Item 1. Financial Statements
FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
IN THOUSANDS
| | | | | | | | | | | |
| April 1, 2023 | | December 31, 2022 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 127,111 | | | $ | 198,726 | |
Accounts receivable - net of allowances for doubtful accounts of $14,297 and $14,647, respectively | 168,947 | | | 206,133 | |
| Inventories | 336,503 | | | 376,028 | |
| Prepaid expenses and other current assets | 171,926 | | | 164,413 | |
| Total current assets | 804,487 | | | 945,300 | |
Property, plant and equipment - net of accumulated depreciation of $416,175 and $415,172, respectively | 78,478 | | | 79,882 | |
| Operating lease right-of-use assets | 147,179 | | | 156,947 | |
| | | |
| Intangible and other assets-net | 55,851 | | | 55,999 | |
| Total long-term assets | 281,508 | | | 292,828 | |
| Total assets | $ | 1,085,995 | | | $ | 1,238,128 | |
| Liabilities and Stockholders’ Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 120,124 | | | $ | 191,141 | |
| Short-term debt | 461 | | | 342 | |
| Accrued expenses: | | | |
| Current operating lease liabilities | 45,642 | | | 49,702 | |
| Compensation | 40,755 | | | 44,259 | |
| Royalties | 8,773 | | | 20,875 | |
| Customer liabilities | 32,582 | | | 41,996 | |
| Transaction taxes | 1,669 | | | 14,303 | |
| Other | 42,967 | | | 40,424 | |
| Income taxes payable | 12,166 | | | 22,878 | |
| Total current liabilities | 305,139 | | | 425,920 | |
| Long-term income taxes payable | 23,323 | | | 22,603 | |
| Deferred income tax liabilities | 618 | | | 616 | |
| Long-term debt | 234,579 | | | 216,132 | |
| Long-term operating lease liabilities | 140,801 | | | 150,188 | |
| Other long-term liabilities | 15,246 | | | 19,660 | |
| Total long-term liabilities | 414,567 | | | 409,199 | |
| Commitments and contingencies (Note 13) | | | |
| Stockholders’ equity: | | | |
Common stock, 51,841 and 51,836 shares issued and outstanding at April 1, 2023 and December 31, 2022, respectively | 518 | | | 518 | |
| Additional paid-in capital | 307,592 | | | 306,241 | |
| Retained earnings | 134,229 | | | 175,491 | |
| Accumulated other comprehensive income (loss) | (73,207) | | | (76,318) | |
| Total Fossil Group, Inc. stockholders’ equity | 369,132 | | | 405,932 | |
| Noncontrolling interests | (2,843) | | | (2,923) | |
| Total stockholders’ equity | 366,289 | | | 403,009 | |
| Total liabilities and stockholders’ equity | $ | 1,085,995 | | | $ | 1,238,128 | |
See notes to the unaudited condensed consolidated financial statements.
FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
UNAUDITED
IN THOUSANDS, EXCEPT PER SHARE DATA
| | | | | | | | | | | | | | | |
| For the 13 Weeks Ended April 1, 2023 | | For the 13 Weeks Ended April 2, 2022 | | | | |
| Net sales | $ | 325,036 | | | $ | 375,853 | | | | | |
| Cost of sales | 164,319 | | | 191,540 | | | | | |
| Gross profit | 160,717 | | | 184,313 | | | | | |
| Operating expenses: | | | | | | | |
| Selling, general and administrative expenses | 190,873 | | | 195,758 | | | | | |
| | | | | | | |
| Other long-lived asset impairments | 55 | | | 286 | | | | | |
| Restructuring expenses | 7,097 | | | 2,551 | | | | | |
| Total operating expenses | 198,025 | | | 198,595 | | | | | |
| Operating income (loss) | (37,308) | | | (14,282) | | | | | |
| Interest expense | 5,004 | | | 3,997 | | | | | |
| Other income (expense) - net | 2,733 | | | 1,618 | | | | | |
| Income (loss) before income taxes | (39,579) | | | (16,661) | | | | | |
| Provision for income taxes | 1,603 | | | 4,687 | | | | | |
| Net income (loss) | (41,182) | | | (21,348) | | | | | |
| Less: Net income (loss) attributable to noncontrolling interests | 80 | | | 166 | | | | | |
| Net income (loss) attributable to Fossil Group, Inc. | $ | (41,262) | | | $ | (21,514) | | | | | |
| Other comprehensive income (loss), net of taxes: | | | | | | | |
| Currency translation adjustment | $ | 5,897 | | | $ | (7,885) | | | | | |
| Cash flow hedges - net change | (2,786) | | | 1,098 | | | | | |
| | | | | | | |
| Total other comprehensive income (loss) | 3,111 | | | (6,787) | | | | | |
| Total comprehensive income (loss) | (38,071) | | | (28,135) | | | | | |
| Less: Comprehensive income (loss) attributable to noncontrolling interests | 80 | | | 166 | | | | | |
| Comprehensive income (loss) attributable to Fossil Group, Inc. | $ | (38,151) | | | $ | (28,301) | | | | | |
| Earnings (loss) per share: | | | | | | | |
| Basic | $ | (0.80) | | | $ | (0.41) | | | | | |
| Diluted | $ | (0.80) | | | $ | (0.41) | | | | | |
| Weighted average common shares outstanding: | | | | | | | |
| Basic | 51,840 | | | 51,999 | | | | | |
| Diluted | 51,840 | | | 51,999 | | | | | |
See notes to the unaudited condensed consolidated financial statements.
FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
UNAUDITED
IN THOUSANDS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the 13 Weeks Ended April 1, 2023 |
| | Common Stock | | Additional
Paid-in
Capital | | Treasury
Stock | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income
(Loss) | | Stockholders'
Equity
Attributable
to Fossil
Group, Inc. | | Noncontrolling Interest | | Total Stockholders' Equity |
| Shares | | Par
Value |
| Balance, December 31, 2022 | 51,836 | | | $ | 518 | | | $ | 306,241 | | | $ | — | | | $ | 175,491 | | | $ | (76,318) | | | $ | 405,932 | | | $ | (2,923) | | | $ | 403,009 | |
| Common stock issued upon exercise of stock options, stock appreciation rights and restricted stock units | 7 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| Acquisition of common stock for employee tax withholding | — | | | — | | | — | | | (11) | | | — | | | — | | | (11) | | | — | | | (11) | |
| Retirement of common stock | (2) | | | — | | | (11) | | | 11 | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Stock-based compensation | — | | | — | | | 1,362 | | | — | | | — | | | — | | | 1,362 | | | — | | | 1,362 | |
| Net income (loss) | — | | | — | | | — | | | — | | | (41,262) | | | — | | | (41,262) | | | 80 | | | (41,182) | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | 3,111 | | | 3,111 | | | — | | | 3,111 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance, April 1, 2023 | 51,841 | | | $ | 518 | | | $ | 307,592 | | | $ | — | | | $ | 134,229 | | | $ | (73,207) | | | $ | 369,132 | | | $ | (2,843) | | | $ | 366,289 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the 13 Weeks Ended April 2, 2022 |
| | Common Stock | | Additional
Paid-in
Capital | | Treasury
Stock | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income
(Loss) | | Stockholders'
Equity
Attributable
to Fossil
Group, Inc. | | Noncontrolling Interest | | Total Stockholders' Equity |
| Shares | | Par
Value |
| Balance, January 1, 2022 | 52,146 | | | $ | 521 | | | $ | 300,848 | | | $ | — | | | $ | 229,132 | | | $ | (67,275) | | | $ | 463,226 | | | $ | 2,132 | | | $ | 465,358 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Acquisition of common stock | — | | | — | | | — | | | (10,000) | | | — | | | — | | | (10,000) | | | — | | | (10,000) | |
| Retirement of common stock | (989) | | | (10) | | | (506) | | | 10,000 | | | (9,484) | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Stock-based compensation | — | | | — | | | 2,241 | | | — | | | — | | | — | | | 2,241 | | | — | | | 2,241 | |
| Net income (loss) | — | | | — | | | — | | | — | | | (21,514) | | | — | | | (21,514) | | | 166 | | | (21,348) | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | (6,787) | | | (6,787) | | | — | | | (6,787) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance, April 2, 2022 | 51,157 | | | $ | 511 | | | $ | 302,583 | | | $ | — | | | $ | 198,134 | | | $ | (74,062) | | | $ | 427,166 | | | $ | 2,298 | | | $ | 429,464 | |
See notes to the unaudited condensed consolidated financial statements.
FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
IN THOUSANDS
| | | | | | | | | | | | | | |
| For the 13 Weeks Ended April 1, 2023 | | For the 13 Weeks Ended April 2, 2022 | |
| Operating Activities: | | | | |
| Net income (loss) | $ | (41,182) | | | $ | (21,348) | | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | |
| Depreciation, amortization and accretion | 5,068 | | | 6,185 | | |
| Non-cash lease expense | 18,619 | | | 20,742 | | |
| Stock-based compensation | 1,362 | | | 2,241 | | |
| Decrease in allowance for returns and markdowns | (6,320) | | | (3,975) | | |
| | | | |
| Property, plant and equipment and other long-lived asset impairment losses | 55 | | | 286 | | |
| | | | |
| Non-cash restructuring charges | — | | | 92 | | |
| Bad debt expense | 395 | | | 2,094 | | |
| | | | |
| Other non-cash items | (1,427) | | | 2,100 | | |
| Contingent consideration remeasurement | (347) | | | 11 | | |
| | | | |
| Changes in operating assets and liabilities: | | | | |
| Accounts receivable | 39,644 | | | 51,069 | | |
| Inventories | 41,959 | | | (41,947) | | |
| Prepaid expenses and other current assets | (10,171) | | | (18,963) | | |
| Accounts payable | (71,548) | | | (30,097) | | |
| Accrued expenses | (29,846) | | | (57,853) | | |
| Income taxes | (9,761) | | | (927) | | |
| Operating lease liabilities | (22,362) | | | (24,755) | | |
| Net cash used in operating activities | (85,862) | | | (115,045) | | |
| Investing Activities: | | | | |
| Additions to property, plant and equipment and other | (2,610) | | | (2,526) | | |
| (Increase) decrease in intangible and other assets | (109) | | | 251 | | |
| | | | |
| | | | |
| Net cash used in investing activities | (2,719) | | | (2,275) | | |
| Financing Activities: | | | | |
| Acquisition of common stock | (11) | | | (10,000) | | |
| | | | |
| Debt borrowings | 40,136 | | | 46,167 | | |
| Debt payments | (22,003) | | | (4,100) | | |
| Payment for shares of Fossil Accessories South Africa Pty. Ltd. | (1,660) | | | — | | |
| | | | |
| Net cash provided by financing activities | 16,462 | | | 32,067 | | |
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 298 | | | (3,502) | | |
| Net decrease in cash, cash equivalents, and restricted cash | (71,821) | | | (88,755) | | |
| Cash, cash equivalents, and restricted cash: | | | | |
| Beginning of period | 204,075 | | | 264,572 | | |
| End of period | $ | 132,254 | | | $ | 175,817 | | |
See notes to the unaudited condensed consolidated financial statements.
FOSSIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. FINANCIAL STATEMENT POLICIES
Basis of Presentation. The condensed consolidated financial statements include the accounts of Fossil Group, Inc., a Delaware corporation, and its wholly and majority-owned subsidiaries (the “Company”).
The information presented herein includes the thirteen-week period ended April 1, 2023 (“First Quarter”) as compared to the thirteen-week period ended April 2, 2022 (“Prior Year Quarter”). The condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to present a fair statement of the Company’s financial position as of April 1, 2023, and the results of operations for the First Quarter and Prior Year Quarter. All adjustments are of a normal, recurring nature.
These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K filed by the Company pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for the fiscal year ended December 31, 2022 (the “2022 Form 10-K”). Operating results for the First Quarter are not necessarily indicative of the results to be achieved for the full fiscal year.
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods reported. We base our estimates on the information available at the time and various other assumptions believed to be reasonable under the circumstances. Actual results could differ from those estimates. The Company has not made any changes in its significant accounting policies from those disclosed in the 2022 Form 10-K.
Business. The Company is a global design, marketing and distribution company that specializes in consumer fashion accessories. Its principal offerings include an extensive line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts and sunglasses. In the watch and jewelry product categories, the Company has a diverse portfolio of globally recognized owned and licensed brand names under which its products are marketed. The Company's products are distributed globally through various distribution channels, including wholesale in countries where it has a physical presence, direct to the consumer through its retail stores and commercial websites and through third-party distributors in countries where the Company does not maintain a physical presence. The Company's products are offered at varying price points to meet the needs of its customers, whether they are value-conscious or luxury oriented. Based on its extensive range of accessory products, brands, distribution channels and price points, the Company is able to target style-conscious consumers across a wide age spectrum on a global basis.
Operating Expenses. Operating expenses include selling, general and administrative ("SG&A"), other long-lived asset impairments and restructuring charges. SG&A expenses include selling and distribution expenses primarily consisting of sales and distribution labor costs, sales distribution center and warehouse facility costs, depreciation expense related to sales distribution and warehouse facilities, the four-wall operating costs of the Company's retail stores, point-of-sale expenses, advertising expenses and art, and design and product development labor costs. SG&A also includes general and administrative expenses primarily consisting of administrative support labor and support costs such as treasury, legal, information services, accounting, internal audit, human resources, executive management costs and costs associated with stock-based compensation. Restructuring charges include costs to reduce and optimize the Company’s infrastructure and store closures. See "Note 16—Restructuring" for additional information on the Company’s restructuring plan.
