8-K
Fossil Group, Inc. (FOSL)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 11, 2020
FOSSIL GROUP, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 0-19848 | 75-2018505 |
|---|---|---|
| (State or other jurisdiction of | (Commission File Number) | (IRS Employer |
| incorporation or organization) | Identification No.) | |
| 901 S. Central Expressway | ||
| --- | --- | --- |
| Richardson, | Texas | 75080 |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (972) 234-2525
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
☐ 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. ☐
| Title of each class | Ticker Symbol | Name of each exchange on which registered |
|---|---|---|
| Common Stock, par value $0.01 per share | FOSL | The Nasdaq Stock Market LLC |
Item 2.02 Results of Operations and Financial Condition.
On November 11, 2020, Fossil Group, Inc. (the “Company”) issued a press release announcing financial results for the fiscal quarter ended October 3, 2020. A copy of the press release is attached hereto as Exhibit 99.1. On November 11, 2020, the Company hosted a conference call to discuss these financial results. A recording of the conference call has been posted on the Company’s website at www.fossilgroup.com. A copy of the transcript from the call is attached hereto as Exhibit 99.2.
The information in this Current Report and the accompanying exhibit are being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and are not incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof, except as shall be expressly set forth by specific reference to this Current Report in such a filing.
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits
| Exhibit No. | Document Description |
|---|---|
| 99.1 | Press Release, dated November 11, 2020, announcing financial results for the fiscal quarter ended October 3, 2020. |
| 99.2 | Transcript of the November 11, 2020 conference call. |
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 hereunto duly authorized.
| Date: November 12, 2020 | ||
|---|---|---|
| FOSSIL GROUP, INC. | ||
| By: | /s/ JEFFREY N. BOYER | |
| Jeffrey N. Boyer | ||
| Chief Operating Officer, Chief Financial Officer and Treasurer |
Document
Exhibit 99.1
FOSSIL GROUP, INC. REPORTS THIRD QUARTER 2020 FINANCIAL RESULTS
Richardson, TX, NOVEMBER 11, 2020 (GLOBE NEWSWIRE) - Fossil Group, Inc. (NASDAQ: FOSL) today announced financial results for the third quarter ended October 3, 2020.
Third Quarter Summary
•Worldwide net sales of $435 million decreased 19% on a reported basis and 20% in constant currency. Topline performance was better than expected, due to continued strength in both owned and third party e-commerce, strong growth in Mainland China and modest improvement within the wholesale channel globally.
•On a constant currency basis, sales from the Company's owned e-commerce websites increased 66% and third party marketplace e-commerce sales increased 44% compared to prior year.
•Gross margin of 52.8%, representing 120 basis points of expansion compared to the third quarter of 2019.
•The Company reduced operating expenses by $75 million, or 26%, on a year-over-year basis, reflecting continued progress under its New World Fossil 2.0 - Transform to Grow program (“NWF 2.0”).
•Operating income of $18 million compared to an operating loss of $9 million a year ago, primarily reflecting gross margin and cost reduction benefits.
•Cash and cash equivalents of $324 million, and total debt of $239 million as of October 3, 2020.
“The organization continues to execute well in the face of a challenging environment,” stated Kosta Kartsotis, Chairman and CEO. “We outperformed our topline expectations in the third quarter, reflecting ongoing momentum in our digital channels and strong growth in mainland China, as well as trend improvement in the wholesale channel globally.”
“In addition, we are making good progress on our strategic priorities, with accelerated initiatives around our digital expansion programs and structural cost reduction efforts. Given the uncertain environment, we are remaining agile and continuing to closely manage liquidity, expenses and inventory as we position the business for future growth.”
