Fossil Group, Inc 10-Q for FY2021 Q3
Fossil Group, Inc. (FOSL)
10-Q
2021-11-12
For: 2021-10-02
View Original
Added on
April 11, 2026
About this 10-Q
Fossil Group, Inc filed this 10-Q on November 12, 2021, covering the quarter ended October 2, 2021 (FY2021 Q3).
Headline figures
Quarter ended October 2, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $491.83M
- up 12.9% from $435.49M a year earlier
- Net income
- $31.92M
- up 96.8% from net income of $16.22M a year earlier
- Diluted EPS
- $0.60
- up 93.5% from $0.31 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________________
FORM 10-Q
__________________________________________________________________
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended: October 2, 2021
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission file number: 000-19848
__________________________________________________________________
(Exact name of registrant as specified in its charter)
__________________________________________________________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
(972 ) 234-2525
(Registrant’s telephone number, including area code)
__________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Ticker Symbol | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act (check one):
| Large accelerated filer | ☐ | ☒ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the registrant’s common stock outstanding as of November 4, 2021: 52,145,738
FOSSIL GROUP, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED OCTOBER 2, 2021
INDEX
| Page | ||||||||
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
IN THOUSANDS
| October 2, 2021 | January 2, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable - net of allowances for doubtful accounts of $ | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
Property, plant and equipment - net of accumulated depreciation of $ | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Intangible and other assets-net | |||||||||||
| Total long-term assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Short-term and current portion of long-term debt | |||||||||||
| Accrued expenses: | |||||||||||
| Current operating lease liabilities | |||||||||||
| Compensation | |||||||||||
| Royalties | |||||||||||
| Customer liabilities | |||||||||||
| Transaction taxes | |||||||||||
| Other | |||||||||||
| Income taxes payable | |||||||||||
| Total current liabilities | |||||||||||
| Long-term income taxes payable | |||||||||||
| Deferred income tax liabilities | |||||||||||
| Long-term debt | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
| Total long-term liabilities | |||||||||||
| Commitments and contingencies (Note 13) | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock, | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive income (loss) | ( | ( | |||||||||
| Total Fossil Group, Inc. stockholders’ equity | |||||||||||
| Noncontrolling interests | |||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See notes to the unaudited condensed consolidated financial statements.
4
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 October 2, 2021 | For the 13 Weeks Ended October 3, 2020 | For the 39 Weeks Ended October 2, 2021 | For the 40 Weeks Ended October 3, 2020 | ||||||||||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||||||||||||||
| Trade name impairments | |||||||||||||||||||||||||||||||||||
| Other long-lived asset impairments | |||||||||||||||||||||||||||||||||||
| Restructuring charges | |||||||||||||||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||||||||||||||
| Operating income (loss) | ( | ||||||||||||||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||||||||||||||
| Other income (expense) - net | ( | ( | |||||||||||||||||||||||||||||||||
| Income (loss) before income taxes | ( | ||||||||||||||||||||||||||||||||||
| Provision for income taxes | ( | ( | |||||||||||||||||||||||||||||||||
| Net income (loss) | ( | ||||||||||||||||||||||||||||||||||
| Less: Net income (loss) attributable to noncontrolling interests | ( | ||||||||||||||||||||||||||||||||||
| Net income (loss) attributable to Fossil Group, Inc. | $ | $ | $ | $ | ( | ||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of taxes: | |||||||||||||||||||||||||||||||||||
| Currency translation adjustment | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Cash flow hedges - net change | ( | ( | |||||||||||||||||||||||||||||||||
| Total other comprehensive income (loss) | ( | ( | |||||||||||||||||||||||||||||||||
| Total comprehensive income (loss) | ( | ( | |||||||||||||||||||||||||||||||||
| Less: Comprehensive income (loss) attributable to noncontrolling interests | ( | ||||||||||||||||||||||||||||||||||
| Comprehensive income (loss) attributable to Fossil Group, Inc. | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||||
| Earnings (loss) per share: | |||||||||||||||||||||||||||||||||||
| Basic | $ | $ | $ | $ | ( | ||||||||||||||||||||||||||||||
| Diluted | $ | $ | $ | $ | ( | ||||||||||||||||||||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||||||||||||||||||||
| Basic | |||||||||||||||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||||||||||||||
See notes to the unaudited condensed consolidated financial statements.
5
FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
UNAUDITED
IN THOUSANDS
| For the 13 Weeks Ended October 2, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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, July 3, 2021 | $ | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued upon exercise of stock options, stock appreciation rights and restricted stock units | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of common stock for employee tax withholding | — | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Retirement of common stock | ( | ( | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, October 2, 2021 | $ | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| For the 13 Weeks Ended October 3, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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, July 4, 2020 | $ | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued upon exercise of stock options, stock appreciation rights and restricted stock units | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of common stock for employee tax withholding | — | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Retirement of common stock | ( | ( | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, October 3, 2020 | $ | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| For the 39 Weeks Ended October 2, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 2, 2021 | $ | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued upon exercise of stock options, stock appreciation rights and restricted stock units | ( | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of common stock for employee tax withholding | — | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Retirement of common stock | ( | ( | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, October 2, 2021 | $ | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
6
| For the 40 Weeks Ended October 3, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 28, 2019 | $ | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued upon exercise of stock options, stock appreciation rights and restricted stock units | ( | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of common stock for employee tax withholding | — | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Retirement of common stock | ( | ( | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | ( | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, October 3, 2020 | $ | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
See notes to the unaudited condensed consolidated financial statements.
7
FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
IN THOUSANDS
| For the 39 Weeks Ended October 2, 2021 | For the 40 Weeks Ended October 3, 2020 | |||||||||||||
| Operating Activities: | ||||||||||||||
| Net income (loss) | $ | $ | ( | |||||||||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||||||||
| Depreciation, amortization and accretion | ||||||||||||||
| Non-cash lease expense | ||||||||||||||
| Stock-based compensation | ||||||||||||||
| Decrease in allowance for returns and markdowns | ( | ( | ||||||||||||
| Gain on disposal of assets | ( | ( | ||||||||||||
| Property, plant and equipment and other long-lived asset impairment losses | ||||||||||||||
| Trade name impairment losses | ||||||||||||||
| Non-cash restructuring charges | ||||||||||||||
| Bad debt expense | ||||||||||||||
| Other non-cash items | ||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||
| Accounts receivable | ( | |||||||||||||
| Inventories | ( | |||||||||||||
| Prepaid expenses and other current assets | ( | |||||||||||||
| Accounts payable | ||||||||||||||
| Accrued expenses | ( | |||||||||||||
| Income taxes | ( | |||||||||||||
| Operating lease liabilities | ( | ( | ||||||||||||
| Net cash (used in) provided by operating activities | ( | |||||||||||||
| Investing Activities: | ||||||||||||||
| Additions to property, plant and equipment | ( | ( | ||||||||||||
| Decrease (increase) in intangible and other assets | ( | |||||||||||||
| Proceeds from the sale of property, plant and equipment and other | ||||||||||||||
| Net cash provided by (used in) investing activities | ( | |||||||||||||
| Financing Activities: | ||||||||||||||
| Acquisition of common stock for employee tax withholdings | ( | ( | ||||||||||||
| Debt borrowings | ||||||||||||||
| Debt payments | ( | ( | ||||||||||||
| Debt issuance costs and other | ( | ( | ||||||||||||
| Net cash (used in) provided by financing activities | ( | |||||||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | ( | |||||||||||||
| Net (decrease) increase in cash, cash equivalents, and restricted cash | ( | |||||||||||||
| Cash, cash equivalents, and restricted cash: | ||||||||||||||
| Beginning of period | ||||||||||||||
| End of period | $ | $ | ||||||||||||
See notes to the unaudited condensed consolidated financial statements.
8
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 Company’s fiscal year periodically results in a 53-week year instead of a normal 52-week year. The fiscal year ended January 2, 2021 was a 53-week year, with the additional week being included in the first quarter. The information presented herein includes the thirteen-week periods ended October 2, 2021 ("Third Quarter") and October 3, 2020 ("Prior Year Quarter"), respectively, and the thirty-nine week period ended October 2, 2021 ("Year To Date Period") as compared to the forty week period ended October 3, 2020 ("Prior Year YTD Period"). 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 October 2, 2021, and the results of operations for the Third Quarter, Prior Year Quarter, Year To Date Period and Prior Year YTD Period. All adjustments are of a normal, recurring nature.
Effective during fiscal year 2021, the Company made a change to the presentation of reportable segments to include all information technology costs within its Corporate cost area. The Company's historical segment disclosures have been recast to be consistent with its current presentation.
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/A filed by the Company pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for the fiscal year ended January 2, 2021 (the “2020 Form 10-K/A”). Operating results for the Third Quarter are not necessarily indicative of the results to be achieved for the full fiscal year.
9
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 October 2, 2021 | For the 13 Weeks Ended October 3, 2020 | For the 39 Weeks Ended October 2, 2021 | For the 40 Weeks Ended October 3, 2020 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income (loss) attributable to Fossil Group, Inc. | $ | $ | $ | $ | ( | ||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Basic EPS computation: | |||||||||||||||||||||||
| Basic weighted average common shares outstanding | |||||||||||||||||||||||
| Basic EPS | $ | $ | $ | $ | ( | ||||||||||||||||||
| Diluted EPS computation: | |||||||||||||||||||||||
| Basic weighted average common shares outstanding | |||||||||||||||||||||||
| Effect of stock options, stock appreciation rights, restricted stock units and performance restricted stock units | |||||||||||||||||||||||
| Diluted weighted average common shares outstanding | |||||||||||||||||||||||
| Diluted EPS | $ | $ | $ | $ | ( | ||||||||||||||||||
At the end of the Third Quarter and Year To Date Period, approximately 0.3 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 12,900
At the end of the Prior Year Quarter and Prior Year YTD Period, approximately 1.1 million and 2.5 million weighted average shares issuable under stock-based awards, respectively, were not included in the diluted EPS calculation because they were antidilutive. The total antidilutive weighted average shares included 0.1 million and 0.3 million weighted average performance-based shares at the end of the Prior Year Quarter and Prior Year YTD Period, respectively. Additionally, 0.1 million weighted average performance-based shares were not included in the diluted EPS calculation at the end of the Prior Year Third Quarter because performance targets were not met.
Cash, Cash Equivalents and Restricted Cash. Restricted cash was comprised primarily of restricted cash balances for tax assessment amounts included in escrow and 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 October 2, 2021 and October 3, 2020 that are presented in the condensed consolidated statement of cash flows (in thousands):
| October 2, 2021 | October 3, 2020 | ||||||||||||||||
| Cash and cash equivalents | $ | $ | |||||||||||||||
| Restricted cash included in prepaid expenses and other current assets | |||||||||||||||||
| Restricted cash included in intangible and other assets-net | |||||||||||||||||
| Cash, cash equivalents and restricted cash | $ | $ | |||||||||||||||
Recently Issued Accounting Standards
In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04") and subsequent guidance that clarified the scope and application of its original guidance. ASU 2020-04 provides optional expedients and exceptions to the current guidance on contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts and hedging relationships that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued due to reference rate reform. The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. The Company will adopt this standard when LIBOR is discontinued and does not expect it to have a material impact on its condensed consolidated financial statements or related disclosures.
10
Recently Adopted Accounting Standards
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to general principles in Income Taxes (Topic 740). It also clarifies and amends existing guidance to improve consistent application. The Company adopted ASU 2019-12 at the beginning of the first quarter of fiscal year 2021, and it did not have a material effect on the Company's condensed consolidated financial statements.
