Fossil Group, Inc. — Form 10-Q Summary
Period: The filing reports the 13 weeks ended April 2, 2016, compared with the 13 weeks ended April 4, 2015. Although the request metadata says 2015 Q1, the filing itself covers 2016 Q1.
Business context and results
Fossil designs, markets and distributes fashion accessories, including watches, leather goods and jewelry, through wholesale, retail and e-commerce channels globally. Management attributed the quarter’s weakness primarily to intensifying pressure on traditional watches in wholesale, foreign currency headwinds and cautious retailer inventory management.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $659.8 million | $725.1 million | Down 9.0% (7% constant currency) |
| Gross profit / margin | $348.3 million / 52.8% | $400.7 million / 55.3% | Profit down 13.1%; margin down 250 bps |
| Operating income / margin | $14.4 million / 2.2% | $56.2 million / 7.7% | Down $41.8 million |
| Net income attributable to Fossil | $5.8 million | $38.1 million | Diluted EPS $0.12 vs. $0.75 |
| Operating cash flow | $34.5 million | $85.0 million | Down $50.4 million |
Drivers and material changes
- Watch sales fell 10.0% to $496.5 million; jewelry declined 13.2% to $54.7 million. Leather sales were nearly flat at $92.5 million.
- Sales declined in all regions: Americas 8.4%, Europe 10.4%, and Asia 8.2%. Foreign currency translation reduced reported sales by about $16.4 million.
- Gross margin fell amid currency effects, increased markdowns and promotions in European outlets, and more off-price sales; pricing initiatives partly offset these pressures.
- SG&A was $333.9 million, down 3.1% reported, but up 2.4% excluding currency effects and prior-year restructuring charges. The quarter included about $6.5 million of Misfit purchase-accounting-related costs.
- Prior-year restructuring charges were $12.1 million; there were no restructuring charges in Q1 2016. Lower foreign-exchange gains also weighed on the year-over-year earnings comparison.
Cash, debt and liquidity
- Cash and cash equivalents were $306.8 million at April 2, 2016, including $301.9 million held outside the United States. Working capital was $967.6 million.
- Total debt was approximately $823.2 million: $23.3 million short-term/current and $799.9 million long-term. The company reported $216.1 million of available revolving-credit capacity and compliance with debt covenants.
- Operating cash flow of $34.5 million, capital expenditures of $19.7 million, and share repurchases of $5.5 million were reported. Cash from operations was supported by a $149.7 million decrease in accounts receivable, partly offset by a net increase of $144.6 million in other working-capital items.
- Management said cash, operating cash flow and available credit were expected to cover working capital and planned capital spending for the next 12 months. Fiscal 2016 capital expenditures were estimated at $75–$85 million.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management described the wholesale watch environment as challenging and said it was investing in brand building, innovation, digital and omnichannel capabilities, and connected accessories.
- Fossil Q was its best-selling SKU in company-owned stores during the quarter. The company announced plans to launch connected accessories across eight brands by holiday 2016; this is a strategic opportunity, not a quantified forecast.
- Management planned approximately 24 store openings and 15 closures for the remainder of fiscal 2016. It opened two and closed nine in Q1.
- The Misfit acquisition, completed in December 2015 for $215.4 million cash net of cash acquired plus replacement awards, added wearable technology capabilities. Preliminary purchase accounting included $164.9 million of goodwill; valuation remained subject to change.
- Key risks include weak consumer demand and traditional-watch sell-through, fashion and product acceptance, foreign-exchange movements, supply interruptions, competition, and integration of acquired businesses. A 10% unfavorable currency move was estimated to reduce pre-tax income by $7.4 million and stockholders’ equity by about $65.4 million; a 100-basis-point rate increase would raise annual interest expense by about $6.2 million, excluding the hedged term loan.
- The company disclosed $22.8 million of unrecognized tax benefits, of which $19.8 million would favorably affect the effective tax rate if recognized. Management said pending legal matters were not expected to have a material effect.
Important facts for investors to verify
- Whether wholesale watch demand and retailer sell-through stabilize, and whether sales declines persist across regions and product categories.
- Whether margins recover as foreign-exchange, promotional and off-price pressures evolve, and whether expense reductions offset strategic investment costs.
- Whether operating cash flow remains adequate as seasonal inventory builds, and whether receivables and inventory quality remain sound.
- Debt levels, revolver availability, covenant headroom and the effect of cash held outside the United States on practical liquidity.
- Misfit integration, connected-product launches, purchase-accounting costs and the final valuation of acquired assets and goodwill.
- Foreign-exchange exposure and hedging outcomes, including the expected reclassification of hedge losses into earnings.