Third Quarter 2020 Operating Results
Worldwide net sales totaled $435.5 million, a decrease of 19% on a reported basis and 20% in constant currency compared to $539.5 million in the third quarter of fiscal 2019. The year-over-year decline was primarily due to COVID-19 related traffic declines in both Fossil stores and wholesale doors. Partly offsetting brick-and-mortar sales declines was growth in digital channels, with owned e-commerce websites increasing 66% and dedicated third party marketplaces growing 44%, both on a constant currency basis. The following table provides a summary of net sales
performance, on both an as reported and constant currency basis, for the third quarter of 2020 compared to the 2019 third quarter (in millions, except percentage data).
| Third Quarter | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | Growth (Decline) | ||||||||||
| Amounts as Reported | Amounts as Reported | Dollars as Reported (1) | Constant Currency Dollars (2) | Percentage as Reported (1) | Percentage Constant Currency (2) | |||||||
| Americas | $ | 175 | $ | 220 | $ | (45) | $ | (43) | (20) | % | (20) | % |
| Europe | 135 | 174 | (39) | (44) | (22) | (25) | ||||||
| Asia | 120 | 143 | (23) | (24) | (16) | (17) | ||||||
| Corporate | 5 | 2 | 3 | 3 | 135 | 117 | ||||||
| Total net sales | $ | 435 | $ | 539 | $ | (104) | $ | (108) | (19) | % | (20) | % |
| Watches | $ | 357 | $ | 445 | $ | (88) | $ | (92) | (20) | % | (21) | % |
| Leathers | 38 | 54 | (16) | (17) | (31) | (31) | ||||||
| Jewelry | 29 | 28 | 1 | — | 2 | (1) | ||||||
| Other | 11 | 12 | (1) | 1 | 9 | 8 | ||||||
| Total net sales | $ | 435 | $ | 539 | $ | (104) | $ | (108) | (19) | % | (20) | % |
(1) Reported GAAP amounts include impacts from currency.
(2) Eliminates the effect of currency changes in fiscal 2020 to give investors a better understanding of the underlying trends within the business. See constant currency financial information at the end of this release for more information.
Gross profit totaled $229.8 million compared to $278.5 million in the third quarter of 2019. Gross margin increased 120 basis points to 52.8% versus 51.6% a year ago, primarily reflecting a higher mix of e-commerce sales, favorable region and product mix and favorable pricing on sell-through of older generation connected products, partially offset by heightened promotional activity and an unfavorable currency impact of approximately 120 basis points.
Operating expenses totaled $212.3 million compared to $287.7 million a year ago. Operating expenses in the third quarter of 2020 included $5.7 million of restructuring costs, primarily related to employee costs, professional services and store closures, while operating expenses in the third quarter of 2019 included $7.0 million of restructuring costs. Third quarter selling, general and administrative expenses decreased on a year-over-year basis, reflecting lower compensation, marketing and discretionary costs.
Third quarter operating income was $17.5 million compared to operating loss of $9.2 million in the third quarter of 2019. Net income totaled $16.0 million, or $0.31 per diluted share, compared to net loss of $25.9 million, or ($0.51) per diluted share, in the third quarter of 2019. Per share data included restructuring charges of $0.09 per diluted share in the third quarter of 2020 while per share data in the third quarter of 2019 included non-cash intangible asset impairment charges of $0.25 per diluted share and restructuring expenses of $0.11 per diluted share. During the third quarter of fiscal 2020, currencies, including both the translation impact on operating earnings and the impact of foreign currency hedging contracts, unfavorably affected income per diluted share by approximately $0.09.
New World Fossil 2.0 - Transform to Grow Initiative
During 2019, the Company initiated NWF 2.0, which was designed to deliver gross margin benefits and operating expense reductions totaling $200 million over the three-year period from 2019 to 2021. As a result of the unprecedented impact of COVID-19, earlier this year the Company significantly expanded its NWF 2.0 initiative to $250 million to include additional organizational efficiencies and accelerate its digital initiatives. The Company expects to generate $100 million in expense savings in 2020.
Balance Sheet Summary
As of October 3, 2020, the Company had cash and cash equivalents of $324 million and total debt of $239 million, including $162 million of borrowings under its Term Credit Agreement. Inventories at the end of third quarter 2020 totaled $360 million, a decrease of 37% versus a year ago, reflecting accelerated inventory reduction actions, primarily in older generation connected product, and proactive management of inbound receipts to align with reduced consumer demand.