Earnings (Loss) Per Share (“EPS”). Basic EPS is based on the weighted average number of common shares outstanding during each period. Diluted EPS adjusts basic EPS for the effects of dilutive common stock equivalents outstanding during each period using the treasury stock method.
The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS (in thousands, except per share data):
| | | | | | | | | | | | | | | |
| For the 13 Weeks Ended April 1, 2023 | | For the 13 Weeks Ended April 2, 2022 | | | | |
| Numerator: | | | | | | | |
| Net income (loss) attributable to Fossil Group, Inc. | $ | (41,262) | | | $ | (21,514) | | | | | |
| Denominator: | | | | | | | |
| Basic EPS computation: | | | | | | | |
| Basic weighted average common shares outstanding | 51,840 | | | 51,999 | | | | | |
| Basic EPS | $ | (0.80) | | | $ | (0.41) | | | | | |
| Diluted EPS computation: | | | | | | | |
| | | | | | | |
| Diluted weighted average common shares outstanding | 51,840 | | | 51,999 | | | | | |
| Diluted EPS | $ | (0.80) | | | $ | (0.41) | | | | | |
At the end of the First Quarter, approximately 2.0 million weighted average shares issuable under stock-based awards were not included in the diluted EPS calculation because they were antidilutive. The total antidilutive weighted average shares included 0.3 million weighted average performance-based shares at the end of the First Quarter.
At the end of the Prior Year Quarter, approximately 2.1 million weighted average shares issuable under stock-based awards were not included in the diluted EPS calculation because they were antidilutive. The total antidilutive weighted average shares included 0.3 million weighted average performance-based shares at the end of the Prior Year Quarter.
Cash, Cash Equivalents and Restricted Cash. Restricted cash included in intangible and other-assets net was comprised primarily of pledged collateral to secure bank guarantees for the purpose of obtaining retail space. The following table provides a reconciliation of the cash, cash equivalents, and restricted cash balances as of April 1, 2023 and April 2, 2022 that are presented in the condensed consolidated statement of cash flows (in thousands):
| | | | | | | | | | | | | |
| April 1, 2023 | | April 2, 2022 | | |
| Cash and cash equivalents | $ | 127,111 | | | $ | 162,619 | | | |
| Restricted cash included in prepaid expenses and other current assets | 107 | | | 117 | | | |
| Restricted cash included in intangible and other assets-net | 5,036 | | | 13,081 | | | |
| Cash, cash equivalents and restricted cash | $ | 132,254 | | | $ | 175,817 | | | |
Recently Adopted Accounting Standards
In October 2021, the Financial Accounting Standards Board issued Accounting Standards Update 2021-08, Business Combinations – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The guidance requires an acquirer to recognize and measure contract assets and liabilities acquired in a business combination as if they had originated the contracts, as opposed to at fair value on the acquisition date. The standard is effective for business combinations after January 1, 2023. The adoption of this standard did not have an impact on the Company's consolidated financial statements or related disclosures.
2. REVENUE
Disaggregation of Revenue. The Company's revenue disaggregated by major product category and timing of revenue recognition was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the 13 Weeks Ended April 1, 2023 |
| Americas | | Europe | | Asia | | Corporate | | Total |
| Product type | | | | | | | | | |
| Watches: | | | | | | | | | |
| Traditional watches | $ | 91,357 | | | $ | 71,803 | | | $ | 62,266 | | | $ | — | | | $ | 225,426 | |
| Smartwatches | 12,490 | | | 6,622 | | | 5,288 | | | — | | | 24,400 | |
| Total watches | $ | 103,847 | | | $ | 78,425 | | | $ | 67,554 | | | $ | — | | | $ | 249,826 | |
| Leathers | 27,112 | | | 6,773 | | | 6,380 | | | — | | | 40,265 | |
| Jewelry | 5,419 | | | 18,501 | | | 5,125 | | | — | | | 29,045 | |
| Other | 1,553 | | | 1,974 | | | 1,077 | | | 1,296 | | | 5,900 | |
| Consolidated | $ | 137,931 | | | $ | 105,673 | | | $ | 80,136 | | | $ | 1,296 | | | $ | 325,036 | |
| | | | | | | | | |
| Timing of revenue recognition | | | | | | | | | |
| Revenue recognized at a point in time | $ | 137,467 | | | $ | 105,484 | | | $ | 80,026 | | | $ | 1,021 | | | $ | 323,998 | |
| Revenue recognized over time | 464 | | | 189 | | | 110 | | | 275 | | | 1,038 | |
| Consolidated | $ | 137,931 | | | $ | 105,673 | | | $ | 80,136 | | | $ | 1,296 | | | $ | 325,036 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the 13 Weeks Ended April 2, 2022 |
| Americas | | Europe | | Asia | | Corporate | | Total |
| Product type | | | | | | | | | |
| Watches: | | | | | | | | | |
| Traditional watches | $ | 115,902 | | | $ | 81,149 | | | $ | 64,363 | | | $ | 13 | | | $ | 261,427 | |
| Smartwatches | 17,272 | | | 12,686 | | | 8,024 | | | 2 | | | 37,984 | |
| Total watches | $ | 133,174 | | | $ | 93,835 | | | $ | 72,387 | | | $ | 15 | | | $ | 299,411 | |
| Leathers | 19,236 | | | 7,369 | | | 7,580 | | | — | | | 34,185 | |
| Jewelry | 7,936 | | | 21,135 | | | 5,625 | | | — | | | 34,696 | |
| Other | 1,581 | | | 2,212 | | | 1,176 | | | 2,592 | | | 7,561 | |
| Consolidated | $ | 161,927 | | | $ | 124,551 | | | $ | 86,768 | | | $ | 2,607 | | | $ | 375,853 | |
| | | | | | | | | |
| Timing of revenue recognition | | | | | | | | | |
| Revenue recognized at a point in time | $ | 161,594 | | | $ | 124,300 | | | $ | 86,608 | | | $ | 1,164 | | | $ | 373,666 | |
| Revenue recognized over time | 333 | | | 251 | | | 160 | | | 1,443 | | | 2,187 | |
| Consolidated | $ | 161,927 | | | $ | 124,551 | | | $ | 86,768 | | | $ | 2,607 | | | $ | 375,853 | |
Contract Balances. As of April 1, 2023, the Company had no material contract assets on the Company's condensed consolidated balance sheets and no deferred contract costs. The Company had contract liabilities of (i) $1.1 million and $0.8 million as of April 1, 2023 and December 31, 2022, respectively, related to remaining performance obligations on licensing income, (ii) $1.9 million and $3.7 million as of April 1, 2023 and December 31, 2022, respectively, primarily related to remaining performance obligations on wearable technology products and (iii) $3.1 million as of both April 1, 2023 and December 31, 2022 related to gift cards issued.
3. INVENTORIES
Inventories consisted of the following (in thousands):
| | | | | | | | | | | |
| April 1, 2023 | | December 31, 2022 |
| Components and parts | $ | 13,868 | | | $ | 20,998 | |
| | | |
| Finished goods | 322,635 | | | 355,030 | |
| Inventories | $ | 336,503 | | | $ | 376,028 | |
4. WARRANTY LIABILITIES
The Company’s warranty liability is recorded in accrued expenses-other in the Company’s condensed consolidated balance sheets. Warranty liability activity consisted of the following (in thousands):
| | | | | | | | | | | |
| For the 13 Weeks Ended April 1, 2023 | | For the 13 Weeks Ended April 2, 2022 |
| Beginning balance | $ | 13,623 | | | $ | 19,159 | |
| Settlements in cash or kind | (2,282) | | | (2,905) | |
Warranties issued and adjustments to preexisting warranties (1) | 1,528 | | | 1,652 | |
| Ending balance | $ | 12,869 | | | $ | 17,906 | |
_______________________________________________
(1) Changes in cost estimates related to preexisting warranties are aggregated with accruals for new standard warranties issued and foreign currency changes.
5. INCOME TAXES
The Company’s income tax (benefit) expense and related effective rates were as follows (in thousands, except percentage data):
| | | | | | | | | | | | | | | |
| For the 13 Weeks Ended April 1, 2023 | | For the 13 Weeks Ended April 2, 2022 | | | | |
| Income tax (benefit) expense | $ | 1,603 | | | $ | 4,687 | | | | | |
| Effective tax rate | (4.1) | % | | (28.1) | % | | | | |
The effective tax rate in the First Quarter was favorable as compared to the Prior Year Quarter due to reduced foreign taxes. The First Quarter and Prior Year Quarter tax rates are negative because foreign income tax expense is accrued on certain foreign entities with positive taxable income when the consolidated results are a loss. The overall tax rate is impacted by the Global Intangible Low-Taxed Income (“GILTI”) provision of the Tax Cuts and Jobs Act which requires the inclusion of certain foreign income in the tax return which absorbs the U.S. net operating loss. Foreign income taxes are also paid on this same foreign income, resulting in double taxation. The effective tax rate can vary from quarter-to-quarter due to changes in the Company's global mix of earnings, the resolution of income tax audits and changes in tax law.
As of April 1, 2023, the Company's total amount of unrecognized tax benefits, excluding interest and penalties, was $24.5 million, of which $24.5 million would favorably impact the effective tax rate in future periods, if recognized. The Company is subject to examinations in various state and foreign jurisdictions for its 2013-2021 tax years, none of which the Company believes are significant, individually or in the aggregate. Tax audit outcomes and timing of tax audit settlements are subject to significant uncertainty.
The Company has classified uncertain tax positions as long-term income taxes payable, unless such amounts are expected to be settled within twelve months of the condensed consolidated balance sheet date. As of April 1, 2023, the Company had recorded $8.5 million of unrecognized tax benefits, excluding interest and penalties, for positions that are expected to be settled within the next twelve months. Consistent with its past practice, the Company recognizes interest and/or penalties related to income tax overpayments and income tax underpayments in income tax expense and income taxes receivable/payable. At April 1, 2023, the total amount of accrued income tax-related interest included in the condensed consolidated balance sheets
was $9.7 million. There were no accrued tax-related penalties. For the First Quarter, the Company accrued income tax related interest expense of $0.6 million.
6. STOCKHOLDERS’ EQUITY
Common and Preferred Stock. The Company has 100,000,000 shares of common stock, par value $0.01 per share, authorized, with 51,841,146 and 51,836,456 shares issued and outstanding at April 1, 2023 and December 31, 2022, respectively. The Company has 1,000,000 shares of preferred stock, par value $0.01 per share, authorized, with none issued or outstanding at April 1, 2023 or December 31, 2022. Rights, preferences and other terms of preferred stock will be determined by the Board of Directors at the time of issuance.
Common Stock Repurchase Programs. Purchases of the Company’s common stock are made from time to time pursuant to its repurchase programs, subject to market conditions and at prevailing market prices, through the open market. Repurchased shares of common stock are recorded at cost and become authorized but unissued shares which may be issued in the future for general corporate or other purposes. The Company may terminate or limit its stock repurchase program at any time. In the event the repurchased shares are cancelled, the Company accounts for retirements by allocating the repurchase price to common stock, additional paid-in capital and retained earnings. The repurchase price allocation is based upon the equity contribution associated with historical issuances. The repurchase programs are conducted pursuant to Rule 10b-18 of the Exchange Act.
As of April 1, 2023 and December 31, 2022, all treasury stock had been effectively retired. As of April 1, 2023, the Company had $20.0 million of repurchase authorizations remaining under its repurchase program.
The following table reflects the Company's common stock repurchase activity for the periods indicated (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | For the 13 Weeks Ended April 1, 2023 | | For the 13 Weeks Ended April 2, 2022 |
Fiscal Year
Authorized | Dollar Value
Authorized | | Termination Date | | Number of
Shares
Repurchased | | Dollar Value
Repurchased | | Number of
Shares
Repurchased | | Dollar Value
Repurchased |
| | | | | | | | | | | |
| 2010 | $ | 30.0 | | | None | | — | | $ | — | | | 1.0 | | | $ | 10.0 | |
7. EMPLOYEE BENEFIT PLANS
Stock-Based Compensation Plans. The following table summarizes stock appreciation rights activity during the First Quarter:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock Appreciation Rights | | Shares | | Weighted-
Average
Exercise Price | | Weighted-
Average
Remaining
Contractual
Term | | Aggregate
Intrinsic
Value |
| | | (in Thousands) | | | | (in Years) | | (in Thousands) |
| Outstanding at December 31, 2022 | | 101 | | | $ | 55.31 | | | 0.9 | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| Forfeited or expired | | (26) | | | 80.22 | | | | | |
| Outstanding at April 1, 2023 | | 75 | | | 46.55 | | | 0.9 | | — | |
| Exercisable at April 1, 2023 | | 75 | | | $ | 46.55 | | | 0.9 | | $ | — | |
The aggregate intrinsic value shown in the table above is based on the exercise price for outstanding and exercisable rights at April 1, 2023.
