Third Quarter Net Sales of $609 Million;
Diluted EPS of $0.10
Fossil Group, Inc. (NASDAQ: FOSL) (the “Company” or “Fossil
Group”) today reported its financial results for the third quarter
ended September 29, 2018.
The Company reported net income for the third
quarter of fiscal 2018 of $5.0 million compared to a net loss of
$(5.4) million for the third quarter of fiscal 2017. Diluted
earnings (loss) per share were $0.10, as compared to $(0.11) for
the third quarter of fiscal 2017. Diluted earnings per share
for the third quarter of fiscal 2018 included restructuring charges
of $0.09 per diluted share while the third quarter of fiscal 2017
included restructuring charges of $0.08 per diluted share.
Currencies, including both the translation impact on operating
earnings and the impact of foreign currency hedging contracts,
unfavorably affected the year-over-year earnings (loss) per share
comparison by $0.01.
Kosta Kartsotis, Chairman and Chief Executive Officer stated:
“Our third quarter operating performance reflects the ongoing
success of our current strategy during a transformational period
for our category and for Fossil Group. We are highly focused
on initiatives that improve our overall profitability and establish
a foundation for sustainable growth. While the business
continues to face topline headwinds stemming from declines in the
traditional watch category combined with business exits and
closings of underperforming stores, we are focused on narrowing the
gap with gains in connected and digital sales. The third
quarter marked progress toward our goals as we saw double digit
growth in both our connected watches and our own e-commerce
business. On a lower overall sales base we significantly
improved profitability. We are pleased with the progress we
are making and our plans for the holiday season, which is reflected
in our increased outlook for the year.”
Mr. Kartsotis continued, "We continue to believe that Fossil
Group is uniquely positioned to harness the power of our brands,
design and technology capabilities and global distribution
infrastructure to capitalize on the fast growing wearables industry
and stabilize our traditional watch business. At the same
time, we are highly focused on driving efficiencies throughout the
organization as we reduce costs to ultimately deliver consistent,
profitable long term growth."
Operating ResultsCompared to
the third quarter of fiscal 2017, foreign currency fluctuations
decreased the Company’s third quarter fiscal 2018 reported net
sales by $7.2 million but increased operating income by $4.8
million. The discussion of the Company’s net sales is
presented on a GAAP basis and in constant dollars and reflects
regional performance based on sales in all channels within the
geographic location.
The following table provides a summary of net
sales performance, on both a reported and constant currency basis,
for the third quarter of fiscal 2018 compared to the fiscal 2017
third quarter (in millions, except percentage data).
|
Third Quarter |
|
|
|
|
|
|
|
|
|
2018 |
|
2017 |
|
Growth (Decline) |
|
Amounts as Reported |
|
Amounts as Reported |
|
Dollars as Reported (1) |
|
Constant Currency Dollars (2) |
|
Percentage as Reported (1) |
|
Percentage Constant Currency (2) |
Americas |
$ |
269 |
|
|
$ |
308 |
|
|
$ |
(39 |
) |
|
$ |
(37 |
) |
|
(13 |
)% |
|
(12 |
)% |
Europe |
208 |
|
|
247 |
|
|
(39 |
) |
|
(37 |
) |
|
(16 |
) |
|
(15 |
) |
Asia |
132 |
|
|
134 |
|
|
(2 |
) |
|
1 |
|
|
(1 |
) |
|
1 |
|
Total net
sales |
$ |
609 |
|
|
$ |
689 |
|
|
$ |
(80 |
) |
|
$ |
(73 |
) |
|
(12 |
)% |
|
(11 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
Watches |
$ |
487 |
|
|
$ |
552 |
|
|
$ |
(65 |
) |
|
$ |
(59 |
) |
|
(12 |
)% |
|
(11 |
)% |
Leathers |
66 |
|
|
76 |
|
|
(10 |
) |
|
(9 |
) |
|
(13 |
) |
|
(12 |
) |
Jewelry |
42 |
|
|
48 |
|
|
(6 |
) |
|
(6 |
) |
|
(12 |
) |
|
(12 |
) |
Other |
14 |
|
|
13 |
|
|
1 |
|
|
1 |
|
|
8 |
|
|
8 |
|
Total net
sales |
$ |
609 |
|
|
$ |
689 |
|
|
$ |
(80 |
) |
|
$ |
(73 |
) |
|
(12 |
)% |
|
(11 |
)% |
(1) Reported GAAP amounts include impacts from
currency.(2) Eliminates the effect of the
stronger U.S. dollar in fiscal 2018 to give investors a better
understanding of the underlying trends within the business. See
constant currency financial information at the end of this release
for more information.
