael Kors) was the most attractive/resistant to competition with high ROI and low capex. That business could cater to whichever fashion brand is the "brand of the moment" with licensing deals (ie. what used to be Coach and became Michael Kors, etc etc). Instead they seem to have gone on this "wearables"/"tech" escapade with half assed products (how would they ever get the tech talent to build products to compete w the likes of Apple?). Should have just kept focus on the licensing/jewelry biz and not gone the tech route.

[Scuttlebutt Plunger]

Decisions that management teams make are not linear - even the best make mistakes, some times.  I can't get over how cheap this thing is.  Cash per share of $6.61 and TTM P/S ratio of 0.18x (significantly lower than 08/09).  Significant debt hurdle in 2019 (likely could be refinanced), but people/analysts are likely too negative.

 

Going to take a closer look (again) and if management buys back shares at these levels I could become a little more confident.

 

 

[MrB]

Misfit was a garbage acquisition.

Why?

 

The Q line of watches are mediocre at best, don't have full functionality with iOS.

 

How can a company that only offers second rate (at best) smart watches compete with tech titans?

Mediocre compared to what?

Also could you not make that same argument about their traditional watch business?

 

If this is a play on jewelry, why engage in this competition with Apple and the like?

Why do you consider Fossil a play on jewelry?

 

They won't win with their poor products and end up damaging their own brand. FOSL could just focus on the jewelry/accessory market and downsize. At these prices, if they do have free cash, buying back chunks of stock or taking the whole thing private might be the way forward.

If it is a bad investment, which I think is what you're saying, then why would it be a good idea for management to repurchase stock and/or take it private?

 

Their licensing biz (where they make watches for other brands with more cachet like Burberry--who is not renewing and Michael Kors) was the most attractive/resistant to competition with high ROI and low capex. That business could cater to whichever fashion brand is the "brand of the moment" with licensing deals (ie. what used to be Coach and became Michael Kors, etc etc). Instead they seem to have gone on this "wearables"/"tech" escapade with half assed products (how would they ever get the tech talent to build products to compete w the likes of Apple?). Should have just kept focus on the licensing/jewelry biz and not gone the tech route.

I think the flip side would be that Fossil caters to fashion brands and fashion brands want the new thing, which is wearable tech. I think Basil 2017, recent industry research and industry sales confirms it as the new trend and Fossil is expected to cover that base for these brands. 

[Green King]

Misfit was a garbage acquisition.

Why?

 

The Q line of watches are mediocre at best, don't have full functionality with iOS.

 

How can a company that only offers second rate (at best) smart watches compete with tech titans?

Mediocre compared to what?

Also could you not make that same argument about their traditional watch business?

 

If this is a play on jewelry, why engage in this competition with Apple and the like?

Why do you consider Fossil a play on jewelry?

 

They won't win with their poor products and end up damaging their own brand. FOSL could just focus on the jewelry/accessory market and downsize. At these prices, if they do have free cash, buying back chunks of stock or taking the whole thing private might be the way forward.

If it is a bad investment, which I think is what you're saying, then why would it be a good idea for management to repurchase stock and/or take it private?

 

Their licensing biz (where they make watches for other brands with more cachet like Burberry--who is not renewing and Michael Kors) was the most attractive/resistant to competition with high ROI and low capex. That business could cater to whichever fashion brand is the "brand of the moment" with licensing deals (ie. what used to be Coach and became Michael Kors, etc etc). Instead they seem to have gone on this "wearables"/"tech" escapade with half assed products (how would they ever get the tech talent to build products to compete w the likes of Apple?). Should have just kept focus on the licensing/jewelry biz and not gone the tech route.

I think the flip side would be that Fossil caters to fashion brands and fashion brands want the new thing, which is wearable tech. I think Basil 2017, recent industry research and industry sales confirms it as the new trend and Fossil is expected to cover that base for these brands.

 

What is the reason that FitBit is also suffering?

Got a view on the Asian Players that are also entering Fitbit's market (wearables)?

[MrB]

What is the reason that FitBit is also suffering?

