Fossil Group, Inc. — Form 10-Q Summary
Period clarification: The request identifies 2013 Q3, but the supplied filing is for the 13 weeks ended October 4, 2014, compared with the 13 weeks ended September 28, 2013. Year-to-date comparisons cover 40 weeks in 2014 versus 39 weeks in 2013; fiscal 2014 included an extra week in Q1. Amounts below are in U.S. dollars.
Business context and reporting period
Fossil designs, markets and distributes fashion accessories, principally watches, along with leather goods, jewelry and other products. It sells through wholesale, company-operated retail and e-commerce channels across global markets. The 10-Q was filed November 13, 2014.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | Year to date 2014 | Year to date 2013 |
|---|---|---|---|---|
| Net sales | $894.5 million | $810.4 million | $2,444.8 million | $2,197.5 million |
| Gross profit / margin | $509.0 million / 56.9% | $465.0 million / 57.4% | $1,396.9 million / 57.1% | $1,252.3 million / 57.0% |
| Operating income / margin | $154.9 million / 17.3% | $141.0 million / 17.4% | $344.4 million / 14.1% | $342.3 million / 15.6% |
| Net income attributable to Fossil / diluted EPS | $103.7 million / $1.96 | $89.7 million / $1.58 | $222.6 million / $4.15 | $229.6 million / $3.93 |
| Operating cash flow | Not separately stated | Not separately stated | $197.9 million | $180.0 million |
At October 4, 2014, cash and cash equivalents were $218.1 million; current assets were $1.495 billion and current liabilities were $493.0 million, or approximately $1.002 billion of working capital. Inventory was $695.2 million. The balance sheet reported $15.2 million of short-term debt and $607.9 million of long-term debt. The company separately disclosed $234.4 million outstanding under its term loan and $378.2 million under its revolver, with approximately $670.9 million of revolver capacity available. It was in compliance with debt covenants.
Year-to-date investing cash outflow was $82.0 million, including $70.9 million of property and equipment additions. Financing cash outflow was $210.9 million, including $321.2 million of share repurchases. Cash declined $102.4 million from year-end 2013.
Material changes versus comparable periods
- Q3 sales grew 10.4%; growth came from all regions and channels. Watches rose 12.5%, jewelry 23.4%, while leather sales declined 5.8%.
- Q3 gross margin contracted 50 basis points, mainly from increased promotions in U.S. outlet stores. SG&A as a share of sales improved to 39.6% from 40.0%, supporting 9.9% operating-income growth despite a 10-basis-point decline in operating margin.
- Q3 net income attributable to Fossil rose 15.6%, helped by higher operating income, a lower tax rate and fewer shares outstanding. The effective tax rate was 30.6%, versus 33.2%.
- Year-to-date sales increased 11.3%, but operating income was nearly flat and attributable net income declined 3.1%. SG&A rose to 43.0% of sales from 41.4%, and operating margin fell to 14.1% from 15.6%. The comparison includes an extra week in 2014.
- Year-to-date cash generation was affected by a $146.1 million inventory increase. Inventory at quarter-end was 5.9% above the prior-year quarter, below sales growth.
Outlook, commentary, risks and unusual items
- Management expected approximately $110 million of fiscal 2014 capital expenditures, primarily for store expansion, renovations and technology. It anticipated approximately 50 net new retail stores globally for the year.
- Management stated that operating cash flow, cash on hand and available revolver capacity should fund working capital, planned capital expenditures and repurchases for the next 12 months. No earnings or revenue guidance was provided in the supplied filing text.
- Management cited strong Q3 growth in Europe and Asia, continued watch-category strength and direct-to-consumer growth from store expansion. Global comparable store sales were down slightly, with U.S. mall traffic weakness and outlet promotions weighing on North America.
- The company recorded a $6.1 million year-to-date impairment charge for retail-store leasehold improvements and fixtures. A $1.1 million Q3 charge increased estimated contingent consideration related to Fossil Spain.
- Year-to-date other income was lower than the prior-year period, which included a $6.5 million noncash gain tied to the Fossil Spain arrangement. Q3 comprehensive income was affected by a $43.5 million currency translation loss, partly offset by derivative gains.
- Risks include discretionary consumer demand, fashion and product acceptance, competition, supply-chain disruptions, foreign-exchange movements, international operations and license relationships. The company reported routine litigation that it did not consider material, and stated that disclosure controls were effective.
- On November 10, 2014, the board authorized a new $1.0 billion share repurchase program, subsequent to quarter-end. The company had repurchased $321.2 million of shares year to date.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the supplied filing is Q3 2014, not Q3 2013.
- Assess whether sales growth can be sustained while promotional activity pressures margins and comparable-store sales remain weak.
- Review inventory levels, seasonal working-capital needs, and the effect of the extra 2014 reporting week on year-to-date comparisons.
- Monitor debt, borrowing capacity, interest-rate exposure and the cash impact of substantial repurchases; most reported cash was held outside the U.S.
- Track foreign-exchange effects, including translation impacts and the valuation and timing of derivative gains and losses.
- Verify the execution and funding of the new repurchase authorization and planned capital expenditures against operating cash flow.