Fossil Group, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended April 2, 2022, compared with the 13 weeks ended April 3, 2021. Although the request metadata says 2021 Q1, the supplied filing is for Q1 2022.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $375.9 million | $363.0 million |
| Gross profit / margin | $184.3 million / 49.0% | $182.6 million / 50.3% |
| Operating loss / margin | $14.3 million / (3.8%) | $16.8 million / (4.6%) |
| Net loss attributable to Fossil Group | $21.5 million; $0.41 per diluted share | $24.4 million; $0.47 per diluted share |
| Adjusted EBITDA | Loss of $1.7 million | Income of $7.5 million |
| Cash used in operating activities | $115.0 million | $37.8 million |
- Sales grew 3.6% as reported and 5.9% in constant currency. Gross margin declined 1.3 percentage points, principally due to higher freight and duty costs and unfavorable regional mix.
- Sales by region: Americas increased 6.2%, Europe increased 14.1% (20.2% constant currency), and Asia declined 12.0% (10.4% constant currency). Traditional watch sales rose 7.8%; smartwatch sales fell 28.2%.
- Digital sales were 34% of worldwide sales and declined 16.7% (15.5% in constant currency). Management attributed the decline mainly to COVID-related China lockdowns and shifts from online to physical retail. Comparable retail sales increased 11.8%.
- Cash and cash equivalents were $162.6 million at quarter-end; total liquidity, including $98.5 million available on the revolver, was $261.1 million. Net working capital was $504.5 million.
- Cash used in operations was driven in part by $123.5 million of cash use from working-capital changes, including higher inventory and lower accounts payable. Cash and cash equivalents fell from $250.8 million at fiscal year-end.
- At April 2, gross principal outstanding was $150.0 million of 7.00% senior notes due 2026 and $42.1 million under the revolving facility; the company reported compliance with debt covenants. The revolver matures September 2024.
Material changes and management commentary
- Operating loss narrowed year over year, but adjusted EBITDA declined from income to a loss and adjusted net loss increased to $19.3 million from $14.9 million. Lower restructuring and impairment charges helped reported operating results; higher SG&A and lower gross margin weighed on performance.
- Europe’s operating income improved substantially, while Americas and Asia operating income declined. Corporate operating costs increased.
- The company repurchased approximately 989,000 shares for $10.0 million, leaving about $20.0 million authorized under its repurchase program.
- Management said it achieved its $250 million NWF 2.0 run-rate savings goal in 2021 and expects the program to conclude in 2022, with approximately $5 million of total 2022 charges. Fiscal 2022 capital expenditures were estimated at $20–$25 million.
- No specific full-year sales or earnings guidance is provided in the supplied filing. Management said operating cash needs typically rise later in the year ahead of the holiday season.
Risks, contingencies and unusual items
- Management cited continued uncertainty from COVID-19, including disruption in China; supply-chain delays; higher freight, shipping and product costs; and possible inflationary and supply-chain effects from the Russia-Ukraine conflict. Sales to the company’s Russian distributor were on hold and described as immaterial.
- Foreign exchange is a material exposure: management estimated that a 10% unfavorable currency move would reduce pretax income by $13.1 million and stockholders’ equity by approximately $40.3 million. Derivatives are used for risk management.
- The company reported $29.2 million of unrecognized tax benefits, excluding interest and penalties, and $8.5 million of accrued tax-related interest. Tax audit outcomes and settlement timing remain uncertain.
- Operating lease obligations totaled $217.3 million, including interest, with $0.5 million of deferred rent payments outstanding. The company reported no material pending legal proceedings beyond routine matters.
- Management stated that cash on hand, operating cash flows and available credit are expected to fund needs for the foreseeable future, excluding long-term debt maturities, while noting that COVID-19 and market uncertainty could affect liquidity.
Important facts for investors to verify
- Whether sales and retail traffic recovery can persist, especially given China lockdown exposure and weakness in smartwatches and digital channels.
- Whether freight, duty, labor and other cost pressures ease enough to stabilize or restore gross margins.
- Cash conversion and inventory levels, given the substantial quarterly operating cash outflow and inventory increase.
- Available revolver capacity, borrowing-base limits, covenant compliance and the company’s ability to service debt and lease obligations.
- Actual 2022 capital expenditures and restructuring costs versus management’s estimates, and progress on profitability after adjusting for restructuring and impairments.