Fossil, Inc. — 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. The filing is an annual report, not a 2010 fourth-quarter filing; comparative fiscal 2010 ended January 1, 2011. Fossil is a global designer, marketer and distributor of watches and other fashion accessories, selling through wholesale, company-operated retail, e-commerce and catalogs.
Financial performance
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Net sales | $2,567.3 million | $2,030.7 million | +26.4% |
| Gross profit / margin | $1,439.2 million / 56.1% | $1,155.2 million / 56.9% | Profit +24.6%; margin -0.8 percentage points |
| Operating income / margin | $472.0 million / 18.4% | $376.4 million / 18.5% | Income +25.4% |
| Net income attributable to Fossil / diluted EPS | $294.7 million / $4.61 | $255.2 million / $3.77 | Income +15.5% |
| Cash from operations | $251.3 million | $209.2 million | +$42.1 million |
Total net income, including noncontrolling interests, was $307.4 million. Higher revenue and operating income were partly offset below operating income by $20.7 million in net foreign-currency transaction losses, compared with $5.2 million in gains in 2010. The effective tax rate was 31.9%, versus 31.1%.
By segment, sales were North America wholesale $967.5 million (+24.2%), Europe wholesale $695.4 million (+27.0%), Asia Pacific wholesale $297.0 million (+34.5%), and direct to consumer $607.4 million (+25.7%). Watches contributed 71.8% of consolidated sales. Licensed products represented 44.7% of sales.
Fourth-quarter 2011 sales were $830.8 million, compared with $701.1 million in fourth-quarter 2010; operating income was $174.4 million versus $149.5 million, and net income attributable to Fossil was $117.9 million versus $96.7 million.
Cash, debt and liquidity
- Cash and cash equivalents were $287.5 million at year-end, down $105.3 million from the prior year. Working capital was $844.1 million, up from $801.3 million.
- Operating cash flow of $251.3 million was more than offset by $110.1 million used in investing and $249.9 million used in financing. Capital expenditures were $109.9 million; share repurchases were $270.9 million.
- Short-term debt was $9.0 million and long-term debt was $6.2 million. No borrowings were outstanding under the $300 million revolving credit facility; approximately $299.1 million was available, net of letters of credit. The company reported compliance with material debt covenants.
- Inventory increased 31.5% to $489.0 million, partly reflecting earlier year-end receipts and additional watch-component inventory following Japan’s 2011 natural disasters. Receivables increased 14.9% to $302.5 million.
Changes, outlook and risks
- Sales growth was broad-based, led by watches and strong expansion in all reported segments. Direct-to-consumer comparable-store sales rose 17.4%; the store base grew to 398 locations.
- Gross margin declined 80 basis points, principally from higher production costs and a greater mix of lower-margin off-price and distributor sales. A weaker U.S. dollar provided an estimated 180-basis-point benefit to gross margin, partially offsetting the pressure.
- Management planned approximately 70–75 store openings and about 18 closures in fiscal 2012. It expected no material change in watch-movement costs and stated operating cash flow, cash on hand and revolver availability should fund working capital, repurchases, planned capital spending and the planned acquisition over the next 12 months. The filing provides no specific 2012 sales or EPS guidance.
- In January 2012, Fossil agreed to acquire Skagen Designs for approximately $225 million in cash, subject to working-capital adjustment, plus 150,000 shares; up to 100,000 additional shares could be issued if sales thresholds are met. U.K. regulatory approval remained pending at filing.
- Key risks include fashion and consumer-demand shifts, dependence on licensed brands and renewals, concentrated suppliers and overseas sourcing, foreign-exchange exposure, inventory and customer-credit risk, seasonality, store expansion execution, and trade, regulatory and geopolitical disruptions. Licensed agreements carried $279.6 million of future minimum royalty commitments; operating lease obligations were $638.9 million.
- A shareholder derivative-lawsuit settlement was completed in 2011: insurers paid approximately $8.7 million to the company, and plaintiff counsel received approximately $7.8 million in stock plus an option for up to 32,000 shares. The company reported no other pending legal matters expected to have a material effect.
- Auditors issued unqualified opinions on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective.
Investor verification priorities
- Confirm that reported growth and earnings quality persist, particularly given lower gross margin, foreign-currency losses and the gap between sales growth and attributable net-income growth.
- Track inventory growth, sell-through, returns and bad-debt reserves, including the extent to which the year-end inventory build converts to sales and cash.
- Review licensed-brand concentration, renewal terms, royalty minimums and the performance of key brands.
- Verify the Skagen transaction’s closing, final consideration, integration progress and subsequent contribution to results.
- Monitor store-opening returns, capital expenditure, share repurchases, cash levels and compliance with credit-facility covenants.
- Assess exposure to supplier concentration, China sourcing, component availability, currency movements and the $371.8 million of foreign earnings designated indefinitely reinvested.