Fossil Group, Inc. — Form 10-Q Summary
Period clarification: The request identifies 2017 Q2, but the supplied filing is for the 13 and 26 weeks ended June 30, 2018, compared with periods ended July 1, 2017. Figures below summarize the filing actually provided. Financial statements are unaudited; amounts are U.S. dollars.
Business context and reporting period
Fossil designs, markets and distributes fashion accessories, principally watches, as well as leather goods and jewelry. It sells globally through wholesale, company-operated retail and e-commerce channels. The second quarter ended June 30, 2018; year-to-date figures cover 26 weeks.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $576.6m | $596.8m | $1,145.7m | $1,178.6m |
| Gross profit / margin | $309.0m / 53.6% | $301.3m / 50.5% | $596.7m / 52.1% | $590.9m / 50.1% |
| Operating income (loss) | $1.0m | $(429.8)m | $(27.3)m | $(475.0)m |
| Net loss attributable to Fossil | $(7.8)m | $(344.7)m | $(56.1)m | $(392.9)m |
| Diluted loss per share | $(0.16) | $(7.11) | $(1.15) | $(8.12) |
| Cash from operating activities | Not separately presented | Not separately presented | $77.4m | $35.4m |
Q2 sales fell 3.4% reported and 5.8% in constant currency; first-half sales fell 2.8% reported and 6.6% constant currency. Q2 results included $6.2m of SKAGEN trade-name impairment and $14.5m of restructuring charges. The prior-year quarter included $407.1m of goodwill and trade-name impairment; this makes the year-over-year operating-loss comparison unusually large. Management said Q2 operating income improved $34.6m excluding impairment and restructuring charges.
At June 30, cash and cash equivalents were $241.8m; current assets were $1,069.3m and current liabilities $507.5m, for working capital of approximately $561.8m. Debt carrying value totaled approximately $396.1m, including $127.7m classified as current; the company reported $400.0m of Term Loan principal outstanding, no revolver borrowings, and $245.3m of available revolver capacity. Net cash, cash equivalents and restricted cash increased $12.0m during the first half. Capital expenditures were $6.3m.
Material changes versus the prior comparable periods
- Gross margin improved 310 basis points in Q2 and 200 basis points year to date, reflecting favorable currency, New World Fossil (NWF) savings and lower markdowns, partly offset by product mix, lower-volume factory cost absorption and off-price sales.
- SG&A declined year over year: Q2 by $27.0m and first half by $40.8m. Management attributed reductions to infrastructure efficiencies and store closures.
- Q2 regional sales were down 3.3% in the Americas and 9.6% in Europe, while Asia grew 7.1% reported. Jewelry remained weak; connected-watch growth partly offset traditional-watch declines.
- Inventory was $497.8m, down 19.5% from the prior-year quarter-end, as the company reduced traditional-watch inventory. The company said it remained focused on clearing prior-generation connected products.
- The company adopted the new revenue standard in 2018. Adoption increased reported Q2 sales by $8.4m and first-half sales by $9.6m versus amounts calculated without adoption; prior-year figures were not restated.
Guidance, outlook, commentary and risks
- Management expects the business to become smaller but more profitable: sales may contract as unprofitable stores, businesses and product lines are exited, while operating income is expected to improve. No specific full-year revenue or earnings guidance is stated in the supplied text.
- Management expects approximately $50m of fiscal 2018 NWF restructuring charges and approximately $25m of fiscal 2018 capital expenditures. It targets $200m of annual run-rate savings from gross-margin and operating-cost benefits by fiscal 2019, with further savings planned in a subsequent NWF phase.
- Management reported that connected-wearables sales nearly doubled in Q2 and said new display-watch platforms were planned for fall and holiday 2018. E-commerce grew 17% in constant currency in Q2. PUMA and BMW licensing products were expected to begin shipping in 2019.
- Liquidity outlook: management believes operating cash flow, existing cash and credit availability will fund working-capital needs and planned capital expenditures for the next 12 months. The company reported compliance with debt covenants at June 30. Its secured credit agreement matures December 31, 2020 and includes scheduled Term Loan principal payments of $125m in March 2019 and $75m in March 2020, with the balance due at maturity.
- Key risks include proposed U.S. tariffs of 10%–25% on certain China-made goods, including some smartwatches; consumer and fashion-trend shifts; foreign-exchange movements; supply interruptions; and customer acceptance of connected products. The filing also notes MICHAEL KORS and ARMANI license sales thresholds for 2018, with potential termination at the end of 2019 if thresholds are not met. The Karl Lagerfeld watch license was terminated effective April 1, 2018, subject to a sell-off period.
- Tax results are affected by valuation allowances, U.S. tax-law provisions and estimates still being refined. The company disclosed $36.1m of unrecognized tax benefits, excluding interest and penalties. It expects the forthcoming lease-accounting standard to materially affect its financial position.
Most important facts for investors to verify
- Confirm the intended period: the supplied filing is Q2 2018, not Q2 2017.
- Track constant-currency sales, particularly Europe and jewelry, and assess whether connected-watch growth offsets traditional-watch declines.
- Evaluate whether margin gains and NWF savings persist after restructuring costs, impairments and currency effects.
- Monitor cash conversion, inventory quality, liquidity availability, debt-covenant headroom and the scheduled 2019 Term Loan repayment.
- Check tariff developments, 2018 license-sales thresholds, and whether management achieves its stated savings, capex and restructuring expectations.