Stock Appreciation Rights Outstanding and Exercisable. The following table summarizes information with respect to stock appreciation rights outstanding and exercisable at April 1, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock Appreciation Rights Outstanding | | Stock Appreciation Rights Exercisable |
Range of
Exercise Prices | | Number of
Shares | | Weighted-
Average
Exercise
Price | | Weighted-
Average
Remaining
Contractual
Term | | Number of
Shares | | Weighted-
Average
Exercise
Price |
| | | (in Thousands) | | | | (in Years) | | (in Thousands) | | |
$36.73 - $55.09 | | 75 | | | $ | 46.55 | | | 0.9 | | 75 | | | $ | 46.55 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total | | 75 | | | $ | 46.55 | | | 0.9 | | 75 | | | $ | 46.55 | |
Restricted Stock Units and Performance Restricted Stock Units. The following table summarizes restricted stock unit and performance restricted stock unit activity during the First Quarter:
| | | | | | | | | | | | | | |
Restricted Stock Units
and Performance Restricted Stock Units | | Number of Shares | | Weighted-Average
Grant Date Fair
Value Per Share |
| | | (in Thousands) | | |
| Nonvested at December 31, 2022 | | 1,967 | | | $ | 10.08 | |
| Granted | | — | | | — | |
| Vested | | (7) | | | 10.28 | |
| Forfeited | | (90) | | | 10.61 | |
| Nonvested at April 1, 2023 | | 1,870 | | | $ | 10.05 | |
The total fair value of restricted stock units vested was less than $0.1 million during the First Quarter. Vesting of performance restricted stock units is based on achievement of operating margin growth and achievement of sales growth and operating margin targets in relation to the performance of a certain identified peer group.
Long-Term Incentive Plans. On the date of the Company’s annual stockholders meeting, each non-employee director automatically receives a grant of restricted stock units which vest 100% on the earlier of one year from the date of grant or the date of the Company's next annual stockholders meeting, provided such director is providing services to the Company or a subsidiary of the Company on that date. Beginning with the grant in fiscal year 2021, non-employee directors may elect to defer receipt of all or a portion of the restricted stock units settled in common stock of the Company upon the vesting date. In addition, beginning in fiscal year 2021, non-employee directors may defer the cash portion of their annual fees. Each participant may also elect to have the cash portion of his or her annual fees for each calendar year treated as if invested in units of common stock of the Company.
8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables disclose changes in the balances of each component of accumulated other comprehensive income (loss), net of taxes (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the 13 Weeks Ended April 1, 2023 |
| | Currency
Translation
Adjustments | | Cash Flow Hedges | | | | |
| | | Forward
Contracts | | | | Pension
Plan | | Total |
| Beginning balance | $ | (90,681) | | | $ | 2,397 | | | | | $ | 11,966 | | | $ | (76,318) | |
| Other comprehensive income (loss) before reclassifications | 5,897 | | | (3,126) | | | | | — | | | 2,771 | |
| Tax (expense) benefit | — | | | 444 | | | | | — | | | 444 | |
| Amounts reclassed from accumulated other comprehensive income (loss) | — | | | (175) | | | | | — | | | (175) | |
| Tax (expense) benefit | — | | | 279 | | | | | — | | | 279 | |
| Total other comprehensive income (loss) | 5,897 | | | (2,786) | | | | | — | | | 3,111 | |
| Ending balance | $ | (84,784) | | | $ | (389) | | | | | $ | 11,966 | | | $ | (73,207) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the 13 Weeks Ended April 2, 2022 |
| | Currency
Translation
Adjustments | | Cash Flow Hedges | | | | |
| | | Forward
Contracts | | | | Pension
Plan | | Total |
| Beginning balance | $ | (75,601) | | | $ | 4,344 | | | | | $ | 3,982 | | | $ | (67,275) | |
| Other comprehensive income (loss) before reclassifications | (7,885) | | | 2,358 | | | | | — | | | (5,527) | |
| Tax (expense) benefit | — | | | 273 | | | | | — | | | 273 | |
| Amounts reclassed from accumulated other comprehensive income (loss) | — | | | 1,453 | | | | | — | | | 1,453 | |
| Tax (expense) benefit | — | | | 80 | | | | | — | | | 80 | |
| Total other comprehensive income (loss) | (7,885) | | | 1,098 | | | | | — | | | (6,787) | |
| Ending balance | $ | (83,486) | | | $ | 5,442 | | | | | $ | 3,982 | | | $ | (74,062) | |
See “Note 10—Derivatives and Risk Management” for additional disclosures about the Company’s use of derivatives.
9. SEGMENT INFORMATION
The Company reports segment information based on the “management approach.” The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments.
The Company manages its business primarily on a geographic basis. The Company’s reportable operating segments are comprised of (i) Americas, (ii) Europe and (iii) Asia. Each reportable operating segment includes sales to wholesale and distributor customers, and sales through Company-owned retail stores and e-commerce activities based on the location of the selling entity. The Americas segment primarily includes sales to customers based in Canada, Latin America and the United States. The Europe segment primarily includes sales to customers based in European countries, the Middle East and Africa. The Asia segment primarily includes sales to customers based in Australia, China (including Hong Kong, Macau and Taiwan), India, Indonesia, Japan, Malaysia, New Zealand, Singapore, South Korea and Thailand. Each reportable operating segment provides similar products and services.
The Company evaluates the performance of its reportable segments based on net sales and operating income (loss). Net sales for geographic segments are based on the location of the selling entity. Operating income (loss) for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. Corporate includes peripheral revenue generating activities from factories and intellectual property and general corporate expenses, including
certain administrative, legal, accounting, technology support costs, equity compensation costs, payroll costs attributable to executive management, brand management, product development, art, creative/product design, marketing, strategy, compliance and back office supply chain expenses that are not allocated to the various segments because they are managed at the corporate level internally. The Company does not include intercompany transfers between segments for management reporting purposes.
Summary information by operating segment was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the 13 Weeks Ended April 1, 2023 | | For the 13 Weeks Ended April 2, 2022 |
| | Net Sales | | Operating Income (Loss) | | Net Sales | | Operating Income (Loss) |
| Americas | $ | 137,931 | | | $ | 12,555 | | | $ | 161,927 | | | $ | 23,910 | |
| Europe | 105,673 | | | 6,969 | | | 124,551 | | | 19,568 | |
| Asia | 80,136 | | | 7,200 | | | 86,768 | | | 8,941 | |
| Corporate | 1,296 | | | (64,032) | | | 2,607 | | | (66,701) | |
| Consolidated | $ | 325,036 | | | $ | (37,308) | | | $ | 375,853 | | | $ | (14,282) | |
The following table reflects net sales for each class of similar products in the periods presented (in thousands, except percentage data):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the 13 Weeks Ended April 1, 2023 | | For the 13 Weeks Ended April 2, 2022 |
| | Net Sales | | Percentage of Total | | Net Sales | | Percentage of Total |
| Watches: | | | | | | | |
| Traditional watches | $ | 225,426 | | | 69.4 | % | | $ | 261,427 | | | 69.6 | % |
| Smartwatches | 24,400 | | | 7.5 | | | 37,984 | | | 10.1 | |
| Total watches | $ | 249,826 | | | 76.9 | % | | $ | 299,411 | | | 79.7 | % |
| Leathers | 40,265 | | | 12.4 | | | 34,185 | | | 9.1 | |
| Jewelry | 29,045 | | | 8.9 | | | 34,696 | | | 9.2 | |
| Other | 5,900 | | | 1.8 | | | 7,561 | | | 2.0 | |
| Total | $ | 325,036 | | | 100.0 | % | | $ | 375,853 | | | 100.0 | % |
10. DERIVATIVES AND RISK MANAGEMENT
Cash Flow Hedges. The primary risks managed by using derivative instruments are the fluctuations in global currencies that will ultimately be used by non-U.S. dollar functional currency subsidiaries to settle future payments of intercompany inventory transactions denominated in U.S. dollars. Specifically, the Company projects future intercompany purchases by its non-U.S. dollar functional currency subsidiaries generally over a period of up to 24 months. The Company enters into forward contracts, generally for up to 85% of the forecasted purchases, to manage fluctuations in global currencies that will ultimately be used to settle such U.S. dollar denominated inventory purchases. Additionally, the Company enters into forward contracts to manage fluctuations in Japanese yen exchange rates that will be used to settle future third-party inventory component purchases by a U.S. dollar functional currency subsidiary. Forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon settlement date and exchange rate. These forward contracts are designated as single cash flow hedges. Fluctuations in exchange rates will either increase or decrease the Company’s U.S. dollar equivalent cash flows from these inventory transactions, which will affect the Company’s U.S. dollar earnings. Gains or losses on the forward contracts are expected to offset these fluctuations to the extent the cash flows are hedged by the forward contracts.
For a derivative instrument that is designated and qualifies as a cash flow hedge, the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (loss), net of taxes and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.
As of April 1, 2023, the Company had the following outstanding forward contracts designated as cash flow hedges that were entered into to hedge future payments of inventory transactions (in millions):
| | | | | | | | | | | | | | | | | | | | |
| Functional Currency | | Contract Currency |
| Type | | Amount | | Type | | Amount |
| Euro | | 65.8 | | | U.S. dollar | | 70.5 | |
| Canadian dollar | | 35.4 | | | U.S. dollar | | 26.7 | |
| Mexican peso | | 144.4 | | | U.S. dollar | | 7.0 | |
| British pound | | 5.5 | | | U.S. dollar | | 6.8 | |
| Japanese yen | | 851.9 | | | U.S. dollar | | 6.6 | |
| Australian dollar | | 4.5 | | | U.S. dollar | | 3.1 | |
| U.S. dollar | | 8.4 | | | Japanese yen | | 1,090.0 | |
Non-designated Hedges. The Company also periodically enters into forward contracts to manage exchange rate risks associated with certain intercompany transactions and for which the Company does not elect hedge accounting treatment. As of April 1, 2023, the Company had non-designated forward contracts of $0.9 million on 15.8 million rand associated with a South African rand-denominated foreign subsidiary. Changes in the fair value of derivatives not designated as hedging instruments are recognized in earnings when they occur.
The gains and losses on cash flow hedges that were recognized in other comprehensive income (loss), net of taxes are set forth below (in thousands):
| | | | | | | | | | | |
| For the 13 Weeks Ended April 1, 2023 | | For the 13 Weeks Ended April 2, 2022 |
| Cash flow hedges: | | | |
| Forward contracts | $ | (2,682) | | | $ | 2,631 | |
| | | |
| Total gain (loss) recognized in other comprehensive income (loss), net of taxes | $ | (2,682) | | | $ | 2,631 | |
The following tables disclose the gains and losses on derivative instruments recorded in accumulated other comprehensive income (loss), net of taxes during the term of the hedging relationship and reclassified into earnings, and gains and losses on derivatives not designated as hedging instruments recorded directly to earnings (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative Instruments | | Condensed Consolidated
Statements of Income (Loss)
and Comprehensive
Income (Loss) Location | | Effect of Derivative
Instruments | | For the 13 Weeks Ended April 1, 2023 | | For the 13 Weeks Ended April 2, 2022 |
| Forward contracts designated as cash flow hedging instruments | | Cost of sales | | Total gain (loss) reclassified from accumulated other comprehensive income (loss) | | $ | 432 | | | $ | 1,002 | |
| Forward contracts designated as cash flow hedging instruments | | Other income (expense)-net | | Total gain (loss) reclassified from accumulated other comprehensive income (loss) | | $ | (328) | | | $ | 531 | |
| Forward contracts not designated as hedging instruments | | Other income (expense)-net | | Total gain (loss) recognized in income | | $ | 25 | | | $ | (54) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
The following table discloses the fair value amounts for the Company’s derivative instruments as separate asset and liability values, presents the fair value of derivative instruments on a gross basis, and identifies the line items in the condensed consolidated balance sheets in which the fair value amounts for these categories of derivative instruments are included (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Asset Derivatives | | Liability Derivatives |
| | | April 1, 2023 | | December 31, 2022 | | April 1, 2023 | | December 31, 2022 |
| Derivative Instruments | | Condensed
Consolidated
Balance Sheets
Location | | Fair
Value | | Condensed
Consolidated
Balance Sheets
Location | | Fair
Value | | Condensed
Consolidated
Balance Sheets
Location | | Fair
Value | | Condensed
Consolidated
Balance Sheets
Location | | Fair
Value |
| Forward contracts designated as cash flow hedging instruments | | Prepaid expenses and other current assets | | $ | 1,298 | | | Prepaid expenses and other current assets | | $ | 2,783 | | | Accrued expenses-other | | $ | 3,127 | | | Accrued expenses-other | | $ | 2,659 | |
| Forward contracts not designated as cash flow hedging instruments | | Prepaid expenses and other current assets | | — | | | Prepaid expenses and other current assets | | — | | | Accrued expenses-other | | 16 | | | Accrued expenses-other | | 16 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Forward contracts designated as cash flow hedging instruments | | Intangible and other assets-net | | — | | | Intangible and other assets-net | | 112 | | | Other long-term liabilities | | 82 | | | Other long-term liabilities | | 318 | |
| | | | | | | | | | | | | | | | |
| Total | | | | $ | 1,298 | | | | | $ | 2,895 | | | | | $ | 3,225 | | | | | $ | 2,993 | |
The following tables summarize the effects of the Company's derivative instruments on earnings (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Effect of Derivative Instruments |
| | For the 13 Weeks Ended April 1, 2023 | | For the 13 Weeks Ended April 2, 2022 |
| | Cost of Sales | | Other Income (Expense)-net | | Cost of Sales | | Other Income (Expense)-net |
| Total amounts of income and expense line items presented in the condensed consolidated statements of income (loss) and comprehensive income (loss) in which the effects of cash flow hedges are recorded | | $ | 164,319 | | | $ | 2,733 | | | $ | 191,540 | | | $ | 1,618 | |
| Gain (loss) on cash flow hedging relationships: | | | | | | | | |
Forward contracts designated as cash flow hedging instruments: | | | | | | | | |
Total gain (loss) reclassified from other comprehensive income (loss) | | $ | 432 | | | $ | (328) | | | $ | 1,002 | | | $ | 531 | |
| Forward contracts not designated as hedging instruments: | | | | | | | | |
| Total gain (loss) recognized in income | | $ | — | | | $ | 25 | | | $ | — | | | $ | (54) | |
At the end of the First Quarter, the Company had forward contracts designated as cash flow hedges with maturities extending through June 2024. As of April 1, 2023, an estimated net gain of $0.2 million is expected to be reclassified into earnings within the next twelve months at prevailing foreign currency exchange rates.
