Business context and reporting period
Fossil Group designs, markets and distributes watches, jewelry, leather goods and connected accessories through wholesale, company-operated retail and e-commerce channels. This filing is the Form 10-K for the fiscal year ended December 31, 2016; the metadata’s “2015 Q4” does not match the filing period. Fiscal 2016 and fiscal 2015 each comprised 52 weeks.
For context, fiscal 2016 fourth-quarter results were compared with the fourth quarter of fiscal 2015.
Financial results and key metrics
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Net sales | $3,042.4 million | $3,228.8 million | Down 5.8% (4.4% in constant currency) |
| Gross profit / margin | $1,578.2 million / 51.9% | $1,753.5 million / 54.3% | Profit down 10.0%; margin down 240 basis points |
| Operating income / margin | $127.1 million / 4.2% | $291.2 million / 9.0% | Down 56.4% |
| Net income attributable to Fossil Group | $78.9 million | $220.6 million | Down 64.2% |
| Diluted EPS | $1.63 | $4.51 | Down $2.88 |
| Operating cash flow | $210.1 million | $360.8 million | Down $150.6 million |
Fiscal 2016 Q4 net sales were $959.2 million versus $992.5 million; net income attributable to Fossil Group was $49.7 million versus $70.4 million; diluted EPS was $1.03 versus $1.46; and gross margin was 51.0% versus 53.0%.
At year-end, cash and cash equivalents were $297.3 million, working capital was $932.7 million, and total assets were $2.19 billion. Debt was $630.9 million excluding capital leases ($441.0 million drawn on the revolving facility and $189.9 million on the term loan); the company reported $303.9 million available to borrow under its revolving facility. Inventory fell 13.2% to $542.5 million. Capital expenditures were $65.7 million.
Material changes versus the prior comparable period
- Sales declined across watches, leather goods and jewelry. Watches, about 76.6% of sales, fell 5.9%; jewelry fell 7.6%; leather goods fell 3.8%.
- Americas sales decreased 8.2% and Europe sales decreased 6.3%; Asia sales increased 3.7%. Reported results were also affected by currency, including an estimated $45.4 million reduction in translated sales.
- Gross margin pressure reflected outlet promotions, more off-price sales and a higher mix of lower-margin connected products; currency reduced gross margin by approximately 70 basis points.
- Operating expenses declined modestly, but increased as a share of sales to 47.7% from 45.3%. Operating income also reflected a $31.7 million unfavorable currency impact.
- Cash from operations declined, while inventory reduction and net repayments on credit facilities supported liquidity and debt reduction.
Outlook, management commentary, risks and unusual items
- Management emphasized connected accessories, owned brands, e-commerce and omni-channel capabilities as growth priorities, while acknowledging continuing weakness in traditional watches and challenging retail conditions. No specific full-year 2017 revenue or earnings guidance is provided in the supplied filing text.
- The New World Fossil restructuring program is expected to generate up to approximately $150 million of charges, predominantly in fiscal 2017 and 2018. Fiscal 2016 included $27.8 million of restructuring charges.
- For fiscal 2017, the company expected approximately $70 million in capital expenditures, to open about 15 stores and close about 40. Fiscal 2016 global comparable-store sales declined 4.5%.
- The ADIDAS and BURBERRY watch licenses were not to be renewed upon expiration in 2017. Licensed products represented 47.6% of fiscal 2016 sales, including MICHAEL KORS products at 22.7%.
- Risks highlighted include fashion and consumer-demand shifts, wearable-technology competition and product acceptance, promotional pricing and margin pressure, reliance on licenses and overseas suppliers, foreign-exchange volatility, store traffic, and restructuring execution. The company reported compliance with debt covenants at year-end; the credit agreement matures in May 2018 and restricts open-market share repurchases.
- Unusual items included a $6.7 million after-tax gain from a Dallas warehouse sale-leaseback and a $3.5 million pre-tax gain on the sale of Misfit’s machine-vision operations. The company also disclosed a guarantee of up to 6.6 million Swiss francs for an investee’s credit facility.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported disclosure controls and internal controls as effective at year-end.
Important facts for investors to verify
- Whether connected-product growth can offset ongoing declines in traditional watches and licensed brands, including the effects of the ADIDAS and BURBERRY license expirations.
- The timing, cash costs and realized savings from the restructuring plan, and whether projected store reductions improve profitability.
- Liquidity and covenant headroom, the May 2018 debt maturity, and the extent to which cash held outside the U.S. is accessible for U.S. needs.
- Foreign-exchange exposure and the effect of currency changes on sales, margins and debt-service costs.
- Whether inventory reduction is sustainable without damaging product availability or sales, and whether promotional activity continues to weigh on gross margin.