Fossil Group(FOSL) - 2023 Q4 - Annual Results

Executive Summary & Strategic Overview This section provides a high-level overview of leadership changes, key financial highlights, and the 2024 outlook Leadership Transition and Strategic Direction Fossil Group appointed Jeffrey N. Boyer as Interim CEO, achieved $125 million in TAG Plan savings, and initiated a strategic review - Jeffrey N. Boyer has been appointed Interim Chief Executive Officer, effective immediately[2] - Achieved $125 million of annualized cost savings in 2023 under the Transform and Grow (TAG) Plan[3] - Exited the smartwatch category and closed underperforming retail stores[3] - Initiated a strategic review of the current business model and capital structure with the goal of maximizing shareholder value[3] Fourth Quarter and Full Year 2023 Financial Highlights Q4 and FY2023 net sales declined significantly, resulting in increased operating losses and diluted losses per share Fourth Quarter 2023 Financial Highlights | Metric | Value (Q4 2023, USD) | Change (YoY) | | :----- | :-------------- | :----------- | | Worldwide Net Sales | $421 million | -16% (reported), -17% (constant currency) | | Operating Loss | $(24.0) million | vs. $1.3 million income (Q4 2022) | | Diluted Loss Per Share | $(0.54) | vs. $(0.18) (Q4 2022) | Full Year 2023 Financial Highlights | Metric | Value (FY 2023, USD) | Change (YoY) | | :----- | :-------------- | :----------- | | Worldwide Net Sales | $1,412 million | -16% (reported & constant currency) | | Operating Loss | $(143) million | vs. $(1) million loss (FY 2022) | | Adjusted Operating Loss | $(92) million | vs. $7 million income (FY 2022) | | Diluted Loss Per Share | $(3.00) | vs. $(0.85) (FY 2022) | - Cash and cash equivalents as of December 30, 2023: $117 million[4] Full Year 2024 Outlook Fossil Group anticipates further net sales decline in 2024, projecting negative adjusted operating margin but positive free cash flow Full Year 2024 Outlook | Metric | Expectation | | :----- | :---------- | | Worldwide Net Sales | Approximately $1.2 billion (reflecting $100 million negative impact from smartwatch exit, store closures, currency, and market softness) | | Adjusted Operating Margin | -3% to -5% | | Free Cash Flow | Positive (inclusive of an anticipated tax refund of approximately $56 million in Q2 2024) | Detailed Financial Results This section presents a comprehensive analysis of Fossil Group's operating results for Q4 and full fiscal year 2023 Fourth Quarter 2023 Operating Results Q4 2023 net sales declined significantly across all regions and channels, resulting in an operating loss and increased net loss per diluted share Net Sales Performance (Q4 2023) Q4 2023 net sales decreased by 15.6% (reported) and 16.9% (constant currency), driven by wholesale weakness and broad declines Q4 2023 Net Sales Overview | Metric | Value (Q4 2023, USD) | Change (YoY) | | :----- | :--------------- | :----------- | | Net Sales (Reported) | $421.3 million | -15.6% | | Net Sales (Constant Currency) | $414.8 million | -16.9% | - Sales decrease largely driven by weakness in the wholesale channel, store rationalization initiatives, and lower smartwatch sales due to category exit[5] - Regional sales declines (constant currency): Europe -22%, Asia -16%, Americas -12%[5] - Channel sales declines (constant currency): Wholesale -19%, Direct to consumer -14% (comparable retail sales -10%)[5] Gross Profit and Margin (Q4 2023) Q4 2023 gross profit decreased to $200.5 million, while gross margin slightly increased by 40 basis points to 47.6% Q4 2023 Gross Profit & Margin | Metric | Value (Q4 2023, USD) | Value (Q4 2022, USD) | Change (YoY) | | :----- | :-------------- | :-------------- | :----------- | | Gross Profit | $200.5 million | $235.4 million | -14.8% | | Gross Margin | 47.6% | 47.2% | +40 bps | - Gross margin increase primarily reflects reduced freight and inventory costs, partially offset by unfavorable product mix (smartwatch exit) and minimum licensor product royalties[5] Operating Expenses and Income (Q4 2023) Q4 2023 total operating expenses decreased, but