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 October 2, 2021 | |||||||||||||||||||||||||||||
| Americas | Europe | Asia | Corporate | Total | |||||||||||||||||||||||||
| Product type | |||||||||||||||||||||||||||||
| Watches | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Leathers | |||||||||||||||||||||||||||||
| Jewelry | |||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||
| Consolidated | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Timing of revenue recognition | |||||||||||||||||||||||||||||
| Revenue recognized at a point in time | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Revenue recognized over time | |||||||||||||||||||||||||||||
| Consolidated | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| For the 13 Weeks Ended October 3, 2020 | |||||||||||||||||||||||||||||
| Americas | Europe | Asia | Corporate | Total | |||||||||||||||||||||||||
| Product type | |||||||||||||||||||||||||||||
| Watches | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Leathers | |||||||||||||||||||||||||||||
| Jewelry | |||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||
| Consolidated | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Timing of revenue recognition | |||||||||||||||||||||||||||||
| Revenue recognized at a point in time | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Revenue recognized over time | |||||||||||||||||||||||||||||
| Consolidated | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
11
| For the 39 Weeks Ended October 2, 2021 | |||||||||||||||||||||||||||||
| Americas | Europe | Asia | Corporate | Total | |||||||||||||||||||||||||
| Product type | |||||||||||||||||||||||||||||
| Watches | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Leathers | |||||||||||||||||||||||||||||
| Jewelry | |||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||
| Consolidated | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Timing of revenue recognition | |||||||||||||||||||||||||||||
| Revenue recognized at a point in time | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Revenue recognized over time | |||||||||||||||||||||||||||||
| Consolidated | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| For the 40 Weeks Ended October 3, 2020 | |||||||||||||||||||||||||||||
| Americas | Europe | Asia | Corporate | Total | |||||||||||||||||||||||||
| Product type | |||||||||||||||||||||||||||||
| Watches | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Leathers | |||||||||||||||||||||||||||||
| Jewelry | |||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||
| Consolidated | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Timing of revenue recognition | |||||||||||||||||||||||||||||
| Revenue recognized at a point in time | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Revenue recognized over time | |||||||||||||||||||||||||||||
| Consolidated | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
3. INVENTORIES
Inventories consisted of the following (in thousands):
| October 2, 2021 | January 2, 2021 | ||||||||||
| Components and parts | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Finished goods | |||||||||||
| Inventories | $ | $ | |||||||||
12
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 39 Weeks Ended October 2, 2021 | For the 40 Weeks Ended October 3, 2020 | ||||||||||
| Beginning balance | $ | $ | |||||||||
| Settlements in cash or kind | ( | ( | |||||||||
Warranties issued and adjustments to preexisting warranties (1) | |||||||||||
| Ending balance | $ | $ | |||||||||
_______________________________________________
(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 October 2, 2021 | For the 13 Weeks Ended October 3, 2020 | For the 39 Weeks Ended October 2, 2021 | For the 40 Weeks Ended October 3, 2020 | ||||||||||||||||||||||||||||||||
| Income tax (benefit) expense | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||
| Effective tax rate | % | ( | % | % | % | ||||||||||||||||||||||||||||||
The effective tax rate in the Third Quarter was unfavorable as compared to the Prior Year Quarter since no tax benefit was accrued on the U.S. net operating loss ("NOL"), unlike in the Prior Year Quarter. The Global Intangible Low-Taxed Income (“GILTI”) provision of the Tax Cuts and Jobs Act requires the inclusion of certain foreign income in the tax return which will absorb most of the U.S. NOL. Foreign income taxes are also paid on this same foreign income, resulting in double taxation. The remaining U.S. NOL is offset with a valuation allowance since there is no certainty of any future tax benefit. The Prior Year Quarter tax rate benefited from the enactment of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which was signed into law on March 27, 2020. The CARES Act provided many beneficial income tax changes including a provision allowing net operating losses arising in tax years 2018, 2019 and 2020 to be carried back to prior years when the U.S. tax rate was 35%, which accounts for most of the Prior Year Quarter benefit.
The Year To Date Period effective tax rate was unfavorable to the Prior Year YTD Period due to the changes from the CARES Act allowing NOL carrybacks in the Prior Year YTD Period.
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 October 2, 2021, the Company's total amount of unrecognized tax benefits, excluding interest and penalties, was $29.4 million, of which $24.3 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 2012-2020 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 October 2, 2021, the Company had recorded $14.1 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 October 2, 2021, the total amount of accrued income tax-related interest included in the condensed consolidated balance sheets was $7.7 million and no penalties have been accrued. For the Third Quarter, the Company accrued income tax related interest benefit of $0.1 million.
13
6. STOCKHOLDERS’ EQUITY
Common and Preferred Stock. The Company has 100,000,000 0.01 52,143,431 51,474,034 1,000,000 0.01 none
Common Stock Repurchase Programs. At October 2, 2021 and January 2, 2021, all treasury stock had been effectively retired. As of October 2, 2021, the Company had $30.0 million of repurchase authorizations remaining under its repurchase program. The Company did no
7. EMPLOYEE BENEFIT PLANS
Stock-Based Compensation Plans. The following table summarizes stock options and stock appreciation rights activity during the Third Quarter:
| Stock Options and Stock Appreciation Rights | Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||||||||||||
| (in Thousands) | (in Years) | (in Thousands) | ||||||||||||||||||||||||
| Outstanding at July 3, 2021 | $ | $ | ||||||||||||||||||||||||
| Forfeited or expired | ( | |||||||||||||||||||||||||
| Outstanding at October 2, 2021 | ||||||||||||||||||||||||||
| Exercisable at October 2, 2021 | $ | $ | ||||||||||||||||||||||||
The exercise price exceeded the stock price for all stock options and stock appreciation rights shown in the table above, resulting in no aggregate intrinsic value for outstanding and exercisable options/rights at October 2, 2021.
Stock Options and Stock Appreciation Rights Outstanding and Exercisable. The following tables summarize information with respect to stock options and stock appreciation rights outstanding and exercisable at October 2, 2021:
| Stock Options Outstanding | Stock Options 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) | ||||||||||||||||||||||||||||||
$ | $ | $ | ||||||||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||||||||
| 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) | ||||||||||||||||||||||||||||||
$ | $ | $ | ||||||||||||||||||||||||||||||
$ | ||||||||||||||||||||||||||||||||
$ | ||||||||||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||||||||
14
Restricted Stock Units and Performance Restricted Stock Units. The following table summarizes restricted stock unit and performance restricted stock unit activity during the Third Quarter:
| Restricted Stock Units and Performance Restricted Stock Units | Number of Shares | Weighted-Average Grant Date Fair Value Per Share | ||||||||||||
| (in Thousands) | ||||||||||||||
| Nonvested at July 3, 2021 | $ | |||||||||||||
| Granted | ||||||||||||||
| Vested | ( | $ | ||||||||||||
| Forfeited | ( | |||||||||||||
| Nonvested at October 2, 2021 | $ | |||||||||||||
The total fair value of restricted stock units vested during the Third Quarter was approximately $0.3 million. 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.
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 October 2, 2021 | |||||||||||||||||||||||||||||
| Currency Translation Adjustments | Cash Flow Hedges | ||||||||||||||||||||||||||||
| Forward Contracts | Pension Plan | Total | |||||||||||||||||||||||||||
| Beginning balance | $ | ( | $ | $ | $ | ( | |||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ||||||||||||||||||||||||||||
| Tax (expense) benefit | ( | ( | |||||||||||||||||||||||||||
| Amounts reclassed from accumulated other comprehensive income (loss) | |||||||||||||||||||||||||||||
| Tax (expense) benefit | ( | ( | |||||||||||||||||||||||||||
| Total other comprehensive income (loss) | ( | ( | |||||||||||||||||||||||||||
| Ending balance | $ | ( | $ | $ | $ | ( | |||||||||||||||||||||||
15
| For the 13 Weeks Ended October 3, 2020 | |||||||||||||||||||||||||||||
| Currency Translation Adjustments | Cash Flow Hedges | ||||||||||||||||||||||||||||
| Forward Contracts | Pension Plan | Total | |||||||||||||||||||||||||||
| Beginning balance | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ||||||||||||||||||||||||||||
| Tax (expense) benefit | |||||||||||||||||||||||||||||
| Amounts reclassed from accumulated other comprehensive income (loss) | |||||||||||||||||||||||||||||
| Tax (expense) benefit | ( | ( | |||||||||||||||||||||||||||
| Total other comprehensive income (loss) | ( | ||||||||||||||||||||||||||||
| Ending balance | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||
| For the 39 Weeks Ended October 2, 2021 | |||||||||||||||||||||||||||||
| Currency Translation Adjustments | Cash Flow Hedges | ||||||||||||||||||||||||||||
| Forward Contracts | Pension Plan | Total | |||||||||||||||||||||||||||
| Beginning balance | $ | ( | $ | $ | $ | ( | |||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | |||||||||||||||||||||||||||
| Tax (expense) benefit | ( | ( | |||||||||||||||||||||||||||
| Amounts reclassed from accumulated other comprehensive income | |||||||||||||||||||||||||||||
| Tax (expense) benefit | ( | ( | |||||||||||||||||||||||||||
| Total other comprehensive income (loss) | ( | ( | |||||||||||||||||||||||||||
| Ending balance | $ | ( | $ | $ | $ | ( | |||||||||||||||||||||||
| For the 40 Weeks Ended October 3, 2020 | |||||||||||||||||||||||||||||
| Currency Translation Adjustments | Cash Flow Hedges | ||||||||||||||||||||||||||||
| Forward Contracts | Pension Plan | Total | |||||||||||||||||||||||||||
| Beginning balance | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | |||||||||||||||||||||||||||||
| Tax (expense) benefit | ( | ( | |||||||||||||||||||||||||||
| Amounts reclassed from accumulated other comprehensive income (loss) | |||||||||||||||||||||||||||||
| Tax (expense) benefit | ( | ( | |||||||||||||||||||||||||||
| Total other comprehensive income (loss) | ( | ||||||||||||||||||||||||||||
| Ending balance | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||
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
16
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, Greater China, 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.
Due to changes in the Company’s reportable segments as discussed in Note 1 to the Condensed Consolidated Financial Statements, segment results for the Prior Year Quarter and Prior Year YTD Period have been recast to present results on a comparable basis. These changes had no impact on the consolidated net sales or operating income (loss). Summary information by operating segment was as follows (in thousands):
| For the 13 Weeks Ended October 2, 2021 | For the 13 Weeks Ended October 3, 2020 | ||||||||||||||||||||||
| Net Sales | Operating Income (Loss) | Net Sales | Operating Income (Loss) | ||||||||||||||||||||
| Americas | $ | $ | $ | $ | |||||||||||||||||||
| Europe | |||||||||||||||||||||||
| Asia | |||||||||||||||||||||||
| Corporate | ( | ( | |||||||||||||||||||||
| Consolidated | $ | $ | $ | $ | |||||||||||||||||||
| For the 39 Weeks Ended October 2, 2021 | For the 40 Weeks Ended October 3, 2020 | ||||||||||||||||||||||
| Net Sales | Operating Income (Loss) | Net Sales | Operating Income (Loss) | ||||||||||||||||||||
| Americas | $ | $ | $ | $ | |||||||||||||||||||
| Europe | |||||||||||||||||||||||
| Asia | |||||||||||||||||||||||
| Corporate | ( | ( | |||||||||||||||||||||
| Consolidated | $ | $ | $ | $ | ( | ||||||||||||||||||
17
The following tables reflect net sales for each class of similar products in the periods presented (in thousands, except percentage data):
| For the 13 Weeks Ended October 2, 2021 | For the 13 Weeks Ended October 3, 2020 | ||||||||||||||||||||||
| Net Sales | Percentage of Total | Net Sales | Percentage of Total | ||||||||||||||||||||
| Watches | $ | % | $ | % | |||||||||||||||||||
| Leathers | |||||||||||||||||||||||
| Jewelry | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total | $ | % | $ | % | |||||||||||||||||||
| For the 39 Weeks Ended October 2, 2021 | For the 40 Weeks Ended October 3, 2020 | ||||||||||||||||||||||
| Net Sales | Percentage of Total | Net Sales | Percentage of Total | ||||||||||||||||||||
| Watches | $ | % | $ | % | |||||||||||||||||||
| Leathers | |||||||||||||||||||||||
| Jewelry | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total | $ | % | $ | % | |||||||||||||||||||
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 October 2, 2021, 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 | U.S. dollar | |||||||||||||||||||
| Canadian dollar | U.S. dollar | |||||||||||||||||||
| Japanese yen | U.S. dollar | |||||||||||||||||||
| British pound | U.S. dollar | |||||||||||||||||||
| Australian dollar | U.S. dollar | |||||||||||||||||||
| Mexican peso | U.S. dollar | |||||||||||||||||||
| U.S. dollar | Japanese yen | |||||||||||||||||||
18
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 October 2, 2021, the Company had non-designated forward contracts of $1.4 million on 20.4 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 October 2, 2021 | For the 13 Weeks Ended October 3, 2020 | ||||||||||
| Cash flow hedges: | |||||||||||
| Forward contracts | $ | $ | ( | ||||||||
| Total gain (loss) recognized in other comprehensive income (loss), net of taxes | $ | $ | ( | ||||||||
| For the 39 Weeks Ended October 2, 2021 | For the 40 Weeks Ended October 3, 2020 | ||||||||||
| Cash flow hedges: | |||||||||||
| Forward contracts | $ | $ | |||||||||
| Total gain (loss) recognized in other comprehensive income (loss), net of taxes | $ | $ | |||||||||
19
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 October 2, 2021 | For the 13 Weeks Ended October 3, 2020 | ||||||||||||||||||||||
| Forward contracts designated as cash flow hedging instruments | Cost of sales | Total gain (loss) reclassified from accumulated other comprehensive income (loss) | $ | $ | ( | |||||||||||||||||||||
| Forward contracts designated as cash flow hedging instruments | Other income (expense)-net | Total gain (loss) reclassified from accumulated other comprehensive income (loss) | $ | $ | ||||||||||||||||||||||
| Forward contracts not designated as hedging instruments | Other income (expense)-net | Total gain (loss) recognized in income | $ | $ | ( | |||||||||||||||||||||
| Derivative Instruments | Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) Location | Effect of Derivative Instruments | For the 39 Weeks Ended October 2, 2021 | For the 40 Weeks Ended October 3, 2020 | ||||||||||||||||||||||
| Forward contracts designated as cash flow hedging instruments | Cost of sales | Total gain (loss) reclassified from accumulated other comprehensive income (loss) | $ | $ | ||||||||||||||||||||||
| Forward contracts designated as cash flow hedging instruments | Other income (expense)-net | Total gain (loss) reclassified from accumulated other comprehensive income (loss) | $ | ( | $ | |||||||||||||||||||||
| Forward contracts not designated as hedging instruments | Other income (expense)-net | Total gain (loss) recognized in income | $ | ( | $ | |||||||||||||||||||||
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 | |||||||||||||||||||||||||||||||||||||||||||||||||
| October 2, 2021 | January 2, 2021 | October 2, 2021 | January 2, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| 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 | $ | Prepaid expenses and other current assets | $ | Accrued expenses-other | $ | Accrued expenses-other | $ | ||||||||||||||||||||||||||||||||||||||||||
| Forward contracts not designated as cash flow hedging instruments | Prepaid expenses and other current assets | Prepaid expenses and other current assets | Accrued expenses-other | Accrued expenses-other | ||||||||||||||||||||||||||||||||||||||||||||||
| Forward contracts designated as cash flow hedging instruments | Intangible and other assets-net | Intangible and other assets-net | Other long-term liabilities | Other long-term liabilities | ||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
20
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 October 2, 2021 | For the 13 Weeks Ended October 3, 2020 | |||||||||||||||||||||||||
| 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 | $ | $ | ( | $ | $ | |||||||||||||||||||||
| Gain (loss) on cash flow hedging relationships: | ||||||||||||||||||||||||||
Forward contracts designated as cash flow hedging instruments: | ||||||||||||||||||||||||||
Total gain (loss) reclassified from other comprehensive income (loss) | $ | $ | $ | ( | $ | |||||||||||||||||||||
| Forward contracts not designated as hedging instruments: | ||||||||||||||||||||||||||
| Total gain (loss) recognized in income | $ | $ | $ | $ | ( | |||||||||||||||||||||
| Effect of Derivative Instruments | ||||||||||||||||||||||||||
| For the 39 Weeks Ended October 2, 2021 | For the 40 Weeks Ended October 3, 2020 | |||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | ( | |||||||||||||||||||||
| Gain (loss) on cash flow hedging relationships: | ||||||||||||||||||||||||||
Forward contracts designated as cash flow hedging instruments: | ||||||||||||||||||||||||||
Total gain (loss) reclassified from other comprehensive income (loss) | $ | $ | ( | $ | $ | |||||||||||||||||||||
| Forward contracts not designated as hedging instruments: | ||||||||||||||||||||||||||
| Total gain (loss) recognized in income | $ | $ | ( | $ | $ | |||||||||||||||||||||
At the end of the Third Quarter, the Company had forward contracts designated as cash flow hedges with maturities extending through December 2022. As of October 2, 2021, an estimated net gain of $3.5 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:
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•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 October 2, 2021 (in thousands):
| Fair Value at October 2, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Forward contracts | $ | $ | $ | $ | |||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Contingent consideration | $ | $ | $ | $ | |||||||||||||||||||
| Forward contracts | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of January 2, 2021 (in thousands):
| Fair Value at January 2, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Forward contracts | $ | $ | $ | $ | |||||||||||||||||||
| Deferred compensation plan assets: | |||||||||||||||||||||||
| Investment in publicly traded mutual funds | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Contingent consideration | $ | $ | $ | $ | |||||||||||||||||||
| Forward contracts | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
The Company's deferred compensation plan was terminated during the first quarter of fiscal year 2021, with the final distributions taking place in the second quarter of fiscal year 2021. The deferred compensation plan assets at January 2, 2021 were recorded in intangible and other assets-net in the Company’s condensed consolidated balance sheets and the fair values were based on quoted prices.
