Fossil Group, Inc. — Form 10-Q Summary
Period clarification: The request identifies 2016 Q1, but the supplied filing is for the 13 weeks ended April 1, 2017, compared with the 13 weeks ended April 2, 2016. The summary below covers the filing’s 2017 first quarter.
Business context and reporting period
Fossil designs, markets and distributes fashion accessories, including watches, jewelry, leather goods and connected wearable products. It sells through wholesale, company-operated retail and e-commerce channels worldwide. The filing reports unaudited results for the 13 weeks ended April 1, 2017.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $581.8 million | $659.8 million |
| Gross profit / gross margin | $289.5 million / 49.8% | $348.3 million / 52.8% |
| Operating income (loss) | $(45.3) million | $14.4 million |
| Net income (loss) attributable to Fossil | $(48.2) million | $5.8 million |
| Diluted EPS | $(1.00) | $0.12 |
| Cash provided by operating activities | $51.4 million | $34.5 million |
| Capital expenditures | $4.4 million | $19.7 million |
| Cash and cash equivalents, quarter-end | $320.7 million | $306.8 million |
Quarter-end current assets were $1.280 billion and current liabilities were $386.7 million, for working capital of $893.6 million. Debt on the balance sheet was $616.1 million, including $26.4 million short-term/current and $589.7 million long-term. The company separately disclosed $619.5 million of debt before unamortized issuance costs and capital leases. Revolving-facility borrowing capacity was $210.1 million; the company reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Sales declined 11.8% as reported and 10.5% in constant currency. Watches fell 9.4%, leathers 21.4%, and jewelry 12.4% as reported.
- Sales fell in all geographic segments: Americas 17.4%, Europe 6.8% (2.9% constant currency), and Asia 4.7%.
- Comparable retail sales, including e-commerce, declined 11%; e-commerce sales increased 17% (20% constant currency).
- Gross margin contracted 300 basis points to 49.8%, reflecting promotions, greater lower-margin connected-product and off-price mix, and currency effects.
- Operating results swung to a loss, with $26.3 million of restructuring charges. Excluding restructuring, operating expenses were lower than the prior-year period, but the sales and margin declines weighed on profitability.
- Operating cash flow improved to $51.4 million from $34.5 million, helped by lower accounts receivable; cash flow also reflected a net increase in other working-capital items and the net loss.
Outlook, management commentary, risks and unusual items
- Management emphasized its multi-year New World Fossil restructuring, connected-product expansion, core watch business and cost discipline. It cited continued retail pressure, weak traffic and challenges in traditional watches and leathers, while noting growth in wearables and e-commerce.
- The company estimated approximately $150 million of total restructuring charges and approximately $45 million of fiscal 2017 charges; $26.3 million was recorded in this quarter. Fiscal 2017 capital expenditures were estimated at approximately $35 million. No specific sales or earnings guidance was provided in the supplied filing text.
- A March 2017 credit amendment reduced the revolving facility from $1.05 billion to $850 million and extended the credit agreement maturity to May 17, 2019. Interest margins rise if the term loan is not repaid by specified dates, and the agreement includes leverage limits and restricts open-market share repurchases.
- Management said a sustained decline in market capitalization could indicate impairment; market capitalization was 14% below the carrying amount of net assets at quarter-end. The quarter included a $1.1 million impairment charge related to retail-store assets.
- Credit ratings had been downgraded by Moody’s and S&P, both with negative outlooks. Other key risks include changing fashion and technology preferences, execution of the restructuring, license renewals and sales thresholds, foreign exchange, supply constraints, debt covenant compliance and consumer demand. The BURBERRY license was not expected to be renewed after its fourth-quarter 2017 expiration.
- The company said it believed cash, operating cash flows and available credit were sufficient for U.S. needs over the next 12 months; $314.2 million of quarter-end cash was held outside the U.S. Litigation was described as routine and not material.
Most important facts for investors to verify
- Confirm the applicable reporting period: the supplied filing is Q1 2017, not Q1 2016.
- Track sales trends, comparable retail performance and whether wearable growth can offset declines in traditional watches and leathers.
- Assess progress and total costs of the restructuring, including expected savings and the effect on margins and cash flow.
- Monitor debt repayment, borrowing availability, rising loan margins, covenant headroom and the effect of cash held outside the U.S.
- Review future impairment testing and the outlook for licensed-brand sales, including license thresholds and expirations.