Fossil Group(US:FOSL)2021-03-11 16:00PART I Business Overview Fossil Group, Inc. is a global design and distribution company specializing in fashion accessories, with watches as its core business and a focus on digital sales growth and operational optimization - Fossil Group, Inc. is a design, innovation and distribution company specializing in consumer fashion accessories, including traditional watches, smartwatches, jewelry, handbags, small leather goods, belts and sunglasses19 - The company operates under owned brands (FOSSIL, SKAGEN, MICHELE, RELIC, ZODIAC) and licensed brands (ARMANI EXCHANGE, DIESEL, DKNY, EMPORIO ARMANI, KATE SPADE NEW YORK, MICHAEL KORS, PUMA, TORY BURCH)19 - Business is managed primarily on a geographic basis: Americas, Europe, and Asia, each including wholesale, distributor, retail, and e-commerce sales20 Net Sales Breakdown by Brand Type (in millions, except percentage data) | Category | 2020 Dollars | 2020 % Change | 2019 Dollars | 2019 % Change | 2018 Dollars | | :--------- | :----------- | :------------ | :----------- | :------------ | :----------- | | Proprietary | $774.2 | (29.8)% | $1,103.4 | (12.6)% | $1,262.1 | | Licensed | $763.5 | (24.7)% | $1,013.7 | (14.4)% | $1,183.7 | | Other | $75.6 | (24.9)% | $100.6 | 5.1% | $95.7 | | Total | $1,613.3 | (27.3)% | $2,217.7 | (12.7)% | $2,541.5 | - Watches (traditional and smartwatches) are the core global business, accounting for approximately 80.6% of consolidated net sales in fiscal year 202027 - Digital sales comprised 38.8% of consolidated net sales in fiscal year 2020, a significant increase from 20.1% in fiscal year 201945 - Strategic priorities include increasing brand excitement, accelerating digital capabilities, expanding in mainland China and India, and optimizing operations through initiatives like 'Make Time for Good' (ESG) and the NWF 2.0 restructuring program39404142 - As of January 2, 2021, the company employed approximately 7,500 persons globally, with 65% women and 35% men. In the U.S., 60% of employees are BIPOC6569 Risk Factors The company faces significant risks from the COVID-19 pandemic, evolving fashion and technology trends, reliance on license agreements, intense competition, substantial indebtedness, and trade tariffs - The COVID-19 pandemic has had, and is expected to continue to have, a material adverse impact on the company's business, operations, liquidity, financial condition, and results of operations, including store closures, reduced traffic, and supply chain disruptions858788 - The company's success depends on its ability to anticipate and respond to changing fashion, functionality, and product trends, especially in the wearable technology market, and to reverse negative sales trends90919294 - Sales of licensed products accounted for approximately 47.3% of consolidated net sales for fiscal year 2020. The loss or non-renewal of significant multi-year, worldwide exclusive license agreements (expiring between 2023 and 2028) could result in a significant decrease in sales969798 - The license for Google's WEAR OS operating system, used in full display smartwatches (approximately 12.4% of FY2020 consolidated net sales), expires on April 27, 2022. Failure to renew could significantly decrease sales99 - Global comparable retail store sales decreased 25.5% in fiscal year 2020, and the company anticipates closing approximately 65 to 75 stores globally in fiscal year 2021100261 - The company faces intense competition from traditional competitors and new competitors in the wearable technology category, including technology brands like Apple and Samsung, and fitness brands like Fitbit56116 - As of January 2, 2021, the company had $152.0 million outstanding under the Term Credit Agreement and $98.3 million under the Revolving Facility, with covenants that restrict business operations and require sufficient cash flow for debt service145296 - Estimated gross profit exposure from Section 301 tariffs on imports from China is approximately $15.0 million in fiscal year 2021178 Unresolved Staff Comments No unresolved staff comments exist - None198 Properties The company owns or leases significant global facilities for offices, warehouses, and distribution, including major hubs in Texas, Germany, and Hong Kong, and operates 415 retail store leases Major Company Facilities (as of FY2020) | Location | Use | Approximate Square Footage | Ownership/Lease Expiration | | :------------------ | :-------------------------------- | :------------------------- | :------------------------- | | Eggstätt, Germany | Office, warehouse and distribution | 383,000 | Owned | | Richardson, Texas | Corporate headquarters | 536,000 | Lease expiring in 2031 | | Dallas, Texas | Office, warehouse and distribution | 518,000 | Lease expiring in 2026 | | Hong Kong | Warehouse and distribution | 205,000 | Lease expiring in 2023 | | Basel, Switzerland | Europe headquarters | 140,000 | Lease expiring in 2036 | | Shenzhen, China | Manufacturing | 110,000 | Lease expiring in 2021 | - As of the end of fiscal year 2020, the company had 415 lease agreements for retail space, with leases expiring at various times through 2030199 Legal Proceedings The company is involved in routine legal proceedings but does not anticipate any material adverse effects on its business or financial condition - The company does not believe that the outcome of any currently pending legal matters, individually or collectively, will have a material effect on the business or financial condition201 Mine Safety Disclosures This item is not applicable to the company - Not applicable203 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Fossil Group's common stock is listed on NASDAQ under 'FOSL,' with no dividends paid or intended, and a significant decline in stock performance over five years - Common stock is listed on the NASDAQ Global Select Market under the symbol "FOSL"3206 - As of March 5, 2021, 51,525,632 shares of common stock were outstanding7 - The company has not declared or paid any dividends since its formation and currently does not intend to pay dividends for the foreseeable future, with a business plan to retain future earnings to finance growth207 2020 Comparative Total Returns (Performance Results through 12/31/2020, $100 invested at 12/31/2015) | Index | 12/31/2015 | 12/31/2020 | | :------------------ | :--------- | :--------- | | Fossil Group, Inc. | $100.00 | $23.71 | | S&P 500 Index | $100.00 | $183.77 | | NASDAQ Retail Trades | $100.00 | $241.62 | - A common stock repurchase program approved in August 2010 has $30.0 million of authorization remaining as of January 2, 2021. No shares were repurchased under this program during fiscal years 2020, 2019, or 2018212213 Selected Financial Data This section provides a five-year summary of key consolidated financial data, highlighting significant declines in net sales, gross profit, and a shift to operating and net losses, particularly in fiscal year 2020 Selected Financial Data (in thousands, except per share data) | Fiscal Year | 2020 | 2019 | 2018 | 2017 | 2016 | | :------------------------------------ | :--------- | :--------- | :--------- | :--------- | :--------- | | Net sales | $1,613,343 | $2,217,712 | $2,541,488 | $2,788,163 | $3,042,371 | | Gross profit | $770,356 | $1,099,438 | $1,340,137 | $1,358,839 | $1,578,186 | | Operating income (loss) | $(135,319) | $(28,383) | $62,711 | $(424,276) | $127,146 | | Net income (loss) attributable to Fossil Group, Inc. | $(96,095) | $(52,365) | $(3,478) | $(478,172) | $78,868 | | Basic EPS | $(1.88) | $(1.04) | $(0.07) | $(9.87) | $1.64 | | Diluted EPS | $(1.88) | $(1.04) | $(0.07) | $(9.87) | $1.63 | | Working capital | $431,949 | $500,278 | $652,766 | $781,900 | $932,705 | | Total assets | $1,478,505 | $1,604,732 | $1,575,198 | $1,658,372 | $2,186,897 | | Total long-term liabilities | $479,947 | $541,711 | $380,764 | $568,337 | $756,874 | | Stockholders' equity attributable to Fossil Group, Inc. | $439,090 | $503,054 | $585,543 | $576,133 | $1,006,236 | | Return on average stockholders' equity attributable to Fossil Group, Inc. | (22.1)% | (9.8)% | (0.6)% | (62.3)% | 8.2% | Management's Discussion and Analysis of Financial Condition and Results of Operations This section details Fossil Group's business, product offerings, global distribution, and strategic initiatives, analyzing the significant declines in net sales and gross profit for FY2020, alongside critical accounting policies - Fossil Group is a global design, marketing, and distribution company specializing in consumer fashion accessories, with a diverse portfolio of owned and licensed brand names217 - Approximately 43% of global watch production in fiscal year 2020 was assembled or sourced through wholly or majority-owned factories, enhancing communication, quality, and supply chain speed219 Net Sales by Geographic Segment (FY2020) | Segment | Percentage of Consolidated Revenue | | :-------- | :--------------------------------- | | Americas | 39.8% | | Europe | 32.4% | | Asia | 26.9% | - Gross profit margins are influenced by product mix (fashion branded watches and jewelry generally higher than leather goods; connected products lower than traditional), brand price points, and geographic mix (Europe and Asia historically higher than Americas)224225 - The COVID-19 pandemic materially impacted fiscal year 2020 operations and financial performance, leading