Fossil Group, Inc. — Form 10-Q Summary
Reporting period: Quarter ended July 5, 2014. The filing compares the 13-week quarter with the 13 weeks ended June 29, 2013; year-to-date results compare 27 weeks with 26 weeks. The request metadata says “2013 Q2,” but the filing itself reports the second quarter of 2014.
Business context and performance
Fossil designs, markets and distributes fashion accessories, led by watches, through wholesale, company-operated retail and e-commerce. In the second quarter, net sales increased 9.6% to $773.8 million, with growth across all geographic segments. Watches rose 11.7% and jewelry rose 19.6%; leather sales fell 4.8%. Direct-to-consumer sales grew 12.3%, primarily from store expansion, while comparable store sales were relatively flat.
Key financial metrics
- Quarter: Gross profit was $444.6 million, up 8.7%; gross margin declined 40 basis points to 57.5%. SG&A rose to $359.8 million, or 46.5% of sales, from 42.8%. Operating income declined 20.7% to $84.8 million, with an 11.0% operating margin versus 15.1%.
- Quarter earnings: Net income attributable to Fossil was $52.5 million, down 22.4%; diluted EPS was $0.98 versus $1.15. Higher operating expenses and interest expense contributed to the decline; a lower tax rate and fewer shares outstanding partially offset it.
- Year to date: Sales rose 11.8% to $1.550 billion, but the current period included an extra week. Operating income decreased 5.9% to $189.5 million; net income attributable to Fossil fell 15.0% to $118.9 million. Diluted EPS was $2.20 versus $2.36.
- Cash flow: Operating cash flow was $155.5 million for the 27 weeks, compared with $158.7 million in the prior 26 weeks. Capital expenditures were $43.5 million. Cash declined $47.8 million from year-end to $272.6 million.
- Liquidity and debt: Working capital was $976.3 million. Balance-sheet cash was $272.6 million; short-term debt was $13.7 million and long-term debt was $533.2 million. The company reported $298.0 million outstanding on its revolver and $237.5 million on its term loan, with approximately $750.9 million of revolver capacity available. It was in compliance with debt covenants.
- Balance sheet: Inventory was $664.2 million, up from $570.7 million at fiscal year-end. Total assets were $2.161 billion and stockholders’ equity was $1.016 billion.
Material changes, outlook and risks
- Quarterly sales growth was strongest in Europe wholesale (+18.6%) and direct-to-consumer (+12.3%); North America wholesale grew 1.7%. North America wholesale operating income fell 23.2%, while direct-to-consumer operating income fell 39.1%.
- Management attributed margin pressure to promotional outlet sales, increased off-price and distributor mix, and planned investment in stores, concessions, infrastructure and global initiatives. SG&A included a $5.2 million non-cash impairment charge on retail-store assets.
- Year-to-date other income was adversely affected by the absence of a $6.5 million non-cash gain recorded in the prior-year period on the Fossil Spain transaction, as well as foreign-currency losses.
- Fiscal 2014 plans included approximately 50 net new stores globally and capital expenditures of $110–$120 million, primarily for store expansion, renovations and technology. Management expected operating cash flow, cash on hand and revolver availability to fund working capital, buybacks and planned capital spending for the next 12 months.
- The company repurchased $184.6 million of shares year to date and had $309.1 million of authorization remaining. Management noted seasonal cash needs typically rise ahead of the holiday season.
- Key risks include discretionary consumer demand, changing fashion preferences, competition, dependence on limited sources for certain components, foreign-exchange movements, and execution of store expansion and global initiatives. A 10% adverse U.S.-dollar move was estimated to reduce pretax income by $12.4 million; a 100-basis-point increase in rates on unhedged variable-rate debt was estimated to add about $3.0 million to annual interest expense.
- Management said pending routine litigation was not expected to have a material effect. It also reported effective disclosure controls and no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales growth and watch-category momentum can continue without heavier promotions or further gross-margin pressure.
- Whether planned operating and retail investments translate into improved expense leverage and store productivity.
- Inventory growth, receivables and cash conversion, particularly as seasonal working-capital needs increase.
- Debt levels, revolver use, covenant headroom and the effect of continued share repurchases on liquidity.
- The impact of currency, consumer demand and the $5.2 million store impairment; also distinguish current results from the prior-year $6.5 million gain and the extra year-to-date week.