As of October 2, 2021, the fair value of the Company's debt approximated its carrying amount. The fair value of debt was obtained using observable market inputs.
The fair value of trade names are measured on a non-recurring basis using Level 3 inputs, including forecasted cash flows, discount rates and implied royalty rates. No trade name impairment was recorded during the Year To Date Period.
During the Year To Date Period, operating lease right-of-use ("ROU") assets with a carrying amount of $14.0 million and property, plant and equipment-net with a carrying amount of $2.5 million related to retail store leasehold improvements and fixturing were written down to a fair value of $7.4 million and $1.0 million, respectively, resulting in impairment charges of $8.1 million.
22
12. INTANGIBLE AND OTHER ASSETS
The following table summarizes intangible and other assets (in thousands):
| October 2, 2021 | January 2, 2021 | |||||||||||||||||||||||||||||||
| Useful | Gross | Accumulated | Gross | Accumulated | ||||||||||||||||||||||||||||
| Lives | Amount | Amortization | Amount | Amortization | ||||||||||||||||||||||||||||
| Intangibles-subject to amortization: | ||||||||||||||||||||||||||||||||
| Trademarks | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Customer lists | ||||||||||||||||||||||||||||||||
| Patents | ||||||||||||||||||||||||||||||||
| Developed technology | ||||||||||||||||||||||||||||||||
| Trade name | ||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| Total intangibles-subject to amortization | ||||||||||||||||||||||||||||||||
| Intangibles-not subject to amortization: | ||||||||||||||||||||||||||||||||
| Trade names | ||||||||||||||||||||||||||||||||
| Other assets: | ||||||||||||||||||||||||||||||||
| Deposits | ||||||||||||||||||||||||||||||||
| Deferred compensation plan assets | ||||||||||||||||||||||||||||||||
| Deferred tax asset-net | ||||||||||||||||||||||||||||||||
| Restricted cash | ||||||||||||||||||||||||||||||||
| Tax receivable | ||||||||||||||||||||||||||||||||
| Investments | ||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| Total other assets | ||||||||||||||||||||||||||||||||
| Total intangible and other assets | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Total intangible and other assets-net | $ | $ | ||||||||||||||||||||||||||||||
Amortization expense for intangible assets was approximately $0.7 million and $1.8 million for the Third Quarter and the Prior Year Quarter, respectively, and $2.7 million and $5.4 million for the Year To Date Period and Prior Year YTD Period, respectively. Estimated aggregate future amortization expense by fiscal year for intangible assets is as follows (in thousands):
| Fiscal Year | Amortization Expense | |||||||
| 2021 (remaining) | $ | |||||||
| 2022 | $ | |||||||
| 2023 | $ | |||||||
| 2024 | $ | |||||||
| 2025 | $ | |||||||
| Thereafter | $ | |||||||
23
13. COMMITMENTS AND CONTINGENCIES
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 to 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 leases 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.
As a result of the COVID-19 pandemic, the Company received lease concessions from landlords in the form of rent deferrals and rent forgiveness. The Company chose the policy election provided by the FASB in April 2020 to record rent concessions as if no modifications to lease contracts were made, and thus no changes to the ROU assets and ROU liabilities were recorded with respect to these concessions. This guidance is only applicable to COVID-19 related lease concessions that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee. As of October 2, 2021, the Company had outstanding deferred rent payments of $0.8 million, and the Company received rent forgiveness of $3.8 million for the Year to Date Period.
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 October 2, 2021 | For the 13 Weeks Ended October 3, 2020 | For the 39 Weeks Ended October 2, 2021 | For the 40 Weeks Ended October 3, 2020 | |||||||||||||||||||||||||||
Operating lease cost(1)(2) | SG&A | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Finance lease cost: | ||||||||||||||||||||||||||||||||
| Amortization of ROU assets | SG&A | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Interest on lease liabilities | Interest expense | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Short-term lease cost | SG&A | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Variable lease cost | SG&A | $ | $ | $ | $ | |||||||||||||||||||||||||||
_______________________________________________
(1) Includes sublease income, which was immaterial
(2) Excludes the impact of deferred or abated rent amounts
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The following table discloses supplemental balance sheet information for the Company’s leases (in thousands):
| Leases | Condensed Consolidated Balance Sheets Location | October 2, 2021 | January 2, 2021 | |||||||||||||||||
| Assets | ||||||||||||||||||||
| Operating | Operating lease ROU assets | $ | $ | |||||||||||||||||
Property, plant and equipment - net of accumulated depreciation of $ | $ | $ | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Current: | ||||||||||||||||||||
| Operating | Current operating lease liabilities | $ | $ | |||||||||||||||||
| Finance | $ | $ | ||||||||||||||||||
| Noncurrent: | ||||||||||||||||||||
| Operating | Long-term operating lease liabilities | $ | $ | |||||||||||||||||
| Finance | $ | $ | ||||||||||||||||||
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 | October 2, 2021 | January 2, 2021 | ||||||||||||
| Weighted-average remaining lease term: | ||||||||||||||
| Operating leases | ||||||||||||||
| Finance leases | ||||||||||||||
| Weighted-average discount rate: | ||||||||||||||
| Operating leases | % | % | ||||||||||||
| Finance leases | % | % | ||||||||||||
Future minimum lease payments by year as of October 2, 2021 were as follows (in thousands):
| Fiscal Year | Operating Leases (1) | Finance Leases | ||||||||||||
| 2021 (remaining) | $ | $ | ||||||||||||
| 2022 | ||||||||||||||
| 2023 | ||||||||||||||
| 2024 | ||||||||||||||
| 2025 | ||||||||||||||
| Thereafter | ||||||||||||||
| Total lease payments | $ | $ | ||||||||||||
| Less: Interest | ||||||||||||||
| Total lease obligations | $ | $ | ||||||||||||
________________________________________________________________________
(1) Future minimum lease payments exclude the impact of deferred or abated rent amounts
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Future minimum lease payments by year as of January 2, 2021 were as follows (in thousands):
| Fiscal Year | Operating Leases | Finance Leases | ||||||||||||
| 2021 | $ | $ | ||||||||||||
| 2022 | ||||||||||||||
| 2023 | ||||||||||||||
| 2024 | ||||||||||||||
| 2025 | ||||||||||||||
| Thereafter | ||||||||||||||
| Total lease payments | $ | $ | ||||||||||||
| Less: Interest | ||||||||||||||
| Finance lease obligations | $ | $ | ||||||||||||
Supplemental cash flow information related to leases was as follows (in thousands):
| For the 39 Weeks Ended October 2, 2021 | For the 40 Weeks Ended October 3, 2020 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
Operating cash flows from operating leases(1) | $ | $ | |||||||||
| Operating cash flows from finance leases | |||||||||||
| Financing cash flows from finance leases | |||||||||||
| Leased assets obtained in exchange for new operating lease liabilities | |||||||||||
________________________________________________________________________________
(1) Cash flows exclude the impact of deferred or abated rent amounts
15. DEBT ACTIVITY
On February 20, 2020, the Company entered into Amendment No. 1 to that certain Term Credit Agreement, dated as of September 26, 2019, by and among the Company, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders (the “Term Credit Agreement Lenders”) party thereto (as amended to date, the “Term Credit Agreement”). On May 12, 2020, the Company entered into Amendment No. 2 to the Term Credit Agreement to extend the deadline for delivery of the Company’s unaudited quarterly financial statements and related deliverables for the fiscal quarter ended April 4, 2020. On June 5, 2020, the Company entered into Amendment No. 3 (the “Third Amendment”) to the Term Credit Agreement to further modify certain terms of the Term Credit Agreement to address the financial impact of COVID-19.
Under the Term Credit Agreement: (i) amounts outstanding bear interest at (a) the adjusted LIBO rate plus 8.50 % for Eurodollar loans, and (b) the alternate base rate plus 7.50 % for alternate base rate loans; (ii) a quarterly amortization payment of $10.0 million is required; and (iii) a maximum total leverage ratio of (a) 2.25 to 1.00 is permitted as of the last day of each fiscal quarter ending April 3, 2021, July 3, 2021 and October 2, 2021, and (b) 1.50 to 1.00 as of the last day of each subsequent fiscal quarter. In connection with the Third Amendment, the quarterly test for maximum total leverage ratio was waived for the first three fiscal quarters of fiscal year 2021, and the Company is required to maintain specified minimum levels of EBITDA during such periods.
While the Third Amendment amended, among other things, certain of the financial covenants in the Term Credit Agreement to address the financial impact of COVID-19, any material further decreases to the Company’s revenues and cash flows, or the Company's inability to successfully achieve its cost reduction targets, could result in the Company not meeting one or more of the amended financial covenants under its Term Credit Agreement within the next twelve months.
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
26
the Company from time to time party thereto as guarantors, entered into a 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").
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 $70.0 million is available under a European facility, $20.0 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 Revolving Facility expires and is due and payable on September 26, 2024, provided that, if on the date that is the 121st day prior to the final maturity date of any class or tranche of term loans under the Term Credit Agreement, any such term loans are outstanding on such date, then the maturity date of the Revolving Facility shall be such date. Unless the maturity of the term loans is extended beyond the current maturity date of September 26, 2024, the Revolving Facility will expire and be due and payable on May 28, 2024. 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, minus (iv) 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.
As of October 2, 2021, the Company had $122.0 million and $32.8 million outstanding under the Term Credit Agreement and Revolving Facility, respectively. The Company had net payments of $6.7 million and $30.0 million under the Term Credit Agreement during the Third Quarter and Year to Date Period, respectively. The Company had net payments of $34.0 million and $64.0 million under the Revolving Facility during the Third Quarter and Year to Date Period, respectively. Amounts available under the Revolving Facility were reduced by any amounts outstanding under standby letters of credit. As of October 2, 2021, the Company had available borrowing capacity of $123.6 million under the Revolving Facility. The Company incurred approximately $3.3 million and $10.4 million of interest expense related to the Term Credit Agreement during the Third Quarter and Year To Date Period, respectively. The Company incurred approximately $0.1 million and $0.8 million of interest expense related to the Revolving Facility during the Third Quarter and Year To Date Period, respectively. The Company incurred approximately $2.4 million and $7.7 million of interest expense related to the amortization of debt issuance costs and the original issue discount during the Third Quarter and Year To Date Period, respectively. At October 2, 2021, the Company was in compliance with all debt covenants related to its credit facilities.