Got a view on the Asian Players that are also entering Fitbit's market (wearables)?

Most industry commentators seem to think it is because Fitbit don't have a smartwatch offering. Most smartwatches now come with Fitbit functionality. Makes sense to me.

 

No view on Asian players.

[Green King]

What is the reason that FitBit is also suffering?

Got a view on the Asian Players that are also entering Fitbit's market (wearables)?

Most industry commentators seem to think it is because Fitbit don't have a smartwatch offering. Most smartwatches now come with Fitbit functionality. Makes sense to me.

 

No view on Asian players.

 

Care to comment on the high operating leverage? failure to cut cost? Is this like the cosmetic businesses where the brand will melt away if they stop spending? Since this is like the car businesses if they miss this product line how many more times can they bet? (ie. Nintendo)

 

The price has significantly changed the risk profile of this investment.

[MrB]

What is the reason that FitBit is also suffering?

Got a view on the Asian Players that are also entering Fitbit's market (wearables)?

Most industry commentators seem to think it is because Fitbit don't have a smartwatch offering. Most smartwatches now come with Fitbit functionality. Makes sense to me.

 

No view on Asian players.

 

Care to comment on the high operating leverage? failure to cut cost? Is this like the cosmetic businesses where the brand will melt away if they stop spending? Since this is like the car businesses if they miss this product line how many more times can they bet? (ie. Nintendo)

 

The price has significantly changed the risk profile of this investment.

 

Fitbit or FOSL?

[Dalal.Holdings]

Tech segments are usually winner-take-all. There is a loaded graveyard with companies like Nokia, Blackberry, etc which developed tech products that were not quite as good as Apple/etc. If you think that a struggling watchmaker with a fraction of the capital resources of Apple and operating in Software/Hardware (outside of its circle of competence but within Apple's circle) is somehow going to win, thrive, or even have moderate success, good luck with that. I'm sure the software talent picked up by misfit is going to compete with Apple. I'm sure top programmers want to go work for Fossil and not Apple.

 

Luxury products are not winner-take-all. Brands like Michael Kors, Gucci, Burberry, Rolex, Omega, etc can all thrive as each one is picked not on the basis of product superiority, but rather how a customer relates to them/wears them in terms of expression. That's why Fossil will have somewhat of a moat in jewelry, licensing business verses wearables where it has no moat and virtually no chance of success.

 

Go ahead and go read reviews of misfit and the Q line of products. Then ask yourself why someone would buy those, when at an extra $50-100, they could get something superior from Apple/Samsung.

[MrB]

Tech segments are usually winner-take-all. There is a loaded graveyard with companies like Nokia, Blackberry, etc which developed tech products that were not quite as good as Apple/etc. If you think that a struggling watchmaker with a fraction of the capital resources of Apple and operating in Software/Hardware (outside of its circle of competence but within Apple's circle) is somehow going to win, thrive, or even have moderate success, good luck with that. I'm sure the software talent picked up by misfit is going to compete with Apple. I'm sure top programmers want to go work for Fossil and not Apple.

Ah of course. We're all going to wear Apple watches, just as we're all using iPhones today. I missed the fact that Fossil is a tech company; I was under the impression it was the largest vertically integrated watch company in the US.

 

Luxury products are not winner-take-all. Brands like Michael Kors, Gucci, Burberry, Rolex, Omega, etc can all thrive as each one is picked not on the basis of product superiority, but rather how a customer relates to them/wears them in terms of expression. That's why Fossil will have somewhat of a moat in jewelry, licensing business verses wearables where it has no moat and virtually no chance of success.

So if a consumer is willing to buy a Michael Kors, Gucci, etc product "not on the basis of product superiority, but rather how a customer relates to them", why does it stop being true when that product is a watch? I doubt anyone with a Michael Kors or Kate Spade hybrid or smart watch would argue their product is superior to the Apple watch.

 

Go ahead and go read reviews of misfit and the Q line of products. Then ask yourself why someone would buy those, when at an extra $50-100, they could get something superior from Apple/Samsung.

