We played this short a couple weeks ago, time to reload. We exited FOSL with slightly more than a $2 gain when it rebounded unexpectedly. Nothing has changed fundamentally and it was down today in a bullish market.
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FOSL - Fossil Group - Company Profile
Fossil Group, Inc., together with its subsidiaries, designs, develops, markets, and distributes consumer fashion accessories. The company's principal products include a line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, and soft accessories. It offers its products under its proprietary brands, such as FOSSIL, MICHELE, MISFIT, RELIC, SKAGEN, and ZODIAC, as well as under the licensed brands, including ADIDAS, ARMANI EXCHANGE, BURBERRY, CHAPS, DIESEL, DKNY, EMPORIO ARMANI, KARL LAGERFELD, KATE SPADE NEW YORK, MARC JACOBS, MICHAEL KORS, and TORY BURCH. The company sells its products through department stores, specialty retail stores, specialty watch and jewelry stores, mass market stores, e-commerce sites, licensed and franchised FOSSIL retail stores, and retail concessions, as well as sells its products on airlines and cruise ships. As of December 31, 2016, it owned and operated 94 retail stores and 129 outlet stores located in the United States, as well as 230 retail stores and 132 outlet stores internationally. The company was formerly known as Fossil, Inc. and changed its name to Fossil Group, Inc. in May 2013. Company description from FinViz.com.
Fossil reported an adjusted loss of 35 cents compared to estimates for a loss of 21 cents. Revenue of $581.8 million missed estimates for $596.5 million. For Q2 they guided for a loss of 23 to 40 cents.
Analyst expectations for Q2 have declined from a loss of 6 cents to a loss of 25 cents and has declined three times in the last couple of weeks. For the full year analysts are now expecting earnings of 90 cents, down from $1.11 a month ago.
Earnings August 8th.
Shares crashed in early June on news the CEO sold 520,000 shares in mid May and 1.074 million shares on May 30th. A Macquarie research note also said that 3.8 million shares were pledged as security for a note of around $75 million and they could be sold at any time. With FOSL shares at $11 the pledge was already in the red by $30 million. At the current price of $10 that value dropped by another $3.8 million. The CEO only has 4.426 million shares after his sales last week and with 3.8 million pledged, that leaves him with roughly 600,000. It appears the CEO is bailing on his holdings and that is never good for the stock price. If the price declines further he may be forced to sell his remaining 600,000 shares to make up the shortfall on the pledged shares.
Fossil is struggling despite the decent revenue. Costs and marketing are too high and they are losing market share to the rapidly expanding number of brands. Burberry is exiting the watch business this year and Fossil makes their watches. That means even lower revenue for Fossil.
Shares traded at a 16-year low in mid June before the recent rebound. I believe Fossil is going lower with $6 the likely target.
There was an upgrade by Buckingham Research on June 20th that stopped us out of the prior position. That was an upgrade from sell to neutral and hardly a reason to rush out and buy the stock. It did trigger some short covering. Shares are rolling over again after hitting resistance at $10.
Sell short FOSL shares, currently $9.75, initial stop loss $10.50.
Alternate position: Buy Aug $9 put, currently 65 cents. Initial stop loss $10.50.
Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 at the market open.