Fossil, Inc. — Form 10-K Summary
Period clarification: The supplied filing is for the fiscal year ended December 29, 2012, not 2011 Q4 as indicated in the request metadata. Fiscal 2012 comprised a 4-4-5 retail calendar.
Business context
Fossil designs, markets and distributes fashion accessories, primarily watches, alongside leather goods, jewelry, sunglasses and clothing. It sells through wholesale channels and direct-to-consumer stores, e-commerce and catalogs, across North America, Europe and Asia Pacific. Watches represented 74.9% of fiscal 2012 sales; international operations generated 52.6% of consolidated sales.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $2.858 billion | $2.567 billion |
| Gross profit / margin | $1.607 billion / 56.2% | $1.439 billion / 56.1% |
| Operating income / margin | $488.8 million / 17.1% | $472.0 million / 18.4% |
| Net income attributable to Fossil | $343.4 million | $294.7 million |
| Diluted EPS | $5.59 | $4.61 |
| Operating cash flow | $451.6 million | $251.3 million |
| Cash and cash equivalents, year-end | $177.2 million | $287.5 million |
| Working capital, year-end | $737.3 million | $844.1 million |
Reported sales grew 11.3%; management cited 13.5% growth excluding unfavorable foreign-exchange effects. Net income attributable to Fossil increased 16.5%. Gross margin edged up 10 basis points, but operating margin fell 130 basis points as operating expenses grew faster than sales. Currency translation reduced operating income by approximately $43.8 million; management said the operating margin would have been about 18.3% excluding currency effects.
Cash from operations was more than offset by $345.2 million used in investing and $219.6 million used in financing. Investing included $229.2 million for acquisitions and $112.4 million in capital expenditures; financing included $271.3 million of share repurchases. Year-end balance-sheet debt included $2.8 million short-term and $75.1 million long-term debt. The revolving facility had $65.0 million outstanding and approximately $284.1 million available; the company reported compliance with its debt covenants. Inventory was $506.3 million, versus $489.0 million a year earlier.
Material changes versus the prior year
- Skagen Designs, acquired April 2, contributed $93.8 million in sales and $11.2 million in operating income from acquisition through year-end. The deal involved $231.7 million cash and 150,000 Fossil shares; the filing also records acquisition and integration costs and a $9.9 million favorable contingent-consideration remeasurement.
- Direct-to-consumer sales increased 17.8% to $715.5 million and rose to 25.0% of consolidated sales. The store base grew from 398 to 473, with 92 openings and 17 closures during the year.
- Asia Pacific wholesale sales increased 21.7% on the filing’s growth-factor table, while Europe wholesale sales were nearly flat on a reported basis. Watches grew to 74.9% of sales; jewelry and “other” categories declined as shares of the mix.
- Foreign exchange reduced reported growth, while the lower effective tax rate (28.0%, versus 31.9%) supported earnings. Fiscal 2012 also included a $10.8 million income-tax benefit associated with completed tax audits, as noted in selected financial data.
Outlook, commentary and risks
The filing provides no specific fiscal 2013 revenue or earnings guidance. Management expected fiscal 2013 capital expenditures of $115–$125 million, mainly for store expansion and renovation and technology, and planned approximately 70–75 store openings and 12 closures. It expected cash from operations, cash on hand and revolver availability to fund near-term working capital, repurchases and planned capital spending. Management did not expect material changes in watch movement costs in 2013.
Key risks include discretionary consumer demand and Europe’s economic conditions; fashion-trend and inventory forecasting; reliance on licensed brands (including major licenses expiring in 2013); concentrated component sourcing and manufacturing in Asia; currency fluctuations; execution and integration of acquisitions; store-expansion economics; customer credit and order volatility; and legal, trade, privacy and regulatory exposure. The company had $285.9 million of minimum royalty commitments, $739.7 million of operating lease commitments and $271.2 million of purchase obligations. It reported no material pending litigation and no off-balance-sheet arrangements.
After year-end, on December 31, 2012, Fossil acquired substantially all assets of distributor Bentrani Watches for $27.0 million. Management also expected to consolidate Fossil Spain beginning in 2013 after assuming day-to-day management. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Reconcile the 11.3% reported sales increase with management’s 13.5% constant-currency comparison and the stated acquisition contribution.
- Assess underlying operating-margin pressure after higher retail, infrastructure and acquisition-related expenses, and the effects of currency and the contingent-consideration remeasurement.
- Review Skagen integration, acquisition valuation and goodwill/trade-name assumptions, and the subsequent Bentrani acquisition and Fossil Spain consolidation.
- Evaluate the renewal status and economics of the major licenses expiring in 2013, along with minimum royalty commitments.
- Monitor cash conversion, inventory and receivables growth, store returns, planned capital spending, repurchases and use of the revolving credit facility.