Fossil Group, Inc. — Form 10-Q Summary
Period clarification: The request identifies 2019 Q3, but the supplied filing is for the 13 weeks ended October 3, 2020 (third quarter 2020), compared with the 13 weeks ended September 28, 2019. Year-to-date comparisons cover 40 weeks in 2020 versus 39 weeks in 2019. Dollar amounts below are in millions unless noted.
Business context and reporting period
Fossil designs, markets and distributes watches, jewelry, leather goods and other fashion accessories through wholesale, retail and e-commerce channels. Its reportable segments are Americas, Europe and Asia. COVID-19 materially affected operations and financial performance; most company and partner stores were open in Q3, but traffic remained significantly depressed. E-commerce growth partially offset declines in physical retail and wholesale.
Financial highlights
| Metric | Q3 2020 | Q3 2019 | YTD 2020 | YTD 2019 |
|---|---|---|---|---|
| Net sales | $435.5 | $539.5 | $1,085.2 | $1,506.1 |
| Gross profit / margin | $229.8 / 52.8% | $278.5 / 51.6% | $510.7 / 47.1% | $791.6 / 52.6% |
| Operating income (loss) | $17.5 | $(9.2) | $(153.6) | $(27.4) |
| Net income (loss) attributable to Fossil | $16.0 | $(25.9) | $(92.1) | $(45.5) |
| Diluted EPS | $0.31 | $(0.51) | $(1.81) | $(0.91) |
| Operating cash flow | Not separately presented for the quarter | $95.9 | $(138.2) |
Q3 gross margin improved 1.2 percentage points year over year, while operating margin improved to 4.0% from (1.7)%. YTD operating margin was (14.2)% versus (1.8)%. Q3 revenue declined 19.3% reported (20.1% constant currency); YTD revenue declined 27.9% reported (27.5% constant currency).
At October 3, 2020, cash and cash equivalents were $323.6, compared with $200.2 at fiscal year-end 2019. Current assets were $1,007.8 and current liabilities $549.9. Inventory was $359.5, down from $452.3 at year-end. Debt was reported as $21.4 current and $217.9 long-term on the balance sheet; the company separately disclosed $162.0 outstanding under its term loan and $103.0 under its revolving facility, with $32.3 of revolving borrowing capacity available. Total stockholders’ equity was $423.6.
Material changes versus comparable periods
- Q3 sales fell across all three regions amid pandemic-related store traffic declines. Comparable retail sales declined 29% globally; e-commerce growth partly offset weakness in stores and wholesale.
- Q3 SG&A declined $57.6, and total operating expenses declined $75.4, helping return the company to operating income despite lower sales. Management attributed the improved Q3 result to cost reductions and improved gross margin.
- YTD gross margin fell to 47.1%, principally due to liquidation and inventory valuation adjustments for older connected products, especially in Q1. YTD operating loss widened despite $141.6 lower SG&A.
- YTD operating cash flow improved to $95.9 from a use of $138.2, supported by working-capital changes and non-cash adjustments. Financing activities provided $25.7; investing activities used $9.2.
- YTD results included $24.9 of property, plant and equipment and other long-lived asset impairment losses and $2.5 of trade-name impairment. Q3 had no trade-name impairment.
Outlook, management commentary and risks
- Outlook: The filing does not provide specific revenue or earnings guidance. Management expects COVID-related revenue pressure in retail and wholesale to continue, while e-commerce remains a source of relative strength. It expects 2020 capital expenditures of approximately $9, down from an original estimate of approximately $25.
- Cost program: New World Fossil 2.0 targets $250 of savings, including $100 in 2020. Estimated total program charges are $50–$70, with approximately $33 expected in 2020. The filing reports $25.6 of restructuring charges YTD.
- Liquidity and covenants: Management believes cash, operating cash flow and available credit will fund needs for the next 12 months. It cautions that further revenue or cash-flow deterioration, or failure to achieve cost reductions, could cause covenant noncompliance. The company reported compliance with all credit covenants at October 3, 2020.
- Debt terms: Amendments increased term-loan interest rates and amortization payments, imposed minimum EBITDA requirements during temporary leverage-covenant relief, limited revolver borrowings to the lesser of borrowing-base availability and $200, and restricted capital expenditures. Term-loan rates were LIBOR plus 8.5% or base rate plus 7.5% at period-end.
- Tax item: The Q3 tax benefit was $6.8; the YTD benefit was $91.3, principally reflecting CARES Act NOL carryback provisions and reserve releases. Management said it could not reliably estimate a full-year effective tax rate because of COVID-19 uncertainty.
- Other risks and contingencies: Key risks include the duration and severity of COVID-19, consumer demand and traffic, supply interruptions, currency movements, competition, product acceptance and restructuring execution. The company reported no material pending litigation. COVID-related lease concessions included $8.8 of deferred rent outstanding and $7.6 of rent forgiveness YTD.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q3 2020, not Q3 2019.
- Track sales, store traffic and comparable retail sales separately from e-commerce performance, and monitor the pace of any renewed restrictions or closures.
- Assess whether gross margin recovery and cost savings can offset lower revenue, and whether the $250 NWF 2.0 savings target remains achievable.
- Review liquidity, the $32.3 available revolver capacity, debt repayments, borrowing-base availability and compliance with amended credit covenants.
- Distinguish recurring operating performance from the sizable CARES Act tax benefit, impairments, restructuring costs and the prior-year intellectual-property divestiture gain.