11. FAIR VALUE MEASUREMENTS
The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
ASC 820, Fair Value Measurement and Disclosures (“ASC 820”), establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
•Level 1 — Quoted prices in active markets for identical assets or liabilities.
•Level 2 — Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
•Level 3 — Unobservable inputs based on the Company’s assumptions.
ASC 820 requires the use of observable market data if such data is available without undue cost and effort.
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of April 1, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value at April 1, 2023 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
| Forward contracts | $ | — | | | $ | 1,298 | | | $ | — | | | $ | 1,298 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total | $ | — | | | $ | 1,298 | | | $ | — | | | $ | 1,298 | |
| Liabilities: | | | | | | | |
| Contingent consideration | $ | — | | | $ | — | | | $ | 1,332 | | | $ | 1,332 | |
| Forward contracts | — | | | 3,225 | | | — | | | 3,225 | |
| | | | | | | |
| Total | $ | — | | | $ | 3,225 | | | $ | 1,332 | | | $ | 4,557 | |
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value at December 31, 2022 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
| Forward contracts | $ | — | | | $ | 2,895 | | | $ | — | | | $ | 2,895 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total | $ | — | | | $ | 2,895 | | | $ | — | | | $ | 2,895 | |
| Liabilities: | | | | | | | |
| Contingent consideration | $ | — | | | $ | — | | | $ | 3,630 | | | $ | 3,630 | |
| Forward contracts | — | | | 2,993 | | | — | | | 2,993 | |
| | | | | | | |
| Total | $ | — | | | $ | 2,993 | | | $ | 3,630 | | | $ | 6,623 | |
The fair values of the Company’s forward contracts are based on published quotations of spot currency rates and forward points, which are converted into implied forward currency rates. See "Note 10—Derivatives and Risk Management", for additional disclosures about the forward contracts.
As of April 1, 2023, the fair value of the Company's debt excluding unamortized debt issuance costs and capital leases, was recorded at cost and had a carrying value of $241.4 million and had a fair value of approximately $192.9 million. The fair value of debt was based on observable market inputs.
During the First Quarter, $0.1 million of impairment charges were recorded for operating lease right-of-use ("ROU") assets with a carrying amount of $0.1 million. During the Prior Year Quarter, ROU assets with a carrying amount of $0.8 million were written down to a fair value of $0.5 million, resulting in impairment charges of $0.3 million.
The fair values of operating lease ROU assets and fixed assets related to retail stores were determined using Level 3 inputs, including forecasted cash flows and discount rates. The $0.1 million impairment expense in the First Quarter was recorded in other long-lived asset impairments in the Europe segment. Of the $0.3 million impairment expense in the Prior Year Quarter, $0.2 million and $0.1 million was recorded in other long-lived asset impairments in the Asia and Europe segments, respectively.
12. INTANGIBLE AND OTHER ASSETS
The following table summarizes intangible and other assets (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | April 1, 2023 | | December 31, 2022 |
| | | Useful | | Gross | | Accumulated | | Gross | | Accumulated |
| | Lives | | Amount | | Amortization | | Amount | | Amortization |
| Intangibles-subject to amortization: | | | | | | | | | | |
| Trademarks | | 10 yrs. | | $ | 3,846 | | | $ | 3,262 | | | $ | 3,728 | | | $ | 3,243 | |
| Customer lists | | 5 - 10 yrs. | | 398 | | | 391 | | | 279 | | | 266 | |
| Patents | | 3 - 20 yrs. | | 867 | | | 545 | | | 867 | | | 537 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Trade name | | 6 yrs. | | 4,502 | | | 2,626 | | | 4,502 | | | 2,439 | |
| Other | | 7 - 20 yrs. | | 341 | | | 206 | | | 342 | | | 195 | |
| Total intangibles-subject to amortization | | | | 9,954 | | | 7,030 | | | 9,718 | | | 6,680 | |
| Intangibles-not subject to amortization: | | | | | | | | | | |
| Trade names | | | | 8,880 | | | | | 8,876 | | | |
| Other assets: | | | | | | | | | | |
| | | | | | | | | | |
| Deposits | | | | 16,727 | | | | | 16,487 | | | |
| | | | | | | | | | |
| Deferred tax asset-net | | | | 17,626 | | | | | 17,262 | | | |
| Restricted cash | | | | 5,036 | | | | | 5,243 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Debt issuance costs | | | | 2,966 | | | | | 3,124 | | | |
| Other | | | | 1,692 | | | | | 1,969 | | | |
| Total other assets | | | | 44,047 | | | | | 44,085 | | | |
| Total intangible and other assets | | | | $ | 62,881 | | | $ | 7,030 | | | $ | 62,679 | | | $ | 6,680 | |
| Total intangible and other assets-net | | | | | | $ | 55,851 | | | | | $ | 55,999 | |
Amortization expense for intangible assets was approximately $0.2 million and $0.6 million for the First Quarter and the Prior Year Quarter, respectively. Estimated aggregate future amortization expense by fiscal year for intangible assets is as follows (in thousands):
| | | | | | | | |
| Fiscal Year | | Amortization
Expense |
| 2023 (remaining) | | $ | 687 | |
| 2024 | | $ | 905 | |
| 2025 | | $ | 715 | |
| 2026 | | $ | 123 | |
| 2027 | | $ | 105 | |
| Thereafter | | $ | 389 | |
13. COMMITMENTS AND CONTINGENCIES
Litigation. The Company is occasionally subject to litigation or other legal proceedings in the normal course of its business. 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 condition of the Company.
14. LEASES
The Company's leases consist primarily of retail space, offices, warehouses, distribution centers, equipment and vehicles. The Company determines if an agreement contains a lease at inception based on the Company's right to the economic benefits of the leased assets and its right to direct the use of the leased asset. ROU assets represent the Company's right to use an underlying asset, and ROU liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term. As the Company's leases do not provide an implicit rate, the Company uses its estimated incremental borrowing rate based on the information available at the commencement date adjusted for the lease term and lease country to determine the present value of the lease payments.
Some leases include one or more options to renew at the Company's discretion, with renewal terms that can extend the lease from approximately one to ten additional years. The renewal options are not included in the measurement of ROU assets and ROU liabilities unless the Company is reasonably certain to exercise the optional renewal periods. Short-term leases are leases having a term of twelve months or less at inception. The Company does not record a related lease asset or liability for short-term leases. The Company has certain leases containing lease and non-lease components which are accounted for as a single lease component. The Company has certain lease agreements where lease payments are based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. The variable portion of these lease payments is not included in the Company's lease liabilities. The Company's lease agreements do not contain any significant restrictions or covenants other than those that are customary in such arrangements.
The components of lease expense were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| Lease Cost | | Condensed Consolidated
Statements of Income (Loss)
and Comprehensive
Income (Loss) Location | | For the 13 Weeks Ended April 1, 2023 | | For the 13 Weeks Ended April 2, 2022 | | | | |
Operating lease cost(1)(2) | | SG&A | | $ | 17,877 | | | $ | 20,192 | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Short-term lease cost | | SG&A | | $ | 215 | | | $ | 184 | | | | | |
| Variable lease cost | | SG&A | | $ | 6,120 | | | $ | 6,948 | | | | | |
_______________________________________________
(1) Includes sublease income, which was immaterial.
(2) Excludes the impact of deferred or abated rent amounts
The following table discloses supplemental balance sheet information for the Company’s leases (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Leases | | Condensed
Consolidated
Balance Sheets
Location | | April 1, 2023 | | December 31, 2022 |
| Assets | | | | | | |
| Operating | | Operating lease ROU assets | | $ | 147,179 | | | $ | 156,947 | |
| | | | | | |
| | | | | | |
| Liabilities | | | | | | |
| Current: | | | | | | |
| Operating | | Current operating lease liabilities | | $ | 45,642 | | | $ | 49,702 | |
| | | | | | |
| Noncurrent: | | | | | | |
| Operating | | Long-term operating lease liabilities | | $ | 140,801 | | | $ | 150,188 | |
| | | | | | |
The following table discloses the weighted-average remaining lease term and weighted-average discount rate for the Company's leases:
| | | | | | | | | | | | | | |
| Lease Term and Discount Rate | | April 1, 2023 | | December 31, 2022 |
| Weighted-average remaining lease term: | | | | |
| Operating leases | | 5.7 years | | 5.6 years |
| | | | |
| Weighted-average discount rate: | | | | |
| Operating leases | | 14.2 | % | | 14.1 | % |
| | | | |
Future minimum lease payments by year as of April 1, 2023 were as follows (in thousands):
| | | | | | | | | | |
| Fiscal Year | | Operating Leases | | |
| 2023 (remaining) | | $ | 58,533 | | | |
| 2024 | | 55,266 | | | |
| 2025 | | 39,174 | | | |
| 2026 | | 31,076 | | | |
| 2027 | | 22,408 | | | |
| Thereafter | | 79,989 | | | |
| | | | |
| Total lease payments | | $ | 286,446 | | | |
| Less: Interest | | 100,003 | | | |
| Total lease obligations | | $ | 186,443 | | | |
Supplemental cash flow information related to leases was as follows (in thousands):
| | | | | | | | | | | |
| For the 13 Weeks Ended April 1, 2023 | | For the 13 Weeks Ended April 2, 2022 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases(1) | $ | 22,362 | | | $ | 24,439 | |
| | | |
| | | |
| | | |
| Leased assets obtained in exchange for new operating lease liabilities | 6,263 | | | 1,494 | |
_______________________________________________
(1) Excludes the impact of deferred or abated rent amounts
As of April 1, 2023, the Company did not have any material operating or finance leases that have been signed but not commenced.
15. DEBT ACTIVITY
On September 26, 2019, the Company and Fossil Partners L.P., as the U.S. borrowers, and Fossil Group Europe GmbH, Fossil Asia Pacific Limited, Fossil (Europe) GmbH, Fossil (UK) Limited and Fossil Canada Inc., as the non-U.S. borrowers, certain other subsidiaries of the Company from time to time party thereto designated as borrowers, and certain subsidiaries of the Company from time to time party thereto as guarantors, entered into a $275.0 million secured asset-based revolving credit agreement (the “Revolving Facility”) with JPMorgan Chase Bank, N.A. as administrative agent (the "ABL Agent"), J.P. Morgan AG, as French collateral agent, JPMorgan Chase Bank, N.A., Citizens Bank, N.A. and Wells Fargo Bank, National Association as joint bookrunners and joint lead arrangers, and Citizens Bank, N.A. and Wells Fargo Bank, National Association, as co-syndication agents and each of the lenders from time to time party thereto (the "ABL Lenders"). On November 8, 2022, the Company entered into Amendment No. 4 (the "Amendment") to the Revolving Facility. The Amendment, among other things, (i) extended the maturity date of the credit facility to November 8, 2027 (provided, that if the Company has any indebtedness in an amount in excess of $35 million that matures prior to November 8, 2027, the maturity date of the credit facility shall be the 91st day prior to the maturity date of such other indebtedness) and (ii) changed the calculation methodology of the borrowing base to include the value of certain of the Company’s intellectual property in such methodology and to provide for seasonal increases to certain advance rates.
In November 2021, the Company sold $150.0 million aggregate principal amount of 7.00% senior notes due 2026 (the “Notes”), generating net proceeds of approximately $141.7 million. The Notes were issued pursuant to an indenture (the "Base Indenture") and a first supplemental indenture (the "First Supplemental Indenture" and, together with the Base Indenture, the "Indenture") with The Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee").
The Notes are general unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured and unsubordinated indebtedness, and will rank senior in right of payment to the Company’s future subordinated indebtedness, if any. The Notes are effectively subordinated to all of the Company’s existing and future secured indebtedness, to the extent of the value of the assets securing such indebtedness, and the Notes are structurally subordinated to all existing and future indebtedness and other liabilities (including trade payables) of the
Company’s subsidiaries (excluding any amounts owed by such subsidiaries to the Company). The Notes bear interest at the rate of 7.00% per annum. Interest on the Notes is payable quarterly in arrears on February 28, May 31, August 31 and November 30 of each year. The Notes mature on November 30, 2026.
The Company may redeem the Notes for cash in whole or in part at any time at its option. Prior to November 30, 2023, the redemption price will be $25.00 per $25.00 principal amount of Notes, plus a "make-whole” premium consisting of the greater of (1) 1.0% of the principal amount of the Note and (2) the excess of (a) the present value at such redemption date of (i) the redemption price of the Note at November 30, 2023 plus (ii) all required interest payments due on the Note through November 30, 2023 (excluding accrued but unpaid interest to the redemption date), computed using a discount rate equal to the Treasury Rate as of such redemption date plus 50 basis points discounted to the redemption date on a semi-annual basis (assuming a 360- day year consisting of twelve 30-day months), over (b) the principal amount of the Note, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. On and after November 30, 2023, the Company may redeem the Notes (i) on or after November 30, 2023 and prior to November 30, 2024, at a price equal to $25.50 per $25.00 principal amount of Notes, (ii) on or after November 30, 2024 and prior to November 30, 2025, at a price equal to $25.25 per $25.00 principal amount of Notes and (iii) on or after November 30, 2025, at a price equal to $25.00 per $25.00 principal amount of Notes, plus (in each case noted above) accrued and unpaid interest, if any, to, but excluding, the date of redemption.
