Fossil Group(FOSL) - 2024 Q1 - Quarterly Results

Executive Summary First Quarter 2024 Highlights Fossil Group reported a challenging first quarter of 2024 with a significant decline in worldwide net sales, primarily due to category and consumer softness, and strategic exits from the smartwatch category and retail store optimization Q1 2024 Key Financial Metrics | Metric | Q1 2024 (Reported) | Q1 2023 (Reported) | Change (YoY) | | :-------------------------------- | :------------------ | :------------------ | :------------- | | Worldwide Net Sales | $255 million | $325 million | -22% | | Gross Margin | 52.4% | 49.4% | +300 bps | | SG&A Expenses | $152 million | $190.8 million | -20% | | Operating Loss | $(29) million | $(37) million | Narrowed | | Adjusted Operating Loss | $(19) million | $(25) million | Narrowed | | Inventory | $224 million | $336.5 million | -33% | | Cash and Cash Equivalents | $113 million | $127.1 million | -11.2% | - Sales decline includes a 5-point impact from strategic actions to exit the smartwatch category and optimize the retail store portfolio[5] - Gross margin expansion primarily reflects progress under the Transform and Grow ("TAG") Plan[5] - Subsequent to quarter end, the Company received a $57 million US tax refund associated with NOL carryback provisions from the CARES Act[5] CEO Commentary Interim CEO Jeffrey Boyer highlighted solid execution of the TAG Plan, which improved gross margin and reduced operating expenses, narrowing the adjusted operating loss - The company is focused on strengthening its operating model and creating shareholder value[4] - Two new Directors with experience in operations, retail, turnarounds, governance, and leadership were welcomed to the Board[4] First Quarter 2024 Financial Performance Consolidated Income Statement Overview The company experienced a significant decline in net sales in Q1 2024, driven by broad market softness and strategic exits, yet gross margin improved due to the TAG plan and reduced costs, leading to a narrower operating loss and net loss for the quarter Consolidated Income Statement Data | Metric | Q1 2024 | Q1 2023 | Change (YoY) | | :-------------------------------- | :---------- | :---------- | :------------- | | Net Sales | $254.9 million | $325.0 million | -21.6% | | Gross Profit | $133.5 million | $160.7 million | -16.9% | | Gross Margin | 52.4% | 49.4% | +300 bps | | Operating Expenses | $162.7 million | $198.0 million | -18% | | Operating Expenses (% of Net Sales) | 63.8% | 60.9% | +290 bps | | Operating Loss | $(29.2) million | $(37.3) million | Narrowed | | Operating Margin | (11.5)% | (11.5)% | Flat | | Income (Loss) before Income Taxes | $(30.4) million | $(39.6) million | Narrowed | | Net Loss Attributable to Fossil Group, Inc. | $(24.3) million | $(41.3) million | Narrowed | | Diluted EPS | $(0.46) | $(0.80) | Narrowed | - Operating expenses in Q1 2024 included $10.1 million in restructuring costs, up from $7.1 million in Q1 2023[6] - The effective income tax rate was 20.1% (benefit) in Q1 2024, favorable compared to (4.1)% (expense) in Q1 2023, due to $9.6 million of favorable discrete items[11] Sales Performance by Segment and Product Category Worldwide net sales decreased significantly across all geographic segments and major product categories, primarily due to overall category, consumer, and channel softness, with strategic exits and store rationalization contributing approximately 5 points to the sales decrease Net Sales by Segment (Constant Currency) | Segment | Q1 2024 (Constant Currency) | Q1 2023 (As Reported) | Change (YoY) | | :-------- | :-------------------------- | :-------------------- | :------------- | | Americas | $109.2 million | $137.9 million | -21% | | Europe | $77.7 million | $105.7 million | -26% | | Asia | $67.7 million | $80.1 million | -15% | Net Sales by Product Category (Constant Currency) | Product Category | Q1 2024 (Constant Currency) | Q1 2023 (As Reported) | Change (YoY) | | :----------------- | :-------------------------- | :-------------------- | :------------- |\ | Traditional Watches | $186.5 million | $225.4 million | -17% | | Smartwatches | $8.9 million | $24.4 million | -63.5% | | Leathers | $27.8 million | $40.3 million | -32% | | Jewelry | $26.4 million | $29.0 million | -9% | - Wholesale sales declined 21% and direct-to-consumer sales decreased 22% on a constant currency basis, while comparable retail sales declined 14%[6] Gross Margin and Operating Expenses Gross margin expanded by 300 basis points to 52.4%, driven by the exit from the smartwatch category, reduced freight costs, improved product margins, and favorable currency impacts, while operating expenses decreased 18% year-over-year but increased