Fossil Group, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended October 2, 2021, and year to date (39 weeks), compared with the 13 weeks and 40 weeks ended October 3, 2020, respectively. Although the request metadata says 2020 Q3, the filing is for fiscal 2021 Q3. Amounts below are U.S. dollars.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Year to date 2021 | Year to date 2020 |
|---|---|---|---|---|
| Net sales | $491.8 million | $435.5 million | $1,265.8 million | $1,085.2 million |
| Gross profit / margin | $259.5 million / 52.8% | $229.8 million / 52.8% | $664.0 million / 52.5% | $510.7 million / 47.1% |
| Operating income (loss) / margin | $47.8 million / 9.7% | $17.5 million / 4.0% | $45.4 million / 3.6% | ($153.6 million) / (14.2%) |
| Net income (loss) attributable to Fossil / diluted EPS | $31.4 million / $0.60 | $16.0 million / $0.31 | $5.8 million / $0.11 | ($92.1 million) / ($1.81) |
| Operating cash flow | Not separately presented for the quarter | Not separately presented for the quarter | ($37.0 million) | $95.9 million |
Q3 sales rose 12.9% reported (11.2% constant currency); digital sales were 40% of worldwide sales and increased 29%. Year-to-date sales rose 16.6% reported (13.0% constant currency); digital sales were 41% and increased 31%. Watches remained the largest product category. Jewelry showed strong growth, while leather sales declined. Q3 operating performance benefited from higher sales; year-to-date gross margin also improved as prior-year liquidation and inventory valuation impacts eased.
Year-to-date operating cash flow was negative as working-capital needs—particularly inventory—absorbed cash. Cash and cash equivalents were $181.8 million at October 2, 2021, down from $316.0 million at January 2, 2021. The cash-flow statement reports $195.8 million of cash, cash equivalents and restricted cash at period end. Inventory was $398.3 million, up from $295.3 million at fiscal year-end. Net working capital was $418.1 million.
Debt and liquidity
At October 2, balance-sheet debt was $41.2 million short-term/current and $97.4 million long-term. The company reported $122.0 million outstanding under its term loan and $32.8 million under its revolving facility, with $123.6 million of revolver capacity available; it was in compliance with debt covenants. Management said existing cash, operating cash flows and available facilities should be sufficient for needs over the next 12 months, while cautioning that COVID-19-related uncertainty could affect liquidity. Fiscal 2021 capital expenditures were expected to be approximately $15 million.
Subsequent financing: On November 8, 2021, Fossil issued $150 million of 7.00% senior notes due 2026, generating approximately $141.7 million in net proceeds, and used most proceeds to repay the term credit agreement. It incurred $2.6 million of prepayment fees and accrued interest, and wrote off $7.1 million of debt issuance costs and $4.6 million of original issue discount. Remaining proceeds were designated for general corporate purposes.
Material changes, outlook and risks
- Compared with Q3 2020, sales and operating income improved, while gross margin was unchanged. Year-to-date results turned from a substantial operating loss to operating profit and from a net loss to modest net income; the comparison covers 39 weeks in 2021 versus 40 weeks in 2020.
- Management said the New World Fossil 2.0 program achieved its $250 million run-rate savings goal in 2021. The company plans continued operational optimization, including a smaller store footprint and greater focus on inventory and supply-chain efficiency, alongside investment in digital engagement, marketing, and opportunities in mainland China and India. No specific revenue or earnings guidance is provided.
- COVID-19 continued to materially affect operations and results. The company cited uncertain consumer demand, store traffic, supply-chain disruption, shipping delays and costs, and the potential for further operational or liquidity pressure.
- China is a major sourcing base. Tariffs and trade measures remain a risk; the company estimated approximately $1.1 million of gross-profit exposure from Section 301 tariffs in Q4 fiscal 2021, assuming no offsets, and was pursuing litigation challenging certain tariffs.
- Other risks include foreign-exchange exposure, cybersecurity and privacy incidents, customer and supplier financial distress, license and intellectual-property risks, and compliance with debt covenants. A 10% unfavorable currency move was estimated to reduce pretax income by $25.0 million and stockholders’ equity by approximately $55.2 million; a 100-basis-point interest-rate increase was estimated to raise annual interest expense by $1.8 million based on period-end variable-rate debt.
- Year-to-date income-tax expense was $19.2 million and the effective tax rate was 73.8%, reflecting tax expense in certain foreign entities alongside no recognized tax benefit for U.S. and certain foreign losses. The filing reports $29.4 million of unrecognized tax benefits, excluding interest and penalties.
- The company recorded $18.7 million of year-to-date restructuring charges and $6.3 million of other long-lived asset impairment charges. It received $3.8 million of rent forgiveness year to date and had $0.8 million of deferred rent payments outstanding.
Important facts for investors to verify
- Whether sales growth and margin improvements persist, especially given Q3 comparable retail sales fell 1% and year-to-date comparable sales fell 1.6%.
- Whether inventory growth, receivables and seasonal working-capital requirements convert into operating cash flow and support liquidity.
- The post-quarter debt position and financing costs after the $150 million notes issuance and term-loan repayment, including the effect of the 7.00% coupon and debt-related write-offs.
- Exposure to COVID-19, China sourcing and tariffs, freight costs, currency movements, tax uncertainty and possible covenant pressure.
- Execution of restructuring savings and digital, marketing, China and India strategies; review segment and product-category trends against reported foreign-exchange effects.