The Indenture contains customary events of default and cure provisions. If an event of default (other than an event of default of the type described in the following sentence) occurs and is continuing with respect to the Notes, the Trustee may, and at the direction of the registered holders of at least 25% in aggregate principal amount of the outstanding debt securities of the Notes shall, declare the principal amount plus accrued and unpaid interest, premium and additional amounts, if any, on the Notes to be due and payable immediately. If an event of default relating to certain events of bankruptcy, insolvency or reorganization of the Company occurs, the principal amount plus accrued and unpaid interest, and premium, if any, on the Notes will become immediately due and payable without any action on the part of the Trustee or any holder of the Notes.
The Revolving Facility provides that the ABL Lenders may extend revolving loans in an aggregate principal amount not to exceed $225.0 million at any time outstanding (the “Revolving Credit Commitment”), of which up to $125.0 million is available under a U.S. facility, an aggregate of $80.0 million is available under a European facility, $10.0 million is available under a Hong Kong facility, $5.0 million is available under a French facility, and $5.0 million is available under a Canadian facility, in each case, subject to the borrowing base availability limitations described below. The Revolving Facility also includes an up to $45.0 million subfacility for the issuance of letters of credit (the “Letters of Credit”). The French facility includes a $1.0 million subfacility for swingline loans, and the European facility includes a $7.0 million subfacility for swingline loans. The Revolving Facility is subject to a line cap equal to the lesser of the total Revolving Credit Commitment and the aggregate borrowing bases under the U.S. facility, the European facility, the Hong Kong facility, the French facility and the Canadian facility. Loans under the Revolving Facility may be made in U.S. dollars, Canadian dollars, euros, Hong Kong dollars or pounds sterling.
The Revolving Facility is an asset-based facility, in which borrowing availability is subject to a borrowing base equal to:(a) with respect to the Company, the sum of (i) the lesser of (x) 90% of the appraised net orderly liquidation value of eligible U.S. finished goods inventory and (y) 65% of the lower of cost or market value of eligible U.S. finished goods inventory, plus (ii) 85% of the eligible U.S. accounts receivable, plus (iii) 90% of eligible U.S. credit card accounts receivable, plus (iv) the lesser of (x) 40% of the appraised net orderly liquidation value of eligible U.S. intellectual property and (y) $20.0 million, minus (v) the aggregate amount of reserves, if any, established by the ABL Agent; (b) with respect to each non-U.S. borrower (except for the French Borrower), the sum of (i) the lesser of (x) 90% of the appraised net orderly liquidation value of eligible foreign finished goods inventory of such non-U.S. borrower and (y) 65% of the lower of cost or market value of eligible foreign finished goods inventory of such non-U.S. borrower, plus (ii) 85% of the eligible foreign accounts receivable of such non-U.S. borrower, minus (iii) the aggregate amount of reserves, if any, established by the ABL Agent; and (c) with respect to the French Borrower, (i) 85% of eligible French accounts receivable minus (ii) the aggregate amount of reserves, if any, established by the ABL Agent. Not more than 60% of the aggregate borrowing base under the Revolving Facility may consist of the non-U.S. borrowing bases. The above advance rates (other than the advance rates with respect to intellectual property) are seasonally increased by 5% (e.g. from 90% to 95%) during the period commencing on the date of delivery of the borrowing base certificate with respect to the second fiscal month of the Company and ending on the last day of the period covered by the borrowing base certificate delivered with respect to the fifth fiscal month of the Company.
The Revolving Facility also includes a commitment fee, payable quarterly in arrears, of 0.250% or 0.375% determined by reference to the average daily unused portion of the overall commitment under the Revolving Facility. The ABL Borrowers will pay the ABL Agent, on the account of the issuing ABL Lenders, an issuance fee of 0.125% for any issued Letters of Credit.
The ABL Borrowers have the right to request an increase to the commitments under the Revolving Facility or any subfacility in an aggregate principal amount not to exceed $75.0 million in increments no less than $10.0 million, subject to certain terms and conditions as defined in the Revolving Facility.
The Revolving Facility is secured by guarantees by the Company and certain of its domestic subsidiaries. Additionally, the Company and such subsidiaries have granted liens on all or substantially all of their assets in order to secure the obligations under the Revolving Facility. In addition, the Swiss Borrower, the Hong Kong Borrower, the French Borrower, the German Borrower and the Canadian Borrower, and the other non-U.S. borrowers from time to time party to the Revolving Facility are required to enter into security instruments with respect to all or substantially all of their assets that can be pledged under applicable local law, and certain of their respective subsidiaries may guarantee the respective non-U.S. obligations under the Revolving Facility.
The Revolving Facility contains customary affirmative and negative covenants and events of default, such as compliance with annual audited and quarterly unaudited financial statements disclosures. Upon an event of default, the ABL Agent will have the right to declare the revolving loans and other obligations outstanding immediately due and payable and all commitments immediately terminated or reduced, subject to cure periods and grace periods set forth in the Revolving Facility.
As of April 1, 2023, the Company had $150.0 million and $91.0 million outstanding under the Notes and Revolving Facility, respectively. The Company had net borrowings of $18.0 million under the Revolving Facility during the First Quarter. Amounts available under the Revolving Facility were reduced by any amounts outstanding under standby Letters of Credit. As of April 1, 2023, the Company had available borrowing capacity of $90.1 million under the Revolving Facility. As of April 1, 2023, the Company had unamortized debt issuance costs of $6.4 million recorded in long-term debt and $3.0 million recorded in intangible and other assets-net on the Company's consolidated balance sheets. The Company incurred approximately $2.6 million and $1.0 million of interest expense related to the Notes and Revolving Facility, respectively, during the First Quarter. The Company incurred approximately $0.6 million of interest expense related to the amortization of debt issuance costs during the First Quarter. At April 1, 2023, the Company was in compliance with all debt covenants related to its credit facilities.
16. RESTRUCTURING
In the First Quarter, the Company announced its Transform and Grow strategy ("TAG") designed to reduce operating costs, improve operating margins, and advance the Company’s commitment to profitable growth. Included in this strategy is a new restructuring plan, (the "TAG Plan"), that is intended to lower operating expenses and reduce working capital. TAG is expected to be implemented over a two year period and is intended to generate estimated annualized benefits of at least $100 million by the end of 2024. The TAG Plan includes a reduction of the Company’s current global workforce in 2023 by approximately eight percent, which includes employee reductions resulting from store closures. The TAG Plan will also include the exit of certain product offerings. The Company estimates approximately $25 million to $30 million in total charges associated with the TAG Plan, all expected to be incurred during fiscal 2023.
The following table shows a summary of TAG Plan charges (in thousands):
| | | | | | | |
| For the 13 Weeks Ended April 1, 2023 | | |
| Cost of sales | $ | 5,264 | | | |
| Selling, general and administrative expenses | 7,097 | | | |
| Total | $ | 12,361 | | | |
The following table shows a rollforward of the accrued liability related to the Company’s TAG Plan (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the 13 Weeks Ended April 1, 2023 |
| Liabilities | | | | | | | | Liabilities |
| December 31, 2022 | | Charges | | Cash Payments | | | | April 1, 2023 |
| | | | | | | | | |
| Professional services | — | | | 36 | | | 16 | | | | | 20 | |
| Severance and employee-related benefits | — | | | 7,061 | | | 2,561 | | | | | 4,500 | |
| Charges related to exits of certain product offerings | — | | | 5,264 | | | — | | | | | 5,264 | |
| Total | $ | — | | | $ | 12,361 | | | $ | 2,577 | | | | | $ | 9,784 | |
TAG Plan restructuring charges by operating segment were as follows (in thousands):
| | | | | |
| For the 13 Weeks Ended April 1, 2023 |
| Americas | $ | 2,959 | |
| Europe | 3,955 | |
| Asia | 4,268 | |
| Corporate | 1,179 | |
| Consolidated | $ | 12,361 | |
In fiscal year 2022, the Company completed its New World Fossil 2.0 (“NWF 2.0”) restructuring program it launched in 2019. The following table shows a rollforward of the accrued liability related to the Company’s NWF 2.0 restructuring plan (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| For the 13 Weeks Ended April 1, 2023 |
| Liabilities | | | | | | | | Liabilities |
| December 31, 2022 | | | | Cash Payments | | | | April 1, 2023 |
| | | | | | | | | |
| Professional services | $ | 74 | | | | | $ | 14 | | | | | $ | 60 | |
| Severance and employee-related benefits | 2,821 | | | | | 2,234 | | | | | 587 | |
| Total | $ | 2,895 | | | | | $ | 2,248 | | | | | $ | 647 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the 13 Weeks Ended April 2, 2022 |
| Liabilities | | | | | | | | Liabilities |
| January 2, 2021 | | Charges | | Cash Payments | | Non-cash Items | | April 2, 2022 |
| Store closures | $ | 300 | | | $ | 405 | | | $ | 349 | | | $ | 92 | | | $ | 264 | |
| Professional services | 643 | | | 135 | | | 421 | | | — | | | 357 | |
| Severance and employee-related benefits | 4,388 | | | 2,011 | | | 1,871 | | | — | | | 4,528 | |
| Total | $ | 5,331 | | | $ | 2,551 | | | $ | 2,641 | | | $ | 92 | | | $ | 5,149 | |
NWF 2.0 restructuring charges by operating segment were as follows (in thousands):
| | | | | | | | | | | |
| For the 13 Weeks Ended April 2, 2022 | | | | | | |
| Americas | $ | 47 | | | | | | | |
| Europe | 1,250 | | | | | | | |
| Asia | 1,163 | | | | | | | |
| Corporate | 91 | | | | | | | |
| Consolidated | $ | 2,551 | | | | | | | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of the financial condition and results of operations of Fossil Group, Inc. and its subsidiaries for the thirteen week period ended April 1, 2023 (the “First Quarter”) as compared to the thirteen week period ended April 2, 2022 (the “Prior Year Quarter”). This discussion should be read in conjunction with the condensed consolidated financial statements and the related notes thereto.
Overview
We are a global design, marketing and distribution company that specializes in consumer fashion accessories. Our principal offerings include an extensive line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts, and sunglasses. In the watch and jewelry product categories, we have a diverse portfolio of globally recognized owned and licensed brand names under which our products are marketed.
Our products are distributed globally through various distribution channels including wholesale in countries where we have a physical presence, direct to the consumer through our retail stores and commercial websites and through third-party distributors in countries where we do not maintain a physical presence. Our products are offered at varying price points to meet the needs of our customers, whether they are value-conscious or luxury oriented. Based on our range of accessory products, brands, distribution channels and price points, we are able to target style-conscious consumers across a wide age spectrum on a global basis.
Known or Anticipated Trends
Based on our recent operating results and current perspectives on our operating environment, we anticipate the following trends will continue to impact our operating results:
Economic Environment Impacting Consumer Spending Ability and Preferences: We believe inflationary pressures, increasing interest rates and recessionary fears are impacting wholesale customer behavior, including cautiousness in placing advance orders for merchandise. In addition, we expect continued pressure on consumer discretionary spending as the U.S. federal funds rate fluctuates and credit markets tighten. We expect high rates of inflation to continue in 2023 in many of our major markets.
Foreign Currencies: At prevailing exchange rates, foreign currency translation would negatively impact our financial results in the first half and positively impact our financial results in the second half of fiscal year 2023, when compared with fiscal year 2022. However, foreign currency translation may continue to have a negative impact on our financial results throughout the year.
Inventory Levels: A slowing of consumer demand in our core categories, in part due to macro economic factors such as higher inflation, has resulted in excess inventory with many of our wholesale customers. With higher marketplace inventories and a rapidly changing economic environment, we expect retailers to rationalize their inventory needs. We continue to proactively manage our inventory purchases to mitigate our cash flow and inventory risks.
Russia-Ukraine Conflict: Our operations in Russia consist of sales through a third-party distributor. Sales to this distributor are currently on hold. Our sales in Russia are not material to our financial results. We have no other operations, including supply chain, in Russia or Ukraine. However, the continuation of the Russia-Ukraine military conflict and/or an escalation of the conflict beyond its current scope may weaken the global economy and could result in additional inflationary pressures and supply chain constraints.
COVID-19: The phase and pace of recovery from the COVID-19 pandemic has continued to vary across markets globally. In Asia, including mainland China particularly, markets emerged from COVID-19 restrictions more gradually and over a longer time, compared to the pace of recovery in the Americas and Europe. We expect the pressures the COVID-19 pandemic put on the global economies, supply chains and financial markets to have a lesser impact on fiscal year 2023, as compared to recent years, although the extent of the impact is uncertain.
Supply Chain: Our business is subject to the risks inherent in global sourcing supply. We rely on domestic and foreign suppliers to provide us with merchandise in a timely manner and at favorable prices. Certain key components in our products come from limited sources of supply, which exposes us to potential supply shortages that could disrupt the manufacture and sale of our products. Any interruption or delay in the supply of key components could significantly harm our ability to meet scheduled product deliveries to our customers and cause us to lose sales. A material increase in the cost of our products or transportation without any offsetting price increases may significantly reduce our profits. Among our foreign suppliers, China is the source of a substantial majority of our imports. We expect fewer impacts from international transit times and transportation
costs in the current fiscal year compared with the prior fiscal year. Additionally, a disruption in the flow of finished goods from China may significantly decrease our profits.
