Sell This Troubled Retailer Now

Melvin Pasternak's picture

Tuesday, October 6, 2015 - 7:30am

by Melvin Pasternak

This stock is on the wrong end of a fading trend. In 2010, customers couldn't buy enough of this company's then-chic watches, jewelry, belts and sunglasses. Today, sales are declining worldwide. 

Fossil Group (Nasdaq: FOSL) -- a name that wasn't meant to be ironic but may prove to be. In the rapidly changing world of fashion, the worst thing a brand can be is antiquated.

This isn't just a subjective interpretation of fashion trends either; the numbers and the stock chart all support the argument that Fossil is in trouble.

All Signs Point Down For Fossil
Let's start with a few fundamental reasons to be concerned over Fossil's business.

Fossil's most recent quarterly results were weighed down by negative currency exchange rates. In mid-August, Fossil reported second-quarter revenue dropped 4% year over year to $740 million -- below analyst estimates for revenue of $750 million. 

Things don't look to be getting better. Nearly half of Fossil's revenues come from Europe and Asia. Economic slowdowns there, coupled with a rising U.S. dollar, could reduce the amount it earns. Anticipating this, management lowered its full-year earnings per share (EPS) guidance to $4.80 to $5.60, down from a previous $5.25 to $6.05.

Analysts are similarly pessimistic. With domestic and international sales expected to slow, they're predicting third-quarter revenue, which should be reported in mid-November, will drop 11.2% to $794.2 million. For the full year, analysts expect revenue to slip 6.5% to $3.3 billion.

With negative currency translation compounded by weak sales, analysts project third-quarter earnings will fall 41% from the comparable year-earlier period to $1.15 per share from $1.96 . Full-year earnings are expected to fall 27.2% to $5.11 per share.

In addition to a weak outlook, the company has an extremely high debt-to-total-equity ratio of more than 82:1. A conservative rule of thumb is 1:1.

The company also has a large amount of variable-rate debt when taken as a percentage of its market cap. Companies with a large amount of variable-rate debt will be negatively affected if the Federal Reserve hikes interest rates, since they will pay more on their loans. 

That's one ugly picture, and it's hard to find a bright spot. Sure, Fossil is attempting to innovate by offering smart watches and other high-tech wearable devices. But even a successful smart watch would be going up against strong macro headwinds, and the company is likely too late in the game anyway.

Fossil's peers, like Swatch and LVMH's Tag Heuer, offer rival devices. Hi-tech innovators, like Apple (Nasdaq: AAPL) and Samsung, have already captured significant market share. With heavy competition vying for a limited consumer base, there's a good chance that Fossil's smart technologies will not make the cut, much less serve as any kind of savior. 

Fossil's Downtrend Should Only Accelerate 

As seen in Fossil's chart below, the technical outlook is also very weak. 

FOSL Stock

Since their November 2013 peak near $135, shares have dropped sharply, with the stock declining almost 60%. 

Roughly a year after its top, shares had already declined to around $90. From there, they staged a weak recovery, rebounding to about $115 by November before weakening for the rest of the year.

In January 2015, shares traded for about $110. At this time, a very steep, accelerated downtrend began. This was reinforced by the highly bearish death cross as the downward-sloping 40-week moving average fell below the 10-week moving average.

That accelerated downtrend still continues. The nearest historical support occurred between 2008 and 2010 when shares formed a base between about $40 and $50 -- and even that level is several dollars away.

If the S&P 500 breaks its Aug. 25 closing low of 1,867.61, I would anticipate a very sharp sell-off in the vast majority of stocks. Companies in accelerated downtrends -- like Fossil -- could be hit very hard. And even if the Aug. 25 low holds, FOSL will still need to swim upstream against falling revenue and earnings.

Recommended Trade Setup: 

-- Sell FOSL short at the market price
-- Set stop-loss at $61.11
-- Set price target at $43.05 for a potential 22% gain by year end 

Note: A small group of investors just turned a 6% move in another retailer into a 27% profit in four days. That works out to a stunning 2,481% annualized gain. 

The best thing about their strategy is that it can be used to profit whether stocks go up or down. So imagine the kind of return you could see from a move like the 20%-plus decline predicted in FOSL. 

To find out how average traders are making profits like this every month, follow this link. 

This article was originally published on ProfitableTrading.com: Sell This Troubled Retailer Now

Melvin Pasternak does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.