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16. RESTRUCTURING
In fiscal year 2019, the Company launched New World Fossil 2.0 - Transform to Grow Program (“NWF 2.0”), which is focused on optimizing the Company’s operating structure to be more efficient, with faster decision-making and a more customer-centric focus. In addition to optimizing the way the Company goes to market, the Company pursued additional gross margin expansion opportunities. The Company has taken a zero-based budgeting approach to adjust its business model to enable more investment in digital capabilities and marketing, move closer to the consumer and react more quickly to the ever-evolving consumer shopping patterns. The Company also changed its overall business processes and resources, creating a more centrally directed operating model, reducing complexity and redundancy, and operating at a lower cost base. The NWF 2.0 restructuring program was expanded to address additional challenges posed by COVID-19, including a number of cost saving measures such as store closures. Total NWF 2.0 charges since inception in fiscal year 2019 are $74.0 million, of which $18.7 million, $36.5 million and $18.8 million were recorded during the Year to Date Period, fiscal year 2020 and fiscal year 2019, respectively.
| For the 13 Weeks Ended October 2, 2021 | |||||||||||||||||||||||||||||
| Liabilities | Liabilities | ||||||||||||||||||||||||||||
| July 3, 2021 | Charges | Cash Payments | Non-cash Items | October 2, 2021 | |||||||||||||||||||||||||
| Store closures | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Professional services | |||||||||||||||||||||||||||||
| Severance and employee-related benefits | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| For the 13 Weeks Ended October 3, 2020 | |||||||||||||||||||||||||||||
| Liabilities | Liabilities | ||||||||||||||||||||||||||||
| July 4, 2020 | Charges | Cash Payments | Non-cash Items | October 3, 2020 | |||||||||||||||||||||||||
| Store closures | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Professional services | |||||||||||||||||||||||||||||
| Severance and employee-related benefits | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| For the 39 Weeks Ended October 2, 2021 | |||||||||||||||||||||||||||||
| Liabilities | Liabilities | ||||||||||||||||||||||||||||
| January 2, 2021 | Charges | Cash Payments | Non-cash Items | October 2, 2021 | |||||||||||||||||||||||||
| Store closures | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Professional services | |||||||||||||||||||||||||||||
| Severance and employee-related benefits | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| For the 40 Weeks Ended October 3, 2020 | |||||||||||||||||||||||||||||
| Liabilities | Liabilities | ||||||||||||||||||||||||||||
| December 28, 2019 | Charges | Cash Payments | Non-cash Items | October 3, 2020 | |||||||||||||||||||||||||
| Store closures | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Professional services | $ | $ | $ | $ | |||||||||||||||||||||||||
| Severance and employee-related benefits | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
28
| For the 13 Weeks Ended October 2, 2021 | For the 13 Weeks Ended October 3, 2020 | For the 39 Weeks Ended October 2, 2021 | For the 40 Weeks Ended October 3, 2020 | |||||||||||||||||||||||||||||||||||||||||
| Americas | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Europe | ||||||||||||||||||||||||||||||||||||||||||||
| Asia | ||||||||||||||||||||||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||||||||||||||||||||||
| Consolidated | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
17. SUBSEQUENT EVENT
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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 and thirty-nine week periods ended October 2, 2021 (the "Third Quarter" and "Year To Date Period") as compared to the thirteen and forty week periods ended October 3, 2020 (the "Prior Year Quarter" and "Prior Year YTD Period"). This discussion should be read in conjunction with the condensed consolidated financial statements and the related notes thereto.
General
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 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.
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 163 Company-owned stores as of the end of the Third 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 128 Company-owned stores as of the end of the Third 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, Greater China, 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 83 Company-owned stores as of the end of the Third Quarter and an extensive collection of products available through our owned websites.
Our consolidated gross profit margin is 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 watch and jewelry offerings produce higher gross profit margins than our 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, and connected products carry relatively lower margins than traditional products. 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.
Our business is subject to the risks inherent in global sourcing supply. 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
30
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. Interruptions or delays in supply may be caused by a number of factors that are outside of our and our contractor manufacturers' control.
COVID-19: Our business operations and financial performance continue to be materially impacted by COVID-19. The COVID-19 pandemic has negatively affected the global economies, disrupted global supply chains and financial markets, and led to significant travel and transportation restrictions, including mandatory closures of non-essential businesses and orders to “shelter-in-place.” We remain focused on protecting the health and safety of our employees, customers and suppliers to minimize potential disruptions and supporting the community to address challenges posed by the global COVID-19 pandemic. The total impact of the pandemic on our business is uncertain and depends in part on future developments including the duration and spread of COVID-19, the availability and acceptance of vaccines and continuing actions taken by governmental authorities to control the outbreak and mitigate its impact, including effects of any vaccine mandates, restrictions on movement and commercial activities and further stimulus and unemployment benefits.
Supply Chain: We rely on domestic and foreign suppliers to provide us with merchandise in a timely manner and at favorable prices. Among our foreign suppliers, China is the source of a substantial majority of our imports. We have experienced, and expect to continue to experience, increased international transit times, particularly for our leathers products and packaging, and increased shipping costs for a majority of our products. A disruption in the flow of our imported merchandise from China or a material increase in the cost of those goods or transportation without any offsetting price increases may significantly decrease our profits.
Data Security: 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, and 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: Notwithstanding the COVID-19 pandemic, we plan to execute the following strategies to enhance our brands, grow our revenue and improve profitability. The first strategic initiative is to increase brand excitement by crafting compelling stories that build upon brand equities for both owned and licensed brands across our product categories. Key to this strategy is our ongoing effort in innovation in our product categories and marketing capabilities, where we aim to build larger communities of brand loyalists. Our second strategic initiative is to increase digital engagement and online sales. We continue to invest in our owned e-commerce sites around the world and in third party marketplaces to enhance our direct to consumer engagement, which we believe can build long-term customer value. Our third strategic initiative is to expand our opportunity in mainland China and India. In these countries, we are continuing to execute against a strategy centered around localized marketing and segmented assortments. Although the impact of COVID-19 is likely to disrupt our growth trajectory in the short to intermediate term, we continue to view mainland China and India as compelling long-term opportunities. Our fourth strategic initiative is to optimize our operations. We initiated the New World Fossil – Transform to Grow (“NWF 2.0”) initiative in 2019 aimed to further simplify our operations and to re-allocate resources toward growth, and we completed our $250 million in run-rate savings goal in 2021. In addition to our NWF 2.0 program, we expect to optimize our operations with further reductions to our store footprint and increased focus on inventory management and supply chain efficiency.
Notes Offering: On November 3, 2021, we entered into an underwriting agreement with B. Riley Securities, Inc., as representative of the several underwriters named therein, providing for the issuance and sale (the “Notes Offering”) of $140.0 million aggregate principal amount of our 7.00% Senior Notes due 2026 (the “Senior Notes”) plus up to an additional $10.0 million aggregate principal amount of Senior Notes pursuant to an option to purchase additional notes. The Senior Notes were offered pursuant to our shelf registration statement on Form S-3 (Registration No. 333-259352), which was declared effective by the Securities and Exchange Commission on September 30, 2021.
On November 8, 2021, we used the majority of the net proceeds from the Notes Offering to repay all of the outstanding borrowings under the Term Credit Agreement (as defined below). In connection with the repayment of the outstanding borrowings under the Term Credit Agreement, we incurred prepayment fees and accrued interest costs of $2.6 million and wrote off $7.1 million of debt issuance costs and $4.6 million of original issuance discount related to the Term Credit Agreement. The remaining net proceeds will be used for general corporate purposes.
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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/A for the fiscal year ended January 2, 2021 and "Part II, Item 1A. Risk Factors" of this Quarter Report on Form 10-Q.
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 discussions contain 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 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. We provide constant currency financial information and the most directly comparable GAAP measure where applicable.
Comparable Retail Sales
Both stores and our own 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 retail sales base, but are included in total sales. These stores are returned to the comparable retail sales base in the thirteenth month following the expansion and/or relocation. Comparable retail sales are calculated on a comparable
calendar period. Therefore, the percentage change in comparable sales for 2021 were calculated on a 39-to-39 week basis to
normalize the 40-week Prior Year YTD Period with the 39-week Year To Date Period. Comparable retail sales also exclude the effects of foreign currency fluctuations.
Results of Operations
Quarterly Periods Ended October 2, 2021 and October 3, 2020
Consolidated Net Sales. Net sales increased $56.3 million, or 12.9% (11.2% in constant currency), for the Third Quarter as compared to the Prior Year Quarter. In the Third Quarter, digital sales, which include sales from our owned e-commerce channels, third-party e-commerce platforms and wholesale dot com, were 40% of worldwide net sales. Digital sales increased 29% (28% in constant currency) in the Third Quarter as compared to the Prior Year Quarter. Global comparable retail sales decreased 1% primarily due to sales declines in our owned e-commerce business partially offset by sales growth in retail stores. We have reduced our store footprint by 57 stores since the end of the Prior Year Quarter. During the Third Quarter, we closed 13 stores and opened 1 new store. The translation of foreign-based net sales into U.S. dollars increased reported net sales by $7.5 million, including favorable impacts of $3.5 million, $2.4 million and $1.6 million in our Asia, Europe and Americas segments, respectively, in the Third Quarter as compared to the Prior Year Quarter.
The following table sets forth consolidated net sales by segment (dollars in millions):
| For the 13 Weeks Ended October 2, 2021 | For the 13 Weeks Ended October 3, 2020 | Growth (Decline) | |||||||||||||||||||||||||||||||||||||||
| Net Sales | Percentage of Total | Net Sales | Percentage of Total | Dollars | Percentage As Reported | Percentage Constant Currency | |||||||||||||||||||||||||||||||||||
| Americas | $ | 193.7 | 39.4 | % | $ | 175.1 | 40.2 | % | $ | 18.6 | 10.6 | % | 9.7 | % | |||||||||||||||||||||||||||
| Europe | 165.9 | 33.7 | 135.3 | 31.1 | 30.6 | 22.6 | 20.8 | ||||||||||||||||||||||||||||||||||
| Asia | 129.5 | 26.3 | 119.7 | 27.5 | 9.8 | 8.2 | 5.3 | ||||||||||||||||||||||||||||||||||
| Corporate | 2.7 | 0.6 | 5.4 | 1.2 | (2.7) | (50.0) | (50.0) | ||||||||||||||||||||||||||||||||||
| Total | $ | 491.8 | 100.0 | % | $ | 435.5 | 100.0 | % | $ | 56.3 | 12.9 | % | 11.2 | % | |||||||||||||||||||||||||||
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Net sales information by product category is summarized as follows (dollars in millions):
| For the 13 Weeks Ended October 2, 2021 | For the 13 Weeks Ended October 3, 2020 | ||||||||||||||||||||||||||||||||||||||||
| Growth (Decline) | |||||||||||||||||||||||||||||||||||||||||
| Net Sales | Percentage of Total | Net Sales | Percentage of Total | Dollars | Percentage As Reported | Percentage Constant Currency | |||||||||||||||||||||||||||||||||||
| Watches | $ | 393.7 | 80.0 | % | $ | 356.6 | 81.9 | % | $ | 37.1 | 10.4 | % | 8.7 | % | |||||||||||||||||||||||||||
| Leathers | 36.4 | 7.4 | 37.7 | 8.7 | (1.3) | (3.4) | (4.5) | ||||||||||||||||||||||||||||||||||
| Jewelry | 52.5 | 10.7 | 28.9 | 6.6 | 23.6 | 81.7 | 78.9 | ||||||||||||||||||||||||||||||||||
| Other | 9.2 | 1.9 | 12.3 | 2.8 | (3.1) | (25.2) | (26.0) | ||||||||||||||||||||||||||||||||||
| Total | $ | 491.8 | 100.0 | % | $ | 435.5 | 100.0 | % | $ | 56.3 | 12.9 | % | 11.2 | % | |||||||||||||||||||||||||||
The following table sets forth the number of stores on the dates indicated below:
| October 3, 2020 | Opened | Closed | October 2, 2021 | ||||||||||||||||||||
| Americas | 189 | 1 | 27 | 163 | |||||||||||||||||||
| Europe | 153 | 1 | 26 | 128 | |||||||||||||||||||
| Asia | 89 | 0 | 6 | 83 | |||||||||||||||||||
| Total stores | 431 | 2 | 59 | 374 | |||||||||||||||||||
Americas Net Sales. Americas net sales increased $18.6 million, or 10.6% (9.7% in constant currency), during the Third Quarter in comparison to the Prior Year Quarter. In the region, sales increased in the U.S. and declined in Mexico and Canada. Sales increased in our wholesale, third party e-commerce and retail stores channels, which more than offset a sales decrease in our owned e-commerce business. Comparable retail sales increased moderately during the Third Quarter, driven by traffic increases in our retail stores compared to the Prior Year Quarter.
