Fossil Group, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended April 1, 2023, compared with the 13 weeks ended April 2, 2022. Although the request metadata says 2022 Q1, the filing itself is for first-quarter 2023. Fossil designs, markets and distributes watches, jewelry and other fashion accessories through wholesale, retail and e-commerce channels.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $325.0 million | $375.9 million |
| Gross profit / margin | $160.7 million / 49.4% | $184.3 million / 49.0% |
| Operating income (loss) | ($37.3) million | ($14.3) million |
| Net income (loss) attributable to Fossil | ($41.3) million | ($21.5) million |
| Diluted loss per share | ($0.80) | ($0.41) |
| Adjusted EBITDA, non-GAAP | ($16.4) million | ($1.7) million |
| Cash used in operating activities | ($85.9) million | ($115.0) million |
Gross margin improved by 0.4 percentage points, but lower sales drove operating margin down to (11.5)% from (3.8)%. SG&A was $190.9 million, or 58.7% of sales, versus $195.8 million, or 52.1%; the higher sales ratio primarily reflected deleveraging. Q1 operating cash use included $62.1 million of cash used by working-capital items.
Material changes versus prior year
- Sales fell 13.5% as reported and 10.7% in constant currency. Wholesale sales declined 22.4%; direct-to-consumer sales grew 4.0% as reported. Comparable retail sales increased 13%.
- Reported sales declined in all regions: Americas 14.8%, Europe 15.2%, and Asia 7.7%. In constant currency, declines were 14.6%, 11.2%, and 1.6%, respectively.
- Traditional watch sales fell 13.8%; smartwatch sales fell 35.8%. Leather sales rose 17.8%, while jewelry declined 16.4%.
- Cash and cash equivalents were $127.1 million at quarter-end, down from $198.7 million at December 31, 2022. Inventories were $336.5 million, versus $376.0 million at year-end.
- Total liquidity was $217.2 million, comprising $127.1 million of cash and $90.1 million of revolver availability. Net working capital was $499.3 million.
Debt, liquidity and cash requirements
At April 1, 2023, the company had $150 million of 7.00% senior notes due November 2026 and $91 million outstanding under its asset-based revolving facility. The filing reports $234.6 million of long-term debt on the balance sheet and $0.5 million of short-term debt; the debt note states carrying value of $241.4 million before unamortized issuance costs and capital leases. Revolver availability was $90.1 million, after considering borrowing-base limits and letters of credit. The company was in compliance with its debt covenants. It expects approximately $15 million of capital expenditures in fiscal 2023.
Management said operating cash flows, cash on hand and available credit are expected to fund cash needs for the foreseeable future, excluding long-term debt maturities. Cash needs typically rise ahead of the holiday season. Operating lease obligations totaled $186.4 million, net of imputed interest.
Outlook, management commentary and risks
- Management remained cautious about fiscal 2023 and did not provide a specific sales or earnings forecast in the supplied filing text. It expects difficult operating conditions to persist.
- The new Transform and Grow (TAG) plan is intended to lower operating costs and working capital, including through lower inventory purchases and an approximately 8% workforce reduction in 2023, including reductions related to store closures. The company expects $25–$30 million of total TAG charges, all in fiscal 2023, and at least $100 million of annualized benefits by the end of 2024. Q1 TAG charges were $12.4 million, including $5.3 million in cost of sales.
- TAG also targets renewed focus on the Fossil brand, core watches and jewelry, and the premium watch segment, supported by digital, marketing and technology investments. The company plans to exit certain product offerings and de-emphasize selected smartwatch offerings.
- Management cited inflation, higher interest rates, recession concerns, cautious wholesale ordering and excess inventory at wholesale customers. Foreign currency translation reduced Q1 sales by $10.6 million and negatively affected operating margin by 260 basis points.
- Additional risks include reliance on suppliers, particularly sourcing from China; possible supply interruptions and cost increases; foreign-exchange exposure; cyber and data-security threats; and the Russia-Ukraine conflict. Sales to a Russian distributor were on hold and were described as immaterial.
- The effective tax rate was negative (4.1%); the company recorded tax expense despite consolidated losses and accrued no tax benefit on certain U.S. and foreign losses due to uncertainty about future utilization. Pending legal matters were described as routine and not material. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether TAG delivers the stated cost savings and margin improvement, and whether restructuring charges remain within the $25–$30 million estimate.
- Whether sales and wholesale orders stabilize, especially in watches, smartwatches and key geographic markets; monitor the contrast between declining wholesale sales and growing comparable retail sales.
- Whether inventory reductions support cash generation without impairing product availability or sales.
- Liquidity and borrowing-base availability as seasonal cash needs rise, together with debt service and the 2026 notes maturity.
- Foreign-exchange, consumer-spending, supply-chain and China-sourcing developments, as well as the realization of tax benefits and exposure from uncertain tax positions.