as a percentage of net sales - Gross margin increase reflects exiting the smartwatch category, reduced freight costs, improved product margins in core categories, and favorable currency impacts[6] - SG&A expenses were $152.2 million, down 20% compared to Q1 2023, primarily due to lower compensation costs from TAG Plan efficiencies[6] Operating Income (Loss) and Net Loss The company reported an operating loss of $29.2 million, an improvement from $37.3 million in the prior year, with the operating margin remaining flat at (11.5)%, and the net loss also narrowed to $24.3 million from $41.3 million in Q1 2023 Operating Income and Net Loss Data | Metric | Q1 2024 | Q1 2023 | Change (YoY) | | :-------------------------------- | :---------- | :---------- | :------------- | | Operating Loss | $(29.2) million | $(37.3) million | Narrowed | | Operating Margin | (11.5)% | (11.5)% | Flat | | Net Loss Attributable to Fossil Group, Inc. | $(24.3) million | $(41.3) million | Narrowed | | Diluted EPS | $(0.46) | $(0.80) | Narrowed | - Interest expense increased slightly to $5.1 million from $5.0 million[6] - Other income (expense) was income of $3.9 million, up from $2.7 million[6] Adjusted Financial Metrics Fossil Group reported improved adjusted financial metrics for Q1 2024, with adjusted operating loss, adjusted net loss, and adjusted diluted EPS all narrowing compared to the prior year, reflecting the impact of strategic initiatives and cost management efforts Adjusted Financial Metrics Overview | Metric | Q1 2024 | Q1 2023 | Change (YoY) | | :-------------------------------- | :---------- | :---------- | :------------- | | Adjusted Operating Loss | $(18.9) million | $(24.8) million | Narrowed | | Adjusted Operating Margin | (7.5)% | (7.7)% | +20 bps | | Adjusted EBITDA | $(10.7) million | $(16.4) million | Narrowed | | Adjusted EBITDA (% of Net Sales) | (4.2)% | (5.0)% | +80 bps | | Adjusted Net Loss | $(16.2) million | $(31.5) million | Narrowed | | Adjusted Diluted EPS | $(0.30) | $(0.61) | Narrowed | - Currencies favorably affected net loss per diluted share by approximately $0.03 in Q1 2024[11] Balance Sheet and Liquidity Balance Sheet Summary As of March 30, 2024, Fossil Group maintained total liquidity of $122.8 million, comprising cash and cash equivalents and available credit, while significantly reduced its inventory levels year-over-year, with total debt remaining substantial Balance Sheet Data | Metric | March 30, 2024 | April 1, 2023 | Change (YoY) | | :-------------------------- | :--------------- | :-------------- | :------------- | | Total Liquidity | $122.8 million | N/A | N/A | | Cash and Cash Equivalents | $112.9 million | $127.1 million | -11.2% | | Availability under Revolving Credit Facility | $9.9 million | N/A | N/A | | Inventories | $224.1 million | $336.5 million | -33.4% | | Total Debt | $203.4 million | $235.1 million | -13.5% | Strategic Initiatives TAG Plan Update Fossil Group remains on track with its Transform and Grow ("TAG") Plan, a comprehensive operational strategy aimed at reducing operating expenses, improving operating margins, and achieving profitable growth, targeting $300 million in annualized operating income benefits by 2025 - TAG Plan aims to drive $300 million in annualized operating income benefits by 2025[8] - The 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] - Estimated restructuring costs associated with the TAG Plan are $35 million in fiscal year 2024, down from $49 million in fiscal year 2023[8] Strategic Business Review In March 2024, the company initiated a strategic review of its business model and capital structure to optimize operations through additional changes and further structural cost reductions, potentially exploring debt and equity financing options to strengthen the balance sheet - Strategic review includes efforts to optimize the business model through additional operational changes and structural cost reductions[9] - Potential options include additional debt and equity financing, and monetization of various assets to strengthen the balance sheet[9] - Evercore has been retained as the financial advisor for the strategic review[9] Full Year 2024 Outlook Fossil Group reiterated its full-year 2024 financial outlook, anticipating worldwide net sales of approximately $1.2 billion, impacted by consumer softness and strategic exits, and projects positive free cash flow for the full year, including a $57 million tax refund Full Year 2024 Outlook | Metric | Full Year 2024 Outlook | | :-------------------------- | :--------------------- | | Worldwide Net Sales | Approximately $1.2 billion | | Adjusted Operating Margin | -3% to -5% | | Free Cash Flow | Positive (inclusive of $57 million