Fossil, Inc. (Fossil Group, Inc.) — Form 10-Q
Period: Third quarter ended September 29, 2012 (13 weeks), and year to date (39 weeks). The request metadata says 2011 Q3, but the filing itself reports 2012 Q3 and compares it with the periods ended October 1, 2011.
Business context and financial performance
Fossil designs, markets and distributes fashion accessories through wholesale, company-owned retail and e-commerce channels. The filing reports unaudited results in U.S. dollars; amounts below are in millions except per-share data.
| Metric | Q3 2012 | Q3 2011 | 39 weeks 2012 | 39 weeks 2011 |
|---|---|---|---|---|
| Net sales | $684.2 | $642.9 | $1,909.8 | $1,736.5 |
| Gross profit / margin | $381.5 / 55.8% | $359.5 / 55.9% | $1,066.9 / 55.9% | $973.3 / 56.0% |
| Operating income / margin | $113.1 / 16.5% | $118.8 / 18.5% | $284.0 / 14.9% | $297.6 / 17.1% |
| Net income attributable to Fossil | $76.8 | $69.6 | $192.3 | $176.8 |
| Diluted EPS | $1.26 | $1.09 | $3.11 | $2.75 |
| Operating cash flow | Not presented separately | Not presented separately | $168.5 | $82.7 |
- Q3 sales increased 6.4% as reported. Management attributed 3.5 percentage points of negative impact to exchange rates; constant-currency growth was 9.9%, including Skagen, while organic growth excluding Skagen-branded products was 5.9%.
- For the 39-week period, reported sales increased 10.0%; management cited 12.9% growth excluding currency effects. Watches were the largest product category and increased to 75.6% of Q3 sales from 72.2% a year earlier.
- Operating expenses grew faster than sales: Q3 expenses increased 11.5% to $268.4 million, and the expense ratio rose to 39.3% from 37.4%. Management cited retail expansion, Skagen operating costs and investments in Asia Pacific. Currency translation reduced operating income by an estimated $17.7 million in Q3 and $29.9 million year to date.
- Net income attributable to Fossil increased 10.3% in Q3 and 8.8% year to date. Lower effective tax rates and fewer shares outstanding supported earnings; Q3 EPS included a stated $0.06 benefit from a 4.5% lower share count. Q3 currency losses reduced diluted EPS by an estimated $0.10.
Cash, debt and liquidity
- Cash and cash equivalents were $142.8 million at September 29, 2012, down from $287.5 million at December 31, 2011. The 39-week net decrease in cash was $144.7 million.
- Operating cash flow was $168.5 million; capital expenditures were $59.7 million. Investing cash use was $286.9 million, principally including $229.2 million for acquisitions. Financing cash use was $30.0 million, including $205.6 million of share repurchases, partly offset by net borrowings.
- Balance-sheet debt was approximately $184.8 million: $6.0 million short term and $178.9 million long term. The company reported $169.0 million outstanding on its main revolver and approximately $180.1 million available under it; Korea had $4.5 million outstanding and $15.5 million available under a separate facility.
- Working capital was $789.4 million. Inventory was $589.0 million, up 15.1% from the prior-year quarter. Management expected fiscal year-end inventory to approximate the prior year level.
- The main revolving facility was expanded to $350 million and extended to December 17, 2014 in connection with the Skagen acquisition. Fossil reported compliance with its debt covenants at quarter end.
Material changes, outlook and risks
- Skagen acquisition: Completed April 2, 2012 for cash, shares and contingent consideration. Q3 Skagen sales were $25.2 million; its reported operating result included acquisition and integration costs. The acquisition added $138.1 million of goodwill and substantial intangible assets; purchase-price allocation and working-capital adjustments were still preliminary.
- Sales mix and regions: Q3 growth was led by Asia Pacific wholesale and direct-to-consumer sales; Europe wholesale remained pressured by weaker conditions and jewelry repositioning. Direct-to-consumer comparable sales rose 1.8% in Q3, while comparable sales for the global full-price accessory concept declined 3.1%.
- Share repurchases: Fossil repurchased approximately 2.3 million shares for $196.3 million year to date, including 1.0 million shares for $78.2 million in Q3. The company said it had repurchased approximately $646.4 million under its $750 million authorization since its announcement.
- Management outlook: Management believed operating cash flow, cash on hand and available credit would fund working capital, planned capital expenditures and repurchases for the next 12 months. It anticipated opening approximately 25–30 additional stores and closing one store in the remainder of fiscal 2012. No full-year revenue or earnings guidance is stated in the provided filing text.
- Risks and contingencies: Key risks include discretionary consumer spending, changing fashion preferences, competition, supply interruptions, foreign-exchange movements and integration of acquisitions. The company hedged forecast foreign-currency inventory payments, generally for up to 65% of projected purchases. It reported routine litigation as immaterial. A post-quarter IRS settlement was expected to reduce unrecognized tax benefits by approximately $6.0 million in Q4 2012.
- Subsequent event: In October 2012, Fossil acquired the remaining minority interests in two Mexican subsidiaries for approximately $14.1 million in cash.
Important facts for investors to verify
- Confirm the reporting period: this filing is for Q3 2012, despite the request metadata identifying 2011 Q3.
- Assess whether operating-margin pressure, foreign-exchange headwinds and higher operating expenses persist, and compare reported growth with management’s constant-currency measures.
- Track inventory levels, holiday shipments and the company’s expectation that year-end inventory would approximate the prior year.
- Review Skagen’s integration, the final purchase-price allocation, contingent consideration and the acquired brand’s contribution to profitability.
- Monitor cash generation, debt and revolver availability alongside continued share repurchases and planned store openings.
- Review tax-audit developments and the effect of the IRS settlement expected in Q4; the filing states that audit outcomes and timing remain uncertain.