Data: We depend on information technology systems, the Internet and computer networks for a substantial portion of our retail and e-commerce businesses, including credit card transaction authorization and processing. We also receive and store personal information about our customers and employees, the protection of which is critical to us. In the normal course of our business, we collect, retain, and transmit certain sensitive and confidential customer information, including credit card information, over public networks. Despite the security measures we currently have in place, our facilities and systems and those of our third party service providers have been, and will continue to be, vulnerable to theft of physical information, security breaches, hacking attempts, computer viruses and malware, ransomware, phishing, lost data and programming and/or human errors. To date, none of these risks, intrusions, attacks or human error have resulted in any material liability to us. While we carry insurance policies that would provide liability coverage for certain of these matters, if we experience a significant security incident, we could be subject to liability or other damages that exceed our insurance coverage. In addition, we cannot be certain that such insurance policies will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim.
Business Strategies and Outlook: We remain cautious in our overall outlook for fiscal 2023, as we anticipate the challenging operating conditions which emerged in the prior year are likely to continue for some time. To align with these conditions, we recently announced our TAG designed to reduce operating expenses, improve operating margins and advance our path to profitable growth.
The “Transform” aspect of our TAG program focuses on optimizing our core categories, brands, geographies and channels. Through this more focused lens, we intend to restructure our operations to achieve lower operating expenses and to reduce our working capital, primarily through lower inventory purchases in fiscal year 2023. The reduction in operating expenses is intended to generate an estimated $100 million in annualized benefits by the end of 2024. This is partly achieved by a reduction in the Company’s global workforce in 2023 by 8%, which includes employees from planned store closures. We have implemented and plan to implement additional programs and initiatives to optimize our operations and de-emphasize non-core parts of our business, which includes non-core brands in certain geographies and certain brands and offerings within our smartwatch category.
The “Growth” aspect of our TAG program focuses on investing in three key growth pillars with three growth enablers to drive sustained and profitable revenue growth. These growth pillars are: (1) revitalize the Fossil Brand, (2) grow our watches and jewelry in our core portfolio brands and (3) to focus on a more premium watch segment. We believe that these growth pillars are best enabled by: (1) our digital transformation, (2) marketing transformation and (3) technology investments.
For a more complete discussion of the risks facing our business, see “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Operating Segments
We operate our business in three segments which are divided into geographies. Net sales for each geographic segment are based on the location of the selling entity, and each reportable segment provides similar products and services.
Americas: The Americas segment is comprised of sales from our operations in the United States, Canada and Latin America. Sales are generated through diversified distribution channels that include wholesalers, distributors, and direct to consumer. Within each channel, we sell our products through a variety of physical points of sale, distributors and e-commerce channels. In the direct to consumer channel, we had 149 Company-owned stores as of the end of the First Quarter and an extensive collection of products available through our owned websites.
Europe: The Europe segment is comprised of sales to customers based in European countries, the Middle East and Africa. Sales are generated through diversified distribution channels that include wholesalers, distributors and direct to consumer. Within each channel, we sell our products through a variety of physical points of sale, distributors, and e-commerce channels. In the direct to consumer channel, we had 99 Company-owned stores as of the end of the First Quarter and an extensive collection of products available through our owned websites.
Asia: The Asia segment is comprised of sales to customers based in Australia, China (including Hong Kong, Macau and Taiwan), India, Indonesia, Japan, Malaysia, New Zealand, Singapore, South Korea and Thailand. Sales are generated through diversified distribution channels that include wholesalers, distributors and direct to consumer. Within each channel, we sell our products through a variety of physical points of sale, distributors, and e-commerce channels. In the direct to consumer channel,
we had 79 Company-owned stores as of the end of the First Quarter and an extensive collection of products available through our owned websites.
Key Measures of Financial Performance and Key Non-GAAP Financial Measures
Constant Currency Financial Information: As a multinational enterprise, we are exposed to changes in foreign currency exchange rates. The translation of the operations of our foreign-based entities from their local currencies into U.S. dollars is sensitive to changes in foreign currency exchange rates and can have a significant impact on our reported financial results. In general, our overall financial results are affected positively by a weaker U.S. dollar and are affected negatively by a stronger U.S. dollar as compared to the foreign currencies in which we conduct our business.
As a result, in addition to presenting financial measures in accordance with accounting principles generally accepted in the United States of America (GAAP), our discussion contains references to constant currency financial information, which is a non-GAAP financial measure. To calculate net sales on a constant currency basis, net sales for the current fiscal year 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. We present constant currency information to provide investors with a basis to evaluate how our 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. Reconciliations between constant currency financial information and the most directly comparable GAAP measure are included where applicable.
Adjusted EBITDA, Adjusted Operating Income (Loss), Adjusted Net Income (Loss) and Adjusted Earnings (Loss) per Share: Adjusted EBITDA, Adjusted operating income (loss), Adjusted net income (loss) and Adjusted earnings (loss) per share are non-GAAP financial measures. We define Adjusted EBITDA as our income (loss) before income taxes, 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. We define Adjusted operating income (loss) as operating income (loss) before impairment expense and restructuring expense. We define 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. We have included Adjusted EBITDA, Adjusted operating income (loss), Adjusted net income (loss) and Adjusted earnings (loss) per share herein because they are widely used by investors for valuation and for comparing our financial performance with the performance of our competitors. We also use these non-GAAP financial measures to monitor and compare the financial performance of our operations. Our presentation of Adjusted EBITDA, Adjusted operating income (loss), Adjusted net income (loss) and Adjusted earnings (loss) per share may not be comparable to similarly titled measures other companies report. Adjusted EBITDA, Adjusted operating income (loss), Adjusted net income (loss) and Adjusted earnings (loss) per share are not intended to be used as alternatives to any measure of our performance in accordance with GAAP.
Digital Sales: Due to shifting consumer traffic patterns and digital buying trends, we continue to accelerate our investments and capabilities in our global digital platform, and digital sales provide an important metric for our company. The digital space provides unique ways of engaging our customers. Digital sales include sales on our own e-commerce sites, global third party platforms, and wholesale dot com sites.
Comparable Retail Sales: Both stores and e-commerce sites are included in comparable retail sales in the thirteenth month of operation. Stores that experience a gross square footage increase of 10% or more due to an expansion and/or relocation are removed from the comparable store sales base, but are included in total sales. These stores are returned to the comparable store sales base in the thirteenth month following the expansion and/or relocation. Comparable retail sales also exclude the effects of foreign currency fluctuations.
Store Counts: While macro economic factors have shifted sales away from traditional brick and mortar stores towards digital channels, store counts continue to provide a key metric for management. Over time, we have made progress right-sizing our fleet of stores, focusing on closing our least profitable stores, and the size and quality of our store fleet have a direct impact on our sales and profitability.
Total Liquidity: We define total liquidity as cash and cash equivalents plus available borrowings on our revolving credit facility. We monitor and forecast total liquidity to ensure we can meet our financial obligations.
Components of Results of Operations
Revenues from sales of our products, including those that are subject to inventory consignment agreements, are recognized when control of the product is transferred to the customer and in an amount that reflects the consideration we expect to be entitled in exchange for the product. We accept limited returns from customers. We continually monitor returns and maintain a provision for estimated returns based upon historical experience and any specific issues identified. Product returns
are accounted for as reductions to revenue and cost of sales and increases to customer liabilities and other current assets to the extent the returned product is resalable.
Cost of Sales includes raw material costs, assembly labor, assembly overhead including depreciation expense, assembly warehousing costs and shipping and handling costs related to the movement of finished goods from assembly locations to sales distribution centers and from sales distribution centers to customer locations. Additionally, cost of sales includes customs duties, product packaging cost, royalty cost associated with sales of licensed products, the cost of molding and tooling, inventory shrinkage and damages and restructuring charges.
Gross Profit and gross profit margin are influenced by our diversified business model that includes, but is not limited to: (i) product categories that we distribute; (ii) the multiple brands, including both owned and licensed, we offer within several product categories; (iii) the geographical presence of our businesses; and (iv) the different distribution channels we sell to or through.
The attributes of this diversified business model produce varying ranges of gross profit margin. Generally, on a historical basis, our fashion branded traditional watch and jewelry offerings produce higher gross profit margins than our smartwatches and leather goods offerings. In addition, in most product categories that we offer, brands with higher retail price points generally produce higher gross profit margins compared to those of lower retail priced brands. However, smartwatches carry relatively lower margins than our other major product categories. Gross profit margins related to sales in our Europe and Asia businesses are historically higher than our Americas business, primarily due to the following factors: (i) premiums charged in comparison to retail prices on products sold in the U.S.; (ii) the product sales mix in our international businesses, in comparison to our Americas business, is comprised more predominantly of watches and jewelry that generally produce higher gross profit margins than leather goods; and (iii) the watch sales mix in our Europe and Asia businesses, in comparison to our Americas business, are comprised more predominantly of higher priced licensed brands.
Operating Expenses include selling, general and administrative ("SG&A"), other long-lived asset impairments and restructuring charges. SG&A expenses include selling and distribution expenses primarily consisting of sales and distribution labor costs, sales distribution center and warehouse facility costs, depreciation expense related to sales distribution and warehouse facilities, the four-wall operating costs of our retail stores, point-of-sale expenses, advertising expenses and art, design and product development labor costs. SG&A also includes general and administrative expenses primarily consisting of administrative support labor and support costs such as treasury, legal, information services, accounting, internal audit, human resources, executive management costs and costs associated with stock-based compensation. Restructuring charges include costs to reorganize, refine and optimize our Company’s infrastructure and store closures under our TAG and New World Fossil initiatives.
Results of Operations
Quarterly Periods Ended April 1, 2023 and April 2, 2022
Consolidated Net Sales. Net sales decreased $50.9 million, or 13.5% (10.7% in constant currency), for the First Quarter as compared to the Prior Year Quarter, with sales decreases in all three geographic segments. Wholesale sales declined 22.4% (20.1% in constant currency), partially offset by 4.0% growth (7.8% in constant currency) in our direct to consumer channels. From a category perspective, traditional watch sales decreased 13.8% (11.0% in constant currency). Net sales in smartwatches decreased 35.8% (33.5% in constant currency), reflecting lower consumer demand across geographies and channels as compared to the prior year period. The leathers category grew 17.8% (20.6% in constant currency) driven by promotions, and jewelry sales decreased 16.4% (12.7% in constant currency) reflecting reduced wholesale replenishment during the First Quarter. From a brand perspective, sales decreased throughout most of our brand portfolio, with the most predominant declines in MICHAEL KORS and EMPORIO ARMANI brands. FOSSIL branded sales declined slightly (increased slightly in constant currency) with growth in leathers and traditional watches largely offset by declines in smartwatches and jewelry. Global comparable retail sales increased 13% primarily due to increases in our owned e-commerce websites and stores. We have reduced our store footprint by 25 stores (7%), since the end of the Prior Year Quarter.
The following table sets forth consolidated net sales by segment (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the 13 Weeks Ended April 1, 2023 | | For the 13 Weeks Ended April 2, 2022 | | Growth (Decline) |
| | Net Sales | | Percentage
of Total | | Net Sales | | Percentage
of Total | | Dollars | | Percentage As Reported | | Percentage Constant Currency |
| Americas | $ | 137.9 | | | 42.4 | % | | $ | 161.9 | | | 43.1 | % | | $ | (24.0) | | | (14.8) | % | | (14.6) | % |
| Europe | 105.7 | | | 32.5 | | | 124.6 | | | 33.1 | | | (18.9) | | | (15.2) | | | (11.2) | |
| Asia | 80.1 | | | 24.6 | | | 86.8 | | | 23.1 | | | (6.7) | | | (7.7) | | | (1.6) | |
| Corporate | 1.3 | | | 0.5 | | | 2.6 | | | 0.7 | | | (1.3) | | | (50.0) | | | (50.0) | |
| Total | $ | 325.0 | | | 100.0 | % | | $ | 375.9 | | | 100.0 | % | | $ | (50.9) | | | (13.5) | % | | (10.7) | % |
Net sales information by product category is summarized as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the 13 Weeks Ended April 1, 2023 | | For the 13 Weeks Ended April 2, 2022 | | | | | | |
| | | | Growth (Decline) |
| Net Sales | | Percentage
of Total | | Net Sales | | Percentage
of Total | | Dollars | | Percentage As Reported | | Percentage Constant Currency |
| Watches: | | | | | | | | | | | | | |
| Traditional watches | $ | 225.4 | | | 69.4 | % | | $ | 261.4 | | | 69.6 | % | | $ | (36.0) | | | (13.8) | % | | (11.0) | % |
| Smartwatches | 24.4 | | | 7.5 | | | 38.0 | | | 10.1 | | | (13.6) | | | (35.8) | | | (33.5) | |
| Total watches | $ | 249.8 | | | 76.9 | % | | $ | 299.4 | | | 79.7 | % | | $ | (49.6) | | | (16.6) | | | (13.9) | |
| Leathers | 40.3 | | | 12.4 | | | 34.2 | | | 9.1 | | | 6.1 | | | 17.8 | | | 20.6 | |
| Jewelry | 29.0 | | | 8.9 | | | 34.7 | | | 9.2 | | | (5.7) | | | (16.4) | | | (12.7) | |
| Other | 5.9 | | | 1.8 | | | 7.6 | | | 2.0 | | | (1.7) | | | (22.4) | | | (18.4) | |
| Total | $ | 325.0 | | | 100.0 | % | | $ | 375.9 | | | 100.0 | % | | $ | (50.9) | | | (13.5) | % | | (10.7) | % |
In the First Quarter, the translation of foreign-based net sales into U.S. dollars decreased reported net sales by $10.6 million (2.8%), including unfavorable impacts of $5.3 million, $5.0 million and $0.3 million in our Asia, Europe and Americas segments, respectively, as compared to the Prior Year Quarter.