Third quarter fiscal 2018 worldwide net sales
decreased $79.9 million or 12% and $72.7 million in constant
currency (a 11% decline) compared to the third quarter of fiscal
2017. Business exits and store closures, primarily
implemented to improve profitability, accounted for approximately
half of the sales contraction in the third quarter versus the prior
year period. Watches declined in the Americas and Europe and
increased slightly in Asia, with growth in connected watches and
declines in traditional watches in all regions on a constant
currency basis. Geographically, sales declines in the U.S.
drove the decrease in the Americas. In Europe, on a constant
currency basis, sales across the Eurozone and in distributor
markets in Eastern Europe and the Middle East declined, with the
greatest declines in Germany, the U.K. and France. In Asia,
sales increases in China, India, Hong Kong and South Korea were
partially offset by double-digit declines in Japan, Australia and
Taiwan.
Global retail comps for the third quarter of
fiscal 2018 were (3%) as compared to the third quarter of fiscal
2017, with declines across all product categories. Positive
comps in Europe were more than offset by declines in the Americas
and Asia, largely driven by the Company's outlet stores.
Global direct e-commerce sales continued double-digit growth in the
third quarter of fiscal 2018.
During the third quarter of fiscal 2018, gross
margin increased 720 basis points to 53.6%, driven in part by a
favorable comparison against an inventory valuation reserve
primarily for excess levels of connected products recorded in the
third quarter of fiscal 2017, lower promotional activity and
markdowns and favorable product mix. Gross profit margin was
also favorably impacted by approximately 100 basis points due to
currency movements, as well as benefits generated by the Company's
New World Fossil ("NWF") margin improvement initiatives.
During the third quarter of fiscal 2018, the
Company’s operating expenses were $303.9 million, including $6.1
million of restructuring costs, primarily related to professional
services, employee costs and store closings as compared to $5.8
million of restructuring costs in the prior fiscal year third
quarter. Selling, general and administrative expenses decreased
$16.8 million as compared to the third quarter of fiscal 2017
primarily as a result of lower store expenses given the significant
number of store closures since the third quarter of last year,
lower variable marketing expenses, corporate and regional
infrastructure reductions driven by the NWF initiatives and the
currency effects of a stronger dollar, partially offset by
increased incentive compensation.
Operating income for the third quarter of fiscal
2018 was $22.6 million, as compared to an operating loss of $0.5
million in the third quarter of fiscal 2017. Operating income
improved $23.1 million in the third quarter of fiscal 2018 driven
by reduced operating expenses, increased gross profit and currency
favorability partially offset by lower sales.
During the third quarter of fiscal 2018,
interest expense decreased $2.2 million to $9.9 million.
Other income (expense) changed unfavorably $6.8 million to $(2.9)
million, primarily due to net foreign currency losses compared to
net gains in the prior fiscal year third quarter.
Income tax expenses were $3.9 million in the
third quarter of fiscal 2018 and included the recognition of
deferred tax asset valuation allowances and an unfavorable impact
from the Global Intangible Low-Taxed Income (“GILTI”) provision of
the Tax Cuts and Jobs Act (the "Tax Act") that was signed into law
in December 2017. These unfavorable impacts were partially
offset by a benefit related to the reduction of the 2017 income tax
liability from previous estimates. As a result, the Company’s
effective income tax rate in the third quarter of fiscal 2018 was
39.9%, compared to 37.1% for the third quarter of fiscal 2017.