rose to 53.3% of net sales, leading to an operating loss of $24.0 million Q4 2023 Operating Expenses & Income | Metric | Value (Q4 2023, USD) | Value (Q4 2022, USD) | Change (YoY) | | :----- | :--------------- | :-------------- | :----------- | | Total Operating Expenses | $224.5 million | $234.1 million | -4.1% | | Operating Expenses (% of Net Sales) | 53.3% | 46.9% | +640 bps | | SG&A Expenses | $207.7 million | $232.2 million | -10.6% | | Operating Income (Loss) | $(24.0) million | $1.3 million | From income to loss | | Operating Margin | (5.7)% | 0.3% | -600 bps | | Adjusted Operating Loss | $(8.5) million | $3.2 million income | From income to loss | | Adjusted Operating Margin | (2.0)% | 0.6% | -260 bps | - SG&A decline largely driven by lower compensation costs related to TAG Plan initiatives[5] - Operating expenses as a percentage of net sales increased due to deleveraging on lower sales[5] Net Loss and EPS (Q4 2023) Q4 2023 net loss widened to $28.2 million and diluted loss per share to $0.54 Q4 2023 Net Loss & EPS | Metric | Value (Q4 2023, USD) | Value (Q4 2022, USD) | Change (YoY) | | :----- | :--------------- | :-------------- | :----------- | | Net Loss | $(28.2) million | $(9.4) million | -200% | | Diluted Loss Per Share | $(0.54) | $(0.18) | -200% | | Adjusted Net Loss | $(16.0) million | $(7.0) million | -128.6% | | Adjusted Loss Per Diluted Share | $(0.30) | $(0.14) | -114.3% | - Currencies favorably affected loss per diluted share by approximately $0.01 in Q4 2023[5] Cash Flow from Operating Activities (Q4 2023) Q4 2023 cash flow from operating activities decreased to $49 million from $104 million - Cash flow from operating activities: $49 million in Q4 2023 compared to $104 million in Q4 2022[5] Full Year 2023 Operating Results FY 2023 saw substantial net sales decline, decreased gross margin, and a widened operating loss and net loss per diluted share Net Sales Performance (FY 2023) FY 2023 net sales decreased by 16.0% (reported) and 15.9% (constant currency) to $1.4 billion, driven by wholesale weakness FY 2023 Net Sales Overview | Metric | Value (FY 2023, USD) | Change (YoY) | | :----- | :-------------- | :----------- | | Net Sales (Reported) | $1.4 billion | -16.0% | | Net Sales (Constant Currency) | $1.4145 billion | -15.9% | - Sales decrease largely driven by weakness in the wholesale channel. Declines in smartwatch sales and store rationalization initiatives comprised approximately 5 points of the annual sales decline[6] - Regional sales declines (constant currency): Europe -21%, Americas -14%, Asia -10%[6] - Product category sales declines (constant currency): Traditional watches -12%, Leathers -11%, Jewelry -15%[6] Gross Profit and Margin (FY 2023) FY 2023 gross profit decreased to $679.6 million, and gross margin declined by 130 basis points to 48.1% FY 2023 Gross Profit & Margin | Metric | Value (FY 2023, USD) | Value (FY 2022, USD) | Change (YoY) | | :----- | :-------------- | :-------------- | :----------- | | Gross Profit | $679.6 million | $830.7 million | -18.2% | | Gross Margin | 48.1% | 49.4% | -130 bps | - Gross margin decrease primarily reflects increased promotions, licensor minimum royalty costs, and unfavorable currency and product mix impact, driven by the exit from the smartwatch category. These costs were partially offset by reduced freight expense[6] Operating Expenses and Loss (FY 2023) FY 2023 total operating expenses slightly decreased, but rose to 58.2% of net sales, leading to a widened operating loss of $143.0 million FY 2023 Operating Expenses & Loss | Metric | Value (FY 2023, USD) | Value (FY 2022, USD) | Change (YoY) | | :----- | :--------------- | :-------------- | :----------- | | Total Operating Expenses | $822.6 million | $832.2 million | -1.2% | | Operating Expenses (% of Net Sales) | 58.2% | 49.5% | +870 bps | | SG&A Expenses | $777.2 million | $823.7 million | -5.6% | | Operating Loss | $(143.0) million | $(1.5) million | -9433% | | Operating Margin | (10.1)% | (0.1)% | -1000 bps | | Adjusted Operating Loss | $(92.0) million | $7.0 million income | From income to loss | | Adjusted Operating Margin | (6.5)% | 0.4% | -690 bps | - SG&A expenses reduction driven by lower operating costs, primarily from initiatives in the TAG Plan[6] - Operating expenses as a percentage of net sales increased mainly driven by deleveraging on lower sales[6] Net Loss and EPS (FY 2023) FY 2023 net loss widened to $157.0 million and diluted loss per share to $3.00 FY 2023 Net Loss & EPS | Metric | Value (FY 2023, USD) | Value (FY 2022, USD) | Change (YoY) | | :----- | :--------------- | :-------------- | :----------- | | Net Loss | $(157.0) million | $(44.2) million | -255.2% | | Diluted Loss Per Share | $(3.00) | $(0.85) | -252.9% | | Adjusted Net Loss | $(116.9) million | $(36.6) million | -219.4% | | Adjusted Loss Per Diluted Share | $(2.24) | $(0.71) | -215.5% | - Currencies unfavorably affected loss per diluted share by approximately $0.10 during fiscal year 2023[6] Cash Flow from Operating Activities (FY 2023) FY 2023 cash used in operations was $59 million, an improvement from $111 million - Cash used in operations: $59 million in fiscal year 2023 compared to $111 million used in the prior year[6] Financial Position and Strategic Initiatives This section details the company's balance sheet, TAG Plan updates, and the ongoing strategic business review Balance Sheet Summary As of December 30, 2023, Fossil Group maintained $181 million in total liquidity, with inventories down 32.8% Balance Sheet Highlights (as of Dec 30, 2023) | Metric | Value (USD) | | :----- | :---- | | Total Liquidity | $181 million | | Cash and Cash Equivalents | $117.2 million | | Inventories | $252.8 million (32.8% decrease YoY) | | Total Debt | $207.5 million | Transform and Grow (TAG) Plan Update The TAG Plan is on track for $300 million in annualized operating income benefits by 2025, generating $125 million in 2023 - TAG Plan generated approximately $125 million in annualized operating income benefits in 2023[8] - Expected to generate additional annualized operating income benefits of at least $100 million in 2024[8] - Remains on track to achieve the previously announced target of $300 million of annualized operating income benefits by the end of 2025[3] - Estimated restructuring costs: $35 million in fiscal year 2024 compared to $49 million in fiscal year 2023[8] Strategic Business Review The company initiated a strategic review of its business model and capital structure to optimize operations and strengthen the balance sheet - Announced a strategic review of its current business model and capital structure[9] - Efforts include optimizing the business model through additional operational changes, further structural cost reductions, and strengthening the balance sheet[9] - Could include additional debt and equity financing options, including monetization of various assets[9] - Retained Evercore to act as its financial advisor[9] Corporate Information and Disclosures This section provides information about Fossil Group, Inc., safe harbor statements, and regulatory disclosures About Fossil Group, Inc. Fossil Group, Inc. is a global lifestyle accessories company, designing, marketing, and distributing watches, jewelry, and leather goods - Fossil Group, Inc. is a global design, marketing, distribution and innovation company specializing in lifestyle accessories[12] - Offerings include watches, jewelry, handbags, small leather goods, belts and sunglasses[12] - Owned brands: Fossil, Michele, Relic, Skagen and Zodiac. Licensed brands: Armani Exchange, Diesel, DKNY, Emporio Armani, kate spade new york, Michael Kors, and Tory Burch[12] Safe Harbor Statement This section details forward-looking statements, cautioning that actual results may differ due to various risks and uncertainties - Certain statements are 'forward-looking statements' and involve a number of risks and uncertainties[11] - Factors that could cause actual results to differ materially include risks related to the success of the TAG Plan, Nasdaq listing requirements, activist shareholders, debt ratings, profitability, economic conditions, supply chain, currency fluctuations, competition, and