Fossil Group, Inc. — FY2023 Form 10-K Summary
Reporting period: The filing covers the fiscal year ended December 30, 2023, with comparisons to fiscal 2022 and fiscal 2021. Although the request metadata says “2022 Q4,” this is an annual report for fiscal 2023, not a quarterly filing.
Business context
Fossil designs, markets and distributes watches and other fashion accessories through owned brands, including FOSSIL and SKAGEN, and licensed brands, including MICHAEL KORS and EMPORIO ARMANI. It reports three geographic segments: Americas, Europe and Asia. Watches represented 77.6% of fiscal 2023 net sales; digital sales represented 38%.
Key financial results
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net sales | $1,412.4 million | $1,682.4 million |
| Gross profit / margin | $679.6 million / 48.1% | $830.7 million / 49.4% |
| Operating income (loss) / margin | $(143.0) million / (10.1)% | $(1.5) million / (0.1)% |
| Net income (loss) attributable to Fossil / diluted EPS | $(157.1) million / $(3.00) | $(44.2) million / $(0.85) |
| Adjusted EBITDA | $(62.6) million | $36.1 million |
| Cash from (used in) operating activities | $(59.5) million | $(110.9) million |
| Cash and cash equivalents at year-end | $117.2 million | $198.7 million |
| Working capital at year-end | $368.2 million | $519.4 million |
Sales fell 16.0% (15.9% at constant currency). Gross margin declined 1.3 percentage points, reflecting promotions, minimum license royalties, unfavorable currency and product mix, partly offset by lower freight costs. SG&A declined in dollars but rose to 55.0% of sales from 49.0%, primarily because of lower revenue. The larger operating loss reflected sales deleveraging and $43.3 million of restructuring expense, plus $5.5 million of restructuring cost in cost of sales.
Cash used in operations improved year over year, chiefly as inventory was reduced. Inventory declined to $252.8 million from $376.0 million. Capital expenditures were $8.5 million. Year-end gross debt was $212.6 million: $150.0 million of 7.00% senior notes due November 2026 and $62.1 million drawn on the asset-based revolving facility. Revolver availability was $64.0 million, bringing reported total liquidity to $181.2 million. The company reported compliance with debt covenants at year-end.
Material changes versus FY2022
- Net sales declined across all three regions; Europe had the largest reported percentage decline at 19.2%.
- Traditional watch sales declined 12.4%, and smartwatch sales declined 46.6%. Fossil said it was exiting the smartwatch category.
- Wholesale sales fell 21.2%; direct-to-consumer sales fell 7.5%. Comparable retail sales decreased 2%, with e-commerce growth more than offset by store declines.
- The company reduced its store count from 342 to 302 during FY2023, including 45 closures and five openings.
- Net loss widened to $157.1 million from $44.2 million; adjusted EBITDA fell from positive $36.1 million to negative $62.6 million.
- Cash and total liquidity fell substantially. Debt declined to $212.6 million from $223.3 million, while revolver availability fell to $64.0 million from $141.2 million.
Outlook, management commentary and notable risks
- Transform and Grow (TAG): The expanded program targets approximately $300 million of annualized operating income benefits by the end of 2025. Estimated total charges are $100–$120 million, including approximately $35 million in FY2024. Long-term goals include adjusted gross margins in the low-to-mid 50% range and adjusted operating margins of approximately 10%. These are targets, not assurances.
- Strategic review and liquidity: Management announced a review of the business model and capital structure, including possible additional cost reductions, asset monetization, and debt or equity financing. It said current sources should fund needs for at least 12 months, while also assessing supplemental liquidity. A $56.5 million U.S. tax refund was expected in FY2024, but timing was uncertain.
- FY2024 operating environment: Management expects continued pressure on consumer confidence and demand, cautious wholesale ordering and lean customer inventories. It anticipated closing approximately 60 stores globally, subject to lease negotiations, and estimated approximately $10 million of FY2024 capital expenditures. The filing does not provide clear numerical FY2024 revenue or earnings guidance.
- Debt and liquidity exposure: The company identifies high leverage, negative operating cash flow, floating-rate revolver exposure and restrictive covenants as risks. The revolver’s stated maturity is November 2027, but may move to August 2026 if more than $35 million of debt, including the senior notes, matures before the revolver maturity date.
- Commercial and supply risks: Licensed products generated 44.7% of FY2023 sales; major license expirations run from 2024 through 2028. The DKNY license expires at the end of 2024 and will not be renewed. Minimum royalty commitments total $158.0 million through 2028, including $111.6 million in 2024. Purchase obligations were $192.1 million.
- Other risks and events: The filing estimates approximately $2.4 million of FY2024 gross-profit exposure from Section 301 tariffs, absent offsets. Sales to distributors in Russia and Israel were on hold but were described as immaterial. An activist stockholder nominated four directors for the 2024 annual meeting. The company also disclosed that its stock had recently closed below Nasdaq’s $1.00 minimum bid-price requirement.
- Contingencies and controls: Management said pending legal matters were not expected to have a material effect. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. Inventory valuation, particularly smartwatch inventory, was identified as a critical audit matter.
Important facts for investors to verify
- Progress against TAG’s savings and margin targets, the timeline and cash costs of restructuring, and whether expected benefits are realized.
- Available liquidity, cash burn, revolver borrowing-base capacity and covenant compliance, including the timing and receipt of the expected tax refund.
- FY2024 sales, gross-margin and inventory trends, including smartwatch inventory valuation and effects of continued promotions.
- License renewal and sales-threshold status, especially the DKNY expiration and dependence on MICHAEL KORS and Armani-branded products; also assess royalty commitments.
- Execution of planned store closures and the strategic review, including any asset sales, refinancing, debt exchanges or equity issuance.
- Nasdaq bid-price compliance and developments concerning the activist director nominations.