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 October 2, 2021 | For the 13 Weeks Ended October 3, 2020 | ||||||||||||||||||||||||||||||||||||||||
| Growth (Decline) | |||||||||||||||||||||||||||||||||||||||||
| Net Sales | Percentage of Total | Net Sales | Percentage of Total | Dollars | Percentage As Reported | Percentage Constant Currency | |||||||||||||||||||||||||||||||||||
| Watches | $ | 150.2 | 77.6 | % | $ | 142.9 | 81.6 | % | $ | 7.3 | 5.1 | % | 4.1 | % | |||||||||||||||||||||||||||
| Leathers | 23.4 | 12.1 | 22.3 | 12.7 | 1.1 | 4.9 | 4.0 | ||||||||||||||||||||||||||||||||||
| Jewelry | 18.3 | 9.4 | 8.0 | 4.6 | 10.3 | 128.8 | 127.5 | ||||||||||||||||||||||||||||||||||
| Other | 1.8 | 0.9 | 1.9 | 1.1 | % | (0.1) | (5.3) | 0.0 | |||||||||||||||||||||||||||||||||
| Total | $ | 193.7 | 100.0 | % | $ | 175.1 | 100.0 | % | $ | 18.6 | 10.6 | % | 9.7 | % | |||||||||||||||||||||||||||
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Europe Net Sales. Europe net sales increased $30.6 million, or 22.6% (20.8% in constant currency), during the Third Quarter in comparison to the Prior Year Quarter. Across Europe sales increased in most major markets, with the largest increases in Germany and the UK. Wholesale and e-commerce channel sales increased strongly while our retail store channel sales declined moderately. Despite an increase in foot traffic in the Third Quarter as compared to the Prior Year Quarter, comparable retail sales declined slightly.
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 October 2, 2021 | For the 13 Weeks Ended October 3, 2020 | ||||||||||||||||||||||||||||||||||||||||
| Growth (Decline) | |||||||||||||||||||||||||||||||||||||||||
| Net Sales | Percentage of Total | Net Sales | Percentage of Total | Dollars | Percentage As Reported | Percentage Constant Currency | |||||||||||||||||||||||||||||||||||
| Watches | $ | 129.8 | 78.2 | % | $ | 105.2 | 77.8 | % | $ | 24.6 | 23.4 | % | 21.6 | % | |||||||||||||||||||||||||||
| Leathers | 7.2 | 4.3 | 8.1 | 6.0 | (0.9) | (11.1) | (12.3) | ||||||||||||||||||||||||||||||||||
| Jewelry | 25.6 | 15.4 | 18.6 | 13.7 | 7.0 | 37.6 | 36.0 | ||||||||||||||||||||||||||||||||||
| Other | 3.3 | 2.1 | 3.4 | 2.5 | % | (0.1) | (2.9) | (5.9) | |||||||||||||||||||||||||||||||||
| Total | $ | 165.9 | 100.0 | % | $ | 135.3 | 100.0 | % | $ | 30.6 | 22.6 | % | 20.8 | % | |||||||||||||||||||||||||||
Asia Net Sales. Net sales in Asia increased $9.8 million, or 8.2% (5.3% in constant currency), during the Third Quarter in comparison to the Prior Year Quarter. Sales increased in our wholesale and e-commerce channels, which more than offset a sales decrease in our retail stores channel. Sales increased in multiple brands during the Third Quarter, most notably in FOSSIL®. Strong sales growth in India more than offset a slight decline in Mainland China and some significant declines in other markets. Comparable retail sales decreased during the Third Quarter, with a significant decline in retail stores and a slight decline in our owned e-commerce compared to the Prior Year Quarter.
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 October 2, 2021 | For the 13 Weeks Ended October 3, 2020 | ||||||||||||||||||||||||||||||||||||||||
| Growth (Decline) | |||||||||||||||||||||||||||||||||||||||||
| Net Sales | Percentage of Total | Net Sales | Percentage of Total | Dollars | Percentage As Reported | Percentage Constant Currency | |||||||||||||||||||||||||||||||||||
| Watches | $ | 113.7 | 87.8 | % | $ | 108.5 | 90.6 | % | $ | 5.2 | 4.8 | % | 2.1 | % | |||||||||||||||||||||||||||
| Leathers | 5.8 | 4.5 | 7.3 | 6.1 | (1.5) | (20.5) | (21.9) | ||||||||||||||||||||||||||||||||||
| Jewelry | 8.6 | 6.6 | 2.3 | 1.9 | 6.3 | 273.9 | 256.5 | ||||||||||||||||||||||||||||||||||
| Other | 1.4 | 1.1 | 1.6 | 1.4 | (0.2) | (12.5) | (18.8) | ||||||||||||||||||||||||||||||||||
| Total | $ | 129.5 | 100.0 | % | $ | 119.7 | 100.0 | % | $ | 9.8 | 8.2 | % | 5.3 | % | |||||||||||||||||||||||||||
Gross Profit. Gross profit of $259.5 million in the Third Quarter increased 13.0% in comparison to $229.8 million in the Prior Year Quarter, driven by the increase in sales. Our gross profit margin rate was 52.8% in the both the Third Quarter and Prior Year Quarter. The year-over-year change in gross profit primarily reflects a favorable currency impact, improved channel mix and reduced minimum licensor royalty costs offset by unfavorable product mix and region mix.
Operating Expenses. Total operating expenses in the Third Quarter were $211.7 million, or 43.0% of sales, compared to $212.3 million, or 48.7% of sales, in the Prior Year Quarter. SG&A expenses were $205.7 million in the Third Quarter compared to $202.0 million in the Prior Year Quarter, reflecting higher marketing costs largely offset by decreased compensation and store costs. As a percentage of net sales, SG&A expenses decreased to 41.8% in the Third Quarter as compared to 46.4% in the Prior Year Quarter. Restructuring costs in the Third Quarter were $5.4 million, primarily related to employee costs, professional services and store closures, while restructuring costs in the Prior Year Quarter were $5.7 million. Other long-lived asset impairments in the Third Quarter were $0.6 million compared to $4.6 million in the Prior Year Quarter, due to lower retail store impairment. The translation of foreign-denominated expenses during the Third Quarter increased operating expenses by $2.1 million as a result of the weaker U.S. dollar.
Operating Income (Loss). Operating income in the Third Quarter was $47.8 million as compared to operating income of $17.5 million in the Prior Year Quarter. The improvement in operating income was primarily driven by increased sales in the
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Third Quarter compared to the Prior Year Quarter. As a percentage of net sales, operating margin was 9.7% in the Third Quarter compared to 4.0% in the Prior Year Quarter. Operating margin in the Third Quarter included a favorable impact of 210 basis points due to changes in foreign currencies.
Operating income (loss) by segment is summarized as follows (dollars in millions):
| For the 13 Weeks Ended October 2, 2021 | For the 13 Weeks Ended October 3, 2020 | Change | Operating Margin | ||||||||||||||||||||||||||||||||
| Dollars | Percentage | 2021 | 2020 | ||||||||||||||||||||||||||||||||
| Americas | $ | 46.6 | $ | 45.1 | $ | 1.5 | 3.3 | % | 24.0 | % | 25.7 | % | |||||||||||||||||||||||
| Europe | 40.5 | 12.3 | 28.2 | 229.3 | 24.4 | 9.1 | |||||||||||||||||||||||||||||
| Asia | 24.0 | 25.7 | (1.7) | (6.6) | 18.5 | 21.5 | |||||||||||||||||||||||||||||
| Corporate | (63.3) | (65.6) | 2.3 | 3.5 | |||||||||||||||||||||||||||||||
| Total operating income (loss) | $ | 47.8 | $ | 17.5 | $ | 30.3 | 173.1 | % | 9.7 | % | 4.0 | % | |||||||||||||||||||||||
Interest Expense. Interest expense decreased by $1.6 million during the Third Quarter compared to the Prior Year Quarter, primarily driven by a lower debt balance.
Other Income (Expense)-Net. During the Third Quarter, other income (expense)-net was an expense of $0.5 million in comparison to zero in the Prior Year Quarter. The year-over-year change was primarily driven by net transactional currency losses in the Third Quarter.
Provision for Income Taxes. Income tax expense for the Third Quarter was $9.0 million, resulting in an effective income tax rate of 22.0%. For the Prior Year Quarter, income tax benefit was $6.8 million, resulting in an effective income tax rate of (71.4)%. The effective tax rate in the Third Quarter was unfavorable as compared to the Prior Year Quarter since no tax benefit was accrued on the U.S. net operating loss ("NOL"), unlike in the Prior Year Quarter. The Global Intangible Low-Taxed Income (“GILTI”) provision of the Tax Cuts and Jobs Act requires the inclusion of certain foreign income in the tax return which will absorb most of the U.S. NOL. Foreign income taxes are also paid on this same foreign income, resulting in double taxation. The remaining U.S. NOL is offset with a valuation allowance since there is no certainty of any future tax benefit. The Prior Year Quarter tax rate benefited from the enactment of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which was in effect in the Prior Year Quarter but expired in 2021. The CARES Act allowed U.S. taxpayers to carry back NOLs arising in tax years 2018, 2019 and 2020 to prior years when the tax rate was 35%. In the Prior Year Quarter, we recognized a U.S. tax benefit from fiscal year 2019 and 2020 tax losses, which were carried back to offset taxable income reported in prior years. No tax benefit has been accrued on the Third Quarter U.S. tax losses and certain foreign tax losses due to the uncertainty of whether they can be used in the future.
Net Income (Loss) Attributable to Fossil Group, Inc. Third Quarter net income (loss) attributable to Fossil Group, Inc. was income of $31.4 million, or $0.60 per diluted share, in comparison to net income of $16.0 million, or $0.31 per diluted share, in the Prior Year Quarter. Diluted earnings (loss) per share in the Third Quarter included restructuring charges of $0.08 per diluted share. Diluted earnings (loss) per share in the Prior Year Quarter included restructuring charges of $0.09 per diluted share. Currency fluctuations favorably impacted diluted earnings per share by $0.15 during the Third Quarter.
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Fiscal Year To Date Periods Ended October 2, 2021 and October 3, 2020
Consolidated Net Sales. Net sales increased $180.6 million or 16.6% (13.0% in constant currency) for the Year To Date Period as compared to the Prior Year YTD Period. We experienced sales increases in all three geographic segments and in the watches and jewelry product categories, while leathers decreased. In the Year To Date Period, digital sales, which include sales from our owned e-commerce channels, third party e-commerce platforms and wholesale dot com, were 41% of worldwide net sales. Digital sales increased 31% (26% in constant currency) in the Year To Date Period, compared to the Prior Year YTD Period. Comparable retail sales decreased 1.6% on a 39-week calendar basis during the Year To Date Period primarily due to traffic declines related to the COVID-19 pandemic.
The following table sets forth consolidated net sales by segment (dollars in millions):
| For the 39 Weeks Ended October 2, 2021 | For the 40 Weeks Ended October 3, 2020 | Growth (Decline) | |||||||||||||||||||||||||||||||||||||||
| Net Sales | Percentage of Total | Net Sales | Percentage of Total | Dollars | Percentage As Reported | Percentage Constant Currency | |||||||||||||||||||||||||||||||||||
| Americas | $ | 523.0 | 41.3 | % | $ | 433.8 | 40.0 | % | $ | 89.2 | 20.6 | % | 19.3 | % | |||||||||||||||||||||||||||
| Europe | 399.5 | 31.6 | 343.1 | 31.6 | 56.4 | 16.4 | 10.7 | ||||||||||||||||||||||||||||||||||
| Asia | 331.6 | 26.2 | 295.2 | 27.2 | 36.4 | 12.3 | 7.6 | ||||||||||||||||||||||||||||||||||
| Corporate | 11.7 | 0.9 | 13.1 | 1.2 | (1.4) | (10.7) | (11.5) | ||||||||||||||||||||||||||||||||||
| Total | $ | 1,265.8 | 100.0 | % | $ | 1,085.2 | 100.0 | % | $ | 180.6 | 16.6 | % | 13.0 | % | |||||||||||||||||||||||||||
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In the Year To Date Period, the translation of foreign-based net sales into U.S. dollars increased reported net sales by $39.2 million, including favorable impacts of $19.6 million, $14.0 million and $5.5 million in our Europe, Asia and Americas segments, respectively, compared to the Prior Year YTD Period.
Net sales information by product category is summarized as follows (dollars in millions):
| For the 39 Weeks Ended October 2, 2021 | For the 40 Weeks Ended October 3, 2020 | Growth (Decline) | |||||||||||||||||||||||||||||||||||||||
| Net Sales | Percentage of Total | Net Sales | Percentage of Total | Dollars | Percentage As Reported | Percentage Constant Currency | |||||||||||||||||||||||||||||||||||
| Watches | $ | 1,014.7 | 80.2 | % | $ | 876.0 | 80.7 | % | $ | 138.7 | 15.8 | % | 12.2 | % | |||||||||||||||||||||||||||
| Leathers | 103.8 | 8.2 | 111.6 | 10.3 | (7.8) | (7.0) | (9.5) | ||||||||||||||||||||||||||||||||||
| Jewelry | 119.2 | 9.4 | 67.3 | 6.2 | 51.9 | 77.1 | 70.9 | ||||||||||||||||||||||||||||||||||
| Other | 28.1 | 2.2 | 30.3 | 2.8 | (2.2) | (7.3) | (9.9) | ||||||||||||||||||||||||||||||||||
| Total | $ | 1,265.8 | 100.0 | % | $ | 1,085.2 | 100.0 | % | $ | 180.6 | 16.6 | % | 13.0 | % | |||||||||||||||||||||||||||
Americas Net Sales. Americas net sales increased $89.2 million, or 20.6% (19.3% in constant currency), during the Year To Date Period in comparison to the Prior Year YTD Period. During the Year To Date Period, sales increased in most brands in our watch portfolio, with the largest increases in MICHAEL KORS® and FOSSIL. Geographically, sales increased in the U.S. and Mexico and declined in Canada. Comparable retail sales in the region increased moderately on a 39-week calendar basis during the Year To Date Period, driven by improved conversion and increased traffic compared to the Prior Year YTD Period.
