Fossil Group, Inc. — Form 10-K Summary
Period clarification: The supplied filing is for fiscal 2015, ended January 2, 2016, not fiscal 2014. Fiscal 2015 had 52 weeks; fiscal 2014 had 53. The filing includes fourth-quarter results.
Business context
Fossil designs, markets and distributes fashion accessories, led by watches, through wholesale, company-operated retail and e-commerce channels. It reports Americas, Europe and Asia segments. Watches generated 76.7% of FY2015 sales; licensed products generated 51.1%, including Michael Kors products at 25.4%. The company acquired wearable-technology business Misfit in December 2015.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $3.229 billion | $3.510 billion |
| Gross profit / margin | $1.753 billion / 54.3% | $2.001 billion / 57.0% |
| Operating income / margin | $291.2 million / 9.0% | $566.5 million / 16.1% |
| Net income attributable to Fossil Group | $220.6 million | $376.7 million |
| Diluted EPS | $4.51 | $7.10 |
| Operating cash flow | $360.8 million | $387.9 million |
| Cash and cash equivalents | $289.3 million | $276.3 million |
| Working capital | $953.1 million | $1.008 billion |
FY2015 net sales fell 8.0% as reported, but declined about 1% on the company’s constant-currency, comparable-calendar basis. Foreign exchange reduced reported sales by approximately $207.5 million. Operating income fell 48.6%; management attributed pressure to lower sales, currency effects, reduced expense leverage and growth investments. The gross margin decline included an approximately 290-basis-point adverse currency impact; excluding currency, management said margin expanded.
Fourth-quarter FY2015 sales were $992.5 million versus $1.065 billion in the prior-year quarter; gross margin was 53.0% versus 56.8%. Net income attributable to Fossil Group was $70.4 million versus $154.1 million.
Liquidity, debt and capital allocation
- Cash from operations was $360.8 million. Investing used $293.8 million, principally including $220.2 million for acquisitions, net of cash acquired, and $79.8 million of capital expenditures. Financing used $64.0 million; stock repurchases were $231.3 million.
- Debt was $801.6 million under the debt note, excluding capital leases, compared with $619.6 million a year earlier. The balance included $589.0 million drawn on a $1.05 billion revolving facility and $212.6 million on the term loan. Available revolver capacity was approximately $460.1 million; the company reported compliance with debt covenants.
- Of $289.3 million cash, $274.3 million was held by foreign subsidiaries. The company stated it expected operating cash flow, cash on hand and revolver availability to fund working capital and planned capital expenditures for the next 12 months.
- FY2015 capital expenditures were $79.8 million; FY2016 expected expenditures were $75–$85 million. The company paid no cash dividends and had $829.3 million of repurchase authorization remaining at year-end.
Material changes and unusual items
- Watch sales fell 9.5% as reported; Americas and Asia declined on a constant-currency, comparable-calendar basis, while Europe grew. Michael Kors growth had moderated, and the multi-brand watch portfolio was challenged by wearable technology and market conditions.
- FY2015 included $24.4 million of restructuring charges, a $9.1 million noncash impairment of the SKAGEN trade name, and $8.4 million of Misfit acquisition-related costs. Store and other long-lived asset impairment charges totaled $11.1 million.
- Misfit was acquired for $215.4 million cash, net of cash acquired, plus $1.7 million in replacement awards. Its results had no material impact on FY2015 income; the purchase-price allocation was preliminary.
- Other income included $32.6 million of currency gains and a $5.2 million gain related to an interest-rate hedge settlement. The effective tax rate fell to 26.2% from 30.7%, reflecting foreign tax credits, prior-year accrual adjustments and audit settlements.
- Revenue and earnings are seasonally weighted toward the second half. The company planned approximately 25–30 store openings and about 30 closures in FY2016.
Outlook, risks and contingencies
The filing provides capital-spending and store plans, but no specific revenue or earnings guidance. Management emphasized brand investment, direct-to-consumer and omni-channel development, and expansion of wearable technology capabilities. Burberry announced it would not renew its watch license when it expires at the end of 2017. Other principal risks include fashion-trend and discretionary-spending shifts; competition from technology and traditional watch brands; dependence on licensed brands and minimum royalties; concentrated component sourcing and overseas manufacturing; currency movements; inventory and product-return risk; and integration and execution risks for Misfit.
Future minimum royalty commitments were $363.8 million through FY2019, including $198.6 million in FY2016. Operating lease commitments totaled $852.3 million. The company said pending ordinary-course legal matters were not expected to have a material effect. Deloitte issued unqualified opinions on the financial statements and internal controls; the internal-control assessment excluded Misfit, which was acquired shortly before year-end.
Important facts for investors to verify
- Confirm the fiscal-period comparison: this is FY2015, with Q4 results shown, rather than a FY2014 10-K.
- Assess underlying sales and margins apart from the $207.5 million currency translation effect and the extra week in FY2014.
- Track watch demand, Michael Kors performance, retail markdowns and the durability of the reported margin pressure.
- Evaluate Misfit integration, purchase accounting, future investment needs and whether wearable products gain meaningful customer acceptance.
- Monitor debt, revolver availability, share repurchases and the substantial royalty, lease and purchase commitments.
- Assess exposure to the Burberry license expiration and reliance on licensed products, particularly Michael Kors.