Accounting for the income tax effects of the Tax
Act required significant judgments and estimates. The Company
made reasonable estimates in its 2017 financial statements and
recorded revisions to this provisional amount in the first and
second quarters of fiscal 2018. The Company finalized its
federal income tax return during the third quarter of fiscal 2018
and the third quarter tax provision reflects the final transition
tax liability. The most significant impact of the legislation
for the Company was the reduction in the value of the net U.S.
deferred tax assets, including net operating losses and excess
foreign tax credits due to the GILTI provision of the Tax Act,
whereby the income of foreign subsidiaries absorbed the U.S. net
operating loss resulting in no tax benefit for these losses.
GuidanceOver the next several
years, Fossil Group will continue to transform the Company’s
business model to address changes in consumer behaviors and their
purchases of traditional watches and connected devices, as well as
jewelry and leathers. During the Company’s ongoing
transformation project, it believes certain operating metrics are
the most appropriate performance measures. These metrics include
net sales, gross margin, operating expenses, operating margin,
other income (expense), interest expense, income (loss) before
income taxes and Adjusted EBITDA.
The Company is providing guidance on a GAAP
basis. For comparison purposes, the Company has also provided
additional information which quantifies the estimated impact on its
operating expenses and operating income for non-operational items
impacting operating results for fiscal 2018 and the third quarter
of fiscal 2018. The Company expects the following during
fiscal 2018:
GAAP GuidanceFor fiscal
2018:
- Net sales in the range of (9)% to (7)%, including the estimated
negative impact of business exits of approximately (5)% and
currency benefits of approximately 1%
- Gross margin in the range of 52.0% to 53.0%
- Operating expenses, including restructuring charges, ranging
from $1.27 billion to $1.29 billion
- Operating margin in the range of 2% to 3%
- Other income (expense) of approximately $(6) million based on
prevailing currency rates
- Interest expense of approximately $43 million
- Income (loss) before income taxes in the range of $5 million to
$30 million
For the fourth quarter of fiscal 2018:
- Net sales in the range of (16)% to (10)%, including the
estimated negative impacts of business exits and currency of
approximately (5)% and (1)%, respectively
- Gross margin in the range of 51.5% to 53.5%
- Operating expenses, including restructuring charges, ranging
from $340 million to $360 million
- Operating margin in the range of 8% to 10%
- Other income (expense) of approximately $(1) million based on
prevailing currency rates
- Interest expense of approximately $11 million
- Income (loss) before income taxes in the range of $47 million
to $72 million
Adjusted EBITDA is non-GAAP financial measure
and should not be considered a substitute for, or superior to,
guidance or financial measures prepared in accordance with GAAP.
The Company defines Adjusted EBITDA as the sum of income (loss)
before income taxes, interest expense, amortization and
depreciation and other non-cash charges (such as impairment),
stock-based compensation expenses, and restructuring expenses minus
interest income. The Company believes Adjusted EBITDA provides
useful information to investors about the Company's operating
performance on a constant currency basis for the periods presented
without the impact of certain items. The Company uses Adjusted
EBITDA to evaluate its operating performance period-over-period.
The Company expects the following during fiscal 2018:
Non-operational and Non-GAAP
ItemsFor fiscal 2018:
- Restructuring charges of approximately $50 million
- Adjusted EBITDA of $205 million to $230 million
For the fourth quarter of fiscal
2018:
- Restructuring charges of approximately $9 million
- Adjusted EBITDA of $90 million to $115 million
Below is a reconciliation of income (loss)
before income taxes to Adjusted EBITDA for fiscal years 2018 and
2017, including forward-looking guidance based on the mid-point of
the Company's guidance range. Certain line items presented in
the tables below, when aggregated, may not foot due to
rounding.