COVID-19 Update
The Company is continuing to closely manage liquidity, expenses and inventory to navigate COVID-19 impacts and related macro uncertainty. During the third quarter, the Company:
•Reduced operating expenses across payroll, marketing, professional fees, travel and contract labor versus prior year;
•Closely managed working capital by reducing inventory receipts; and
•Reduced outstanding debt and revolving credit levels by $30 million.
As of October 3, 2020, the Company had total liquidity of $356 million, comprised of $324 million of cash and cash equivalents and $32 million of availability under its revolving credit facility. The Company expects to end the fourth quarter of 2020 with approximately $300 million to $325 million of cash and cash equivalents and approximately $30 million of availability under its revolving credit facility.
Outlook
The Company anticipates that impacts from COVID-19 will continue to pressure sales in the fourth quarter of 2020, with ongoing strength in e-commerce channels offset by contraction in Fossil retail stores and the wholesale channel. Worldwide net sales are expected to decline in the range of 40% to 30%.
Safe Harbor
Certain statements contained herein that are not historical facts, including multi-year New World Fossil expense reduction estimates, , future financial estimates as well as estimated impacts from COVID-19, , constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and involve a number of risks and uncertainties. The actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: the effect of worldwide economic conditions; the impact of COVID-19; the length and severity of COVID-19; the duration of trends resulting from the impact of COVID-19, including strength in e-commerce channels; the pace of recovery following COVID-19; the impact of the Coronavirus Aid, Relief, and Economic Security Act; significant changes in consumer spending patterns or preferences; interruptions or delays in the supply of key components; acts of war or acts of terrorism; changes in foreign currency valuations in relation to the U.S. dollar; lower levels of consumer spending resulting from a general economic downturn or generally reduced shopping activity caused by public safety or consumer confidence concerns; the performance of our products within the prevailing retail environment; risks related to excess inventory, including older generation connected products; customer acceptance of both new designs and newly-introduced product lines, including risks related to new generation connected products; financial difficulties encountered by customers; 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 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; and the outcome of current and possible future litigation, as well as the risks and uncertainties set forth in the Company’s most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”). These forward-looking statements are based on our current expectations and
beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. Readers of this release should consider these factors in evaluating, and are cautioned not to place undue reliance on, the forward-looking statements contained herein. The Company assumes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.
About Fossil Group, Inc.
Fossil Group, Inc. is a global design, marketing, distribution and innovation company specializing in lifestyle accessories. Under a diverse portfolio of owned and licensed brands, our offerings include fashion watches, jewelry, handbags, small leather goods and connected products. We are committed to delivering the best in design and innovation across our owned brands, Fossil, Michele, Misfit, Relic, Skagen and Zodiac, and licensed brands, Armani Exchange, BMW, Diesel, DKNY, Emporio Armani, kate spade new york, Michael Kors, PUMA and Tory Burch. We bring each brand story to life through an extensive distribution network across numerous geographies, categories and channels. Certain press release and SEC filing information concerning the Company is also available at www.fossilgroup.com.
