Fossil Group, Inc. — Form 10-Q Summary
Period clarification: The request identifies 2021 Q3, but the supplied filing is for the 13 weeks ended October 1, 2022, with comparisons to the quarter ended October 2, 2021. Year-to-date figures cover 39 weeks.
Business context and reporting period
Fossil designs, markets and distributes watches, jewelry, leather goods and other fashion accessories through wholesale, distributor, retail and e-commerce channels. It reports three geographic segments: Americas, Europe and Asia.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 39 weeks 2022 | 39 weeks 2021 |
|---|---|---|---|---|
| Net sales | $436.3 million | $491.8 million | $1,183.3 million | $1,265.8 million |
| Gross profit / margin | $219.6 million / 50.3% | $259.5 million / 52.8% | $595.3 million / 50.3% | $664.0 million / 52.5% |
| Operating income (loss) | $22.5 million | $47.8 million | $(2.7) million | $45.4 million |
| Net income (loss) attributable to Fossil | $5.8 million | $31.4 million | $(34.7) million | $5.8 million |
| Diluted EPS | $0.11 | $0.60 | $(0.67) | $0.11 |
| Adjusted EBITDA (non-GAAP) | $26.0 million | $62.5 million | $24.0 million | $100.3 million |
Q3 operating margin was 5.2%, compared with 9.7% a year earlier; year-to-date operating margin was (0.2%), versus 3.6%. Q3 diluted EPS includes an estimated $0.14 unfavorable currency impact; year-to-date diluted EPS includes an estimated $0.20 unfavorable impact.
For the 39 weeks, operating cash flow was $(214.8) million, investing cash flow $(7.7) million and financing cash flow $132.2 million. Operating cash use reflected $272.8 million used by working-capital items and the net loss, partly offset by non-cash items. Cash and cash equivalents were $162.6 million at quarter-end, versus $250.8 million at fiscal year-end 2021.
At October 1, 2022, total debt carrying value was approximately $293.9 million, including $150.0 million of 7.00% senior notes due 2026 and $151.0 million drawn on the revolving facility. Revolver availability was $50.4 million; reported total liquidity was $213.0 million. The company reported covenant compliance. Net working capital was $586.6 million. Inventory rose to $452.7 million from $346.9 million at fiscal year-end.
Material changes versus comparable periods
- Q3 sales fell 11.3% as reported and 5.2% in constant currency. Year-to-date sales fell 6.5% reported and 2.1% in constant currency.
- Q3 sales declined in all three regions. Asia was down 22.6% reported, mainly due to China; Europe declined 13.4% reported but was essentially flat in constant currency. Year-to-date Asia sales fell 15.7% reported.
- Smartwatch sales fell 38.3% in Q3 and 30.2% year to date, attributed partly to lapping the prior-year Gen 6 launch and weaker demand. Leathers grew 12.9% in Q3 and 7.1% year to date, reported.
- Gross margin contracted amid higher freight costs, unfavorable currency effects and increased promotions; year-to-date results also reflected the non-recurrence of prior-year tariff reductions.
- Year-to-date SG&A was 50.0% of sales versus 46.9%, despite lower absolute operating expenses. Restructuring charges declined to $5.4 million from $18.7 million year to date.
- Year-to-date operating cash use increased substantially from $37.0 million in the prior-year period. Revolver borrowing increased, and the company repurchased $10.0 million of stock year to date; no shares were repurchased in Q3.
Outlook, commentary, risks and unusual items
- The filing does not provide a specific full-year sales or earnings forecast. Management expected fiscal 2022 capital expenditures of approximately $15–$20 million and said it would focus on working capital, selling down inventory and potentially reducing early-2023 open-to-buy.
- Management cited ongoing COVID-19 effects, especially China restrictions; supply-chain delays and dependence on China sourcing; inflation, freight and labor costs; softer consumer demand and elevated marketplace inventories; and a stronger U.S. dollar.
- Digital sales were 37% of worldwide Q3 sales and fell 19.5% reported (12.0% constant currency). Global comparable retail sales increased 15.2% in Q3; year-to-date comparable retail sales increased 14.5%.
- The NWF 2.0 restructuring program was expected to incur about $6 million of charges in fiscal 2022 and conclude; management said its $250 million run-rate savings goal had been achieved in 2021.
- Effective November 8, 2022, after quarter-end, the revolving credit facility was amended to extend maturity to November 8, 2027, subject to an earlier-maturity provision, and to revise borrowing-base calculations, including certain intellectual property and seasonal advance-rate increases.
- Tax expense was elevated relative to pretax results: the year-to-date effective tax rate was (87.9%), reflecting tax expense on profitable foreign entities while consolidated results were a loss and no recognized benefit for certain losses. The IRS was examining the company’s 2019 federal return and CARES Act refund claim.
- Management said pending routine litigation was not expected to materially affect the company. Foreign-exchange sensitivity disclosures estimate that a 10% unfavorable dollar move would reduce pretax income by $17.3 million and stockholders’ equity by about $40.3 million; a 100-basis-point increase in variable borrowing rates would add $1.5 million in annual interest expense.
Most important facts for investors to verify
- Confirm the reporting-period mismatch: this filing is Q3 2022, not Q3 2021.
- Track inventory conversion, working-capital cash use and the effect of any planned purchase reductions on sales and margins.
- Monitor revolver availability, borrowing-base support, debt maturities and covenant compliance, including terms of the November 2022 amendment.
- Assess whether China demand, currency headwinds, freight costs and promotional activity continue to pressure sales and gross margin.
- Review tax audit developments and the realization of tax benefits from losses and unrecognized tax positions.