Fossil returns to profit and raises outlook as turnaround advances

By Daniel Okafor

What changed in Fossil's third quarter?

Fossil Group reported $25.3 million in operating income for the fiscal third quarter ended Oct. 3, reversing a $21.7 million operating loss from a year earlier.

Fossil reported net sales of $271.2 million, up 0.4%. That was its first year-over-year sales increase since the fiscal first quarter of 2022. Net income reached $11.7 million, or 19 cents per share, compared with a $39.9 million loss, or 76 cents per share, a year earlier.

Operating expenses fell 11.1% to $137 million, according to Fossil. The company last posted quarterly net income in the fiscal third quarter of 2022.

Fossil's reported numbers show that cost control did more work than sales volume. A 0.4% sales increase and an 11.1% drop in operating expenses moved the watchmaker from a $21.7 million operating loss to $25.3 million in operating income.

CEO Franco Fogliato told CNBC in an exclusive interview: “We're excited about improving dramatically the profitability of the company through a very strong and disciplined management of full-price sales as well as cost management.”

What does the reset look like?

Fossil's results point to an early turnaround for a legacy watchmaker. Since its sales and stock price peaked in the 2010s, the company has struggled to compete with new gadgets. It also faced the rise of smartwatches, mounting debt and declining mall foot traffic.

Fossil's stock has lost the vast majority of its value since the early-to-mid 2010s, despite a recent surge. The shares traded below $8 on Tuesday.

Fogliato joined Fossil in 2024. He focused on closing stores, moving away from promotions toward full-price sales, improving marketing and broadening the product range. The goal, he said, was to shrink the business to a sustainable baseline before trying to grow it.

Direct-to-consumer sales fell 5.9% in the third quarter. Fogliato attributed that decline to the company's “aggressive” downsizing. “We simplified a lot of the business doing this,” he said. He added that customers responded well when Fossil moved away from markdowns: “People tell me they are excited about what they are seeing in the marketplace now.”

Where is growth coming from?

Fossil identified Asia as the quarter's key growth engine. Net sales in the region rose 15.1%, and Fogliato said much of that growth came from India.

International gains address only part of the challenge because Fossil still needs to improve in its home country. “Priority number one is to grow our home market, and we're doing that,” he said.

“As retail is settling into a smaller, more profitable base, ready to grow again, we're entering 2027 with plenty of opportunities,” Fogliato said.

Can traditional watches carry the recovery?

Fogliato said one key to growth was not trying to keep pace with the smartwatch trend. Earlier efforts to gain ground in smartwatches hampered Fossil's performance, but the company has returned to investing in analog watches.

Smartwatch sales came in below $1 million for the quarter. Traditional watches, which make up around 86% of Fossil's sales, grew 6.4%. The quarter's product mix therefore remained overwhelmingly analog.

What does the raised sales outlook mean?

Fossil raised full-year net sales guidance to a range of $980 million to $990 million. The range still implies a slight decline from just over $1 billion in prior-year net sales, but compares with the previous expectation of a 3% to 5% drop.

The company also expects positive free cash flow by the end of the year. Fogliato said Fossil had previously not expected sales growth for another year and a half. The raised outlook therefore moved the company ahead of that earlier timetable, though it still targets a full-year sales decline.

“Fossil is literally having a comeback, a strong comeback, a momentum, and we can see this,” Fogliato said. “And it comes not only through the numbers – it comes with the excitement we see in the stores, and we think we're just at the beginning. We have so much work to do.”

The next test is whether Fossil can grow its home market fast enough to narrow the still-declining full-year sales outlook while sustaining positive free cash flow.