The following table sets forth product net sales and 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 39 Weeks Ended October 2, 2021 | For the 40 Weeks Ended October 3, 2020 | Growth (Decline) | |||||||||||||||||||||||||||||||||||||||
| Net Sales | Percentage of Total | Net Sales | Percentage of Total | Dollars | Percentage As Reported | Percentage Constant Currency | |||||||||||||||||||||||||||||||||||
| Watches | $ | 413.4 | 79.1 | % | $ | 346.6 | 79.9 | % | $ | 66.8 | 19.3 | % | 18.0 | % | |||||||||||||||||||||||||||
| Leathers | 63.9 | 12.2 | 67.7 | 15.6 | (3.8) | (5.6) | (6.6) | ||||||||||||||||||||||||||||||||||
| Jewelry | 40.5 | 7.7 | 14.7 | 3.4 | 25.8 | 175.5 | 172.1 | ||||||||||||||||||||||||||||||||||
| Other | 5.2 | 1.0 | 4.8 | 1.1 | 0.4 | 8.3 | 10.4 | ||||||||||||||||||||||||||||||||||
| Total | $ | 523.0 | 100.0 | % | $ | 433.8 | 100.0 | % | $ | 89.2 | 20.6 | % | 19.3 | % | |||||||||||||||||||||||||||
Europe Net Sales. Europe net sales increased $56.4 million, or 16.4% (10.7% in constant currency), during the Year To Date Period in comparison to the Prior Year YTD Period. During the Year To Date Period, most of the brands in the portfolio increased, with the largest sales increases in MICHAEL KORS, FOSSIL and EMPORIO ARMANI, driven mainly by increases in digital sales. Comparable retail sales in the region decreased significantly on a 39-week calendar basis during the Year To Date Period, driven by traffic declines due to the COVID-19 pandemic.
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 39 Weeks Ended October 2, 2021 | For the 40 Weeks Ended October 3, 2020 | Growth (Decline) | |||||||||||||||||||||||||||||||||||||||
| Net Sales | Percentage of Total | Net Sales | Percentage of Total | Dollars | Percentage As Reported | Percentage Constant Currency | |||||||||||||||||||||||||||||||||||
| Watches | $ | 309.5 | 77.5 | % | $ | 265.2 | 77.3 | % | $ | 44.3 | 16.7 | % | 11.0 | % | |||||||||||||||||||||||||||
| Leathers | 19.9 | 5.0 | 22.6 | 6.6 | (2.7) | (11.9) | (17.3) | ||||||||||||||||||||||||||||||||||
| Jewelry | 62.0 | 15.5 | 47.5 | 13.8 | 14.5 | 30.5 | 24.2 | ||||||||||||||||||||||||||||||||||
| Other | 8.1 | 2.0 | 7.8 | 2.3 | 0.3 | 3.8 | (1.3) | ||||||||||||||||||||||||||||||||||
| Total | $ | 399.5 | 100.0 | % | $ | 343.1 | 100.0 | % | $ | 56.4 | 16.4 | % | 10.7 | % | |||||||||||||||||||||||||||
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Asia Net Sales. Asia net sales increased $36.4 million, or 12.3% (7.6% in constant currency), during the Year To Date Period in comparison to the Prior Year YTD Period. During the Year To Date Period, sales increased in multiple brands, with the largest sales increases in EMPORIO ARMANI, ARMANI EXCHANGE® and FOSSIL. The majority of the region's sales increase came from mainland China and India, while sales in South Korea declined. For the Year To Date Period, comparable retail sales declined moderately on a 39-week calendar basis, driven by traffic declines due to the COVID-19 pandemic.
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 39 Weeks Ended October 2, 2021 | For the 40 Weeks Ended October 3, 2020 | Growth (Decline) | |||||||||||||||||||||||||||||||||||||||
| Net Sales | Percentage of Total | Net Sales | Percentage of Total | Dollars | Percentage As Reported | Percentage Constant Currency | |||||||||||||||||||||||||||||||||||
| Watches | $ | 290.8 | 87.7 | % | $ | 264.1 | 89.5 | % | $ | 26.7 | 10.1 | % | 5.6 | % | |||||||||||||||||||||||||||
| Leathers | 20.1 | 6.1 | 21.4 | 7.2 | (1.3) | (6.1) | (10.3) | ||||||||||||||||||||||||||||||||||
| Jewelry | 16.7 | 5.0 | 5.1 | 1.7 | 11.6 | 227.5 | 207.8 | ||||||||||||||||||||||||||||||||||
| Other | 4.0 | 1.2 | 4.6 | 1.6 | (0.6) | (13.0) | (15.2) | ||||||||||||||||||||||||||||||||||
| Total | $ | 331.6 | 100.0 | % | $ | 295.2 | 100.0 | % | $ | 36.4 | 12.3 | % | 7.6 | % | |||||||||||||||||||||||||||
Gross Profit. Gross profit of $664.0 million in the Year To Date Period increased $153.2 million, or 30.0%, in comparison to $510.7 million in the Prior Year YTD Period primarily due to the increase in net sales. Gross profit margin rate increased to 52.5% in the Year To Date Period compared to 47.1% in the Prior Year YTD Period. The gross profit margin rate increased primarily due to decreased liquidation and inventory valuation adjustments of older generation connected products, which most heavily impacted the first quarter of fiscal year 2020. Additionally, the gross profit margin rate was favorably impacted by currency changes, reduced levels of minimum licensed product royalties and reduced tariffs, partially offset by unfavorable region mix and product mix.
Operating Expenses. For the Year To Date Period, total operating expenses decreased to $618.6 million, or 48.9% of sales, compared to $664.4 million, or 61.2% of sales, in the Prior Year YTD Period. SG&A expenses were $593.5 million in the Year To Date Period compared to $611.2 million in the Prior Year YTD Period, mainly due to corporate and regional infrastructure reductions and lower store costs as a result of store closures and were partially offset by increased marketing costs. As a percentage of net sales, SG&A expenses decreased to 46.9% in the Year To Date Period as compared to 56.3% in the Prior Year YTD Period, mainly driven by the contraction of sales in the Prior Year YTD Period due to the COVID-19 pandemic. During the Year To Date Period, we incurred restructuring costs of $18.7 million in comparison to restructuring costs of $25.6 million in the Prior Year YTD Period. We incurred $6.3 million of other long-lived asset impairments and no non-cash intangible asset impairment charges in the Year To Date Period compared to charges of $25.1 million and $2.5 million, respectively, in the Prior Year YTD Period. The translation of foreign-denominated expenses during the Year To Date Period increased operating expenses by $16.7 million as a result of the weaker U.S. dollar.
Operating Income (Loss). Operating income was $45.4 million in the Year To Date Period as compared to a loss of $153.6 million in the Prior Year YTD Period. The improvement in operating income (loss) primarily resulted from the $180.6 million increase in net sales due to the effects of the COVID-19 pandemic in the Prior Year YTD Period, improved margin rate and reduced operating expenses in the Year To Date Period compared to the Prior Year YTD Period. As a percentage of net sales, operating margin was 3.6% in the Year To Date Period as compared to (14.2)% in the Prior Year YTD Period and was positively impacted by approximately 190 basis points due to changes in foreign currencies.
Operating income (loss) by segment is summarized as follows (dollars in millions):
| For the 39 Weeks Ended October 2, 2021 | For the 40 Weeks Ended October 3, 2020 | Change | Operating Margin | ||||||||||||||||||||||||||||||||
| Dollars | Percentage | 2021 | 2020 | ||||||||||||||||||||||||||||||||
| Americas | $ | 109.2 | $ | 12.7 | $ | 96.5 | 759.8 | % | 20.9 | % | 2.9 | % | |||||||||||||||||||||||
| Europe | 67.6 | 2.2 | 65.4 | 2,972.7 | 16.9 | 0.6 | |||||||||||||||||||||||||||||
| Asia | 50.6 | 44.8 | 5.8 | 12.9 | 15.2 | 15.2 | |||||||||||||||||||||||||||||
| Corporate | (182.0) | (213.3) | 31.3 | 14.7 | |||||||||||||||||||||||||||||||
| Total operating income (loss) | $ | 45.4 | $ | (153.6) | $ | 199.0 | 129.6 | % | 3.6 | % | (14.2) | % | |||||||||||||||||||||||
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Interest Expense. Interest expense decreased by $3.1 million during the Year To Date Period primarily driven by a lower debt balance.
Other Income (Expense)-Net. During the Year To Date Period, other income (expense)-net was income of $0.9 million compared to expense of $6.4 million in the Prior Year YTD Period. This change was primarily driven by reduced net foreign currency losses during the Year To Date Period as compared to the Prior Year YTD Period.
Provision for Income Taxes. Income tax expense for the Year To Date Period was $19.2 million, resulting in an effective income tax rate of 73.8%. The Prior Year YTD Period income tax benefit was $91.3 million resulting in an effective tax rate of 49.7%. The effective tax rate in the Year To Date Period differed from the Prior Year YTD Period primarily due to changes enacted in the CARES Act allowing a U.S. NOL carryback. The Year To Date Period effective tax rate was higher as compared to the Prior Year YTD Period because income tax expense was accrued on certain foreign entities with positive taxable income whereas no income tax benefit was recognized for U.S. and certain foreign entity losses.
Net Income (Loss) Attributable to Fossil Group, Inc. For the Year To Date Period, net income was $5.8 million, or $0.11 per diluted share, in comparison to a loss of $92.1 million, or $1.81 per diluted share, in the Prior Year YTD Period. The year-over-year improvement was mainly driven by increased sales due to the effects of the COVID-19 pandemic in the Prior Year YTD Period, improved margin rate and reduced operating expenses in the Year To Date Period, compared to the Prior Year YTD Period. Currency fluctuations favorably impacted diluted earnings per share by $0.44 in the Year To Date Period, as compared to the Prior Year YTD Period.
Liquidity and Capital Resources
Our cash and cash equivalents balance at the end of the Third Quarter was $181.8 million, including $167.9 million held in banks outside the U.S., in comparison to cash and cash equivalents of $323.6 million at the end of the Prior Year Quarter and $316.0 million at the end of fiscal year 2020. Historically, our business operations have not required substantial cash during the first several months of our fiscal year. 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 and other capital expenditures. We believe cash flows from operations, including our current and planned cost savings measures, combined with existing cash on hand and amounts available under our credit facilities will be sufficient to fund our cash needs for the next twelve months. 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.
For the Year To Date Period, we had an operating cash flow deficit of $37.0 million. Net income of $6.8 million and favorable net non-cash items of $102.5 million were more than offset by an increase in working capital items of $146.3 million. During the Year To Date Period, we had net debt payments of $94.8 million and capital expenditures of $6.7 million.
Accounts receivable, net of allowances, increased by 32.5% to $251.5 million at the end of the Third Quarter compared to $189.8 million at the end of the Prior Year Quarter, mainly driven by the increase in sales. Days sales outstanding for our wholesale businesses for the Third Quarter increased to 60 days compared to 54 days in the Prior Year Quarter.
Inventory at the end of the Third Quarter was $398.3 million, which increased by 10.8% from the end of the Prior Year Quarter ending inventory balance of $359.5 million.
At the end of the Third Quarter, we had net working capital of $418.1 million compared to net working capital of $457.9 million at the end of the Prior Year Quarter. At the end of the Third Quarter, we had $41.2 million of short-term borrowings and $97.4 million in long-term debt.
For fiscal year 2021, we expect total capital expenditures to be approximately $15 million. Our capital expenditure budget is an estimate and is subject to change.
Senior Notes: On November 8, 2021, we sold $150.0 million aggregate principal amount of our Senior Notes, generating net proceeds of approximately $141.7 million. On November 8, 2021, we used the majority of the net proceeds from the Notes Offering to repay all of the outstanding borrowings under the Term Credit Agreement. In connection with the repayment of the outstanding borrowings under the Term Credit Agreement, we incurred prepayment fees and accrued interest costs of $2.6 million. The remaining net proceeds will be used for general corporate purposes.
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The Senior Notes are our general unsecured obligations. The Senior Notes bear interest at the rate of 7.00% per annum. Interest on the Senior Notes is payable quarterly in arrears on February 28, May 31, August 31 and November 30 of each year, commencing on February 28, 2022. The Senior Notes will mature on November 30, 2026. We may redeem the Senior 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 Senior 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 Senior 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 Senior 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 Senior Notes and (iii) on or after November 30, 2025, at a price equal to $25.00 per $25.00 principal amount of Senior Notes, plus (in each case noted above) accrued and unpaid interest, if any, to, but excluding, the date of redemption.
