Business Context and Reporting Period
Company: Fossil, Inc. (Delaware corporation)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: 13 weeks ended July 1, 2000 (Second Quarter) and 26 weeks ended July 1, 2000 (Year-to-Date).
Business Overview: The Company designs, develops, markets, and distributes fashion watches and accessories under the "FOSSIL" and "RELIC" brands, as well as licensed products (e.g., DKNY, Emporio Armani). Products are sold through department stores, specialty retailers, and company-owned stores in over 85 countries.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended July 1, 2000 | 13 Weeks Ended July 3, 1999 | 26 Weeks Ended July 1, 2000 | 26 Weeks Ended July 3, 1999 |
|---|---|---|---|---|
| Net Sales | $113,393 | $90,271 | $216,962 | $173,548 |
| Gross Profit | $56,560 | $44,750 | $110,219 | $87,422 |
| Gross Margin % | 49.9% | 49.6% | 50.8% | 50.4% |
| Operating Income | $20,452 | $16,759 | $41,611 | $34,636 |
| Net Income | $11,948 | $9,866 | $24,576 | $20,297 |
| Diluted EPS | $0.36 | $0.29 | $0.74 | $0.61 |
| Cash & Equivalents (End of Period) | $81,849 | $70,648 | $81,849 | $70,648 |
| Working Capital | $173,694 | $128,000 (approx) | $173,694 | $155,000 (approx) |
| Notes Payable | $4,858 | $5,043 | $4,858 | $5,043 |
Note: Working capital calculated as Total Current Assets ($251,610) minus Total Current Liabilities ($77,916). Prior year working capital figures are estimates based on MD&A text.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 25.6% for the quarter and 25.0% year-to-date compared to the prior year.
- Profitability: Net income rose 21.1% for the quarter and 21.1% year-to-date. Operating income increased 22.0% for the quarter.
- Inventory Build: Inventories increased significantly from $63,029 (Jan 1, 2000) to $96,554 (July 1, 2000), driven by new factory acquisitions, DKNY inventory buildup, and store expansion.
- Cash Flow: Net cash used in operating activities was $(4,368) for the 26 weeks ended July 1, 2000, compared to $18,369 generated in the prior year period. This shift is attributed to increased inventory and accounts receivable.
- Store Expansion: The Company operated 35 outlet and 17 full-price retail stores at the end of the quarter, up from 30 and 14 respectively in the prior year.
Guidance, Outlook, and Risks
- Outlook: Management anticipates sales volume growth of 20% or more for the remainder of 2000. Gross profit margins are expected to be equal to or marginally above 1999 levels. Operating expense ratios are expected to increase slightly due to brand advertising and new store openings.
- Liquidity: Management believes cash flow from operations and existing cash on hand ($81.8 million) will satisfy working capital needs for at least the next 18 months. Outstanding borrowings were $4.9 million against $43 million in credit facilities.
- Risks:
- Currency: Significant exposure to the Euro and Japanese Yen; a strengthening U.S. dollar negatively impacted European margins.
- Consumer Trends: Changes in consumer spending patterns or preferences.
- Competition: Intense competition in the fashion watch and accessory market.
- Unusual Items: The quarter included an $8.3 million international non-branded premium incentive sale, which generated margins below the Company's average.
Investor Verification Checklist
- Inventory Turnover: Verify the sustainability of the 53% increase in inventory levels ($33.5M increase) and its impact on future cash flow.
- Currency Hedging: Review the effectiveness of forward contracts (24.9M Euro, 2.5M GBP, 143.4M JPY) in mitigating foreign exchange risk.
- Licensed Brand Performance: Confirm continued growth in DKNY ($6.2M Q2 sales) and Emporio Armani ($8.5M Q2 sales) lines.
- Operating Expense Leverage: Monitor if operating expenses (up 28.4% QoQ) can be controlled as sales growth stabilizes.
- Store Economics: Assess the profitability of the 8 new company-owned stores opened in the quarter.