to disruptions in consumer spending patterns and traffic in traditional brick-and-mortar shopping centers228 - Key strategic initiatives include increasing brand excitement, accelerating digital sales, expanding opportunities in mainland China and India, and optimizing operations through the NWF 2.0 restructuring program229 - The NWF 2.0 program's goal was increased from $200 million to $250 million in run-rate savings due to COVID-19, with approximately $175 million achieved in fiscal year 2020 and completion expected in 2021229 Consolidated Financial Performance (FY2020 vs. FY2019) | Metric | FY2020 | FY2019 | Change (Reported) | Change (Constant Currency) | | :-------------------- | :--------- | :--------- | :------------------------ | :------------------------- | | Net Sales | $1,613.3M | $2,217.7M | (27.3)% | (27.6)% | | Net Loss | $(96.1)M | $(52.4)M | (83.5)% | N/A | | Gross Profit | $770.4M | $1,099.4M | (29.9)% | N/A | | Gross Profit Margin | 47.7% | 49.6% | (1.9) ppts | N/A | | Operating Loss | $(135.3)M | $(28.4)M | (376.4)% | N/A | | Operating Margin | (8.4)% | (1.3)% | (7.1) ppts | N/A | Product Net Sales Changes (FY2020 vs FY2019, in millions) | Product Category | 2020 Sales | % Change (Reported) | % Change (Constant Currency) | | :--------------- | :--------- | :------------------ | :--------------------------- | | Watches | $1,299.8 | (27.9)% | (28.2)% | | Leathers | $173.6 | (27.2)% | (27.6)% | | Jewelry | $102.9 | (16.5)% | (18.1)% | | Other | $37.0 | (30.7)% | (31.3)% | Geographic Net Sales Changes (FY2020 vs FY2019, in millions) | Segment | 2020 Sales | % Change (Reported) | % Change (Constant Currency) | | :-------- | :--------- | :------------------ | :--------------------------- | | Americas | $642.2 | (32.4)% | (32.1)% | | Europe | $522.4 | (27.0)% | (28.6)% | | Asia | $434.3 | (18.8)% | (18.7)% | | Corporate | $14.4 | (15.8)% | (17.0)% | - The number of stores decreased from 451 at the end of fiscal year 2019 to 421 at the end of fiscal year 2020. The company anticipates closing approximately 65 to 75 stores globally in fiscal year 2021260261 - A $76.0 million income tax benefit was recorded in fiscal year 2020 (44.2% effective tax rate), primarily due to the CARES Act allowing net operating loss carrybacks, resulting in $37.7 million short-term and $52.3 million long-term tax receivables269 - Critical accounting policies include product returns, inventory valuation (lower of cost and net realizable value), impairment of trade names (MICHELE impaired by $2.5 million in FY2020, SKAGEN by $16.6 million in FY2019), property, plant and equipment and lease impairment, income taxes (valuation allowances, GILTI), and warranty costs230231232233234235236238241243 Quantitative and Qualitative Disclosures About Market Risk The company is exposed to foreign currency exchange rate risk, primarily with the euro, and interest rate risk from variable-rate debt, using forward contracts to hedge currency exposure - The most significant foreign currency risk relates to the euro, and to a lesser extent, other major global currencies, impacting intercompany inventory transactions306 - The company uses forward contracts, generally for up to 85% of forecasted purchases, to manage fluctuations in global currencies for U.S. dollar denominated inventory purchases307 - As of January 2, 2021, a 10% unfavorable change in the U.S. dollar strengthening against foreign currencies would decrease net pre-tax income by $17.6 million and reduce consolidated stockholders' equity by approximately $43.3 million309 - Based on variable-rate debt outstanding as of January 2, 2021, a 100 basis point increase in interest rates would increase annual interest expense by approximately $2.5 million310 Consolidated Financial Statements and Supplementary Data This section presents the audited consolidated financial statements, including balance sheets, income statements, cash flows, and notes, with an unqualified opinion from Deloitte & Touche LLP - The independent registered public accounting firm, Deloitte & Touche LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting for the period ended January 2, 2021312313 - Inventory valuation was identified as a critical audit matter due to significant judgments made by management in estimating future demand, market conditions, and available liquidation channels318319 - The company's significant accounting policies cover areas such as use of estimates, concentration of risk, cash equivalents, restricted cash, accounts receivable, inventories, investments, leases, property, plant and equipment, intangible assets, accrued expenses, other long-term liabilities, cumulative translation adjustment, foreign