tax refund) | - Net sales outlook reflects approximately $100 million negative impact from the exit of the smartwatch business and retail store closures[10] Company Information About Fossil Group, Inc. Fossil Group, Inc. is a global company specializing in lifestyle accessories, including watches, jewelry, handbags, and small leather goods, operating under a diverse portfolio of owned and licensed brands - Fossil Group is a global design, marketing, distribution, and innovation company specializing in lifestyle accessories[13] - Offerings include watches, jewelry, handbags, small leather goods, belts, and sunglasses[13] - Owned brands include Fossil, Michele, Relic, Skagen, and Zodiac; licensed brands include Armani Exchange, Diesel, DKNY, Emporio Armani, kate spade new york, Michael Kors, and Tory Burch[13] Investor Relations Contact information for investor relations is provided for inquiries regarding Fossil Group, Inc - Investor Relations contact: Christine Greany, The Blueshirt Group, (858) 722-7815, christine@blueshirtgroup.com[14] Financial Statements and Non-GAAP Reconciliations Consolidated Income Statement Data This section presents the detailed consolidated income statement for the 13 weeks ended March 30, 2024, and April 1, 2023, showing net sales, cost of sales, gross profit, operating expenses, operating income (loss), interest expense, other income (expense), income (loss) before income taxes, provision for income taxes, and net income (loss) attributable to Fossil Group, Inc., along with earnings per share Consolidated Income Statement Data | ($ in millions, except per share data) | For the 13 Weeks Ended March 30, 2024 | For the 13 Weeks Ended April 1, 2023 | | :------------------------------------- | :------------------------------------ | :----------------------------------- | | Net sales | $254.9 | $325.0 | | Cost of sales | 121.4 | 164.3 | | Gross profit | 133.5 | 160.7 | | Gross margin | 52.4% | 49.4% | | Selling, general and administrative expenses | 152.2 | 190.8 | | Other long-lived asset impairments | 0.4 | 0.1 | | Restructuring charges | 10.1 | 7.1 | | Total operating expenses | $162.7 | $198.0 | | Operating income (loss) | (29.2) | (37.3) | | Interest expense | 5.1 | 5.0 | | Other income (expense) - net | 3.9 | 2.7 | | Income (loss) before income taxes | (30.4) | (39.6) | | Provision for income taxes | (6.1) | 1.6 | | Net income (loss) attributable to Fossil Group, Inc. | $(24.3) | $(41.3) | | Diluted Earnings per share | $(0.46) | $(0.80) | Consolidated Balance Sheet Data This section provides the consolidated balance sheet data as of March 30, 2024, and April 1, 2023, detailing assets (current and long-term), liabilities (current and long-term), and stockholders' equity Consolidated Balance Sheet Data | ($ in millions) | March 30, 2024 | April 1, 2023 | | :------------------------------------------ | :--------------- | :-------------- | | Cash and cash equivalents | $112.9 | $127.1 | | Accounts receivable - net | 134.4 | 168.9 | | Inventories | 224.1 | 336.5 | | Total current assets | 637.3 | 804.5 | | Total assets | $891.0 | $1,007.5 | | Accounts payable, accrued expenses and other current liabilities | $294.9 | $304.6 | | Total current liabilities | 295.4 | 305.1 | | Long-term debt | 202.9 | 234.6 | | Total long-term liabilities | 369.0 | 414.6 | | Stockholders' equity | 226.6 | 366.3 | | Total liabilities and stockholders' equity | $891.0 | $1,086.0 | Constant Currency Financial Information This section explains the calculation and purpose of constant currency financial measures, which are non-GAAP, to help investors evaluate underlying business performance without foreign currency exchange rate fluctuations - Constant currency net sales are calculated by translating current fiscal year sales for foreign entities using prior fiscal year average exchange rates[17] Net Sales by Segment and Product Categories (Constant Currency) | ($ in millions) | Q1 2024 (As Reported) | Impact of Foreign Currency Exchange Rates | Q1 2024 (Constant Currency) | Q1 2023 (As Reported) | | :---------------- | :-------------------- | :---------------------------------------- | :-------------------------- | :-------------------- | | Segment: | | | | | | Americas | $110.0 | $(0.8) | $109.2 | $137.9 | | Europe | $78.7 | $(1.0) | $77.7 | $105.7 | | Asia | $65.6 | $2.1 | $67.7 | $80.1 | | Total net sales | $254.9 | $0.3 | $255.2 | $325.0 | | Product Categories: | | | | | | Traditional watches | $186.5 | $— | $186.5 | $225.4 | | Smartwatches | $8.9 | $— | $8.9 | $24.4 | | Leathers | $27.6 | $0.2 | $27.8 | $40.3 | | Jewelry | $26.3 | $0.1 | $26.4 | $29.0 | | Total net sales | $254.9 | $0.3 | $255.2 | $325.0 | Adjusted EBITDA Reconciliation