| Investor Relations: | Christine Greany | |||||
|---|---|---|---|---|---|---|
| The Blueshirt Group | ||||||
| (858) 523-1732 | ||||||
| christine@blueshirtgroup.com | ||||||
| Consolidated Income Statement Data | For the 13 <br>Weeks Ended | For the 13 <br>Weeks Ended | ||||
| --- | --- | --- | --- | --- | --- | --- |
| ($ in millions, except per share data): | October 3, 2020 | September 28, 2019 | ||||
| Net sales | $ | 435.5 | $ | 539.5 | ||
| Cost of sales | 205.7 | 261.0 | ||||
| Gross profit | 229.8 | 278.5 | ||||
| Gross margin | 52.8 | % | 51.6 | % | ||
| Operating expenses: | ||||||
| Selling, general and administrative expenses | 206.6 | 264.1 | ||||
| Trade name impairment | — | 16.6 | ||||
| Restructuring charges | 5.7 | 7.0 | ||||
| Total operating expenses | $ | 212.3 | $ | 287.7 | ||
| Total operating expenses (% of net sales) | 48.7 | % | 53.3 | % | ||
| Operating income (loss) | 17.5 | (9.2) | ||||
| Operating margin | 4.0 | % | (1.7) | % | ||
| Interest expense | 8.0 | 7.4 | ||||
| Other income (expense) - net | — | (1.4) | ||||
| Income (loss) before income taxes | 9.5 | (18.0) | ||||
| Provision for income taxes | (6.8) | 6.9 | ||||
| Less: Net income attributable to noncontrolling interest | 0.3 | 1.0 | ||||
| Net income attributable to Fossil Group, Inc. | $ | 16.0 | $ | (25.9) | ||
| Earnings per share: | ||||||
| Basic | $ | 0.31 | $ | (0.51) | ||
| Diluted | $ | 0.31 | $ | (0.51) | ||
| Weighted average common shares outstanding: | ||||||
| Basic | 51.3 | 50.5 | ||||
| Diluted | 51.8 | 50.5 | ||||
| Consolidated Balance Sheet Data ($ in millions): | October 3, 2020 | September 28, 2019 | ||||
| --- | --- | --- | --- | --- | ||
| Assets: | ||||||
| Cash and cash equivalents | $ | 323.6 | $ | 147.5 | ||
| Accounts receivable - net | 189.8 | 247.6 | ||||
| Inventories | 359.5 | 570.2 | ||||
| Other current assets | 134.9 | 126.4 | ||||
| Total current assets | $ | 1,007.8 | $ | 1,091.7 | ||
| Property, plant and equipment - net | $ | 118.5 | $ | 155.0 | ||
| Operating lease right-of-use assets | 244.5 | 292.1 | ||||
| Intangible and other assets - net | 151.5 | 101.8 | ||||
| Total long-term assets | $ | 514.5 | $ | 548.9 | ||
| Total assets | $ | 1,522.3 | $ | 1,640.6 | ||
| Liabilities and stockholders’ equity: | ||||||
| Accounts payable, accrued expenses and other current liabilities | $ | 528.5 | $ | 507.3 | ||
| Short-term debt | 21.4 | 21.8 | ||||
| Total current liabilities | $ | 549.9 | $ | 529.1 | ||
| Long-term debt | $ | 217.9 | $ | 242.1 | ||
| Long-term operating lease liabilities | 260.7 | 288.6 | ||||
| Other long-term liabilities | 70.2 | 70.9 | ||||
| Total long-term liabilities | $ | 548.8 | $ | 601.6 | ||
| Stockholders’ equity | 423.6 | $ | 509.9 | |||
| Total liabilities and stockholders’ equity | $ | 1,522.3 | $ | 1,640.6 |
Constant Currency Financial Information
The following table presents the Company’s business segment and product net sales on a constant currency basis which are non-GAAP financial measures. To calculate net sales on a constant currency basis, net sales for the current fiscal year period for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average rates during the comparable period of the prior fiscal year. The Company presents constant currency information to provide investors with a basis to evaluate how its underlying business performed excluding the effects of foreign currency exchange rate fluctuations. The constant currency financial information presented herein should not be considered a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.