 

Simply because the $50-$100 is a bridge too far for Fossil segment (generally speaking). They cannot afford it. That is why Kosta is so set on driving volume, so he can drive the prices below $200, whilst getting margins up thereby making the value proposition clear to the typical Fossil customer. 

 

Put another way. Go to a Wal-Mart watch section and "Then ask yourself why someone would buy those". Don't you think that customer buying that watch in Wal-Mart (supplied by Fossil) also wants a hybrid/smart watch and don't you think Kosta wants to be the guy supplying it.

 

 

All being said, the concern around tech is valid, but I think it is simplistic to reduce the argument to Fossil v Apple.

[Dalal.Holdings]

Please explain how vertical integration makes Fossil competitive in wearables/tech watches. My original argument that Fossil is not competitive in this space (but does have a chance to survive in the traditional watch space) still stands.

 

Yeah, it's going to be the big guys with the software/hardware talent that will dominate in tech/smart watches. I'm sure many analysts thought Nokia phones would keep selling because they're "more affordable" to "certain segments". Then the iPhone 2 came out and the iPhone 1 was sold at the same prices as those Nokia phones and those cheaper folk bought the old gen iPhone because it was still superior to the new product Nokia put out. You know, all that seamless software integration with their Apple devices and products they already had. Plus there was something called the App Store. Oh yeah and Nokia had nothing in terms of software talent compared to Apple. And it won't be just Apple, but Samsung's watches that will crush Fossil's Q line particularly as they will directly target that price point.

 

You seem to misinterpret what I mean by "jewelry". Jewelry brands will have a moat. Fossil's old non-smart watches and licensed (ie Kors) watches were "jewelry" in the same sense that Rolex is. They are worn as accessories, not for their superiority in telling time. The hybrid watches are interesting and may be an area where Fossil can keep this moat while offering some limited tech capabilities (ie, no screen, touchscreen, or apps). This is because these are still more fashion accessories/jewelry than tech products (at least outwardly).

 

However, the Q series/full touch screen watches and the misfit series will not be able to compete against the likes of Apple/Samsung/etc. Fitbit will also likely fall to the better resourced tech firms that can create watches with screens. With these products, it's less about wearing them as accessories (ie, not "jewelry") and more about the tech capabilities. In that realm, companies like Apple will always beat Fossil. This is likely a wasted area of effort for FOSL.

 

EDIT:

Just to add, a quick Amazon search of "smartwatch" yields a huge number of products from Asus, Pebble, Garmin, Sony, Fitbit, Samsung, Apple, Huawei, a plethora of random asian brands, etc ranging in price from $25 to $350. Fossil's products don't even make the front page. And most of these have a higher number of ratings and higher star ratings than Fossil's 2nd gen Q or misfit lines. So, again, what is the point of engaging in this market?

[Green King]

What is the reason that FitBit is also suffering?

Got a view on the Asian Players that are also entering Fitbit's market (wearables)?

Most industry commentators seem to think it is because Fitbit don't have a smartwatch offering. Most smartwatches now come with Fitbit functionality. Makes sense to me.

 

No view on Asian players.

 

Care to comment on the high operating leverage? failure to cut cost? Is this like the cosmetic businesses where the brand will melt away if they stop spending? Since this is like the car businesses if they miss this product line how many more times can they bet? (ie. Nintendo)

 

The price has significantly changed the risk profile of this investment.

 

Fitbit or FOSL?

 

Fosl

[bonkers]

Does anyone know how to best estimate retailer's risk of going bankrupt? And what is the typical pattern / timeline?

 

However, in my mind FOSL is not "just a retailer" trying to select 3rd party stuff that customers lover and to sell it efficiently, but more of a branded apparel company with subcontracting business as well, that designs and produces its own merchandise, and then tries to sell it. So it's not Sears or Target, but more like Ralph Lauren and Benetton (albeit with weaker main brand).

[MrB]

Please explain how vertical integration makes Fossil competitive in wearables/tech watches. My original argument that Fossil is not competitive in this space (but does have a chance to survive in the traditional watch space) still stands.

