Fossil Group, Inc. — Form 10-Q Summary
Period clarification: The request identifies “2020 Q2,” but the filing is for the 13 weeks ended July 3, 2021 (second quarter of fiscal 2021). The comparable quarter ended July 4, 2020. Year-to-date comparisons are 26 weeks in 2021 versus 27 weeks in 2020.
Business context and reporting period
Fossil designs, markets and distributes fashion accessories, including watches, jewelry and leather goods, through wholesale, company-owned stores and digital channels. It reports Americas, Europe and Asia segments. At quarter-end it operated 386 stores, down from 436 a year earlier; digital sales were 41% of worldwide sales.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 |
|---|---|---|---|---|
| Net sales | $410.9 million | $259.0 million | $774.0 million | $649.7 million |
| Gross profit / margin | $221.8 million / 54.0% | $140.6 million / 54.3% | $404.4 million / 52.3% | $281.0 million / 43.2% |
| Operating income (loss) | $14.3 million | $(36.8) million | $(2.4) million | $(171.1) million |
| Net income (loss) attributable to Fossil | $(1.2) million | $(22.5) million | $(25.6) million | $(108.1) million |
| Diluted loss per share | $(0.02) | $(0.44) | $(0.50) | $(2.13) |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $(9.8) million | $11.6 million |
At July 3, 2021, cash and cash equivalents were $252.3 million; current assets were $949.2 million and current liabilities $521.8 million, for working capital of about $427.4 million. Balance-sheet debt was $178.1 million, including current maturities; the company separately reported $128.7 million outstanding under its term loan and $67.5 million under its revolving facility. Revolver availability was $42.1 million. Inventory was $352.0 million, up from $295.3 million at January 2, 2021. YTD capital expenditures were $3.4 million.
Material changes versus the prior comparable period
- Q2 sales rose 58.6% reported and 51.3% in constant currency; the prior-year quarter was affected by widespread COVID-19 closures. Comparable retail sales rose 12% in Q2, while YTD comparable retail sales fell 2% on a normalized 26-week basis.
- Q2 gross margin edged down 0.3 percentage points, reflecting nonrecurrence of lower minimum licensor royalty costs in the prior-year quarter and a less favorable Americas sales mix, partly offset by product/channel mix, currency and lower tariffs.
- Q2 operating results improved to income from a loss; YTD operating loss narrowed substantially. YTD gross margin improved, primarily reflecting fewer liquidation and inventory valuation adjustments on older connected products, alongside currency, royalty and tariff effects.
- YTD SG&A declined to $387.8 million from $409.2 million, while restructuring charges declined to $13.3 million from $19.9 million. Store count fell by 50 year over year.
- YTD cash decreased by $57.2 million, including $53.7 million of net debt repayments. Operating cash flow was negative, with inventory investment and other working-capital movements contributing to cash use.
Outlook, commentary, risks and unusual items
- Management gave no specific revenue or earnings guidance in the supplied filing text. It expects fiscal 2021 capital expenditures of approximately $15 million, says it completed its $250 million run-rate savings goal in 2021, and plans further store-footprint optimization and focus on inventory and supply-chain efficiency.
- Management expects cash from operations, cash on hand and credit availability to fund needs for the next 12 months, but cautions that COVID-19, consumer demand and other market uncertainty could affect operations and liquidity.
- The company said it was in compliance with debt covenants at July 3, 2021. Leverage-ratio testing was waived for the first three fiscal 2021 quarters, subject to specified minimum EBITDA requirements. Management warned that further material declines in revenue or cash flow, or failure to meet cost-reduction targets, could cause covenant noncompliance within 12 months.
- COVID-19 and new variants continued to affect store traffic, consumer behavior and global supply chains. Other disclosed risks include supply interruptions, foreign-exchange movements, competition, license renewals, inventory management and debt-covenant compliance.
- Q2 income tax expense was $8.1 million despite a $7.3 million pretax profit, producing a 110.5% effective rate; the filing cites no recognized tax benefit for U.S. losses and GILTI-related effects. YTD tax benefit was $10.2 million, with no tax benefit recognized for certain losses.
- YTD restructuring charges were $13.3 million. Retail asset impairments and related restructuring charges totaled $7.5 million. Management said routine pending legal matters were not expected to have a material effect.
Important facts for investors to verify
- Confirm the intended filing period: the supplied 10-Q covers Q2 2021, not Q2 2020.
- Assess whether reported sales recovery and comparable-sales trends are sustainable beyond the pandemic-related comparison period, and distinguish reported growth from constant-currency growth.
- Monitor operating cash flow, seasonal inventory needs, cash balances, and actual borrowing availability under the asset-based revolver.
- Review debt maturities, interest costs and covenant requirements, including the minimum EBITDA conditions during the leverage-test waiver period.
- Track the tax valuation allowance, unrecognized tax benefits and potential audit outcomes, as well as restructuring and impairment charges.