Stores. The following table sets forth the number of stores on the dates indicated below:
| | | | | | | | | | | | | | | | | | | | | | | |
| April 2, 2022 | | Opened | | Closed | | April 1, 2023 |
| Americas | 159 | | 0 | | 10 | | 149 |
| Europe | 115 | | 0 | | 16 | | 99 |
| Asia | 78 | | 5 | | 4 | | 79 |
| Total stores | 352 | | 5 | | 30 | | 327 |
Americas Net Sales. Americas net sales decreased $24.0 million, or 14.8% (14.6% in constant currency), during the First Quarter in comparison to the Prior Year Quarter. Sales decreases were largely in the MICHAEL KORS brand and partially offset by sales increases in FOSSIL. The sales decreases were mainly in wholesale, and partially offset by increases in our owned e-commerce and store channels. Comparable retail sales increased significantly during the First Quarter, primarily due to increases in our owned e-commerce websites and our stores.
The following table sets forth product net sales and the changes in product net sales on both a reported and constant-currency basis from period to period for the Americas segment (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the 13 Weeks Ended April 1, 2023 | | For the 13 Weeks Ended April 2, 2022 | | | | | | |
| | | | Growth (Decline) |
| Net Sales | | Percentage
of Total | | Net Sales | | Percentage
of Total | | Dollars | | Percentage As Reported | | Percentage Constant Currency |
| Watches: | | | | | | | | | | | | | |
| Traditional watches | $ | 91.4 | | | 66.3 | % | | $ | 115.9 | | | 71.6 | % | | $ | (24.5) | | | (21.1) | % | | (21.3) | % |
| Smartwatches | 12.5 | | | 9.1 | | | 17.3 | | | 10.7 | | | (4.8) | | | (27.7) | | | (27.7) | |
| Total watches | $ | 103.9 | | | 75.4 | % | | $ | 133.2 | | | 82.3 | % | | $ | (29.3) | | | (22.0) | | | (22.1) | |
| Leathers | 27.1 | | | 19.7 | | | 19.2 | | | 11.9 | | | 7.9 | | | 41.1 | | | 42.7 | |
| Jewelry | 5.4 | | | 3.9 | | | 7.9 | | | 4.9 | | | (2.5) | | | (31.6) | | | (30.4) | |
| Other | 1.5 | | | 1.0 | | | 1.6 | | | 0.9 | | | (0.1) | | | (6.3) | | | 14.3 | |
| Total | $ | 137.9 | | | 100.0 | % | | $ | 161.9 | | | 100.0 | % | | $ | (24.0) | | | (14.8) | % | | (14.6) | % |
Europe Net Sales. Europe net sales decreased $18.9 million, or 15.2% (11.2% in constant currency), during the First Quarter in comparison to the Prior Year Quarter. Our sales across much of the Eurozone decreased, with the greatest decreases in Germany, France and the U.K. From a channel perspective, sales decreases in wholesale were partially offset by increases in e-commerce and stores on a constant currency basis. Comparable retail sales increased moderately during the First Quarter, primarily due to increased store and owned e-commerce sales.
The following table sets forth product net sales and the changes in product net sales on both a reported and constant-currency basis from period to period for the Europe segment (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the 13 Weeks Ended April 1, 2023 | | For the 13 Weeks Ended April 2, 2022 | | | | | | |
| | | | Growth (Decline) |
| Net Sales | | Percentage
of Total | | Net Sales | | Percentage
of Total | | Dollars | | Percentage As Reported | | Percentage Constant Currency |
| Watches: | | | | | | | | | | | | | |
| Traditional watches | $ | 71.8 | | | 67.9 | % | | $ | 81.1 | | | 65.1 | % | | $ | (9.3) | | | (11.5) | % | | (7.3) | % |
| Smartwatches | 6.6 | | | 6.2 | | | 12.7 | | | 10.2 | | | (6.1) | | | (48.0) | | | (45.7) | |
| Total watches | $ | 78.4 | | | 74.1 | % | | $ | 93.8 | | | 75.3 | % | | $ | (15.4) | | | (16.4) | | | (12.5) | |
| Leathers | 6.8 | | | 6.4 | | | 7.4 | | | 5.9 | | | (0.6) | | | (8.1) | | | (2.7) | |
| Jewelry | 18.5 | | | 17.5 | | | 21.1 | | | 16.9 | | | (2.6) | | | (12.3) | | | (8.5) | |
| Other | 2.0 | | | 2.0 | | | 2.3 | | | 1.9 | | | (0.3) | | | (13.0) | | | (8.7) | |
| Total | $ | 105.7 | | | 100.0 | % | | $ | 124.6 | | | 100.0 | % | | $ | (18.9) | | | (15.2) | % | | (11.2) | % |
Asia Net Sales. Net sales in Asia decreased $6.7 million, or 7.7% (1.6% in constant currency), during the First Quarter in comparison to the Prior Year Quarter. The sales decreases were largely driven by mainland China and partially offset by sales increases in India. Sales decreased in the EMPORIO ARMANI brand and were partially offset by sales growth in the MICHAEL KORS brand. Comparable retail sales increased slightly during the First Quarter, driven by our retail stores.
The following table sets forth product net sales and the changes in product net sales on both a reported and constant-currency basis from period to period for the Asia segment (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the 13 Weeks Ended April 1, 2023 | | For the 13 Weeks Ended April 2, 2022 | | | | | | |
| | | | Growth (Decline) |
| Net Sales | | Percentage
of Total | | Net Sales | | Percentage
of Total | | Dollars | | Percentage As Reported | | Percentage Constant Currency |
| Watches: | | | | | | | | | | | | | |
| Traditional watches | $ | 62.3 | | | 77.8 | % | | $ | 64.4 | | | 74.2 | % | | $ | (2.1) | | | (3.3) | % | | 2.8 | % |
| Smartwatches | 5.3 | | | 6.6 | | | 8.0 | | | 9.2 | | | (2.7) | | | (33.8) | | | (27.5) | |
| Total watches | $ | 67.6 | | | 84.4 | % | | $ | 72.4 | | | 83.4 | % | | $ | (4.8) | | | (6.6) | | | (0.6) | |
| Leathers | 6.4 | | | 8.0 | | | 7.6 | | | 8.8 | | | (1.2) | | | (15.8) | | | (13.2) | |
| Jewelry | 5.1 | | | 6.4 | | | 5.6 | | | 6.5 | | | (0.5) | | | (8.9) | | | (1.8) |
| Other | 1.0 | | | 1.2 | | | 1.2 | | | 1.3 | | | (0.2) | | | (16.7) | | | 8.3 | |
| Total | $ | 80.1 | | | 100.0 | % | | $ | 86.8 | | | 100.0 | % | | $ | (6.7) | | | (7.7) | % | | (1.6) | % |
Gross Profit. Gross profit of $160.7 million in the First Quarter decreased 12.8% in comparison to $184.3 million in the Prior Year Quarter. Our gross profit margin rate increased to 49.4% in the First Quarter compared to 49.0% in the Prior Year Quarter, primarily reflecting timing of licensor minimum royalty costs and favorable product and region mix. These benefits were partially offset by an unfavorable currency impact, increased promotions and a $5.3 million restructuring charge related to the exit of certain product offerings within our smartwatch category.
Operating Expenses. Total operating expenses in the First Quarter decreased slightly to $198.0 million or 60.9% of net sales, in comparison to $198.6 million or 52.8% of net sales in the Prior Year Quarter. SG&A expenses were $190.9 million in the First Quarter compared to $195.8 million in the Prior Year Quarter. As a percentage of net sales, SG&A expenses increased to 58.7% in the First Quarter as compared to 52.1% in Prior Year Quarter, mainly driven by deleveraging on lower sales. Operating expenses in the First Quarter included $7.1 million of restructuring costs, primarily related to employee costs, while the Prior Year Quarter included $2.6 million in restructuring costs. The translation of foreign-denominated expenses during the First Quarter decreased operating expenses by $5.1 million as a result of the stronger U.S. dollar.
Operating Income (Loss). Operating loss in the First Quarter was $37.3 million as compared to an operating loss of $14.3 million in the Prior Year Quarter. The increased operating loss was primarily driven by decreased sales and partially offset by a higher gross profit margin rate. As a percentage of net sales, operating margin was (11.5)% in the First Quarter compared to (3.8)% in the Prior Year Quarter. Operating margin rate in the First Quarter included an unfavorable impact of 260 basis points due to changes in foreign currencies.
Operating income (loss) by segment is summarized as follows (dollars in millions):
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| | For the 13 Weeks Ended April 1, 2023 | | For the 13 Weeks Ended April 2, 2022 | | Change | | Operating Margin % |
| | | | Dollars | | Percentage | | 2023 | | 2022 |
| Americas | $ | 12.6 | | | $ | 23.9 | | | $ | (11.3) | | | (47.3) | % | | 9.1 | % | | 14.8 | % |
| Europe | 7.0 | | | 19.6 | | | (12.6) | | | (64.3) | | | 6.6 | | | 15.7 | |
| Asia | 7.2 | | | 8.9 | | | (1.7) | | | (19.1) | | | 9.0 | | | 10.3 | |
| Corporate | (64.1) | | | (66.7) | | | 2.6 | | | 3.9 | | | | | |
| Total operating income (loss) | $ | (37.3) | | | $ | (14.3) | | | $ | (23.0) | | | (160.8) | % | | (11.5) | % | | (3.8) | % |
Interest Expense. Interest expense increased by $1.0 million during the First Quarter compared to the Prior Year Quarter, primarily driven by an increased debt balance.
Other Income (Expense)-Net. During the First Quarter, other income (expense)-net was income of $2.7 million in comparison to income of $1.6 million in the Prior Year Quarter. This change was primarily driven by increased net foreign currency gains in the First Quarter as compared to the Prior Year Quarter.
Provision for Income Taxes. Income tax expense for the First Quarter was $1.6 million, resulting in an effective income tax rate of (4.1)%. For the Prior Year Quarter, income tax expense was $4.7 million, resulting in an effective income tax rate of (28.1)%. The effective tax rate in the First Quarter was favorable as compared to the Prior Year Quarter due to reduced foreign
taxes. No tax benefit has been accrued on the First Quarter U.S. tax losses and certain foreign tax losses due to the uncertainty of whether they can be used in the future. The First Quarter tax rate is negative because foreign income tax expense is accrued on certain foreign entities with positive taxable income when the consolidated operating results are a loss.
Net Income (Loss) Attributable to Fossil Group, Inc. First Quarter net income (loss) attributable to Fossil Group, Inc. was a net loss of $41.3 million, or $0.80 per diluted share, in comparison to a net loss of $21.5 million, or $0.41 per diluted share, in the Prior Year Quarter. During the First Quarter, currencies unfavorably affected diluted earnings (loss) by approximately $0.08, when compared to the Prior Year Quarter.
Adjusted EBITDA. The following table reconciles Adjusted EBITDA to the most directly comparable GAAP financial measure, which is income (loss) before income taxes. Certain line items presented in the table below, when aggregated, may not foot due to rounding (dollars in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the 13 Weeks Ended | | |
| | | April 1, 2023 | | April 2, 2022 | | |
| | | Dollars | | % of Net Sales | | Dollars | | % of Net Sales | | |
| Income (loss) before income taxes | | | $ | (39.6) | | | (12.2)% | | $ | (16.7) | | | (4.4) | % | | |
| Plus: | | | | | | | | | | | |
| Interest expense | | | 5.0 | | | | | 4.0 | | | | | |
| Amortization and depreciation | | | 5.1 | | | | | 6.2 | | | | | |
| Impairment expense | | | 0.1 | | | | | 0.3 | | | | | |
| Other non-cash charges | | | (0.2) | | | | | (0.2) | | | | | |
| Stock-based compensation | | | 1.4 | | | | | 2.2 | | | | | |
| Restructuring expenses | | | 7.1 | | | | | 2.6 | | | | | |
| Restructuring cost of sales | | | 5.3 | | | | | — | | | | | |
| | | | | | | | | | | |
| Less: | | | | | | | | | | | |
| Interest income | | | 0.6 | | | | | 0.1 | | | | | |
| Adjusted EBITDA | | | $ | (16.4) | | | (5.0) | % | | $ | (1.7) | | | (0.5) | % | | |
Adjusted Operating Income (Loss), Adjusted Net Income (Loss) and Adjusted Earnings (Loss) per Share. The following tables reconcile Adjusted operating income (loss), Adjusted net income (loss) and Adjusted earnings (loss) per share to the most directly comparable GAAP financial measures, which are operating income (loss), net income (loss) attributable to Fossil Group, Inc. and diluted earnings (loss) per share, respectively. Certain line items presented in the table below, when aggregated, may not foot due to rounding.
