Fossil Group(US:FOSL)2024-08-09 17:49Financial Data and Key Metrics Changes - In Q2 2024, net sales totaled $260 million, down 19% on a constant currency basis, impacted by the exit from the smartwatch category and store closures [14][5] - Gross margin expanded by 390 basis points compared to the previous year, primarily due to improved product margins from TAG initiatives and a lower smartwatch mix [14][4] - SG&A expenses decreased by $34 million, representing an 18% reduction year-over-year, attributed to lower store operating costs and fewer stores [15][16] - Adjusted operating loss narrowed to $17 million, reflecting a 39% improvement from an adjusted operating loss of $28 million a year ago [16][14] Business Line Data and Key Metrics Changes - Traditional watches showed stabilization, with sales approximately flat globally, while Fossil traditional watches increased by 4% in DTC channels in Q2 [11][5] - The licensed watch brands and leathers category, which represents about half of revenue, faced pressure due to brand repositioning and soft consumer demand, particularly in China [6][5] - Sales in India increased by double digits compared to last year, indicating strong growth across virtually all brands [5][11] Market Data and Key Metrics Changes - The wholesale channel in the US and Europe remains challenging, with soft consumption sentiment noted in China [5][4] - About half of the sales base is beginning to stabilize, with Q1 performance flat and Q2 results down about 4% [5][4] Company Strategy and Development Direction - The company is focused on four core priorities: advancing the Transform and Grow (TAG) Plan, strengthening the balance sheet, stabilizing the business, and conducting a strategic review of the business model [7][8] - The TAG Plan aims to achieve at least $100 million of annualized benefits in 2024, with total expected benefits of $300 million [8][9] - A shift to a globally led operating model with regional execution of consolidated brand strategies is a critical element of the TAG Plan [8][9] Management's Comments on Operating Environment and Future Outlook - Management expects sequential improvement in sales, gross margin, and adjusted operating margin for the remainder of 2024 [13][12] - The company remains on track to achieve net sales of approximately $1.2 billion for the full year, with an adjusted operating margin loss expected to range from negative 3% to negative 5% [17][13] - Management acknowledges the current business is not at its potential but remains focused on stabilizing and improving financial performance [18][12] Other Important Information - The company received a $57 million tax refund in Q2, which strengthened its liquidity position [10][17] - Total liquidity at the end of the quarter was $156 million, providing flexibility to execute the TAG Plan [17][10] Q&A Session Summary Question: What is being done to stabilize the top-line and when is growth expected? - The company is directing programs and funding towards key top-line opportunities, increasing upper funnel marketing programs to generate demand [19] Question: What is happening in the core traditional watch business? - About half of the traditional watch business performed consistently with industry trends, while other parts remain pressured due to softness in China and brand repositioning efforts [21] Question: Are there plans for equity or bond buybacks given liquidity levels? - The company believes current valuation levels do not reflect long-term potential but prioritizes maintaining financial flexibility over buybacks [22] Question: How many quarters of runway are there to execute the TAG plan? - Ample runway exists to execute the TAG plan, with most initiatives expected to complete by 2024 [23] Question: What is the status of potential refinancing out of upcoming debt maturity? - The company is assessing potential debt and equity financings and has retained a financial advisor for this process [24] Question: Can you explain the cash flow situation this year? - Seasonal working capital needs and projected sales decline will require operating cash use in the near term, but positive free cash flow is expected in Q4 [25]