That was not the point; Fossil is vertically integrated (design, manufacture/source, distribute & design) of watches and related products across a range of brands (own and licensed). Smartwatches are only one part of the business (5% of revenue the last time I checked). My point is to look at it as a tech company is simplistic.

 

Yeah, it's going to be the big guys with the software/hardware talent that will dominate in tech/smart watches. I'm sure many analysts thought Nokia phones would keep selling because they're "more affordable" to "certain segments". Then the iPhone 2 came out and the iPhone 1 was sold at the same prices as those Nokia phones and those cheaper folk bought the old gen iPhone because it was still superior to the new product Nokia put out. You know, all that seamless software integration with their Apple devices and products they already had. Plus there was something called the App Store. Oh yeah and Nokia had nothing in terms of software talent compared to Apple. And it won't be just Apple, but Samsung's watches that will crush Fossil's Q line particularly as they will directly target that price point.

 

As I said and to echo what I said above in this post, "All being said, the concern around tech is valid, but I think it is simplistic to reduce the argument to Fossil v Apple."

You seem to misinterpret what I mean by "jewelry". Jewelry brands will have a moat. Fossil's old non-smart watches and licensed (ie Kors) watches were "jewelry" in the same sense that Rolex is. They are worn as accessories, not for their superiority in telling time. The hybrid watches are interesting and may be an area where Fossil can keep this moat while offering some limited tech capabilities (ie, no screen, touchscreen, or apps). This is because these are still more fashion accessories/jewelry than tech products (at least outwardly).

No, that is a poor attempt to misdirect. It was a simple question. "So if a consumer is willing to buy a Michael Kors, Gucci, etc product "not on the basis of product superiority, but rather how a customer relates to them", why does it stop being true when that product is a watch? I doubt anyone with a Michael Kors or Kate Spade hybrid or smart watch would argue their product is superior to the Apple watch."

 

However, the Q series/full touch screen watches and the misfit series will not be able to compete against the likes of Apple/Samsung/etc. Fitbit will also likely fall to the better resourced tech firms that can create watches with screens. With these products, it's less about wearing them as accessories (ie, not "jewelry") and more about the tech capabilities. In that realm, companies like Apple will always beat Fossil. This is likely a wasted area of effort for FOSL.

I view at as a range of options Kosta faced, so I don't agree it is a wasted effort at all.

The basic options being,

 

1. Does he refuse to engage with tech?

2. Does he engage along the lines they did with China manufacturing in the 80's or Swiss manufacturing in the 90's?

3. Does he engage along the lines Movado does (partner on the tech side)?

 

2 or 3 makes the most sense to me and my preference would be for 3, but can I fault Kosta for choosing 2 considering past success? No, I don't believe I can, especially considering the demand drivers for his licensing customers.

 

EDIT:

Just to add, a quick Amazon search of "smartwatch" yields a huge number of products from Asus, Pebble, Garmin, Sony, Fitbit, Samsung, Apple, Huawei, a plethora of random asian brands, etc ranging in price from $25 to $350. Fossil's products don't even make the front page. And most of these have a higher number of ratings and higher star ratings than Fossil's 2nd gen Q or misfit lines. So, again, what is the point of engaging in this market?

Because you're shopping like a geek man! Do you think the average gal that bought a Michael Kors Bradshaw in rose gold searched for "smartwatch" on Amazon?

 

 

Again, I don't fault the gist of your argument re tech, but it is too simplistic as it relates to Fossil Inc.

[Green King]

This is something I've been thinking about for the past few weeks while looking at retail. Since the advertising age, a big part of demand and desire is created in a retail display setting as more of the flow move online and mall traffic decrease, will this have an effect on overall consumptions since online display is not as developed as offline at this moment in time. In effect put some of the weaker players in receivership. Due to operating leverage & debt.

[DooDiligence]

This is something I've been thinking about for the past few weeks while looking at retail. Since the advertising age, a big part of demand and desire is created in a retail display setting as more of the flow move online and mall traffic decrease, will this have an effect on overall consumptions since online display is not as developed as offline at this moment in time. In effect put some of the weaker players in receivership. Due to operating leverage & debt.

