Fossil, Inc. Form 10-Q Summary
Period: 13 weeks ended March 30, 2013, compared with the 13 weeks ended March 31, 2012. The filing identifies the registrant as Fossil, Inc.; this differs from the request metadata’s “Fossil Group, Inc.” and “2012 Q1.” Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Business context and results
Fossil designs, markets and distributes fashion accessories, principally watches, through wholesale, company-operated stores and e-commerce. Reported net sales rose 15.5% to $680.9 million. Management attributed 5.5 percentage points of consolidated growth to acquisitions and 10.2 percentage points to organic growth, partly offset by a 0.2 percentage-point foreign-exchange impact.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $680.9 million | $589.5 million | Up 15.5% |
| Gross profit / margin | $378.5 million / 55.6% | $329.0 million / 55.8% | Margin down 0.2 percentage points |
| Operating income / margin | $94.3 million / 13.9% | $82.9 million / 14.1% | Income up 13.8%; margin down 0.2 points |
| Net income attributable to Fossil / diluted EPS | $72.2 million / $1.21 | $58.1 million / $0.93 | Income up 24.2% |
| Operating cash flow | $85.9 million | $35.5 million | Up $50.4 million |
| Cash and cash equivalents | $241.4 million | $260.5 million at prior-year quarter-end | Down $19.1 million year over year |
Other income was $9.8 million, including a $6.4 million noncash gain from remeasuring Fossil’s preexisting investment in Fossil Spain when it obtained control. The effective tax rate was 28.1%, versus 27.8%. The filing reports cash and equivalents of $241.4 million at March 30, 2013, including $185.4 million held outside the United States.
Material changes and operating trends
- Watches were the main product growth driver: sales increased 15.6%; watches represented 75.3% of sales, versus 71.0% a year earlier. Leather sales fell 1.3%, and eyewear sales fell 35.7%.
- Direct-to-consumer sales rose 22.7%, supported by 24.2% square-footage growth and 4.3% comparable-store sales growth. Wholesale sales increased across North America, Europe and Asia Pacific.
- Skagen, acquired in April 2012, contributed $29.1 million to quarterly sales. Fossil Spain began being consolidated on January 1, 2013 after Fossil assumed control; Bentrani, acquired at the end of 2012, also contributed to consolidated results.
- Gross margin declined due in part to currency effects and a higher share of lower-margin distributor sales. Operating expenses increased $38.0 million, largely with store and concession expansion, infrastructure investment and acquired businesses; expenses remained 41.7% of sales.
- Reported net income benefited from the Fossil Spain remeasurement gain, foreign-currency gains and a lower share count. The company repurchased $56.6 million of shares during the quarter and used $75.0 million of net revolving-credit borrowings, primarily to fund repurchases.
Cash, debt and liquidity
Cash from operations was $85.9 million; investing activities used $34.9 million, including $19.5 million of capital expenditures and $15.2 million for acquisitions, net of acquired cash. Financing activities provided $20.3 million, including net debt borrowings, partly offset by $61.2 million of share repurchases. Cash increased $64.2 million during the quarter.
At March 30, 2013, current assets were $1,147.7 million and current liabilities were $314.3 million; reported working capital was $833.3 million. Short-term debt was $1.6 million and long-term debt was $151.1 million. The revolving facility had $140.0 million drawn and approximately $209.1 million available. The company reported compliance with material debt covenants and said it expected operating cash flow, cash on hand and revolver availability to fund working capital, repurchases and planned capital expenditures for the next 12 months.
Outlook, risks and unusual items
- Management forecast fiscal 2013 capital expenditures of $95 million to $105 million, principally for retail expansion and renovation and technology infrastructure, and approximately 70–75 net new retail stores. No earnings or revenue guidance is provided in the filing.
- Management cited exposure to discretionary consumer spending, fashion trends and product acceptance, competition, supply interruptions, foreign currency movements, customer financial health, and the integration of acquired businesses.
- North America wholesale sales were affected by a fiscal-calendar mismatch with the retail NRF calendar (approximately $10 million negative) and an estimated $15 million timing shift from Q2 into Q1, which management associated largely with the earlier Easter.
- Currency translation reduced other comprehensive income by $19.8 million in the quarter. A hypothetical 10% strengthening of the U.S. dollar would, the filing estimates, reduce pretax income by $4.5 million and stockholders’ equity by approximately $65.7 million.
- The company disclosed routine litigation that it did not believe would materially affect its financial condition or results, no material changes to its previously disclosed risk factors, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the filing identity and period: the supplied filing is for Fossil, Inc. for Q1 2013, not a 2012 Q1 filing.
- Assess how much reported growth reflects organic demand versus acquisitions, and whether the Q1 timing shifts in North America reverse in later quarters.
- Separate recurring operating performance from the $6.4 million noncash Fossil Spain gain and other currency-related benefits.
- Monitor gross-margin pressure, inventory growth, store expansion costs and the cash requirements of repurchases and capital expenditures.
- Review the contingent consideration tied to Fossil Spain’s future results, remaining revolver capacity, and the company’s foreign-exchange and consumer-demand exposures.