Fossil Group, Inc. — Form 10-Q Summary
Period: The filing covers the 13 weeks ended April 3, 2021, compared with 14 weeks ended April 4, 2020. This differs from the request metadata labeling the filing “2020 Q1.” Amounts below are U.S. dollars unless noted.
Business context and results
Fossil designs, markets and distributes fashion accessories, primarily watches, as well as jewelry, leather goods and other products. It reports Americas, Europe and Asia segments and sells through wholesale, retail and e-commerce channels.
- Net sales: $363.0 million, down 7.1% reported and 10.3% in constant currency. The prior-year comparison included one additional week.
- Gross profit and margin: $182.6 million and 50.3%, versus $140.4 million and 35.9%. Management attributed the margin improvement mainly to lower inventory valuation adjustments and minimum licensed royalties than in the COVID-affected prior-year quarter, plus favorable mix and currency, partly offset by higher freight costs.
- Operating expenses: $199.3 million, down 27.4%; SG&A was $187.3 million, or 51.6% of sales, versus 62.9% a year earlier. Charges included $7.5 million of restructuring and $4.5 million of long-lived asset impairments.
- Operating loss: $16.8 million, compared with $134.3 million. Net loss attributable to Fossil: $24.4 million, or $0.47 per diluted share, versus $85.6 million, or $1.69 per share.
- Segment operating results: Americas income $26.0 million; Europe income $5.0 million; Asia income $11.7 million; Corporate loss $59.5 million.
- Sales mix and channels: Watches generated $291.6 million, about 80% of sales. Digital sales were 41% of worldwide sales and grew 46% reported. Global comparable retail sales fell 14%; the company had 395 stores, 52 fewer than a year earlier.
Cash flow, balance sheet and liquidity
- Operating cash flow: cash used of $37.8 million, an improvement from $77.1 million used in the prior-year quarter. Investing provided $15.1 million, including $10.9 million of asset-sale proceeds; financing used $34.2 million. Cash, cash equivalents and restricted cash ended at $260.7 million; cash and cash equivalents alone were $246.7 million.
- Working capital: $439.9 million, compared with $503.9 million at the prior-year quarter-end. Inventory was $322.5 million, down 26.7% year over year; receivables were $175.5 million, up 14.4%. Wholesale days sales outstanding rose to 60 from 55.
- Debt: balance-sheet carrying amounts were $37.9 million current and $157.2 million long-term. Separately, the company reported $138.4 million outstanding under its term facility and $77.4 million under its revolving facility. Available revolving capacity was only $2.5 million; $3.4 million of letters of credit were outstanding.
- The term loan carried a reported average interest rate of 10.0% in the quarter. The company was in compliance with its debt covenants at April 3, 2021. The leverage-ratio test was waived for the first three fiscal quarters of 2021, subject to specified minimum EBITDA requirements.
- Fiscal 2021 capital expenditures were expected to be approximately $20 million. Management said cash on hand, operating cash flows and credit facilities were expected to fund needs for the next 12 months, while cautioning that COVID-19 and operating performance could affect liquidity.
Changes, outlook, risks and unusual items
- Sales declined across Europe and Asia and were nearly flat in the Americas. COVID-19 restrictions, store traffic declines and the smaller store base weighed on results; e-commerce growth partly offset weakness in physical retail.
- Management reported $53 million of first-quarter expense savings under its NWF 2.0 program, against a $250 million multi-year run-rate savings goal. It cited brand investment, digital engagement, growth opportunities in mainland China and India, and further store-footprint and operating optimization as priorities. No specific revenue or earnings forecast was provided.
- COVID-19, new virus variants, consumer spending and store traffic remain material uncertainties. Other cited risks include supply-chain interruptions, foreign-exchange movements, competition, inventory management, licensed-brand relationships and debt-covenant compliance. Management warned that further significant revenue or cash-flow declines, or failure to meet cost-reduction targets, could jeopardize covenant compliance within 12 months.
- The prior-year quarter’s $63.7 million income-tax benefit reflected CARES Act loss carrybacks; the current quarter recorded $2.1 million of tax expense despite a consolidated pretax loss, partly because no benefit was accrued on certain losses. The company disclosed $31.4 million of unrecognized tax benefits, excluding interest and penalties.
- First-quarter restructuring charges were $7.5 million. Store-related impairments were also recorded; the fair-value note describes $4.7 million of impairment expense, while the income statement reports $4.5 million of other long-lived asset impairments. The filing text does not clearly reconcile these amounts.
- COVID-related landlord concessions included $1.1 million of rent forgiveness during the quarter and $3.1 million of deferred rent outstanding. Routine litigation was not expected by management to have a material effect. The filing also corrected a prior-year segment allocation of $24.5 million of charges, which management concluded was not material to that period.
Investor verification priorities
- Confirm the correct reporting period: the filing is for Q1 2021, not Q1 2020, and compares 13 weeks with 14 weeks.
- Monitor usable liquidity and borrowing-base availability, given just $2.5 million of revolver capacity and upcoming seasonal inventory needs.
- Track compliance with minimum EBITDA requirements and the return of leverage-ratio testing after the temporary waiver.
- Assess whether digital growth and the reported savings program can offset continuing weakness in stores, Europe and other markets.
- Reconcile the impairment amounts and evaluate tax-loss valuation allowances and unrecognized tax positions.