Fossil Group, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 14 weeks ended April 5, 2014, compared with 13 weeks ended March 30, 2013. Although the request metadata labels this “2013 Q1,” the filing is for fiscal 2014 Q1. Fiscal 2014 includes an extra week, which affects year-over-year comparisons.
Business context and results
Fossil designs, markets and distributes fashion accessories globally through wholesale, company-operated retail and e-commerce channels. Its portfolio includes watches, leather goods, jewelry and other accessories.
| Metric | Q1 2014 | Comparable period | Change |
|---|---|---|---|
| Net sales | $776.5 million | $680.9 million | +14.0% |
| Gross profit / margin | $443.2 million / 57.1% | $378.5 million / 55.6% | Margin +150 bps |
| Operating income / margin | $104.7 million / 13.5% | $94.3 million / 13.9% | Income +11.0%; margin -40 bps |
| Net income attributable to Fossil | $66.3 million | $72.2 million | -8.1% |
| Diluted EPS | $1.22 | $1.21 | +$0.01 |
| Operating cash flow | $97.0 million | $85.9 million | +$11.1 million |
Material changes and operating drivers
- Sales increased across all segments. Watches grew 17.2% and jewelry 33.6%; leather sales declined 3.0%. Direct-to-consumer sales rose 17.9%, primarily from store expansion, while comparable-store sales declined 2.4%.
- Wholesale sales grew 6.9% in North America, 18.3% in Europe and 19.2% in Asia Pacific. Reported growth includes foreign exchange effects; Europe and Asia Pacific constant-currency growth was 14.5% and 23.7%, respectively.
- Gross-margin improvement reflected product mix, freight and other cost improvements, prior-year acquisitions and international mix. Outlet promotions and leather reserves partly offset gains.
- SG&A rose to $338.5 million, or 43.6% of sales versus 41.7%, as the company invested in stores, concessions, infrastructure, advertising and global initiatives. Operating margin consequently declined.
- Net income was lower despite higher sales and operating income. The prior-year period included a $6.4 million non-cash gain related to the Spanish joint venture and favorable tax-audit settlements; current-quarter interest expense and tax rate were higher.
Cash, debt and liquidity
- Cash and equivalents were $303.4 million at April 5, 2014, including $299.2 million held outside the United States. Cash declined $17.1 million from fiscal year-end.
- Operating cash flow was $97.0 million; capital expenditures were $21.5 million. Repurchases of common stock used $119.7 million. Inventory was $601.9 million, up 15.7% from the prior-year quarter, primarily reflecting higher watch and leather inventory.
- Working capital was $976.1 million. The balance sheet reported $13.6 million of short-term debt and $528.3 million of long-term debt. Separately, the debt discussion reported $240.6 million outstanding under the Term Loan and $290.0 million under the Revolver; investors should reconcile these disclosures.
- Revolver availability was approximately $458.9 million. The company said it was in compliance with debt covenants and expected operating cash, cash on hand and available credit to fund working capital, planned repurchases and capital expenditures.
Outlook, risks and contingencies
- Management expected fiscal 2014 capital expenditures of $95–$100 million, mainly for retail expansion and renovation and technology infrastructure, and approximately 55 net new retail stores globally. No earnings or revenue guidance was provided in the filing.
- Management cited risks from discretionary consumer spending, fashion and product acceptance, competition and promotional activity, supply interruptions, foreign-exchange movements, customer financial difficulties, and costs of materials, labor and advertising.
- Foreign-exchange hedges had an estimated $2.3 million net loss if settled at quarter-end. A hypothetical 10% strengthening of the U.S. dollar was estimated to reduce annual pretax income by $10.8 million and stockholders’ equity by approximately $84.1 million. A 100-basis-point rate increase was estimated to add $2.6 million to annual interest expense on unhedged variable-rate debt.
- The Romag Fasteners litigation remained unresolved after trial. The plaintiff sought approximately $0.2 million in patent and trademark damages, $9.1 million in future deterrence damages and $3.8 million in fees and costs. Fossil contested the requested awards and said it did not expect a material effect, but the ultimate liability could not be determined.
- Fossil repurchased approximately 1.0 million shares for $117.3 million and had $376.4 million of repurchase authorization remaining. The filing also recorded a $0.3 million impairment charge for certain company-owned store assets.
Important facts for investors to verify
- Assess sales, margin and earnings trends on a comparable-week basis because the current quarter had an extra week.
- Reconcile balance-sheet debt with the separately disclosed Term Loan and Revolver balances, and monitor borrowing, covenant headroom and interest costs.
- Track inventory growth, leather-category performance, promotional activity and comparable-store sales, particularly in North America.
- Review execution of planned capital spending and store openings, and the scale and funding of further share repurchases.
- Monitor the Romag ruling, tax examinations and other disclosed contingencies, as well as foreign-exchange exposures and hedge outcomes.