transaction gains and losses, revenue recognition, cost of sales, operating expenses, advertising costs, warranty costs, research and development costs, noncontrolling interest, other comprehensive income (loss), earnings per share, and income taxes336337338339340343344345346348352353354355356357358359363364365366367368372 - Recently adopted accounting standards (ASU 2018-15, ASU 2018-14, ASU 2018-13, ASU 2016-13) at the beginning of fiscal year 2020 did not have a material effect on the consolidated financial statements376377378382 Disaggregation of Revenue by Product Type and Geographic Segment (FY2020, in thousands) | Product Type | Americas | Europe | Asia | Corporate | Total | | :----------- | :------- | :----- | :--- | :-------- | :---- | | Watches | $507,278 | $404,520 | $388,004 | $44 | $1,299,846 | | Leathers | $104,621 | $36,570 | $32,430 | — | $173,621 | | Jewelry | $23,959 | $71,209 | $7,749 | — | $102,917 | | Other | $6,355 | $10,065 | $6,168 | $14,371 | $36,959 | | Consolidated | $642,213 | $522,364 | $434,351 | $14,415 | $1,613,343 | Debt Outstanding (as of January 2, 2021, in millions) | Type | Amount | | :---------------- | :----- | | Revolving facility | $98.3 | | U.S. term loan | $152.0 | | Other international | $0.5 | | Total Debt | $250.8 | NWF 2.0 Restructuring Charges by Operating Segment (in thousands) | Segment | 2020 | 2019 | | :-------- | :----- | :----- | | Americas | $4,969 | $2,048 | | Europe | $12,630 | $9,333 | | Asia | $8,823 | $773 | | Corporate | $10,086 | $6,677 | | Consolidated | $36,508 | $18,831 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes in or disagreements with accountants on accounting and financial disclosure occurred - None542 Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of January 2, 2021, with an unqualified attestation report from Deloitte & Touche LLP - The CEO and CFO concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level as of January 2, 2021544 - Management assessed and concluded that the company maintained effective internal control over financial reporting as of January 2, 2021, based on the COSO framework547 - Deloitte & Touche LLP issued an unqualified attestation report on the company's internal control over financial reporting548552 - There were no changes in internal control over financial reporting during the quarter ended January 2, 2021, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting549 Other Information No other information is reported under this item - None559 PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, corporate governance, and the company's Code of Conduct and Ethics is incorporated by reference from the proxy statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the proxy statement561 - The company has adopted a Code of Conduct and Ethics that applies to all directors and employees, including the principal executive officer, principal financial officer, and principal accounting officer562 Executive Compensation Information regarding executive compensation is incorporated by reference from the proxy statement - Information regarding executive compensation is incorporated by reference from the proxy statement563 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management and related stockholder matters is incorporated by reference from the proxy statement - Information regarding security ownership of certain beneficial owners and management and related stockholder matters is incorporated by reference from the proxy statement564 Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships and related transactions, and director independence is incorporated by reference from the proxy statement - Information regarding certain relationships and related transactions, and director independence is incorporated by reference from the proxy statement565 Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the proxy statement - Information regarding principal accountant fees and services is incorporated by reference from the proxy statement566 PART IV Exhibits and Consolidated Financial Statement Schedules This section lists the Report of Independent Registered Public Accounting Firm, Consolidated Financial Statements and Notes, and various exhibits required by Item 601 of Regulation S-K - The section includes the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Consolidated Statements of Income (Loss) and Comprehensive Income (Loss), Consolidated Statements of Stockholders' Equity, Consolidated Statements of Cash Flows, and Notes to Consolidated Financial Statements570 - Various exhibits required by Item 601 of Regulation S-K are listed, including organizational documents, credit agreements, and certifications580581