Fiscal 2018
|
Fiscal 2018 |
|
Actuals |
|
Guidance |
|
Total |
($ in millions): |
Q1 |
|
Q2 |
|
Q3 |
|
Q4 |
|
Income (Loss) Before Income Taxes |
$ |
(41 |
) |
|
$ |
(11 |
) |
|
$ |
10 |
|
|
$ |
59 |
|
|
$ |
17 |
|
Plus: |
|
|
|
|
|
|
|
|
|
Interest Expense |
11 |
|
|
11 |
|
|
10 |
|
|
11 |
|
|
43 |
|
Amortization and Depreciation |
16 |
|
|
15 |
|
|
16 |
|
|
16 |
|
|
63 |
|
Impairment Expense |
— |
|
|
8 |
|
|
— |
|
|
— |
|
|
8 |
|
Other Non-cash Charges |
12 |
|
|
3 |
|
|
2 |
|
|
— |
|
|
17 |
|
Stock-based Compensation |
4 |
|
|
7 |
|
|
6 |
|
|
6 |
|
|
23 |
|
Restructuring Expense |
21 |
|
|
15 |
|
|
6 |
|
|
9 |
|
|
50 |
|
Less: |
|
|
|
|
|
|
|
|
|
Interest Income |
— |
|
|
1 |
|
|
— |
|
|
— |
|
|
1 |
|
Adjusted EBITDA |
$ |
23 |
|
|
$ |
47 |
|
|
$ |
50 |
|
|
$ |
101 |
|
|
$ |
220 |
|
Fiscal 2017 Actuals
|
Fiscal 2017 |
($ in millions): |
Q1 |
|
Q2 |
|
Q3 |
|
Q4 |
|
Total |
Income (Loss) Before Income Taxes |
$ |
(48 |
) |
|
$ |
(439 |
) |
|
$ |
(9 |
) |
|
$ |
42 |
|
|
$ |
(454 |
) |
Plus: |
|
|
|
|
|
|
|
|
|
Interest Expense |
8 |
|
|
12 |
|
|
12 |
|
|
11 |
|
|
43 |
|
Amortization and Depreciation |
21 |
|
|
21 |
|
|
19 |
|
|
20 |
|
|
81 |
|
Impairment Expense |
1 |
|
|
410 |
|
|
— |
|
|
— |
|
|
411 |
|
Other Non-cash Charges |
3 |
|
|
7 |
|
|
15 |
|
|
21 |
|
|
46 |
|
Stock-based Compensation |
6 |
|
|
8 |
|
|
8 |
|
|
9 |
|
|
31 |
|
Restructuring Expense |
26 |
|
|
10 |
|
|
6 |
|
|
6 |
|
|
48 |
|
Less: |
|
|
|
|
|
|
|
|
|
Interest Income |
1 |
|
|
1 |
|
|
1 |
|
|
2 |
|
|
5 |
|
Adjusted EBITDA |
$ |
16 |
|
|
$ |
28 |
|
|
$ |
50 |
|
|
$ |
107 |
|
|
$ |
201 |
|
Note that due to relatively low levels of income
(loss) before income taxes in the near term, as well as the
combined impact of the modified territorial tax program under the
Tax Act and deferred tax asset valuation reserve accounting, the
Company’s effective tax rate is expected to have unusual variations
and occasionally an inverse relationship to income (loss) before
income taxes.
Safe HarborCertain statements
contained herein that are not historical facts, including
multi-year profit improvement estimates, the success of our
connected accessories, future financial guidance as well as
estimated impacts from the Tax Act, foreign currency translation,
amortization expense, foreign tax credits, non-cash impairments and
restructuring charges, constitute “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act
of 1995 and involve a number of risks and uncertainties. The
actual results of the future events described in such
forward-looking statements could differ materially from those
stated in such forward-looking statements. Among the factors
that could cause actual results to differ materially are: changes
in economic trends and financial performance, changes in government
regulation and tariffs, changes in consumer demands, tastes and
fashion trends, lower levels of consumer spending resulting from a
general economic downturn, shifts in market demand resulting in
inventory risks, changes in foreign currency exchange rates, risks
related to the success of the multi-year profit improvement
initiative, risks related to our connected accessories and the
outcome of current and possible future litigation, as well as the
risks and uncertainties set forth in the Company’s Annual Report on
Form 10-K for the fiscal year ended December 30, 2017 filed with
the Securities and Exchange Commission (the “SEC”). These
forward-looking statements are based on our current expectations
and beliefs concerning future developments and their potential
effect on us. While management believes that these forward-looking
statements are reasonable as and when made, there can be no
assurance that future developments affecting us will be those that
we anticipate. Readers of this release should consider these
factors in evaluating, and are cautioned not to place undue
reliance on, the forward-looking statements contained herein.
