(Reuters) - Fossil Group Inc's FOSL.O shares soared 79 percent in early trading on Wednesday as short sellers rushed to cover their positions, a day after the watchmaker posted a better-than-expected increase in sales in the holiday quarter.

FILE PHOTO - A Fossil store logo is pictured on a building along the Lincoln Road Mall in Miami Beach, Florida March 17, 2016. REUTERS/Carlo Allegri/File Photo

Fossil, struggling with declining sales in Europe and several other operational problems, is heavily shorted - an indication that market players bet that it would report disappointing results.

Nearly 40 percent of its outstanding shares were shorted as of Jan. 31, according to Thomson Reuters data, making it currently the third-most shorted stock on the S&P 600 consumer discretionary sector .SPSMCD.

“The better than expected fourth quarter earnings performance can improve confidence in the company’s financial outlook,” Telsey Advisory Group analyst Dana Telsey said in a note.

“However, we continue to see visibility to ultimate topline and profitability potential as difficult,” Telsey said, adding that she expected a significant shortcovering fueled rally on Wednesday.

She more than doubled her price target on the stock to $15.

Fossil Group shares rose to $16.18 and on track to move to their highest since May 9, 2017. The stock has lost 61 percent over the past year, excluding gains on Wednesday.

If gains hold, Fossil Group is on track to gain over $350 million market capitalization.

While there were bright spots in the quarter - tighter cost control and a 31 percent surge in e-commerce sales - nothing had fundamentally changed for the company, analysts said.

“The company is seeing no stabilization of the traditional watch category,” Wells Fargo analyst Ike Boruchow said. “This simply isn’t a fundamentally sound business right now.”

Boruchow, however, raised his price target by $4 to $8, citing a two percent gain in same-store sales, helped by higher demand in the Americas and Europe - the company’s biggest contributors to sales.

The company said on Tuesday that it had introduced a number of new models before the holiday quarter, which fueled a double-digit increase in Armani watch sales.

But Fossil, which also sells watches for brands such as DKNY and Skagen, discounted slow-moving items in the December quarter, a sign that it was struggling to compete with a certain section of the wearables market dominated by Apple Inc AAPL.O, Samsung Electronics Co Ltd 005930.KS and Garmin Ltd GRMN.O.

Five out of 10 brokerages covering the stock rate it a “hold”, while only one rates it a “buy”. The remaining rate the stock a “sell” or lower.

(This version of the story corrects ticker symbol to FOSL.O from FOSL.N in first paragraph.)