Term Credit Agreement: On February 20, 2020, we entered into Amendment No. 1 to that certain Term Credit Agreement, dated as of September 26, 2019, by and among us, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders (the “Term Credit Agreement Lenders”) party thereto (as amended to date, the “Term Credit Agreement”). On May 12, 2020, we entered into Amendment No. 2 to the Term Credit Agreement to extend the deadline for delivery of our unaudited quarterly financial statements and related deliverables for the fiscal quarter ended April 4, 2020. On June 5, 2020, we entered into Amendment No. 3 (the “Third Amendment”) to the Term Credit Agreement to further modify certain terms of the Term Credit Agreement to address the financial impact of COVID-19. On November 8, 2021, we used the majority of the net proceeds from the Notes Offering to repay all of the outstanding borrowings under the Term Credit Agreement. In connection with the repayment of the outstanding borrowings under the Term Credit Agreement, we incurred prepayment fees and accrued interest costs of $2.6 million and wrote off $7.1 million of debt issuance costs and $4.6 million of original issuance discount related to the Term Credit Agreement.
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 (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").
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 $70.0 million is available under a European facility, $20.0 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, minus (iv) 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.
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We had net payments of $30.0 million during the Year To Date Period under the Term Credit Agreement at an average interest rate of 10.0%. We had net payments of $64.0 million under the Revolving Facility during the Year To Date Period at an average interest rate of 1.8%. Amounts available under the Revolving Facility are reduced by any amounts outstanding under standby letters of credit. As of October 2, 2021, we had available borrowing capacity of $123.6 million under the Revolving Facility. At October 2, 2021, we were in compliance with all debt covenants related to our credit facilities. On November 8, 2021, we issued $150.0 million of Senior Notes, repaid the outstanding borrowings under the Term Credit Agreement, incurred prepayment fees and accrued interest costs of $2.6 million and wrote off $7.1 million of debt issuance costs and $4.6 million of original issuance discount related to the Term Credit Agreement.
Off Balance Sheet Arrangements
As of October 2, 2021, there were no material changes to our off balance sheet arrangements as set forth in commitments and contingencies in our Annual Report on Form 10-K/A for the fiscal year ended January 2, 2021.
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 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/A for the fiscal year ended January 2, 2021.
Forward-Looking Statements
The statements contained in this Quarterly Report on Form 10-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: the effect of worldwide economic conditions; the impact of COVID-19; the length and severity of COVID-19; the pace of recovery following COVID-19 and the availability, widespread distribution and use of effective vaccines; significant changes in consumer spending patterns or preferences; interruptions or delays in the supply of key components; 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 COVID-19, a general economic downturn or generally reduced shopping activity caused by public safety (including COVID-19) 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, including risks related to the expanded launch of connected accessories; changes in the mix of product sales; our ability to maintain proper inventory levels; financial difficulties encountered by customers and related bankruptcy and collection issues; the effects of vigorous competition in the markets in which we operate; compliance with debt covenants and other contractual provisions; risks related to the success of our business strategy and restructuring programs; the termination or non-renewal of material licenses; risks related to foreign operations and manufacturing; changes in the costs of materials, labor and advertising; 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; 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/A for the fiscal year ended January 2, 2021. 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.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Rate Risk
As a multinational enterprise, we are exposed to changes in foreign currency exchange rates. Our most significant foreign currency risk relates to the euro and, to a lesser extent, the Canadian dollar, Japanese yen, British pound, Australian dollar and Mexican peso as compared to the U.S. dollar. Due to our vertical nature whereby a significant portion of goods are sourced from our owned entities, we face foreign currency risks related to the necessary current settlement of intercompany inventory transactions. We employ a variety of operating practices to manage these market risks relative to foreign currency exchange rate changes and, where deemed appropriate, utilize forward contracts. These operating practices include, among others, our ability to convert foreign currency into U.S. dollars at spot rates and to maintain U.S. dollar pricing relative to sales of our products to certain distributors located outside the U.S. Additionally, we enter 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. The use of forward contracts allows us to offset exposure to rate fluctuations because the gains or losses incurred on the derivative instruments will offset, in whole or in part, losses or gains on the underlying foreign currency exposure. We use derivative instruments only for risk management purposes and do not use them for speculation or for trading. There were no significant changes in how we managed foreign currency transactional exposure in the Third Quarter, and management does not anticipate any significant changes in such exposures or in the strategies we employ to manage such exposure in the near future.
The following table shows our outstanding forward contracts designated as cash flow hedges for inventory transactions (in millions) at October 2, 2021 and their expiration dates.
| Functional Currency | Contract Currency | |||||||||||||||||||||||||
| Type | Amount | Type | Amount | Expiring Through | ||||||||||||||||||||||
| Euro | 68.3 | U.S. dollar | 82.7 | November 2022 | ||||||||||||||||||||||
| Canadian dollar | 14.3 | U.S. dollar | 11.4 | December 2022 | ||||||||||||||||||||||
| Japanese yen | 1,047.1 | U.S. dollar | 9.7 | December 2022 | ||||||||||||||||||||||
| British pound | 5.6 | U.S. dollar | 7.7 | December 2022 | ||||||||||||||||||||||
| Australian dollar | 5.6 | U.S. dollar | 4.2 | June 2022 | ||||||||||||||||||||||
| Mexican peso | 81.1 | U.S. dollar | 4.0 | March 2022 | ||||||||||||||||||||||
| U.S. dollar | 8.4 | Japanese yen | 925.0 | May 2022 | ||||||||||||||||||||||
If we were to settle our forward contracts listed in the table above as of October 2, 2021, the result would have been a net gain of $3.9 million. As of October 2, 2021, a 10% unfavorable change in the U.S. dollar strengthening against foreign currencies to which we have balance sheet transactional exposures would have decreased net pre-tax income by $25.0 million. The translation of the balance sheets of our foreign-based operations from their local currencies into U.S. dollars is also sensitive to changes in foreign currency exchange rates. As of October 2, 2021, a 10% unfavorable change in the exchange rate of the U.S. dollar strengthening against the foreign currencies to which we have exposure would have reduced consolidated stockholders' equity by approximately $55.2 million.
Interest Rate Risk
We are subject to interest rate volatility with regard to debt borrowings. Based on our variable-rate debt outstanding as of October 2, 2021, a 100 basis point increase in interest rates would increase annual interest expense by $1.8 million.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”), as defined by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this Quarterly Report on Form 10-Q. The Disclosure Controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
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Based upon this evaluation, our CEO and CFO have concluded that our Disclosure Controls were effective as of October 2, 2021.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the Third Quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
There are no legal proceedings to which we are a party or to which our properties are subject, other than routine litigation incidental to our business that is not material to our consolidated financial condition, results of operations or cash flows.
Item 1A. Risk Factors
This section supplements and updates certain of the information found under Part I, Item1A. "Risk Factors” of our Annual Report on Form10-K/A for the fiscal year ended January 2, 2021 filed with the Securities and Exchange Commission on April 5, 2021 (the "2020 Form10-K/A”), and is based on the information currently known to us and recent developments since the date of the 2020 Form10-K/A filing. The matters discussed below should be read in conjunction with the risk factors set forth in the 2020 Form10-K/A.
However, the risks and uncertainties that we face are not limited to those described below and those set forth in the 2020 Form10-K/A. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business and the trading price of our common stock, particularly in light of the fast-changing nature of the COVID-19 pandemic, containment measures and the related impacts to economic and operating conditions.
COVID-19 Pandemic Risks
The COVID-19 pandemic has had, and is expected to continue to have, a material adverse impact on our business, operations, liquidity, financial condition and results of operations.
The COVID-19 pandemic has continued to cause global uncertainty and disruption throughout the geographic regions in which we run our business and where our suppliers, third-party manufacturers, retail stores, wholesale customers and consumers are located. The total impact of the pandemic on us will depend on developments outside of our control, including, among other factors, the duration, spread, severity and impact of the outbreak, availability of effective vaccines and vaccination rates, continuing and new actions that may be taken by governmental authorities to contain the outbreak or mitigate its impact, including effects of vaccine mandates, restrictions on movement and commercial activities and further stimulus and unemployment benefits, the economic or other impacts on our wholesale customers, the impact on our supply chain, manufacturing delays and the uncertainty with respect to the accessibility of additional liquidity or to the capital markets.
Even after the COVID-19 outbreak has subsided, we could experience materially adverse impacts to our business as a result of an economic recession or depression that may occur. In addition, any continued erosion in consumer sentiment or the effect of high unemployment on our consumer base would likely impact the financial condition of our customers and vendors, which may result in a decrease in discretionary consumer spending and lower store traffic and sales, and an increase in bankruptcies or insolvencies with respect to our suppliers or wholesale customers.
The duration of the COVID-19 impact is uncertain. In the event of a prolonged material economic downturn, including circumstances that require further or continued store closures or that result in further or continued reduction in store traffic, we may not be able to comply with the financial covenants in our debt agreements, which could negatively impact our borrowing ability, negatively impact our liquidity position and may increase our risk of insolvency.
In addition, the effects of COVID-19 could affect our ability to successfully operate in many ways, including, but not limited to, the following factors:
•the impact of the pandemic on the economies and financial markets of the countries and regions in which we operate, including a potential global recession, a decline in consumer confidence and spending, or a further increase in unemployment levels, has resulted, and could continue to result, in consumers having less disposable income and, in turn, decreased sales of our products;
•“shelter in place” and other similar mandated or suggested isolation protocols, which have disrupted, and could continue to disrupt, our retail locations and wholesale customers’ stores, as a result of store closures or reduced operating hours and decreased retail traffic;
•the acceleration in a shift in our core customer’s behaviors, expectations and shopping trends, which could result in lost sales and market share if we are not able to successfully increase the pace of our strategic initiatives development, particularly our digital strategic initiatives, and if our current digital shopping offerings do not continue to compete effectively;
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•the failure of, or delay by, our wholesale customers or third-party distributors to whom we extend credit to pay invoices, particularly our major wholesale accounts and third-party distributors that are significantly impacted by COVID-19;
•COVID-19 and remote-work oriented phishing and similar cybersecurity attack attempts;
•operating challenges with a fully or part time remote workforce and the effectiveness of health and safety measures;
•retaining and attracting employees, particularly at our retail stores, as a result of a decrease in the number of potential employees in the workforce;
•the risk that even after the pandemic has initially subsided, fear of a COVID-19 re-occurrence could cause consumers to avoid public places where our stores and those of our wholesale customers are located, such as malls and outlets; and
•we may be required to revise certain accounting estimates and judgments such as, but not limited to, those related to the valuation of long-lived assets and deferred tax assets, which could have a material adverse effect on our financial position and results of operations.
Our supply chain may be disrupted by changes in U.S. trade policy with China or as a result of the COVID-19 pandemic.
We rely on domestic and foreign suppliers to provide us with merchandise in a timely manner and at favorable prices. Among our foreign suppliers, China is the source of a substantial majority of our imports. We have experienced, and expect to continue to experience, increased international transit times, particularly for our leathers products and packaging, and increased shipping costs for a majority of our products. A disruption in the flow of our imported merchandise from China or a material increase in the cost of those goods or transportation without any offsetting price increases may significantly decrease our profits.
New U.S. tariffs or other actions against China, including actions related to the COVID-19 pandemic, and any responses by China, could impair our ability to meet customer demand and could result in lost sales or an increase in our cost of merchandise. This would have a material adverse impact on our business and results of operations.
The extent to which the COVID-19 pandemic ultimately impacts our business, financial performance and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, availability of effective vaccines and vaccination rates, effects of vaccine mandates and how quickly and to what extent normal economic and operating conditions can resume.
Legal, Compliance and Reputational risks
A data security or privacy breach could damage our reputation, harm our customer relationships, expose us to litigation or government actions, and result in a material adverse effect to our business, financial condition and results of operations.
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. Our customers have a high expectation that we will adequately protect their personal information. In addition, personal information is highly regulated at the international, federal and state level.
While we and our third-party service providers have safeguards in place to defend our systems against intrusions and attacks and to protect our data, we cannot be certain that these measures are sufficient to counter all current and emerging technology threats. 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, and 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.
Any electronic or physical security breach involving the misappropriation, loss, or other unauthorized disclosure of confidential or personally identifiable information, including penetration of our network security or those of our third party service providers, could disrupt our business, severely damage our reputation and our customer relationships, expose us to litigation and liability, subject us to governmental investigations, fines and enforcement actions, result in negative media coverage and distraction to management and result in a material adverse effect to our business, financial condition, and results of operations. In addition, as a result of security breaches at a number of prominent retailers and other companies, the media
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and public scrutiny of information security and privacy has become more intense and the regulatory environment related thereto has become more uncertain. As a result, we may incur significant costs in complying with new and existing state, federal, and foreign laws regarding protection of, and unauthorized disclosure of, personal information. A successful ransomware attack on our systems could make them inaccessible for a period of time pending the payment of a ransom to unlock the systems or our ability to otherwise restore our access to our systems.
We are subject to laws and regulations in the U.S. and the many countries in which we operate. Violations of laws and regulations, or changes to existing laws or regulations, could have a material adverse effect on our financial condition or results of operations.
Our operations are subject to domestic and international laws and regulations in a number of areas, including, but not limited to, labor, advertising, consumer protection, real estate, product safety, e-commerce, promotions, intellectual property, tax, import and export, anti-corruption, anti-bribery, foreign exchange controls and cash repatriation, data privacy, anti-competition, environmental, health and safety. Compliance with these numerous laws and regulations is complicated, time consuming and expensive, and the laws and regulations may be inconsistent from jurisdiction to jurisdiction, further increasing the difficulty and cost to comply with them. New laws and regulations, or changes to existing laws and regulations, could individually or in the aggregate make our products more costly to produce, delay the introduction of new products in one or more regions, cause us to change or limit our business practices, or affect our financial condition and results of operations. We have implemented policies and procedures designed to ensure compliance with the numerous laws and regulations affecting our business, but there can be no assurance that our employees, contractors, or agents will not violate such laws, regulations or our policies related thereto. Any such violations could have a material adverse effect on our financial condition or operating results.