The Company assumes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information,
future events, or otherwise, except as required by law.
About Fossil
Group, Inc.Fossil Group, Inc. is a global design,
marketing, distribution and innovation company specializing in
lifestyle accessories. Under a diverse portfolio of owned and
licensed brands, our offerings include fashion watches, jewelry,
handbags, small leather goods and wearables. We are committed
to delivering the best in design and innovation across our owned
brands, Fossil, Michele, Misfit, Relic, Skagen and Zodiac, and
licensed brands, Armani Exchange, BMW, Chaps, Diesel, DKNY, Emporio
Armani, kate spade new york, Marc Jacobs, Michael Kors, Puma and
Tory Burch. We bring each brand story to life through an
extensive wholesale distribution network across approximately 150
countries and 500 retail locations. Certain press release and
SEC filing information concerning the Company is also available at
www.fossilgroup.com.
Investor Relations: |
Allison Malkin |
|
ICR, Inc. |
|
(203) 682-8225 |
Consolidated
Income Statement Data |
For the 13
Weeks Ended |
|
For the 13
Weeks Ended |
($ in millions,
except per share data): |
September 29, 2018 |
|
September 30, 2017 |
Net sales |
$ |
608.8 |
|
|
$ |
688.7 |
|
Cost of sales |
282.3 |
|
|
368.8 |
|
Gross
profit |
326.5 |
|
|
319.9 |
|
Gross margin |
53.6 |
% |
|
46.4 |
% |
Operating
expenses: |
|
|
|
Selling,
general and administrative expenses |
297.8 |
|
|
314.6 |
|
Restructuring charges |
6.1 |
|
|
5.8 |
|
Total operating
expenses |
$ |
303.9 |
|
|
$ |
320.4 |
|
Total operating
expenses (% of net sales) |
49.9 |
% |
|
46.5 |
% |
Operating income
(loss) |
22.6 |
|
|
(0.5 |
) |
Operating margin |
3.7 |
% |
|
(0.1 |
)% |
Interest expense |
9.9 |
|
|
12.1 |
|
Other income (expense)
- net |
(2.9 |
) |
|
3.9 |
|
Income (loss) before
income taxes |
9.8 |
|
|
(8.7 |
) |
Provision for income
taxes |
3.9 |
|
|
(3.2 |
) |
Less: Net
income attributable to noncontrolling interest |
0.9 |
|
|
(0.1 |
) |
Net income attributable
to Fossil Group, Inc. |
$ |
5.0 |
|
|
$ |
(5.4 |
) |
Earnings per
share: |
|
|
|
Basic |
$ |
0.10 |
|
|
$ |
(0.11 |
) |
Diluted |
$ |
0.10 |
|
|
$ |
(0.11 |
) |
Weighted average common
shares outstanding: |
|
|
|
Basic |
49.4 |
|
|
48.5 |
|
Diluted |
50.7 |
|
|
48.5 |
|
Consolidated Balance Sheet Data ($ in
millions): |
September 29, 2018 |
|
September 30, 2017 |
Assets: |
|
|
|
Cash and cash
equivalents |
$ |
236.1 |
|
|
$ |
166.9 |
|
Accounts receivable - net |
261.7 |
|
|
310.9 |
|
Inventories |
521.3 |
|
|
683.0 |
|
Other
current assets |
129.4 |
|
|
125.6 |
|
Total current assets |
$ |
1,148.5 |
|
|
$ |
1,286.4 |
|
Property, plant and equipment - net |
$ |
190.6 |
|
|
$ |
243.4 |
|
Intangible and other assets - net |
130.4 |
|
|
220.6 |
|
Total long-term assets |
$ |
321.0 |
|
|
$ |
464.0 |
|
Total assets |
$ |
1,469.5 |
|
|
$ |
1,750.4 |
|
|
|
|
|
Liabilities and stockholders’ equity: |
|
|
|
Accounts payable, accrued expenses and other current
liabilities |
$ |
443.2 |
|
|
$ |
513.3 |
