Fossil Group, Inc. — Form 10-Q Summary
Period note: The request identifies 2015 Q3, but the filing is for the 13 and 39 weeks ended October 1, 2016, compared with the periods ended October 3, 2015. The filing’s figures below are for 2016.
Business context and reporting period
Fossil designs, markets and distributes fashion accessories, led by watches, through wholesale, company-operated stores, e-commerce and distributors. Its reportable segments are Americas, Europe and Asia. The filing is unaudited and covers the third quarter and first 39 weeks of fiscal 2016.
Financial performance
| Metric | Q3 2016 | Q3 2015 | 39 weeks 2016 | 39 weeks 2015 |
|---|---|---|---|---|
| Net sales | $738.0m | $771.3m | $2,083.2m | $2,236.4m |
| Gross profit / margin | $385.1m / 52.2% | $417.7m / 54.2% | $1,089.2m / 52.3% | $1,227.9m / 54.9% |
| Operating income / margin | $31.2m / 4.2% | $75.7m / 9.8% | $61.0m / 2.9% | $202.3m / 9.0% |
| Net income attributable to Fossil | $17.4m | $57.5m | $29.2m | $150.3m |
| Diluted EPS | $0.36 | $1.19 | $0.60 | $3.06 |
- Q3 sales fell 4.3% reported (3.8% constant currency); year-to-date sales fell 6.9% (5.6% constant currency). Watches remained the largest category and were down 2.4% in Q3 and 7.5% year to date.
- Q3 gross margin declined 200 basis points; year-to-date margin declined 260 basis points. Management cited outlet promotions, lower-margin wearables, greater off-price wholesale mix and currency effects.
- Year-to-date operating cash flow was $59.4m, versus $134.5m a year earlier. Capital expenditures were $53.5m. Cash declined to $236.0m from $289.3m at fiscal year-end.
- At October 1, cash was $236.0m; current assets were $1,389.6m and current liabilities $424.1m. Working capital was approximately $1.0bn. Debt was approximately $723.8m, comprising $26.4m current and $697.4m long-term debt. Revolver availability was $299.7m.
Material changes versus the prior comparable period
- Q3 operating income fell 58.8%; year-to-date operating income fell 69.8%. Year-to-date net income attributable to Fossil declined 80.6%.
- Q3 sales declined in the Americas and Europe, while Asia grew 11.5% reported. Year to date, Americas and Europe declined, while Asia was nearly flat.
- Other income was lower, primarily because of reduced foreign-currency hedging gains; interest expense increased with higher spreads associated with leverage and the amended credit facility.
- Inventory was $699.6m at quarter-end, up from $625.3m at January 2, 2016, though management reported it was 6.3% below the prior-year quarter-end.
Outlook, management commentary, risks and unusual items
- Management expects fiscal 2016 capital expenditures of approximately $65m–$70m and said operating cash, cash on hand and credit availability should fund working capital and planned capital expenditures for the next 12 months. No earnings or revenue guidance is provided in the supplied filing text.
- A new multi-year restructuring program is intended to streamline operations, adjust the store fleet and improve profitability. Estimated charges are up to approximately $150m, predominantly in fiscal 2017 and 2018; Q3 recorded $14.5m, including $12.5m of noncash retail-related impairment charges.
- Connected accessories are a strategic growth focus. Management reported strong initial sales for MICHAEL KORS ACCESS and nearly 50% Q3 e-commerce growth, while noting connected products currently carry lower margins than traditional watches.
- The August 2016 credit amendment increased loan margins, raised the maximum leverage covenant to 3.25:1.00, pledged substantially all domestic assets and restricted open-market share repurchases. The company reported compliance with covenants at quarter-end.
- A Dallas distribution-center sale-leaseback generated a $6.7m Q3 gain, net of taxes and fees, and a $13.2m deferred gain; the operating lease runs 10 years, with two five-year renewal options.
- Key risks include weak discretionary consumer spending, traditional-watch headwinds, fashion and product acceptance, supply interruptions, foreign-exchange exposure, competition, and execution of the restructuring and connected-products strategy. Management said pending routine litigation was not expected to have a material effect.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q3 2016, not Q3 2015.
- Track sales trends, comparable-store performance and margins by region and product, particularly traditional watches and wearables.
- Assess restructuring execution and total charges against the estimated ceiling of approximately $150m.
- Monitor cash generation, inventory, debt, revolver capacity, covenant headroom and the restriction on share repurchases.
- Evaluate whether initial connected-accessory and e-commerce growth can scale while improving profitability and margins.