This section defines Adjusted EBITDA as a non-GAAP financial measure and provides a reconciliation to the most directly comparable GAAP measure, income (loss) before income taxes, for Q1 2024 and prior periods - Adjusted EBITDA is defined as net income (loss) before income tax expense (benefit), plus interest expense, amortization and depreciation, impairment expense, other non-cash charges, stock-based compensation expense, restructuring expense, and unamortized debt issuance costs, minus interest income[19] Adjusted EBITDA Reconciliation | ($ in millions) | Q1 2024 | Q1 2023 | | :-------------------------------- | :------ | :------ | | Income (loss) before income taxes | $(30.4) | $(39.6) | | Plus: Interest expense | 5.1 | 5.0 | | Plus: Amortization and depreciation | 4.5 | 5.1 | | Plus: Impairment expense | 0.4 | 0.1 | | Plus: Stock-based compensation | 1.0 | 1.4 | | Plus: Restructuring expense | 10.1 | 7.1 | | Plus: Restructuring cost of sales | (0.2) | 5.3 | | Less: Interest Income | 1.1 | 0.6 | | Adjusted EBITDA | $(10.7) | $(16.4) | Adjusted Operating Income, Net Income & EPS Reconciliation This section provides reconciliations of Adjusted operating income (loss), Adjusted net income (loss), and Adjusted earnings (loss) per share to their most directly comparable GAAP financial measures for Q1 2024 and Q1 2023, excluding impairment and restructuring expenses for a clearer view of core operational performance - Adjusted operating income (loss) excludes impairment expense and restructuring expense[19] - Adjusted net income (loss) and Adjusted earnings (loss) per share exclude impairment expense, restructuring expense, and unamortized debt issuance costs[19] Adjusted Operating Income, Net Income & EPS Reconciliation (Q1 2024) | ($ in millions, except per share data) | As Reported | Adjustments | As Adjusted | | :------------------------------------- | :---------- | :---------- | :---------- | | Operating income (loss) | $(29.2) | $10.3 (Restructuring Cost of Sales, Other Long-Lived Asset Impairment, Restructuring Expenses) | $(18.9) | | Operating margin (% of net sales) | (11.5)% | | (7.5)% | | Net income (loss) attributable to Fossil Group, Inc. | $(24.3) | $8.1 (Restructuring Cost of Sales, Other Long-Lived Asset Impairment, Restructuring Expenses, Tax Impact) | $(16.2) | | Diluted earnings (loss) per share | $(0.46) | $0.16 (Restructuring Cost of Sales, Other Long-Lived Asset Impairment, Restructuring Expenses) | $(0.30) | Adjusted Operating Income, Net Income & EPS Reconciliation (Q1 2023) | ($ in millions, except per share data) | As Reported | Adjustments | As Adjusted | | :------------------------------------- | :---------- | :---------- | :---------- | | Operating income (loss) | $(37.3) | $12.5 (Restructuring Cost of Sales, Other Long-Lived Asset Impairment, Restructuring Expenses) | $(24.8) | | Operating margin (% of net sales) | (11.5)% | | (7.7)% | | Net income (loss) attributable to Fossil Group, Inc. | $(41.3) | $9.8 (Restructuring Cost of Sales, Other Long-Lived Asset Impairment, Restructuring Expenses, Tax Impact) | $(31.5) | | Diluted earnings (loss) per share | $(0.80) | $0.19 (Restructuring Cost of Sales, Other Long-Lived Asset Impairment, Restructuring Expenses) | $(0.61) | Operational Data Store Count Information Fossil Group's store count decreased significantly across all regions from April 1, 2023, to March 30, 2024, reflecting the company's strategic initiatives to optimize its retail store portfolio Store Count by Region | Region | April 1, 2023 | Opened | Closed | March 30, 2024 | | :------- | :------------ | :----- | :----- | :------------- | | Americas | 149 | 2 | 16 | 135 | | Europe | 99 | 2 | 28 | 73 | | Asia | 79 | 0 | 10 | 69 | | Total stores | 327 | 4 | 54 | 277 | - Total store count decreased by 50 stores (327 to 277) over the year, with 54 stores closed and 4 opened[24] Legal Disclosures Safe Harbor Statement This section contains a safe harbor statement, indicating that certain statements in the report are forward-looking and involve risks and uncertainties, listing various factors that could cause actual results to differ materially from those projected - Forward-looking statements include those regarding outlook, financial position, TAG plan benefits and expenses, liquidity, and strategic review[12] - Factors that could cause actual results to differ include worldwide economic conditions, risks related to restructuring, consumer spending patterns, supply chain disruptions, data security breaches, foreign currency valuations, competition, and compliance with debt covenants[12] - The company assumes no obligation to publicly update or revise any forward-looking statements, except as required by law[12]