Fossil Group, Inc. - 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Fossil Group, Inc., a global design, marketing, and distribution company specializing in consumer fashion accessories including watches, jewelry, handbags, and apparel. The report covers the 13-week and 26-week periods ended July 4, 2009. The company operates through four reportable segments: United States Wholesale, Europe Wholesale, Other International Wholesale, and Worldwide Direct to Consumer.
Key Financial Metrics
| Metric | 13 Weeks Ended July 4, 2009 | 26 Weeks Ended July 4, 2009 |
|---|---|---|
| Net Sales | $315.9 million | $638.9 million |
| Gross Profit | $167.2 million (52.9% margin) | $336.6 million (52.7% margin) |
| Operating Income | $22.5 million (7.1% margin) | $46.3 million (7.3% margin) |
| Net Income (Attributable to Fossil) | $16.6 million | $33.9 million |
| Diluted EPS | $0.25 | $0.51 |
| Cash and Cash Equivalents | $264.1 million | $264.1 million |
| Working Capital | $596.9 million | $596.9 million |
| Total Debt (Short + Long Term) | $8.0 million | $8.0 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 10.6% in the second quarter and 9.9% year-to-date compared to the prior year. This was driven by a 24.1% decline in Europe Wholesale and a 25.5% decline in Other International Wholesale, largely due to worsening global economic conditions and customer de-stocking.
- Profitability Pressure: Operating income dropped 35.7% in the quarter and 45.0% year-to-date. Gross profit margins compressed by 100 basis points in the quarter, primarily due to a stronger U.S. dollar (unfavorable impact of ~270 basis points) and a higher mix of lower-margin off-price channel sales.
- Direct to Consumer Growth: Despite wholesale declines, the Direct to Consumer segment grew 21.1% in the quarter and 23.2% year-to-date, driven by a 27.5% increase in the average number of stores open and positive comparable store sales.
- Cash Flow Strength: Net cash provided by operating activities was $116.3 million for the 26-week period, a significant increase from $32.7 million in the prior year, aided by reductions in accounts receivable and inventory.
Guidance, Outlook, and Risks
- Outlook: Management expects the challenging economic environment to persist. For Q3 2009, net sales are expected to decrease 6% to 9%, with diluted EPS of $0.38 to $0.42. For Q4 2009, sales are expected to be flat to up 3%, with diluted EPS of $0.74 to $0.80.
- Currency Impact: A strengthening U.S. dollar is expected to negatively impact reported sales and earnings. Management estimates a negative currency impact of approximately $0.05 per share for Q3.
- Risks: Key risks include the global economic downturn reducing consumer discretionary spending, foreign currency exchange rate fluctuations, and the uncertainty of consumer acceptance of new product designs.
- Legal Proceedings: Three shareholder derivative lawsuits regarding stock option grants are pending. Management intends to defend vigorously and does not expect a material impact on financial condition.
Investor Verification Checklist
- Wholesale De-stocking: Verify the extent of inventory reduction by wholesale customers in Europe and Asia and the potential for a rebound in orders.
- Currency Hedging: Review the effectiveness of foreign exchange forward contracts in mitigating the impact of the strong U.S. dollar on future margins.
- Retail Expansion Costs: Assess the sustainability of the Direct to Consumer growth given the increased operating expenses associated with opening 30-40 new stores in the second half of 2009.
- Off-Price Channel Mix: Monitor the sales mix shift toward off-price channels and its long-term effect on gross margins and brand positioning.
- Michael Kors Performance: Confirm the continued growth trajectory of the Michael Kors brand, which offset declines in the core Fossil watch business in the U.S. wholesale segment.