litigation[11] - The Company assumes no obligation to publicly update or revise any forward-looking statements, except as required by law[11] Additional Information and Participants The company will file a proxy statement for its 2024 Annual Meeting, urging investors to review it for key information - The Company intends to file with the SEC a proxy statement on Schedule 14A for the 2024 Annual Meeting of Stockholders[13] - Investors and security holders are urged to read the Proxy Statement and any other relevant documents filed with the SEC carefully and in their entirety[13] - Information about Fossil's executive officers and directors and a description of their direct and indirect interests will be included in the Proxy Statement and other relevant materials[14] Supplementary Financial Data and Reconciliations This section offers detailed financial statements, constant currency information, and non-GAAP reconciliations Consolidated Income Statement Data This section presents the detailed consolidated income statement for Q4 and full fiscal years 2023 and 2022 Consolidated Income Statement Data | Metric | Q4 2023 (USD) | Q4 2022 (USD) | FY 2023 (USD) | FY 2022 (USD) | | :---------------------------------- | :------ | :------ | :------ | :------ | | Net sales | $421.3 million | $499.1 million | $1,412.4 million | $1,682.4 million | | Gross profit | $200.5 million | $235.4 million | $679.6 million | $830.7 million | | Gross margin (% of net sales) | 47.6% | 47.2% | 48.1% | 49.4% | | Total operating expenses | $224.5 million | $234.1 million | $822.6 million | $832.2 million | | Operating income (loss) | $(24.0) million | $1.3 million | $(143.0) million | $(1.5) million | | Operating margin (% of net sales) | (5.7)% | 0.3% | (10.1)% | (0.1)% | | Net income (loss) attributable to Fossil Group, Inc. | $(28.2) million | $(9.4) million | $(157.0) million | $(44.2) million | | Diluted earnings (loss) per share | $(0.54) | $(0.18) | $(3.00) | $(0.85) | Consolidated Balance Sheet Data This section presents the consolidated balance sheet data for December 30, 2023, and December 31, 2022 Consolidated Balance Sheet Data | Metric | Dec 30, 2023 (USD) | Dec 31, 2022 (USD) | | :---------------------------------- | :----------- | :----------- | | Cash and cash equivalents | $117.2 million | $198.7 million | | Inventories | $252.8 million | $376.0 million | | Total current assets | $710.7 million | $945.3 million | | Total assets | $978.0 million | $1,238.1 million | | Total current liabilities | $342.5 million | $425.9 million | | Long-term debt | $207.0 million | $216.1 million | | Stockholders' equity | $251.7 million | $403.0 million | | Total liabilities and stockholders' equity | $978.0 million | $1,238.1 million | Constant Currency Financial Information This section explains constant currency net sales methodology and provides tables breaking down net sales by segment and product categories Net Sales by Segment (Constant Currency) This section breaks down net sales by geographic segment for Q4 and full year 2023 and 2022 Q4 2023 Net Sales by Segment (Constant Currency) | Segment | As Reported (USD) | Impact of Foreign Currency Exchange Rates (USD) | Constant Currency (USD) | As Reported (Q4 2022, USD) | | :------ | :---------- | :-------------------------------------- | :---------------- | :-------------------- | | Americas | $203.7 million | $(1.4) million | $202.3 million | $229.5 million | | Europe | $135.7 million | $(6.2) million | $129.5 million | $165.2 million | | Asia | $80.9 million | $1.1 million | $82.0 million | $98.0 million | | Corporate | $1.0 million | $— | $1.0 million | $6.4 million | | Total | $421.3 million | $(6.5) million | $414.8 million | $499.1 million | FY 2023 Net Sales by Segment (Constant Currency) | Segment | As Reported (USD) | Impact of Foreign Currency Exchange Rates (USD) | Constant Currency (USD) | As Reported (FY 2022, USD) | | :------ | :---------- | :-------------------------------------- | :---------------- | :-------------------- | | Americas | $640.8 million | $(2.3) million | $638.5 million | $744.0 