Tariffs or other restrictions placed on imports from China and any retaliatory trade measures taken by China could materially harm our revenue and results of operations.
Beginning in July 2018, certain of our products have been subject to additional ad valorem duties imposed by the U.S. government on products of China under Section 301 of the Trade Act of 1974. These tariffs, imposed via four successive “Lists” were the result of an April 2018 determination by the Office of the U.S. Trade Representative that China’s acts, practices, and policies with respect to technology transfer, intellectual property, and innovation are unreasonable or discriminatory and burden or restrict U.S. commerce.
In particular, certain of our packaging and handbag products have been subject to an additional 25% ad valorem tariff, based on the first sale export price as imported into the U.S., since July 2018 (“List 1”). Certain of our handbag and wallet products were subject to an additional 10% ad valorem tariff, based on the first sale export price as imported into the U.S., beginning in September 2018, a rate that was then raised to 25% ad valorem from June 2019 to present (“List 3”). Finally, smart watches, certain jewelry products, and several of our traditional watch products were subject to an additional 15% ad valorem tariff, based on the first sale export price as imported into the U.S., beginning in September 2019, a rate that was lowered to 7.5% ad valorem from February 2020 to present (“List 4A”).
Biden Administration officials have publically stated that, while these tariffs are under review, they are likely to remain in place for the foreseeable future. However, we have joined litigation before the U.S. Court of International Trade challenging the legality of the Section 301 List 3 and List 4A tariffs and seeking refunds of duties paid on imports that were subject to those tariffs. That litigation is ongoing with a decision possible in early 2022 at the earliest. As a result, it is difficult to accurately estimate the impact on our business from these tariff actions or similar actions. However, assuming no further offsets from price increases, sourcing changes, or other changes to trade policy and regulatory rulings, all of which are currently under review, the estimated gross profit exposure from the Section 301 tariffs is approximately $1.1 million in the fourth quarter of fiscal year 2021.
If the tariffs continue or increase, we may be required to raise our prices, which may result in the loss of customers and harm our operating performance. Alternatively, we may seek to shift production outside of China or otherwise change our sourcing strategy for these products, resulting in significant costs and disruption to our operations. Even if the U.S. further modifies these tariffs, it is always possible that our business will be impacted by retaliatory trade measures taken by China or other countries in response to existing or future tariffs, causing us to raise prices or make changes to our operations, any of which could materially harm our revenue or operating results.
The loss of our intellectual property rights may harm our business.
Our trademarks, patents and other intellectual property rights are important to our success and competitive position. We are devoted to the establishment and protection of our trademarks, patents and other intellectual property rights in those countries where we believe it is important to our ability to sell our products. However, we cannot be certain that the actions we have taken will result in enforceable rights, will be adequate to protect our products in every country where we may want to sell
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our products, will be adequate to prevent imitation of our products by others or will be adequate to prevent others from seeking to prevent sales of our products as a violation of the trademarks, patents or other intellectual property rights of others. Additionally, we rely on the patent, trademark and other intellectual property laws of the U.S. and other countries to protect our proprietary rights. Even if we are successful in obtaining appropriate trademark, patent and other intellectual property rights, we may be unable to prevent third parties from using our intellectual property without our authorization, particularly in those countries where the laws do not protect our proprietary rights as fully as in the U.S. Because we sell our products internationally and are dependent on foreign manufacturing in China, we are significantly dependent on foreign countries to protect our intellectual property rights. The use of our intellectual property or similar intellectual property by others could reduce or eliminate any competitive advantage we have developed, causing us to lose sales or otherwise harm our business. Further, if it became necessary for us to resort to litigation to protect our intellectual property rights, any proceedings could be burdensome and costly and we may not prevail. The failure to obtain or maintain trademark, patent or other intellectual property rights could materially harm our business.
Our products may infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling certain of our products.
We cannot be certain that our products do not and will not infringe upon the intellectual property rights of others. The wearable technology space is rapidly developing with new innovation, which will likely result in a significant number of domestic and international patent filings for new technology. As a result, wearable technology companies may be subject to an increasing number of claims that their products infringe the intellectual property rights of competitors or non-practicing entities. As we increase our wearable technology and other product offerings, we have been, are and may in the future be subject to legal proceedings, including claims of alleged infringement of the intellectual property rights of third parties by us and our customers in connection with their marketing and sale of our products. Any such claims, whether or not meritorious, could result in costly litigation and divert the efforts of our personnel. Moreover, should we be found liable for infringement, we may be required to enter into agreements (if available on acceptable terms or at all) or to pay damages and cease making or selling certain products. Moreover, we may need to redesign or rename some of our products to avoid future infringement liability. Any of the foregoing could cause us to incur significant costs and prevent us from manufacturing or selling certain of our products.
If an independent manufacturer or license partner of ours fails to use acceptable labor practices or otherwise comply with laws or suffers reputation harm, our business could suffer.
While we have a code of conduct for our manufacturing partners, we have no control over the ultimate actions or labor practices of our independent manufacturers. The violation of labor or other laws by one of our independent manufacturers, or by one of our license partners, or the divergence of an independent manufacturer's or license partner's labor practices from those generally accepted as ethical in the U.S. or other countries in which the violation or divergence occurred, could interrupt or otherwise disrupt the shipment of finished products to us or damage our reputation. In addition, certain of our license agreements are with named globally recognized fashion designers. Should one of these fashion designers, or any or our licensor companies, conduct themselves inappropriately or make controversial statements, the underlying brand, and consequently our business under that brand, could suffer. Any of these, in turn, could have a material adverse effect on our financial condition and results of operations. As a result, should one of our independent manufacturers or licensors be found in violation of state or international laws or receive negative publicity, we could suffer financial or other unforeseen consequences.
Risks Relating to Our Common Stock
Our shares of common stock have recently experienced extreme volatility in market prices and trading volume and purchasers of our common stock could incur substantial losses due to similar volatility in the future.
The extreme volatility of the market prices and trading volume that our shares of common stock have recently experienced, and may continue to experience, could cause purchasers of our common stock to incur substantial losses. For example, from January 1, 2021 to the date hereof, the market price of our common stock has fluctuated from an intra-day low on the NASDAQ Global Select Market of $8.43 per share on January 4, 2021 to an intra-day high of $28.60 per share on January 27, 2021. For comparison, during the month of December 2020, prior to the recent onset of extreme volatility, the market price of our common stock on the NASDAQ Global Select Market fluctuated from intra-day low of $8.38 per share on December 29, 2020 to an intra-day high of $13.61 per share on December 14, 2020. Significant fluctuations in the market price of our common stock have been accompanied by reports of strong and atypical retail investor interest, including on social media and online forums. The market volatility and trading patterns we have experienced create several risks for investors, including the following:
•the market price of our common stock may experience rapid and substantial increases or decreases unrelated to our operating performance, financial condition or business prospects, or macro or industry fundamentals;
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•factors in the public trading market for our common stock may include the sentiment of retail investors (including as may be expressed on financial trading and other social media sites and online forums), the direct access by retail investors to broadly available trading platforms, the amount and status of short interest in our securities, access to margin debt, trading in options and other derivatives on our common stock and any related hedging and other trading factors;
•our market capitalization, as implied by various trading prices, has reflected valuations that diverge significantly from those seen prior to recent volatility and that are significantly higher than our market capitalization immediately prior to such recent volatility, which began on or about January 25, 2021, and to the extent these valuations reflect trading dynamics unrelated to our financial performance or business prospects, purchasers of our common stock could incur substantial losses if there are declines in market prices driven by a return to earlier valuations of the Company;
•to the extent volatility in our common stock is caused by a “short squeeze” in which coordinated trading activity causes a spike in the market price of our common stock as traders with a short position make market purchases to avoid or to mitigate potential losses, investors may purchase at inflated prices unrelated to our financial performance or prospects, and may thereafter suffer substantial losses as prices decline once the level of short-covering purchases has abated; and
•if the market price of our common stock declines, investors may be unable to resell their shares of common stock at or above the price at which they acquired them.
We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future, in which case investors could incur substantial losses.
We may continue to incur rapid and substantial increases or decreases in our stock price in the foreseeable future that may not coincide in timing with the disclosure of news or developments by or affecting us. Accordingly, the market price of our common stock may fluctuate dramatically, and may decline rapidly, regardless of any developments in our business.
Overall, there are various factors, many of which are beyond our control, that could negatively affect the market price of our common stock or result in fluctuations in the price or trading volume of our common stock, including:
•the ongoing impacts and developments relating to the COVID-19 pandemic;
•actual or anticipated variations in our annual or quarterly results of operations, including our earnings estimates and whether we meet market expectations with regard to our earnings;
•our current inability to pay dividends or other distributions;
•publication of research reports by analysts or others about us or the specialty retail industry, which may be unfavorable, inaccurate, inconsistent or not disseminated on a regular basis;
•changes in market valuations of similar companies;
•market reaction to any additional equity, debt or other securities that we may issue in the future, and which may or may not dilute the holdings of our existing stockholders;
•additions or departures of key personnel;
•actions by institutional or significant stockholders;
•short interest in our stock and the market response to such short interest;
•a dramatic increase in the number of individual holders of our stock and their participation in social media platforms targeted at speculative investing;
•speculation in the press or investment community about our company or industry;
•strategic actions by us or our competitors, such as acquisitions or other investments;
•legislative, administrative, regulatory or other actions affecting our business, our industry, including positions taken by the Internal Revenue Service (“IRS”);
•investigations, proceedings, or litigation that involve or affect us;
•the occurrence of any of the other risk factors included or incorporated by reference in this prospectus; and
•general market and economic conditions.
A “short squeeze” due to a sudden increase in demand of our common stock that largely exceeds supply may lead to additional price volatility.
Investors may purchase shares of our common stock to hedge existing exposure or to speculate on the price of our common stock. Speculation on the price of our common stock may involve long and short exposures. To the extent aggregate short exposure exceeds the number of shares of our common stock available for purchase on the open market, investors with short
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exposure may have to pay a premium to repurchase shares of our common stock for delivery to lenders of our common stock. Those repurchases may in turn, dramatically increase the price of our common stock until additional shares of our common stock are available for trading or borrowing. This is often referred to as a “short squeeze.” A proportion of our common stock has been and may continue to be traded by short sellers which may increase the likelihood that our common stock will be the target of a short squeeze. A short squeeze could lead to volatile price movements in shares of our common stock that are unrelated or disproportionate to our operating performance or prospectus and, once investors purchase the shares of our common stock necessary to cover their short positions, the price of our common stock may rapidly decline. Investors that purchase shares of our common stock during a short squeeze may lose a significant portion of their investment.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no shares of common stock repurchased under our repurchase program during the Third Quarter.
Item 5. Other Information
None.
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Item 6. Exhibits
(a) Exhibits
| Exhibit Number | Document Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 3.3 | ||||||||
| 4.1 | ||||||||
| 4.2 | ||||||||
| 4.3 | ||||||||
| 31.1(1) | ||||||||
| 31.2(1) | ||||||||
| 32.1(2) | ||||||||
| 32.2(2) | ||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||
_______________________________________________
(1) Filed herewith.
(2) Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FOSSIL GROUP, INC. | |||||
| November 12, 2021 | /S/ SUNIL M. DOSHI | ||||
| Sunil M. Doshi | |||||
| Senior Vice President, Chief Financial Officer and Treasurer (Principal financial and accounting officer duly authorized to sign on behalf of the Registrant) | |||||
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Exhibit 31.1
CERTIFICATION
I, Kosta N. Kartsotis, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Fossil Group, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| November 12, 2021 | /s/ KOSTA N. KARTSOTIS | ||||
| Kosta N. Kartsotis | |||||
| Chief Executive Officer | |||||
Exhibit 31.2
CERTIFICATION
I, Sunil M. Doshi, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Fossil Group, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| November 12, 2021 | /S/ SUNIL M. DOSHI | ||||
| Sunil M. Doshi | |||||
| Senior Vice President, Chief Financial Officer and Treasurer | |||||
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
I, Kosta N. Kartsotis, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge, the Quarterly Report of Fossil Group, Inc. on Form 10-Q for the quarter ended October 2, 2021, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Fossil Group, Inc.
| Dated: November 12, 2021 | By: | /s/ KOSTA N. KARTSOTIS | ||||||
| Name: | Kosta N. Kartsotis | |||||||
| Title: | Chief Executive Officer | |||||||
The foregoing certification is being furnished as an exhibit to the Form 10-Q pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the Form 10-Q for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
I, Sunil M. Doshi, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge, the Quarterly Report of Fossil Group, Inc. on Form 10-Q for the quarter ended October 2, 2021, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Fossil Group, Inc.
| Dated: November 12, 2021 | By: | /S/ SUNIL M. DOSHI | ||||||
| Name: | Sunil M. Doshi | |||||||
| Title: | Senior Vice President, Chief Financial Officer and Treasurer | |||||||
The foregoing certification is being furnished as an exhibit to the Form 10-Q pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the Form 10-Q for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.