| Net Sales | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| September 28, 2019 | |||||||||
| ( in millions) | As Reported | Impact of Foreign Currency Exchange Rates | Constant Currency | As Reported | |||||
| Segment: | |||||||||
| Americas | $ | 175.1 | $ | 1.3 | $ | 176.4 | $ | 220.0 | |
| Europe | 135.3 | (5.4) | 129.9 | 173.9 | |||||
| Asia | 119.7 | (0.2) | 119.5 | 143.3 | |||||
| Corporate | 5.4 | (0.1) | 5.3 | 2.3 | |||||
| Total net sales | $ | 435.5 | $ | (4.4) | $ | 431.1 | $ | 539.5 | |
| Product Categories: | |||||||||
| Watches | $ | 356.6 | $ | (3.1) | $ | 353.5 | $ | 445.5 | |
| Leathers | 37.7 | (0.3) | 37.4 | 54.5 | |||||
| Jewelry | 28.9 | (0.9) | 28.0 | 28.2 | |||||
| Other | 12.3 | (0.1) | 12.2 | 11.3 | |||||
| Total net sales | $ | 435.5 | $ | (4.4) | $ | 431.1 | $ | 539.5 |
All values are in US Dollars.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure. We define Adjusted EBITDA as our net income (loss) before the impact of income tax expense (benefit), plus interest expense, amortization and depreciation, impairment expense, other non-cash charges, stock-based compensation expense, and restructuring expense minus interest income. We have included Adjusted EBITDA herein because it is widely used by investors for valuation and for comparing our financial performance with the performance of our competitors. We also use Adjusted EBITDA to monitor and compare the financial performance of our operations. Our presentation of Adjusted EBITDA may not be comparable to similarly titled measures other companies report. Adjusted EBITDA is not intended to be used as an alternative to any measure of our performance in accordance with GAAP. The following table reconciles Adjusted EBITDA to the most directly comparable GAAP financial measure, which is income (loss) before income taxes. Certain line items presented in the tables below, when aggregated, may not foot due to rounding.
| Fiscal 2019(1) | Fiscal 2020 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions): | Q4 | Q1 | Q2 | Q3 | Total | |||||
| Income (loss) before income taxes | $ | (6.0) | $ | (149.1) | $ | (43.8) | $ | 9.5 | $ | (189.4) |
| Plus: | ||||||||||
| Interest expense | 7.0 | 7.5 | 7.9 | 8.0 | 30.4 | |||||
| Amortization and depreciation | 12.9 | 12.2 | 10.7 | 10.3 | 46.1 | |||||
| Impairment expense | 4.7 | 19.6 | 3.4 | 4.6 | 32.3 | |||||
| Other non-cash charges | 43.2 | 21.7 | 3.6 | 2.9 | 71.4 | |||||
| Stock-based compensation | 1.9 | 3.1 | 2.9 | 3.2 | 11.1 | |||||
| Restructuring expense | 5.2 | 9.4 | 10.5 | 5.7 | 30.8 | |||||
| Less: | ||||||||||
| Interest Income | 0.1 | — | (0.1) | (0.1) | (0.1) | |||||
| Adjusted EBITDA | $ | 68.8 | $ | (75.6) | $ | (4.7) | $ | 44.3 | $ | 32.8 |
(1) Prior period amounts have been adjusted to conform to the current period presentation.
Store Count Information
| October 3, 2020 | September 28, 2019 | |||||||
|---|---|---|---|---|---|---|---|---|
| Americas | Europe | Asia | Total | Americas | Europe | Asia | Total | |
| Full price accessory | 77 | 74 | 54 | 205 | 87 | 86 | 53 | 226 |
| Outlets | 112 | 76 | 32 | 220 | 115 | 72 | 35 | 222 |
| Full priced multi-brand | — | 3 | 3 | 6 | — | 4 | 2 | 6 |
| Total stores | 189 | 153 | 89 | 431 | 202 | 162 | 90 | 454 |
END OF RELEASE
fossilq32020transcript
Exhibit 99.2 REFINITIV STREETEVENTS EDITED TRANSCRIPT Q3 2020 Fossil Group Inc Earnings Call EVENT DATE/TIME: NOVEMBER 11, 2020 / 10:00PM GMT REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us 1 ©2020 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.