|
Short-term debt |
128.0 |
|
|
40.2 |
|
Total current liabilities |
$ |
571.2 |
|
|
$ |
553.5 |
|
Long-term debt |
$ |
269.1 |
|
|
$ |
444.3 |
|
Other
long-term liabilities |
99.7 |
|
|
99.6 |
|
Total long-term liabilities |
$ |
368.8 |
|
|
$ |
543.9 |
|
Stockholders’ equity |
$ |
529.6 |
|
|
$ |
653.0 |
|
Total liabilities and stockholders’ equity |
$ |
1,469.5 |
|
|
$ |
1,750.4 |
|
|
For the 13
Weeks Ended |
Business
Segment Net Sales ($ in millions): |
September 29, 2018 |
|
September 30, 2017 |
Segment: |
|
|
|
Americas |
$ |
269.1 |
|
|
$ |
308.1 |
|
Europe |
207.5 |
|
|
247.2 |
|
Asia |
132.2 |
|
|
133.4 |
|
Total
net sales |
$ |
608.8 |
|
|
$ |
688.7 |
|
Product Category
Information
|
For the 13
Weeks Ended |
Product Sales ($ in millions): |
September 29, 2018 |
|
September 30, 2017 |
Watches |
$ |
486.5 |
|
|
$ |
551.9 |
|
Leathers |
66.0 |
|
|
75.7 |
|
Jewelry |
41.8 |
|
|
47.7 |
|
Other |
14.5 |
|
|
13.4 |
|
Total net sales |
$ |
608.8 |
|
|
$ |
688.7 |
|
Store Count Information
|
September 29,
2018 |
|
September 30,
2017 |
|
Americas |
|
Europe |
|
Asia |
|
Total |
|
Americas |
|
Europe |
|
Asia |
|
Total |
Full price accessory |
87 |
|
94 |
|
51 |
|
232 |
|
112 |
|
109 |
|
61 |
|
282 |
Outlets |
130 |
|
74 |
|
40 |
|
244 |
|
136 |
|
74 |
|
46 |
|
256 |
Full priced multi-brand |
0 |
|
5 |
|
4 |
|
9 |
|
0 |
|
8 |
|
10 |
|
18 |
Total stores |
217 |
|
173 |
|
95 |
|
485 |
|
248 |
|
191 |
|
117 |
|
556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Constant Currency Financial
InformationThe following table presents the Company’s
business segment and product net sales on a constant currency basis
which are non-GAAP financial measures. To calculate net sales
on a constant currency basis, net sales for the current fiscal year
period for entities reporting in currencies other than the U.S.
dollar are translated into U.S. dollars at the average rates during
the comparable period of the prior fiscal year. The Company
presents constant currency information to provide investors with a
basis to evaluate how its underlying business performed excluding
the effects of foreign currency exchange rate fluctuations.
The constant currency financial information presented herein should
not be considered a substitute for, or superior to, the measures of
financial performance prepared in accordance with GAAP.
|
Net Sales |
For the 13 Weeks Ended |
September 29, 2018 |
($ in millions) |
As Reported |
|
Impact of Foreign Currency Exchange
Rates |
|
Constant Currency |
Segment: |
|
|
|
|
|
Americas |
$ |
269.1 |
|
|
$ |
1.8 |
|
|
$ |
270.9 |
|
Europe |
207.5 |
|
|
2.5 |
|
|
210.0 |
|
Asia |
132.2 |
|
|
2.9 |
|
|
135.1 |
|
Total net sales |
$ |
608.8 |
|
|
$ |
7.2 |
|
|
$ |
616.0 |
|
|
|
|
|
|
|
Product
Categories: |
|
|
|
|
|
Watches |
$ |
486.5 |
|
|
$ |
6.1 |
|
|
$ |
492.6 |
|
Leathers |
66.0 |
|
|
0.7 |
|
|
66.7 |
|
Jewelry |
41.8 |
|
|
0.4 |
|
|
42.2 |
|
Other |
14.5 |
|
|
— |
|
|
14.5 |
|
Total net sales |
$ |
608.8 |
|
|
$ |
7.2 |
|
|
$ |
616.0 |
|
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