| | | | | | | | | | | | | | | | | | | |
| For the 13 Weeks Ended April 1, 2023 |
| ($ in millions, except per share data): | As Reported | Restructuring Cost of Sales | Other Long-Lived Asset Impairment | | Restructuring Expenses | | As Adjusted |
| Operating income (loss) | $ | (37.3) | | $ | 5.3 | | $ | 0.1 | | | $ | 7.1 | | | $ | (24.8) | |
| Operating margin (% of net sales) | (11.5) | % | | | | | | (7.7) | % |
| Interest expense | 5.0 | | — | | — | | | — | | | 5.0 | |
| Other income (expense) - net | 2.7 | | — | | — | | | — | | | 2.7 | |
| Income (loss) before income taxes | (39.6) | | 5.3 | | 0.1 | | | 7.1 | | | (27.1) | |
| Provision for income taxes | 1.6 | | 1.1 | | — | | | 1.5 | | | 4.2 | |
| Less: net income attributable to noncontrolling interest | 0.1 | | — | | — | | | — | | | 0.1 | |
| Net income (loss) attributable to Fossil Group, Inc. | $ | (41.3) | | 4.2 | | $ | — | | | $ | 5.6 | | | (31.5) | |
| Diluted earnings (loss) per share | $ | (0.80) | | $ | 0.08 | | $ | — | | | $ | 0.11 | | | $ | (0.61) | |
| | | | | | | | | | | | | | | | |
| For the 13 Weeks Ended April 2, 2022 |
| ($ in millions, except per share data): | As Reported | Other Long-Lived Asset Impairment | | Restructuring Expenses | | As Adjusted |
| Operating income (loss) | $ | (14.3) | | $ | 0.3 | | | $ | 2.6 | | | $ | (11.4) | |
| Operating margin (% of net sales) | (3.8) | % | | | | | (3.0) | % |
| Interest expense | (4.0) | | — | | | — | | | (4.0) | |
| Other income (expense) - net | 1.6 | | — | | | — | | | 1.6 | |
| Income (loss) before income taxes | (16.7) | | 0.3 | | | 2.6 | | | (13.8) | |
| Provision for income taxes | 4.7 | | 0.1 | | | 0.5 | | | 5.3 | |
| Less: Net income attributable to noncontrolling interest | 0.1 | | — | | | — | | | 0.1 | |
| Net income (loss) attributable to Fossil Group, Inc. | $ | (21.5) | | $ | 0.2 | | | $ | 2.0 | | | $ | (19.3) | |
| Diluted earnings (loss) per share | $ | (0.41) | | $ | — | | | $ | 0.04 | | | $ | (0.37) | |
Liquidity and Capital Resources
Our cash and cash equivalents balance at the end of the First Quarter was $127.1 million, including $124.9 million held by foreign subsidiaries, in comparison to cash and cash equivalents of $162.6 million at the end of the Prior Year Quarter and $198.7 million at the end of fiscal year 2022. Generally, starting in the third quarter, our cash needs begin to increase, typically reaching a peak in the September-November time frame as we increase inventory levels in advance of the holiday season. Our quarterly cash requirements are also impacted by debt repayments, restructuring charges, strategic investments such as acquisitions, share repurchases and other capital expenditures.
At the end of the First Quarter, we had net working capital of $499.3 million compared to net working capital of $504.5 million at the end of the Prior Year Quarter. At the end of the First Quarter, we had $0.5 million of short-term borrowings and $234.6 million in long-term debt including unamortized issuance costs compared to $0.6 million of short-term borrowings and $183.9 million in long-term debt including unamortized issuance costs at the end of the Prior Year Quarter.
Operating Activities. Cash used in operating activities is net income (loss) adjusted for certain non-cash items and changes in assets and liabilities. Cash used in operating activities in the First Quarter decreased as compared to the Prior Year Quarter and was primarily due to cash of $62.1 million used by working capital items, a net loss of $41.2 million, partially offset by net non-cash items of $17.4 million.
Investing Activities. Investing cash flows primarily consist of capital expenditures and are offset by proceeds from the sale of property, plant and equipment.
Financing Activities. Financing cash flows primarily consist of borrowings and repayments of debt. The $15.6 million decrease in financing cash flows was primarily due to less net borrowings during the First Quarter as compared to the Prior Year Quarter under the Revolving Facility.
Material Cash Requirements. We have various payment obligations as part of our ordinary course of business. Our material cash requirements include: (1) operating lease obligations (see "Note 14—Leases" within the Consolidated Financial Statements); (2) debt repayments (see "Note 15—Debt Activity" within the Consolidated Financial Statements); (3) non-cancellable purchase obligations; (4) minimum royalty payments; and (5) employee wages, benefits, and incentives. The expected timing of payments of our obligations is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the timing of receipt of goods or services, or changes to agreed-upon amounts for some obligations. In addition, some of our purchasing requirements are not current obligations and are therefore not included above. For example, some of these requirements are not handled through binding contracts or are fulfilled by vendors on a purchase order basis within short time horizons. Moreover, we may be subject to additional material cash requirements that are contingent upon the occurrence of certain events, e.g., legal contingencies, uncertain tax positions (see "Note 5—Income Taxes" within the Consolidated Financial Statements) and other matters.
For fiscal year 2023, we expect total capital expenditures to be approximately $15 million. Our capital expenditure budget is an estimate and is subject to change.
Sources of Liquidity. We believe cash flows from operations, combined with existing cash on hand and amounts available under our credit facilities will be sufficient to fund our cash needs for the foreseeable future, not including the maturities of long-term debt. Although we believe we have adequate sources of liquidity in the short-term and long-term, the success of our operations, in light of the market volatility and uncertainty as a result of the COVID-19 pandemic, among other factors, could impact our business and liquidity. In the event our liquidity is insufficient, we may be required to limit our spending or sell assets or equity or debt securities.
The following table shows our sources of liquidity (in millions):
| | | | | | | | | | | | | | | | |
| | April 1, 2023 | | April 2, 2022 | | |
| Cash and cash equivalents | | $ | 127.1 | | | $ | 162.6 | | | |
| Revolver availability | | 90.1 | | | 98.5 | | | |
| Total liquidity | | $ | 217.2 | | | $ | 261.1 | | | |
Notes: In November 2021, we sold $150.0 million aggregate principal amount of our 7.00% senior notes due 2026 (the "Notes"), generating net proceeds of approximately $141.7 million. The Notes are our general unsecured obligations. The Notes bear interest at the rate of 7.00% per annum. Interest on the Notes is payable quarterly in arrears on February 28, May 31, August 31 and November 30 of each year. The Notes mature on November 30, 2026. We may redeem the Notes for cash in whole or in part at any time at our option. Prior to November 30, 2023, the redemption price will be $25.00 per $25.00 principal amount of Notes, plus a “make-whole” premium plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. On and after November 30, 2023 we may redeem the Notes (i) on or after November 30, 2023 and prior to November 30, 2024, at a price equal to $25.50 per $25.00 principal amount of Notes, (ii) on or after November 30, 2024 and prior to November 30, 2025, at a price equal to $25.25 per $25.00 principal amount of Notes and (iii) on or after November 30, 2025, at a price equal to $25.00 per $25.00 principal amount of Notes, plus (in each case noted above) accrued and unpaid interest, if any, to, but excluding, the date of redemption.
Revolving Facility: On September 26, 2019, we and Fossil Partners L.P., as the U.S. borrowers, and Fossil Group Europe GmbH, Fossil Asia Pacific Limited, Fossil (Europe) GmbH, Fossil (UK) Limited and Fossil Canada Inc., as the non-U.S. borrowers, certain other of our subsidiaries from time to time party thereto designated as borrowers, and certain of our subsidiaries from time to time party thereto as guarantors, entered into a secured asset-based revolving credit agreement (as amended from time to time, the “Revolving Facility”) with JPMorgan Chase Bank, N.A. as administrative agent (the "ABL Agent"), J.P. Morgan AG, as French collateral agent, JPMorgan Chase Bank, N.A., Citizens Bank, N.A. and Wells Fargo Bank, National Association as joint bookrunners and joint lead arrangers, and Citizens Bank, N.A. and Wells Fargo Bank, National
Association, as co-syndication agents and each of the lenders from time to time party thereto (the "ABL Lenders"). On November 8, 2022, we entered into Amendment No. 4 (the "Amendment”) to the Revolving Facility. The Amendment, among other things, (i) extended the maturity date of the credit facility to November 8, 2027 (provided, that if we have any indebtedness in an amount in excess of $35 million that matures prior to November 8, 2027, the maturity date of the credit facility shall be the 91st day prior to the maturity date of such other indebtedness) and (ii) changed the calculation methodology of the borrowing base to include the value of certain of our intellectual property in such methodology and to provide for seasonal increases to certain advance rates.
The Revolving Facility provides that the ABL Lenders may extend revolving loans in an aggregate principal amount not to exceed $225.0 million at any time outstanding (the “Revolving Credit Commitment”), of which up to $125.0 million is available under a U.S. facility, an aggregate of $80.0 million is available under a European facility, $10.0 million is available under a Hong Kong facility, $5.0 million is available under a French facility, and $5.0 million is available under a Canadian facility, in each case, subject to the borrowing base availability limitations described below. The Revolving Facility also includes an up to $45.0 million subfacility for the issuance of letters of credit (the “Letters of Credit”). The French facility includes a $1.0 million subfacility for swingline loans, and the European facility includes a $7.0 million subfacility for swingline loans. The Revolving Facility is subject to a line cap equal to the lesser of the total Revolving Credit Commitment and the aggregate borrowing bases under the U.S. facility, the European facility, the Hong Kong facility, the French facility and the Canadian facility. Loans under the Revolving Facility may be made in U.S. dollars, Canadian dollars, euros, Hong Kong dollars or pounds sterling.
The Revolving Facility is an asset-based facility, in which borrowing availability is subject to a borrowing base equal to:(a) with respect to us, the sum of (i) the lesser of (x) 90% of the appraised net orderly liquidation value of eligible U.S. finished goods inventory and (y) 65% of the lower of cost or market value of eligible U.S. finished goods inventory, plus (ii) 85% of the eligible U.S. accounts receivable, plus (iii) 90% of eligible U.S. credit card accounts receivable, plus (iv) the lesser of (x) 40% of the appraised net orderly liquidation value of eligible U.S. intellectual property and (y) $20.0 million, minus (v) the aggregate amount of reserves, if any, established by the ABL Agent; (b) with respect to each non-U.S. borrower (except for the French Borrower), the sum of (i) the lesser of (x) 90% of the appraised net orderly liquidation value of eligible foreign finished goods inventory of such non-U.S. borrower and (y) 65% of the lower of cost or market value of eligible foreign finished goods inventory of such non-U.S. borrower, plus (ii) 85% of the eligible foreign accounts receivable of such non-U.S. borrower, minus (iii) the aggregate amount of reserves, if any, established by the ABL Agent; and (c) with respect to the French Borrower, (i) 85% of eligible French accounts receivable minus (ii) the aggregate amount of reserves, if any, established by the ABL Agent. Not more than 60% of the aggregate borrowing base under the Revolving Facility may consist of the non-U.S. borrowing bases.
The above advance rates (other than the advance rate with respect to intellectual property) are seasonally increased by 5% (e.g. from 90% to 95%) during the period commencing on the date of delivery of the borrowing base certificate with respect to the second fiscal month of the Company and ending on the last day of the period covered by the borrowing base certificate delivered with respect to the fifth fiscal month of the Company.
First Quarter Activity: We had net borrowings of $18.0 million under the Revolving Facility during the First Quarter at an average interest rate of 6.3%. As of April 1, 2023, we had $150.0 million outstanding under the Notes and $91.0 million outstanding under the Revolving Facility. We also had unamortized debt issuance costs of $6.4 million recorded in long-term debt and $3.0 million recorded in intangible and other assets-net on the condensed consolidated balance sheets. In addition, we had $4.4 million of outstanding standby letters of credit at April 1, 2023. Amounts available under the Revolving Facility are reduced by any amounts outstanding under standby letters of credit. As of April 1, 2023, we had available borrowing capacity of $90.1 million under the Revolving Facility. At April 1, 2023, we were in compliance with all debt covenants related to our credit facilities.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods reported. On an on-going basis, we evaluate our estimates and judgments, including those related to product returns, inventories, long-lived asset impairment, impairment of trade names, income taxes and warranty costs. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Our estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
There have been no changes to the critical accounting policies and estimates disclosed in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Forward-Looking Statements
The statements contained in this Quarterly Report on Form10-Q that are not historical facts, including, but not limited to, statements regarding our expected financial position, results of operations, business and financing plans found in this "Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations" and "Item 3. Quantitative and Qualitative Disclosures About Market Risk," 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 words "may," "believes," "will," "should," "seek," "forecast," "outlook," "estimate," "continue," "anticipate," "intend," "could," "would," "project," "predict," "potential," "plan," "expect" or the negative or plural of these words or similar expressions identify forward-looking statements. 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: increased political uncertainty, the effect of worldwide economic conditions; the effect of the COVID-19 pandemic; risks related to the success of the multi-year profit improvement initiative; significant changes in consumer spending patterns or preferences; interruptions or delays in the supply of key components or products; acts of war or acts of terrorism; loss of key facilities; data breach or information systems disruptions; changes in foreign currency valuations in relation to the U.S. dollar; lower levels of consumer spending resulting from a general economic downturn or generally reduced shopping activity caused by public safety or consumer confidence concerns; the performance of our products within the prevailing retail environment; customer acceptance of both new designs and newly-introduced product lines; changes in the mix of product sales; the effects of vigorous competition in the markets in which we operate; compliance with debt covenants and other contractual provisions and meeting debt service obligation; risks related to the success of our business strategy; the termination or non-renewal of material licenses; risks related to foreign operations and manufacturing; changes in the costs of materials and labor; government regulation and tariffs; our ability to secure and protect trademarks and other intellectual property rights; levels of traffic to and management of our retail stores; loss of key personnel; and the outcome of current and possible future litigation.
In addition to the factors listed above, our actual results may differ materially due to the other risks and uncertainties discussed in our Quarterly Reports on Form 10-Q and the risks and uncertainties set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Accordingly, readers of this Quarterly Report on Form 10-Q should consider these facts in evaluating the information and are cautioned not to place undue reliance on the forward-looking statements contained herein. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.