Business context and reporting period
Fossil Group, Inc. designs, markets and distributes fashion accessories, including watches, jewelry, leather goods and apparel, through wholesale and direct-to-consumer channels. This Form 10-Q covers the 13 and 39 weeks ended September 28, 2013, compared with periods ended September 29, 2012. The request metadata says “2012 Q3,” but the filing is for 2013 Q3.
Financial performance and position
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2013 | Q3 2012 | 39 weeks 2013 | 39 weeks 2012 |
|---|---|---|---|---|
| Net sales | $810.4 | $684.2 | $2,197.5 | $1,909.8 |
| Gross profit / margin | $465.0 / 57.4% | $381.5 / 55.8% | $1,252.3 / 57.0% | $1,066.9 / 55.9% |
| Operating income / margin | $141.0 / 17.4% | $113.1 / 16.5% | $342.3 / 15.6% | $284.0 / 14.9% |
| Net income attributable to Fossil Group | $89.7 | $76.8 | $229.6 | $192.3 |
| Diluted EPS | $1.58 | $1.26 | $3.93 | $3.11 |
- Q3 sales grew 18.4%; watches rose 19.7% and jewelry 43.3%. Year-to-date sales grew 15.1%, led by watches (+18.9%) and jewelry (+25.5%).
- Q3 operating expenses increased to $323.9 million from $268.4 million; as a share of sales, they rose to 40.0% from 39.2%. The stronger gross margin more than offset expense deleveraging.
- Year-to-date operating cash flow was $180.0 million, versus $168.5 million. Investing used $87.7 million, including $66.3 million of capital expenditures and $14.9 million for acquisitions. Financing used $45.6 million, including $460.4 million of share repurchases, partially offset by net debt borrowings.
- Cash and equivalents were $228.9 million at September 28, 2013, including $190.6 million held outside the U.S. Working capital was $918.2 million. Inventory was $656.6 million, up from $506.3 million at fiscal year-end, and accounts receivable was $360.6 million.
- Debt was $482.9 million: $14.6 million short-term and $468.4 million long-term. The company had $527.9 million of available revolver capacity and reported compliance with debt covenants. A five-year credit facility established in May 2013 includes a $750 million revolver and a $250 million term loan.
Material changes and unusual items
- Reported Q3 growth benefited from shipment timing: approximately $20 million of current-year sales shifted into Q3, while approximately $17 million of prior-year holiday shipments moved out of the prior-year quarter. Management said timing also benefited year-to-date comparisons.
- Q3 comparable owned-store sales declined 0.5%; year-to-date comparable sales increased 1.1%. Direct-to-consumer operating income fell to $18.6 million in Q3 from $22.9 million.
- The 2013 year-to-date results include a $6.5 million non-cash gain from remeasuring the company’s existing investment in Fossil Spain after it gained control and began consolidating the business. The filing says this added approximately $0.11 to diluted EPS.
- The company repurchased 4.3 million shares for $460.4 million year to date, including 2.0 million shares for $228.2 million in Q3. Repurchases reduced weighted-average shares and supported EPS growth.
- Long-term debt rose substantially from $75.1 million at December 29, 2012, reflecting the new term loan and revolver borrowings. The company also entered an interest-rate swap covering $250 million of term debt.
Outlook, management commentary and risks
- Management expected a challenging retail environment, particularly in the U.S., with a highly promotional holiday season and six fewer shopping days due to the later Thanksgiving calendar. The filing provides no specific full-year revenue or earnings guidance.
- Management expected approximately 70 net new global stores for fiscal 2013 and $30–$35 million of capital expenditures for the remainder of the year, mainly for store expansion, renovation and technology. It said cash, operating cash flow and revolver availability should fund next 12 months’ working capital, repurchases and planned capital expenditures.
- Key risks include discretionary consumer spending, fashion trends and product acceptance, competition, global sourcing and supply interruptions, foreign-exchange movements, acquired-business integration, and material or labor costs. A 10% adverse currency move was estimated to reduce pretax income by $10.8 million and equity by approximately $76.3 million; a 100-basis-point rate increase would add about $2.2 million to annual interest expense on unhedged variable-rate debt.
- The company reported no material pending litigation and no material change to previously disclosed risk factors. It had $10.0 million of unrecognized tax benefits, of which $6.1 million could favorably affect the effective tax rate if recognized; tax audits and settlement timing remain uncertain.
Investor facts to verify
- Confirm the reporting-period discrepancy in the request metadata: the filing covers Q3 2013, not Q3 2012.
- Assess how much reported growth and margin expansion depended on shipment timing, promotions, product mix and currency effects, and whether those factors persist.
- Track inventory and receivables growth, seasonal working-capital needs, cash conversion and the impact of the holiday selling period.
- Monitor debt, interest costs, covenant headroom, repurchases and remaining authorization; the filing reports $614.6 million of repurchase authorization remaining.
- Review the Fossil Spain contingent consideration, tax exposures, and the sustainability of earnings excluding the $6.5 million remeasurement gain and share-repurchase effects.