Fossil Group, Inc. — Form 10-K Summary
Reporting period: The supplied filing is for the 53 weeks ended January 2, 2021, not fiscal 2019 or a standalone 2019 fourth quarter. Fiscal 2019 ended December 28, 2019. Amounts below are in U.S. dollars.
Business context and period
Fossil designs, markets and distributes watches, smartwatches and other fashion accessories under owned and licensed brands. It reports Americas, Europe and Asia segments. Watches generated 80.6% of fiscal 2020 sales; licensed products generated 47.3%. The year was materially affected by COVID-19, store closures and lower retail traffic. Fiscal 2020 included 53 weeks versus 52 weeks in fiscal 2019.
Key financial metrics
| Metric | Fiscal 2020 | Fiscal 2019 |
|---|---|---|
| Net sales | $1,613.3 million | $2,217.7 million |
| Gross profit / margin | $770.4 million / 47.7% | $1,099.4 million / 49.6% |
| Operating income (loss) | $(135.3) million | $(28.4) million |
| Net loss attributable to Fossil Group | $(96.1) million | $(52.4) million |
| Diluted loss per share | $(1.88) | $(1.04) |
| Operating cash flow | $101.2 million | $(14.2) million |
- Fiscal 2020 sales fell 27.3% reported (27.6% constant currency); declines affected all geographic segments and major product categories. Americas sales fell 32.4%, Europe 27.0%, and Asia 18.8%.
- Gross margin contracted 1.9 percentage points, reflecting promotions, higher product and freight costs, lower factory absorption and unfavorable currency effects. Higher e-commerce mix and favorable product and regional mix partly offset these pressures.
- SG&A fell to $866.7 million from $1,081.6 million, mainly due to restructuring, lower store costs and cost reductions. Total operating expenses nevertheless rose to 56.1% of sales from 50.9% as revenue declined.
- Cash and cash equivalents were $316.0 million at year-end, compared with $200.2 million. Working capital was $431.9 million, down from $500.3 million. Inventory fell 34.7% to $295.3 million; accounts receivable fell to $229.8 million.
- Debt principal was $250.8 million: $152.0 million under the term loan and $98.3 million under the revolving facility. The company reported $42.1 million of remaining revolving availability and was in compliance with debt covenants at year-end.
- Cash flow from operations improved chiefly with non-cash expenses and working-capital reductions, including inventory reduction. Capital expenditures were $8.7 million, versus $20.9 million in fiscal 2019.
Material changes and fourth-quarter results
- Fiscal 2020 net sales declined by $604.4 million, while the net loss widened by $43.7 million. Operating loss widened by $106.9 million.
- Fourth-quarter fiscal 2020 sales were $528.1 million, gross profit was $259.6 million and gross margin was 49.2%; attributable net loss was $4.0 million. In fourth-quarter fiscal 2019, sales were $711.6 million, gross margin was 43.3% and attributable net loss was $6.9 million.
- Digital sales were 38.8% of consolidated sales, up from 20.1% in fiscal 2019. Comparable retail sales declined in the mid-twenties overall; strong e-commerce growth partly offset store and wholesale declines.
- Fiscal 2020 included $36.5 million of restructuring charges and $2.5 million of MICHELE trade-name impairment. Fiscal 2019 included a $21.6 million gain on intellectual-property sale to Google and $16.6 million of SKAGEN trade-name impairment.
Outlook, commentary and risks
- Management said operating conditions remained uncertain due to COVID-19, including its effects on consumer demand, store traffic, supply chains and the pace of recovery. Management believed cash, operating cash flow and available credit would fund operations and covenant needs for the 12 months after issuance of the financial statements; this is subject to significant uncertainty.
- The NWF 2.0 restructuring program targets $250 million in run-rate savings over multiple years. The company reported approximately $175 million of savings in fiscal 2020 and expected to complete the savings plan in 2021. Fiscal 2020 restructuring charges were $36.5 million; estimated total NWF 2.0 charges were $75–$85 million.
- For fiscal 2021, management expected to close approximately 65–75 stores, open no additional stores, and spend approximately $20 million on capital expenditures. No clear consolidated revenue or earnings guidance is provided in the supplied filing text.
- Debt terms were amended during 2020, including higher term-loan interest rates, increased scheduled amortization and temporary covenant relief. The term loan requires minimum liquidity of $150 million per month after the temporary relief period; management warned that further revenue or cash-flow declines, or missed cost savings, could impair covenant compliance.
- China sourcing and U.S. tariffs remain material exposures. The company estimated approximately $15 million of fiscal 2021 gross-profit exposure from Section 301 tariffs, assuming no offsets; it is challenging certain tariffs in court. Other key risks include continued traditional-watch declines, competition and product obsolescence, license renewals, minimum royalty commitments, foreign exchange, and retail lease costs.
- Contractual obligations include $197.6 million of minimum royalties, $456.2 million of operating lease payments and $363.1 million of purchase obligations. A separate guarantee covers up to 2.2 million Swiss francs of an investee’s credit facility. The company said pending ordinary-course litigation was not expected to have a material effect.
Important facts for investors to verify
- Confirm the period: this filing reports fiscal 2020 ended January 2, 2021; it is not a fiscal 2019 Q4 filing.
- Track cash generation, inventory and receivables, and whether the reported cash balance is accessible for debt service, given that $277.4 million was held by foreign subsidiaries.
- Monitor debt availability, monthly liquidity and covenant compliance, including the effect of scheduled repayments and amended loan terms.
- Assess whether NWF 2.0 savings and store closures are achieved without further sales, margin or restructuring costs deterioration.
- Check tariff developments, sourcing changes and the potential effect on the estimated fiscal 2021 gross-profit exposure.
- Evaluate licensed-brand concentration, renewal and termination terms, minimum royalties, and the WEAR OS license expiration in April 2022.
- Review inventory valuation assumptions and impairment risks; inventory valuation was identified as the auditor’s critical audit matter. The auditor issued an unqualified opinion on the financial statements and internal controls.