Fossil Drops On Slower Sales; Analysts Fret Over Margins, Contracts

Fossil (NASDAQ: FOSL) fell more than five percent Wednesday on narrowing margins and decelerating sales growth, while analysts fretted over promotions and pending contracts.

The manufacturer and retailer of fashion accessories posted a 22 percent decline in profits on 10 percent sales growth.

"Handbag promotions are pressuring Fossil" said Macquarie's Liz Dunn, who maintained a Hold rating and $110 target. Dunn said worries about renegotiating a branded watch and jewelry-making agreement with Michael Kors is weighing on the stock. Kors accounted for 22.4 percent of sales in fiscal 2013.

Fossil's current Kors agreement expires in December 2015.

Fossil announced the extension Tuesday of a similar agreement with Giorgio Armani S.p.A through 2023, but declined to disclose terms.

"The vague response on Armani was disappointing," Dunn said in a note Wednesday.

Citi's Oliver Chen is upbeat on the shares, maintaining a Buy and $135 target. Chen sees upside in Fossil's collaboration with Google to produce a so-called smartwatch with product launch in 2015.

"Fossil will likely produce other wearable technology like jewelry," Chen said, nothing the company has mentioned health and fitness, "community networks" and "sleep patterns."

The threat posed by Apple's iWatch is overstated by some, according to Jefferies' Randall J. Konik.

Although Fossil's retail segment remains "troublesome" with disappointing same-store sales, "overall we're positive on the stock," Konik said, citing a strong position in the watch industry and geographic diversification.

Konik maintained a Buy rating and $102 target.

But with shares down more than 19 percent year to date, "Fossil continues to be an unloved stock," Oppenheimer's Anna Andreeva said in a research note. While Andreeva is fond of Fossil's long-term growth outlook, she maintained a Perform rating (the firm's equivalent to Neutral) and $105 target.

With U.S. watch sales slowing and Kors concern building, resolution of those issues is "unlikely any time soon and the stock's upside is likely to be capped," Andreeva said.

Fossil closed Wednesday at $96.55, down 5.57 percent.