Fossil Group, Inc. — Form 10-Q Summary
Period: The filing covers the 13 and 26 weeks ended July 2, 2022, compared with periods ended July 3, 2021. This differs from the request metadata’s “2021 Q2.” Amounts are U.S. dollars unless noted.
Business context and performance
Fossil designs, markets and distributes watches, jewelry, leather goods and other fashion accessories globally. Its reportable segments are Americas, Europe and Asia. Second-quarter net sales fell 9.7% to $371.2 million (down 5.4% in constant currency). For the first half, sales fell 3.5% to $747.0 million, approximately flat in constant currency.
Financial results
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $371.2M | $410.9M | $747.0M | $774.0M |
| Gross profit / margin | $191.3M / 51.6% | $221.8M / 54.0% | $375.7M / 50.3% | $404.4M / 52.3% |
| Operating income (loss) | ($10.9M) | $14.3M | ($25.2M) | ($2.4M) |
| Net income (loss) attributable to Fossil | ($19.1M) | ($1.2M) | ($40.6M) | ($25.6M) |
| Diluted EPS | ($0.37) | ($0.02) | ($0.78) | ($0.50) |
| Adjusted EBITDA | ($0.3M) | $30.3M | ($2.0M) | $37.8M |
Second-quarter SG&A was $199.2 million, or 53.7% of sales, versus $200.5 million, or 48.8%, a year earlier. First-half operating expenses declined to $400.9 million from $406.8 million, but remained a higher share of sales. First-half interest expense was $8.3 million, down from $13.9 million; income tax expense was $6.7 million despite the consolidated pretax loss, partly because foreign entities with taxable income incurred taxes and no benefit was recorded on certain losses.
First-half operating cash flow was negative $165.8 million, versus negative $9.8 million in the prior-year period. Investing cash flow was negative $3.8 million; financing provided $88.2 million. Cash, cash equivalents and restricted cash ended at $179.4 million, down from $264.6 million at the start of the period. Balance-sheet cash and cash equivalents were $167.1 million. Inventory rose to $437.9 million from $346.9 million at year-end.
At July 2, debt included $150.0 million of 7.00% senior notes due 2026 and $106.7 million drawn on the asset-based revolving facility; the balance sheet reported $248.9 million of long-term debt and $0.6 million current debt. Revolver availability was $53.8 million, for reported total liquidity of $220.9 million. The company reported compliance with debt covenants. Net working capital was $543.5 million.
Changes and drivers
- Traditional watch sales fell 11.0% in Q2; smartwatch sales fell 22.5%. First-half watch sales declined 6.0%, with smartwatches down 25.6%. Leather and jewelry sales increased in the first half.
- Q2 sales declined in all three regions. Asia’s first-half sales fell 11.2%, mainly reflecting COVID-related restrictions in mainland China; Americas sales were up 0.3%, and Europe was down 0.6% as reported but up 7.7% in constant currency.
- Digital sales were 35% of Q2 worldwide sales and fell 25.5% (21.4% constant currency). First-half digital sales were 34% of sales and fell 22.0% (19.1% constant currency). Comparable retail sales rose 16.3% in Q2 and 14.0% year to date, primarily on stronger store traffic.
- Gross margin weakened due mainly to higher freight costs, the non-recurrence of prior-year tariff reductions and unfavorable currency effects. Management cited partial offsets from product mix, pricing and hedging gains.
- Operating loss widened despite lower restructuring and impairment charges. Corporate operating loss increased, and SG&A as a share of sales rose, including compensation and digital investment costs.
Outlook, risks and unusual items
No specific revenue or earnings guidance is provided. Management expected COVID-related disruption in China, foreign-currency headwinds, elevated marketplace inventory, inflation and freight costs to continue affecting results. The company was adjusting future inventory purchases, focused on selling down inventory and said it might reduce early-2023 open-to-buy commitments. It expected fiscal 2022 capital expenditures of approximately $15 million to $20 million and estimated $7.0 million of NWF 2.0 restructuring charges for the year, which would conclude the program. Management said cash, operating cash flows and credit availability should fund needs for the foreseeable future, excluding long-term debt maturities, while cautioning that market volatility could affect liquidity.
- COVID-related restrictions in China disrupted sales and supply planning; the company also accelerated inventory receipts to address longer transit times and possible supply disruption.
- Management cited inflation-driven softness in consumer demand, sourcing concentration in China, longer shipping times, supply-chain constraints and a stronger U.S. dollar as risks. Russia sales were on hold but described as immaterial.
- First-half inventory growth and operating cash use are notable liquidity and potential markdown risks. The company’s seasonal cash needs typically rise in the third quarter ahead of holiday selling.
- The IRS opened an examination of the company’s 2019 federal tax return and CARES Act refund claim. Unrecognized tax benefits were $28.8 million, and accrued tax-related interest was $8.9 million. Management did not expect routine pending litigation to have a material effect.
- The company repurchased $10.0 million of stock in the first half; no shares were repurchased in Q2. $20.0 million of authorization remained at July 2.
Key facts for investors to verify
- Whether inventory levels normalize without material discounting, and whether working-capital use reverses in the second half.
- Trends in China, smartwatch sell-through, digital sales and wholesale replenishment, alongside reported comparable-store growth.
- Gross-margin recovery amid freight, currency and tariff-related cost pressures.
- Revolver borrowing-base availability, debt service and covenant compliance, particularly given the facility’s September 2024 maturity and reported liquidity excluding long-term debt maturities.
- Progress against management’s restructuring, cost-optimization and capital-expenditure expectations, and the outcome of the IRS examination.