Fossil returns to profit as watchmaker turnaround beats timeline

Fossil Group returned to profitability in the third quarter and posted its first year-over-year sales increase since early 2022, CNBC reported.

The legacy watchmaker posted operating income of $25.3 million, compared with an operating loss of $21.7 million a year earlier, according to CNBC’s retail coverage. Net income was $11.7 million, or 19 cents per share, reversing a net loss of $39.9 million, or 76 cents per share, in the same period last year. The company last reported quarterly net income in the third fiscal quarter of 2022.

CEO Franco Fogliato, who joined Fossil in 2024, told CNBC the turnaround is running about a year and a half ahead of the original timeline. The company raised its full-year outlook and said it expects positive free cash flow by the end of the year, a milestone that few analysts had on their calendar for a stock trading under $8 a share.

The numbers

Net sales rose 0.4% to $271.2 million in the quarter ended Oct. 3. The increase is small, but it ends a streak of consecutive quarterly sales declines that stretched back to 2022. Operating expenses fell 11.1% to $137 million, which is where the profit comes from. Fossil cut costs faster than sales declined, and the gap between the two turned positive.

Fossil raised its full-year guidance to net sales of $980 million to $990 million, which would be a slight decline from just over $1 billion in the prior year. The previous guidance called for a 3% to 5% decline. The revised outlook is not a growth forecast, but it is less bad than what the company was projecting, and the direction of the revision matters more than the level.

The balance sheet is improving alongside the income statement. Fossil said it expects positive free cash flow by the end of the year, which would give the company financial flexibility it has not had since the smartwatch era began eroding its business. The stock has lost the vast majority of its value since the early-to-mid 2010s, when sales and the share price both peaked.

The strategy

Fogliato’s approach has been to shrink the business before trying to grow it. He closed stores, moved away from promotional markdowns to full-price sales, improved marketing, and broadened the product range. The direct-to-consumer sales channel posted a 5.9% decline for the quarter, which Fogliato attributed to the aggressive downsizing. The decline is intentional, and the customers who remain are buying at full price rather than at a discount.

“We simplified a lot of the business doing this,” Fogliato told CNBC. “People tell me they are excited about what they are seeing in the marketplace now.” The comment about customer response is anecdotal, but the sales numbers give it some support. Traditional watches, which make up about 86% of Fossil’s sales, grew 6.4% in the quarter. Smartwatch sales came in under $1 million, a rounding error on a $271 million quarter.

The decision to stop chasing the smartwatch trend is the most interesting part of the strategy. Fossil initially tried to compete with Apple Watch and other wearables, and the effort drained resources and distracted management from the core analog business. Fogliato is investing in analog watches again, and the growth in that category suggests the market for traditional timepieces is larger and more durable than the smartwatch narrative implied.

Asia leads the growth

The key growth engine for the quarter was Asia, where net sales grew 15.1%. Fogliato said much of that growth was led by the India market, which is a notable data point for a company that has historically been dependent on the United States and Europe. India’s growing middle class and increasing disposable income have made it a target market for consumer brands across categories, and Fossil’s 15% growth there suggests the brand has resonance outside its traditional markets.

Growing internationally is only part of the strategy. Fogliato said the priority is to grow the home market, and he framed the store closures as setting up for that growth. “As retail is settling into a smaller, more profitable base, ready to grow again, we’re entering 2027 with plenty of opportunities,” he said. The framing is optimistic, but it is supported by the numbers. A smaller, profitable retail footprint is a better starting point for growth than a larger, unprofitable one.

The competitive context

Fossil operates in a watch market that has been reshaped by smartwatches over the past decade. Apple Watch dominates the wearable category, and fitness-focused devices from Garmin and others have captured the health-tracking segment. The traditional watch market has contracted but has not disappeared, and Fossil’s results suggest there is a viable business in analog timepieces at the right price point and with the right brand positioning.

The competitive question is whether the traditional watch market is stable or continuing to shrink. Fossil’s sales growth of 0.4% is barely positive, and it comes off a low base after years of decline. One quarter of growth does not establish a trend, and the company’s own guidance for the full year still projects a slight sales decline. The turnaround is real in the profit and cash flow numbers, but the top-line growth is modest and could reverse.

The stock market’s response to the earnings was muted. Fossil was trading under $8 a share after the report, which is a fraction of its historical highs. The valuation reflects skepticism about the durability of the turnaround, and the stock will need several more quarters of profit and cash flow to convince investors that the business has been reset rather than temporarily boosted by cost cuts.

What I think

The turnaround is real but the stock is not yet pricing it. Fossil has gone from losing $40 million in a quarter to making $12 million, and the company is on track for positive free cash flow this year. Those are meaningful changes for a company that was widely considered to be in terminal decline. The cost-cutting has been effective, the shift to full-price sales is working, and the decision to stop chasing smartwatches and invest in analog watches is paying off. Fogliato has done what he was hired to do, and he has done it faster than expected.

The question is whether the profit is sustainable. The cost cuts are permanent, but the sales growth is modest and comes from a low base. Fossil’s full-year guidance still projects a slight sales decline, which means the third-quarter growth may not repeat in the fourth quarter. The profit in the third quarter was driven by expense reduction, not by top-line growth, and there is a limit to how much you can cut costs before the cuts start to hurt the business. Fogliato has said the downsizing is nearing completion, which means the next phase has to be growth, and growth in the traditional watch market is not easy.

The India growth story is the most promising sign. A 15% sales increase in Asia, led by India, suggests that Fossil’s brand has appeal in emerging markets where the middle class is expanding and the smartwatch penetration is lower than in the United States. If Fossil can build a meaningful presence in India and other Asian markets, the growth story has legs. If the third-quarter Asia growth was a one-quarter anomaly, the turnaround stalls at a smaller, profitable but not growing business.

The stock at under $8 is a bet on the turnaround continuing. The market is pricing Fossil as a company in decline that had one good quarter, and the valuation is low enough that any sustained improvement in earnings would drive a meaningful re-rating. The risk is that the cost cuts have run their course, the sales growth does not hold, and the company settles into a low-profit, no-growth equilibrium that does not justify a higher stock price. The bull case is that Fogliato has reset the business and is now positioned to grow it from a profitable base. The bear case is that the traditional watch market is still shrinking and one quarter of 0.4% growth is a pause in the decline, not a reversal.

Fogliato’s comment that the turnaround is 18 months ahead of schedule is the kind of statement that is easy to make and hard to verify, because the original schedule was never published. But the numbers support the claim. Fossil is profitable, cash flow positive, growing in Asia, and growing in its core analog category. Those are not the results of a company in terminal decline. They are the results of a company that has been reset and is beginning to grow again, and the stock market has not yet caught up to that story.