 

Smaller store footprints & more store within a store formats (geared towards product demos & capturing old fashioned bag shoppers as an afterthought?)

[MrB]

This is something I've been thinking about for the past few weeks while looking at retail. Since the advertising age, a big part of demand and desire is created in a retail display setting as more of the flow move online and mall traffic decrease, will this have an effect on overall consumptions since online display is not as developed as offline at this moment in time. In effect put some of the weaker players in receivership. Due to operating leverage & debt.

 

Smaller store footprints & more store within a store formats (geared towards product demos & capturing old fashioned bag shoppers as an afterthought?)

 

and/or  larger flagship/product entertainment stores.

[DooDiligence]

This is something I've been thinking about for the past few weeks while looking at retail. Since the advertising age, a big part of demand and desire is created in a retail display setting as more of the flow move online and mall traffic decrease, will this have an effect on overall consumptions since online display is not as developed as offline at this moment in time. In effect put some of the weaker players in receivership. Due to operating leverage & debt.

 

Smaller store footprints & more store within a store formats (geared towards product demos & capturing old fashioned bag shoppers as an afterthought?)

 

and/or  larger flagship/product entertainment stores.

 

I think AND in major metros with minis everywhere else

 

Is the Sham Wow guy still alive?

[Green King]

That takes time. I think what we are seen with retail is the beginning of that change and decline in SSS are just the beginning since the physical world is changing much slower than the digital. I think the retail number partly reflect that. And this is a moment of uncertainty I think those ideas might work. But like mining, you don't know how much gold is down there until all the ores are mine out and milled.

[DooDiligence]

That takes time. I think what we are seen with retail is the beginning of that change and decline in SSS are just the beginning since the physical world is changing much slower than the digital. I think the retail number partly reflect that. And this is a moment of uncertainty I think those ideas might work. But like mining, you don't know how much gold is down there until all the ores are mine out and milled.

 

They're mining desire & need to create attachments to be successful

[Dalal.Holdings]

I view at as a range of options Kosta faced, so I don't agree it is a wasted effort at all.

The basic options being,

 

1. Does he refuse to engage with tech?

2. Does he engage along the lines they did with China manufacturing in the 80's or Swiss manufacturing in the 90's?

3. Does he engage along the lines Movado does (partner on the tech side)?

 

2 or 3 makes the most sense to me and my preference would be for 3, but can I fault Kosta for choosing 2 considering past success? No, I don't believe I can, especially considering the demand drivers for his licensing customers.

 

2 or 3 are classic "do something syndrome". Just a reminder that Fossil bought Misfit for $260M one and a half years ago -- more than half of Fossil's market cap today....and to add insult to injury, the transaction was done with cash (not stock).

 

We seem to agree about the tech limitation and yes, it is a small % of revenues for Fossil. My opinion is that the company can continue to survive in fashion watches and limited tech (hybrid) watches. The Q and misfit lines likely do not have a viable future however. The fashion watch segment seems to be in decline and it is a question of if this is short term turbulence or long term secular decline. I do not feel that Apple's watch or the full screen watch category is a "game changer" like smart phones were, but merely that Q/misfit would never compete in this area. It is quite likely in my opinion that the market will settle on hybrid as the best of both worlds: offering fashion/jewelry like accessory outwardly with some underlying tech functionality that is less apparent on the surface.

[Mungerish]

Kartsotis sold 20% of his holdings on 5/25 for prices ranging from $11.21- 11.82. Geez I hope he is building a yacht or a house that he cant get out of paying for.......Otherwise, that is a pretty bad sign to be selling at these levels.

[Dalal.Holdings]

Looks like CEO dumping even more shares at record low prices:

 

Over half a million shares at 10.71

https://www.gurufocus.com/news/531498/fossil-group-inc-fosl-chairman-of-the-board--ceo-kosta-n-kartsotis-sold-56-million-of-shares

 

That represents a significant part of his stake...has dumped about 30% of his overall position recently.