Fossil Group, Inc. — Form 10-Q Summary
Period clarification: Although the request identifies 2019 Q1, this filing reports the 14 weeks ended April 4, 2020, compared with 13 weeks ended March 30, 2019. The extra week affects comparability. The filing was signed June 10, 2020 and delayed because of COVID-19-related disruption.
Business context and financial performance
Fossil designs, markets and distributes fashion accessories, including watches, jewelry and leather goods, through wholesale, retail and e-commerce channels. The filing describes significant COVID-19 disruption, including widespread store closures.
- Net sales were $390.7 million, down 16.0% reported and 14.7% in constant currency. Watches accounted for $309.9 million of sales. Sales declined across all regions; Americas fell 19.7%, Europe 16.4% and Asia 9.2% reported.
- Gross profit was $140.4 million, down 43.4%; gross margin contracted to 35.9% from 53.3%. Management cited COVID-related sales declines, liquidation and valuation adjustments on older connected watches, minimum royalties and markdowns.
- Operating expenses were $274.7 million, up 2.5%, including $9.4 million of restructuring charges and significant non-cash impairment charges. Operating loss was $134.3 million, versus $19.9 million.
- Net loss attributable to Fossil was $85.6 million, or $1.69 per diluted share, versus a $12.2 million loss, or $0.25 per share. The current-period result included a $63.7 million income tax benefit, principally related to CARES Act NOL carrybacks. Prior-year other income included a $21.6 million gain on intellectual-property sale.
- Operating cash flow was negative $77.1 million, versus positive $7.6 million. Investing cash outflow was $3.2 million; financing cash inflow was $112.3 million, including substantial revolving borrowings. Cash, cash equivalents and restricted cash ended at $252.3 million.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $245.4 million at April 4, 2020, versus $200.2 million at December 28, 2019; $181.3 million was held outside the U.S. Inventory was $439.7 million. Management attributed elevated inventory relative to the prior-year quarter to reduced sales plans and consumer demand.
- Reported debt carrying amounts were $21.1 million current and $298.5 million long-term. Separately, the company disclosed $190.0 million outstanding under its term loan and approximately $158.9 million under its revolving facility, with $33.0 million of revolving capacity available. Debt fair value was approximately $282.9 million, versus carrying value of $338.7 million before unamortized debt costs and capital leases.
- On February 20, the term-loan amendment increased borrowing rates and relaxed leverage limits temporarily, while tightening other terms and limiting revolver borrowings to the lesser of the borrowing base and $200 million. The company reported covenant compliance at quarter-end.
- A subsequent June 5 amendment raised term-loan rates again, required a $15 million prepayment, increased scheduled amortization, reduced minimum liquidity requirements through November 2020, waived leverage testing temporarily subject to minimum EBITDA requirements, and increased pledged foreign-subsidiary equity.
Outlook, commentary and risks
- Management expected a more difficult second quarter as many stores could remain closed for the full period, and said it could not reasonably estimate the overall sales impact. Reopened stores in parts of Asia had traffic down about 50%, while conversion rates were up 70%–80%; e-commerce trends were strong.
- Fiscal 2020 capital expenditures were expected to be approximately $5–$7 million, reduced from prior guidance of approximately $25 million. SG&A was expected to be several million dollars below 2019 and the original 2020 plan.
- NWF 2.0 restructuring charges were estimated at $50–$70 million in total, with approximately $25 million expected in fiscal 2020. Management said the expanded program could generate approximately $50 million of incremental benefits in 2020 and 2021.
- Management believed cost reductions, cash on hand and credit availability would support operations and covenant compliance for one year after issuance of the financial statements. It cautioned that prolonged COVID-19 disruption or failure to achieve savings could cause further revenue and cash-flow deterioration and covenant difficulty.
- Other material risks include wholesale customer payment delays or insolvencies, supply-chain disruption and China-related tariffs, currency movements, changing consumer preferences, and the need for rent concessions. The filing states pending routine litigation was not expected to have a material effect.
Important facts for investors to verify
- Confirm the actual reporting period: this is fiscal Q1 2020, not Q1 2019, and the quarter includes an extra week.
- Track store reopenings, wholesale demand, e-commerce performance, inventory levels and margin recovery amid continuing COVID-19 effects.
- Review subsequent debt amendments, required payments, minimum EBITDA and liquidity tests, covenant headroom, and remaining revolver availability.
- Assess whether projected cost reductions and NWF 2.0 savings are achieved, and whether restructuring estimates change.
- Verify timing and realization of the CARES Act tax refund and monitor the company’s ability to generate cash and maintain liquidity.