NOVEMBER 11, 2020 / 10:00PM GMT, Q3 2020 Fossil Group Inc Earnings Call CORPORATE PARTICIPANTS Gregory A. McKelvey Fossil Group, Inc. - Executive VP & Chief Commercial Officer Jeffrey N. Boyer Fossil Group, Inc. - CFO, COO & Treasurer Kosta N. Kartsotis Fossil Group, Inc. - Chairman & CEO CONFERENCE CALL PARTICIPANTS Christine Greany The Blueshirt Group, LLC - MD PRESENTATION Operator Good afternoon, ladies and gentlemen, and welcome to the Fossil Group Third Quarter 2020 Earnings Call. (Operator Instructions) This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company. Now I'll turn the call over to Christine Greany of the Blueshirt Group to begin. Christine Greany The Blueshirt Group, LLC - MD Hello, everyone, and thank you for joining us. With us today on the call are Kosta Kartsotis, Chairman and CEO; and Jeff Boyer, Chief Operating Officer and CFO; and Greg McKelvey, EVP and Chief Commercial Officer. I would like to remind you that information made available during this conference call contains forward-looking information, and actual results could differ materially from those that will be discussed during this call. Fossil Group's policy on forward-looking statements and additional information concerning a number of factors that could cause actual results to differ materially from such statements is readily available in the company's Form 8-K and 10-Q reports filed with the SEC. In addition, Fossil assumes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. All references to sales during today's call reflect constant currency results unless otherwise indicated. Please note that you can find a reconciliation and other information regarding non-GAAP financial measures discussed on this call in Fossil's earnings release, which was filed today on Form 8-K and is available in the Investors section of fossilgroup.com. With that, I will turn the call over to Kosta to begin the formal remarks. Kosta N. Kartsotis Fossil Group, Inc. - Chairman & CEO Good afternoon, everyone, and thank you for joining us today. We hope everyone is staying healthy and safe. We would like to start by expressing our gratitude to the entire organization for delivering strong execution in the third quarter. Our financial performance exceeded our expectations, and we continue to make progress on our 4 strategic priorities. During the past 8 months, our teams have demonstrated tremendous resilience and an ability to navigate extremely dynamic market conditions. We appreciate their ongoing commitment to Fossil, and we'll continue to prioritize the health and safety of our employees, our customers and the communities we serve. In the third quarter, we achieved net sales of $435 million on a reported basis and strong gross margins while continuing to reduce our operating expenses. This enabled us to deliver adjusted EBITDA of $44 million, a 7% increase versus a year ago. From a global business perspective, sales trends were fairly consistent across all 3 regions, which includes the Americas, Europe and Asia. Notably, we saw continued acceleration across our owned and third-party digital channels, strong growth in Mainland China and modest improvement among the majority of our wholesale partners. Sales on a constant currency basis were up 66% on our own e-commerce sites globally and third-party e-commerce increased 44% in the quarter. As expected, digital growth rates tempered somewhat from Q2 when brick-and-mortar locations were essentially closed across the globe. Core digital sales through our own e-commerce sites and third-party marketplaces represented nearly 30% of our sales mix in the quarter, demonstrating the importance of this channel and our ability to meet increasing consumer demand. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us 2 ©2020 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.
NOVEMBER 11, 2020 / 10:00PM GMT, Q3 2020 Fossil Group Inc Earnings Call Our strongest performance on a regional basis was in Asia, reflecting continued growth in China. In Q3, Mainland China represented over 40% of Asia region sales and increased 55% due to online growth in both our own and third-party e-commerce sites. Our performance in China was offset by COVID-related impacts, felt most significantly in Korea and India. Globally, traffic and conversion trends in our stores were fairly similar to last quarter with traffic down approximately 54% and conversion up about 16%. In the U.S., conversion rates are being helped by ship from store and buy online, pickup in the store. Our wholesale partners in the Americas and Europe are indicating similar traffic and conversion trends in stores, partly mitigated by the strength in their e-commerce businesses. Our indirect sales channel revenue was down 19% globally year-over-year, primarily driven by contraction in the wholesale segment, partly offset by growth of 44% in our third-party e-commerce channel. We are navigating the uncertain global environment by remaining agile and planning conservatively as we execute against the 4 strategic priorities we laid out at the beginning of 2020. Let me update you on our initiatives. First is storytelling and innovation. At Fossil, we are product and merchandising innovators at our heart. Delivering product excitement to the consumer is what keeps our teams energized and consumers engaged. As we approach holiday, consumer demand for traditional watches and jewelry