Fossil Group, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13 and 26 weeks ended July 1, 2017—not 2016 Q2 as stated in the request metadata. It compares those periods with the corresponding periods ended July 2, 2016. Amounts below are in millions of U.S. dollars unless otherwise noted.
Business context and reporting period
Fossil designs, markets and distributes fashion accessories, including watches, jewelry, leather goods and connected wearables, through wholesale, retail and e-commerce channels worldwide. Its reportable segments are Americas, Europe and Asia.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $596.8 | $685.4 | $1,178.6 | $1,345.2 |
| Gross profit / margin | $301.3 / 50.5% | $355.8 / 51.9% | $590.9 / 50.1% | $704.1 / 52.3% |
| Operating income (loss) | $(429.8) | $15.5 | $(475.0) | $29.9 |
| Net income (loss) attributable to Fossil | $(344.7) | $6.0 | $(392.9) | $11.8 |
| Diluted EPS | $(7.11) | $0.12 | $(8.12) | $0.24 |
| Cash provided by operating activities | Not separately stated | Not separately stated | $35.4 | $71.9 |
Q2 operating loss included $407.1 of non-cash goodwill and trade-name impairment charges and $9.8 of restructuring charges. Excluding those unusual charges, results still reflected lower sales and gross margin. Q2 interest expense was $11.6, versus $6.4 a year earlier; the first-half amounts were $20.0 and $12.4, respectively.
At July 1, 2017, cash and equivalents were $319.8, including $318.0 held outside the U.S.; working capital was $890.7. Current assets were $1,304.8 and current liabilities $414.1. Debt on the balance sheet was $646.3, including current maturities; the company separately reported $649.0 of debt before unamortized issuance costs. Revolver availability was $79.1. The company reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Q2 sales fell 12.9% reported and 11.7% in constant currency; first-half sales fell 12.4% and 11.1%, respectively.
- Q2 comparable retail sales declined 11%; e-commerce comparable sales rose 8%, but store traffic remained weak. Traditional watch declines were partly offset by connected-watch growth.
- Q2 gross margin declined 140 basis points, to 50.5%. Management cited promotions, a higher mix of lower-margin connected products and unfavorable currency effects; cost initiatives and international sales mix partly offset these pressures.
- Sales declined across all segments in Q2: Americas 16.3%, Europe 9.8% and Asia 8.8% reported. Leathers and jewelry weakened alongside traditional watches.
- Goodwill was fully impaired following sustained market-capitalization declines and lower sales projections. The company also recorded $47.6 of impairment against SKAGEN, MISFIT and MICHELE trade names. Total goodwill and trade-name impairment was approximately $407.1.
- First-half operating cash flow decreased to $35.4 from $71.9. Cash increased by $22.5 from year-end, while first-half capital expenditures were $12.8.
Outlook, management commentary and risks
- Management emphasized New World Fossil restructuring, cost reduction, a leaner operating model, core-watch stabilization and expanding connected products. It planned nearly 300 wearable SKUs and five additional brands on its wearables platform during 2017; targeted penetration in the consumer-electronics channel was not achieved in Q2.
- Management estimated 2017 capital expenditures of approximately $30 and fiscal 2017 restructuring charges of approximately $45; the multi-year restructuring program was estimated at $150 in total charges. No specific sales or earnings guidance was provided in the supplied filing text.
- The credit agreement maturity was extended to May 17, 2019, but borrowing margins rise if the term loan is not repaid by specified dates, and a further fee applies if it remains outstanding after March 31, 2018. Revolver capacity had been reduced to $850.0. The company noted seasonal cash needs typically increase ahead of the holiday period.
- Key risks include continued weak consumer demand and retail traffic, fashion and product acceptance, execution of restructuring and wearables plans, customer and supplier concentration, foreign-exchange and variable-rate debt exposure, and covenant or refinancing constraints. A 100-basis-point rise in rates was estimated to increase annual interest expense by $4.7; a 10% unfavorable currency move would reduce pretax income by $22.0.
- Management said cash, operating cash flow and available credit should cover working capital and planned capital expenditures for the next 12 months. It also said it would continue monitoring deferred-tax-asset recoverability in light of sales and market-capitalization declines.
Important facts for investors to verify
- Confirm the reporting period: this filing covers Q2 2017, despite the 2016 Q2 request metadata.
- Review impairment assumptions, including the lower sales projections and valuations that led to full goodwill impairment and the trade-name write-downs.
- Track sales trends, comparable retail performance, gross-margin recovery and whether connected-product growth offsets traditional-watch weakness.
- Assess liquidity and refinancing headroom, including $79.1 of available revolver capacity, covenant compliance, scheduled debt-margin increases and seasonal inventory needs.
- Compare actual restructuring charges and capital expenditures with management’s estimates, and assess whether the program delivers durable savings and cash generation.