Fossil Group, Inc. — Form 10-Q Summary
Period clarification: The filing is for the 13 weeks ended April 4, 2015, not 2014 Q1 as indicated in the request metadata. It compares results with the 14 weeks ended April 5, 2014; the extra prior-year week affects comparisons.
Business context
Fossil designs, markets and distributes fashion accessories, including watches, jewelry, leather goods and apparel, through wholesale, distributor, retail and e-commerce channels. It reports three geographic segments—Americas, Europe and Asia—after changing its segment structure to align with how management operates and evaluates the business.
Key financial results
| Metric | Q1 2015 | Prior-year quarter | Change / context |
|---|---|---|---|
| Net sales | $725.1 million | $776.5 million | Down 6.6% reported; up 5% on management’s constant-currency, comparable-calendar basis |
| Gross profit / margin | $400.7 million / 55.3% | $443.2 million / 57.1% | Gross profit down 9.6%; margin down 180 basis points |
| Operating income / margin | $56.2 million / 7.7% | $104.7 million / 13.5% | Operating income down 46.4% |
| Net income attributable to Fossil / diluted EPS | $38.1 million / $0.75 | $66.3 million / $1.22 | Net income down 42.6% |
| Operating cash flow | $85.0 million | $97.0 million | Down $12.0 million |
Other income was $7.2 million, compared with a $0.4 million expense, primarily reflecting foreign-currency gains from hedging and other transactions. Interest expense was $4.2 million, up $0.5 million. The effective tax rate was 31.3% in both periods.
At April 4, 2015, cash was $236.8 million, total assets were $2.04 billion, and working capital was $961.8 million. Inventory was $630.6 million, up from $597.3 million at January 3, 2015. Total debt was approximately $644.8 million: $18.5 million current and $626.4 million long-term. The company had $407.0 million drawn on its revolving facility and approximately $642.1 million of borrowing capacity available. It reported compliance with debt covenants.
Operating cash flow and cash on hand, together with $14.8 million of net borrowings, funded $116.0 million of share repurchases and $16.9 million of capital expenditures. Cash declined $39.4 million during the quarter. Cash flow benefited from a $158.6 million reduction in accounts receivable and was partly offset by inventory growth and other working-capital uses.
Changes and management commentary
- Foreign-currency translation reduced reported sales by approximately $45.2 million and operating income by approximately $15.7 million. Management attributed the weaker reported results primarily to currency effects, restructuring charges and higher planned operating expenses.
- On a constant-currency, comparable-calendar basis, sales grew in each region. Europe was particularly strong; reported sales were down 10.0% there, but adjusted sales increased 9%. Jewelry sales rose 11.5% reported, while watches declined 8.2% and leather goods declined 6.8%.
- Fossil-brand sales declined 7% reported but increased 6% on the adjusted basis. Skagen sales increased 7% reported and 24% on the adjusted basis. Global comparable-store sales increased 1.8%, normalized for the calendar difference.
- Operating expenses included $12.1 million of restructuring charges. The company also recorded a $1.3 million impairment charge for retail-store leasehold improvements and related key money.
- The company acquired majority ownership of its South African distributor for approximately $5.0 million net of cash acquired, recording $3.7 million of goodwill. It opened five stores and closed eight during the quarter, and acquired 24 stores through the transaction.
- Foreign-currency translation drove a $33.5 million other comprehensive loss, contributing to a decline in Fossil stockholders’ equity from $977.9 million at January 3 to $870.9 million at April 4.
Outlook, risks and contingencies
- No full-year revenue or earnings guidance is provided in the supplied filing text. Management expected approximately $110–$120 million of fiscal 2015 capital expenditures, mainly for store expansion, renovation and technology infrastructure. It anticipated opening about 42 stores and closing about 23 globally for the year.
- Management said cash from operations, existing cash and available revolving-credit capacity should fund working capital, planned capital expenditures and repurchases for the next 12 months. It noted seasonal cash needs typically rise ahead of the holiday season.
- Key risks cited include consumer spending and fashion preferences, product acceptance, competition, foreign exchange, supply interruptions, customer financial difficulties, licensing and intellectual-property issues, and integration of acquired businesses. A 10% adverse currency move was estimated to reduce pretax income by $7.3 million and stockholders’ equity by approximately $79.2 million.
- The amended credit agreement provides a $1.05 billion revolver and a $231.3 million term loan, maturing May 17, 2018. Financial covenants require leverage no greater than 2.50-to-1.00 and interest coverage no less than 3.50-to-1.00. A 100-basis-point rate increase was estimated to increase annual interest expense by approximately $4.1 million, excluding the swapped term loan.
- Operating lease obligations were approximately $886.7 million. The filing says pending litigation was routine and not expected to have a material effect. Unrecognized tax benefits were $20.9 million, excluding interest and penalties; tax audit outcomes and settlement timing remain uncertain.
- Management stated disclosure controls were effective as of April 4, 2015, with no material first-quarter change in internal control over financial reporting.
Most important facts for investors to verify
- Whether sales and margins continue to improve when assessed on a comparable-calendar and constant-currency basis, and how much currency translation continues to affect reported results.
- Whether restructuring, marketing and store-investment costs deliver the intended operating improvements, given the sharp decline in operating margin.
- Inventory levels, seasonal cash requirements, receivables collection and the company’s ability to fund buybacks and capital spending without materially increasing debt.
- Debt-covenant headroom, interest-rate exposure and the assumptions supporting management’s liquidity outlook.
- Progress on store plans, the South African acquisition, tax examinations and other disclosed commitments or contingencies.