million | | Europe | $437.4 million | $(8.8) million | $428.6 million | $541.3 million | | Asia | $328.2 million | $13.2 million | $341.4 million | $377.6 million | | Corporate | $6.0 million | $— | $6.0 million | $19.5 million | | Total | $1,412.4 million | $2.1 million | $1,414.5 million | $1,682.4 million | Net Sales by Product Categories (Constant Currency) This section details net sales by product category for Q4 and full year 2023 and 2022 Q4 2023 Net Sales by Product Category (Constant Currency) | Product Category | As Reported (USD) | Impact of Foreign Currency Exchange Rates (USD) | Constant Currency (USD) | As Reported (Q4 2022, USD) | | :--------------- | :---------- | :-------------------------------------- | :---------------- | :-------------------- | | Traditional watches | $300.9 million | $(4.5) million | $296.4 million | $328.6 million | | Smartwatches | $21.5 million | $(0.5) million | $21.0 million | $46.9 million | | Leathers | $51.8 million | $(0.2) million | $51.6 million | $67.3 million | | Jewelry | $40.4 million | $(1.2) million | $39.2 million | $47.6 million | | Other | $6.7 million | $(0.1) million | $6.6 million | $8.7 million | | Total | $421.3 million | $(6.5) million | $414.8 million | $499.1 million | FY 2023 Net Sales by Product Category (Constant Currency) | Product Category | As Reported (USD) | Impact of Foreign Currency Exchange Rates (USD) | Constant Currency (USD) | As Reported (FY 2022, USD) | | :--------------- | :---------- | :-------------------------------------- | :---------------- | :-------------------- | | Traditional watches | $1,015.1 million | $1.9 million | $1,017.0 million | $1,158.9 million | | Smartwatches | $80.9 million | $0.2 million | $81.1 million | $151.6 million | | Leathers | $158.5 million | $0.9 million | $159.4 million | $178.5 million | | Jewelry | $131.4 million | $(1.0) million | $130.4 million | $154.1 million | | Other | $26.5 million | $0.1 million | $26.6 million | $39.3 million | | Total | $1,412.4 million | $2.1 million | $1,414.5 million | $1,682.4 million | Non-GAAP Financial Measures Explanation This section defines non-GAAP financial measures like Adjusted EBITDA, Adjusted operating income, and Adjusted EPS - Defines Adjusted EBITDA as net income (loss) before the impact of income tax expense (benefit), plus interest expense, amortization and depreciation, impairment expense, other non-cash charges, stock-based compensation expense, restructuring expense and unamortized debt issuance costs included in loss on extinguishment of debt minus interest income[19] - Defines Adjusted operating income (loss) as operating income (loss) before impairment expense and restructuring expense[19] - Defines Adjusted net income (loss) and Adjusted earnings (loss) per share as net income (loss) attributable to Fossil Group, Inc. and diluted earnings (loss) per share, respectively, before impairment expense, restructuring expense and unamortized debt issuance costs included in loss on extinguishment of debt[19] Adjusted EBITDA Reconciliation This section provides a detailed reconciliation of Adjusted EBITDA to income (loss) before income taxes for FY2023 and FY2022 Adjusted EBITDA Reconciliation (FY 2023) | Metric | Q1 (USD) | Q2 (USD) | Q3 (USD) | Q4 (USD) | Total (USD) | | :----- | :--- | :--- | :--- | :--- | :---- | | Income (loss) before income taxes | $(39.6) million | $(33.5) million | $(55.2) million | $(27.8) million | $(156.1) million | | Plus: Interest expense | $5.0 million | $5.3 million | $5.8 million | $5.7 million | $21.8 million | | Plus: Amortization and depreciation | $5.1 million | $4.8 million | $4.5 million | $4.6 million | $19.1 million | | Plus: Impairment expense | $0.1 million | $0.2 million | $0.6 million | $1.3 million | $2.2 million | | Plus: Stock-based compensation | $1.4 million | $1.6 million | $1.5 million | $1.1 million | $5.7 million | | Plus: Restructuring expense | $7.1 million | $4.6 million | $16.0 million | $15.5 million | $43.3 million | | Plus: Restructuring cost of sales | $5.3 million | $2.9 million | $(1.3) million | $(1.3) million | $5.5 million | | Less: Interest Income | $0.6 million | $0.8 million | $1.0 million | $0.9 million | $3.2 million | | Adjusted EBITDA | $(16.4) million | $(15.4) million | $(29.3) million | $(1.6) million | $(62.6) million | Adjusted EBITDA Reconciliation (FY 2022) | Metric | Q1 (USD) | Q2 (USD) | Q3 (USD) | Q4 (USD) | Total (USD) | | :----- | :--- | :--- | :--- | :--- | :---- | | Income (loss) before income taxes | $(16.7) million | $(16.9) million | $15.5 million | $(4.0) million | $(22.1) million | | Plus: Interest expense | $4.0 million | $4.3 million | $5.1 million | $5.8 million | $19.2 million | | Plus: Amortization and depreciation | $6.2 million | $5.8 million | $5.6 million | $5.7 million | $23.3 million | | Plus: Impairment expense | $0.3 million | $0.2 million | $0.6 million | $1.2 million | $2.4 million | | Plus: Stock-based compensation | $2.2 million | $3.8 million | $(0.3) million | $2.3 million | $8.0 million | | Plus: Restructuring expense | $2.6 million | $2.9 million | $— | $0.7 million | $6.1 million | | Plus: Unamortized debt issuance costs | $— | $— | $— | $1.1 million | $1.1 million | | Less: Interest Income | $0.1 million | $0.2 million | $0.1 million | $0.4 million | $0.8 million | | Adjusted EBITDA | $(1.7) million | $(0.3) million | $26.0 million | $12.1 million | $36.1 million | Adjusted Operating Income, Net Income and EPS Reconciliation This section provides detailed reconciliations of Adjusted operating income, net income, and EPS to GAAP measures Q4 2023 Adjusted Operating Income, Net Income & EPS Reconciliation | Metric | As Reported (USD) | Restructuring cost of sales (USD) | Other long-lived asset impairment (USD) | Restructuring expenses (USD) | As Adjusted (USD) | | :----- | :---------- | :-------------------------- | :-------------------------------- | :-------------------- | :---------- | | Operating income (loss) | $(24.0) million | $(1.3) million | $1.3 million | $15.5 million | $(8.5) million | | Net income (loss) attributable to Fossil Group, Inc. | $(28.2) million | $(1.0) million | $1.0 million | $12.2 million | $(16.0) million | | Diluted earnings (loss) per share | $(0.54) | $(0.02) | $0.02 | $0.23 | $(0.30) | FY 2023 Adjusted Operating Income, Net Income & EPS Reconciliation | Metric | As Reported (USD) | Restructuring cost of sales (USD) | Other long-lived asset impairment (USD) | Restructuring expenses (USD) | As Adjusted (USD) | | :----- | :---------- | :-------------------------- | :-------------------------------- | :-------------------- | :---------- | | Operating income (loss) | $(143.0) million | $5.5 million | $2.2 million | $43.3 million | $(92.0) million | | Net income (loss) attributable to Fossil Group, Inc. | $(157.1) million | $4.3 million | $1.7 million | $34.2 million | $(116.9) million | | Diluted earnings (loss) per share | $(3.00) | $0.08 | $0.03 | $0.65 | $(2.24) | FY 2022 Adjusted Operating Income, Net Income & EPS Reconciliation | Metric | As Reported (USD) | Other long-lived asset impairment (USD) | Restructuring expenses (USD) | Unamortized debt issuance costs included in loss on extinguishment of debt (USD) | As Adjusted (USD) | | :----- | :---------- | :-------------------------------- | :-------------------- | :---------------------------------------------------------------- | :---------- | | Operating income (loss) | $(1.5) million | $2.4 million | $6.1 million | $— | $7.0 million | | Net income (loss) attributable to Fossil Group, Inc. | $(44.2) million | $1.9 million | $4.8 million | $0.9 million | $(36.6) million | | Diluted earnings (loss) per share | $(0.85) | $0.04 | $0.09 | $0.01 | $(0.71) | Store Count Information This section details store count by region, including openings and closures in 2023, with a total of 302 stores Store Count Information | Region | Dec 31, 2022 (number) | Opened (2023, number) | Closed (2023, number) | Dec 30, 2023 (number) | | :------- | :----------- | :------------ | :------------ | :----------- | | Americas | 151 | 2 | 10 | 143 | | Europe | 111 | 2 | 27 | 86 | | Asia | 80 | 1 | 8 | 73 | | Total stores | 342 | 5 | 45 | 302 |