appears to be rebounding. Notably, sales of Michael Kors watches and jewelry in our Americas region are improving with Emporio Armani watches and jewelry delivering high single-digit growth in Asia. In addition, demand for our Gen 5 connected product remains strong, and we're leveraging that with the introduction of a new Gen 5E offering. Our 5E smartwatch, which launched in October, delivers the features and styles that our customers love in a smaller size option. Both the 5E and our new Fossil smartwatch app are meeting with positive consumer response. We've also expanded our Hybrid HR offering, which combines the best looks of traditional watches with the connected features consumers want most. Initial response to this expanded assortment has been extremely positive. As we look ahead to next year, we feel great about our market positioning and product road map leading into 2021, which will include a software upgrade and be highlighted by the launch of an LTE product this spring. Moving now to our second strategic priority, commercial transformation. We have accelerated our investments in digital capabilities over the past few years, and we are seeing very strong results in the current environment. We've built a robust e-commerce platform and strong fulfillment capabilities, including BOPIS and ship from store that are serving us well during this period of heightened online consumer demand. At the same time, we're implementing more sophisticated digital marketing capabilities, which are driving efficiency and yielding strong ROIs on our digital marketing programs. An important distinction within our particular business model is the profit profile on our own e-commerce channel, which is margin accretive. As digital becomes a larger percentage of our overall business, we expect to expand our overall gross margin and drive increased segment profitability. We have a significant long-term opportunity in digital, and we'll continue to invest in additional capabilities in markets around the world. Our third strategic priority is expanding Fossil's opportunity in China and India. The momentum we were experiencing in those markets in 2019, characterized by double-digit growth, have been interrupted by the pandemic. Today, India remains under strict COVID restrictions. In Mainland China, however, the consumer recovery is well underway, and our sales increased by 55% in the quarter, as we mentioned earlier. Our fourth area of focus is our New World Fossil initiative. Under our 2.0 program, we remain on track to achieve expense savings of $100 million in 2020. While there have been some temporary COVID-related expense reductions this year, particularly in our second quarter, we have removed structural costs across payroll, marketing and rent. We also see additional opportunities to increase the productivity of our store portfolio through both lease negotiations or exits as we come up on natural lease expirations over the next 2 to 3 years. With holiday just ahead, we feel very good about Fossil's positioning, both strategically and operationally. We have product innovation in the market. We have a substantial digital presence supported by robust capabilities. We've been carefully managing inventories, and we're maintaining a strong balance sheet and a focus on managing our liquidity. Looking further ahead, we are positioning the business to deliver top line growth in 2021. Notwithstanding the pandemic uncertainty, we have a positive view of the total addressable watch market, the channel and regional opportunities and the innovation we'll be bringing to both the connected and the traditional categories. We appreciate the ongoing support of our partners and shareholders and wish everyone a safe and happy holiday season. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us 3 ©2020 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.
NOVEMBER 11, 2020 / 10:00PM GMT, Q3 2020 Fossil Group Inc Earnings Call Now I'll ask Jeff to provide some additional color around our financial performance. Jeffrey N. Boyer Fossil Group, Inc. - CFO, COO & Treasurer Thanks, Kosta. While net sales declined in the third quarter, we strengthened gross margins and reduced operating expenses. Our actions allowed us to improve profitability, increase cash flow and maintain a strong liquidity position throughout the quarter. On a reported basis, Q3 net sales totaled $435 million, down 19% versus a year ago. Top line results were better than expected, primarily due to strength within our Fossil and third-party e-commerce channels, high double-digit growth in Mainland China and modest improvement within the wholesale channel globally. From a regional lens, performance in the Americas was consistent with total sales trends, contracting approximately 20% on a constant currency basis. Trends were about 5 points softer than that in Europe and down mid-teens in Asia. Within the Asia region, Mainland China delivered a third consecutive quarter of growth. Sales increased 55% versus a year ago and 44% on a sequential basis. All sales channels in Mainland China demonstrated year-over-year growth with e-commerce expanding 90%. Within our direct-to-consumer business, our Fossil-owned e-commerce channel generated sales growth of 66%, while global comp sales in constant currency decreased 29%. In the third quarter, we ended with 431 stores, a net reduction of 5 stores from the prior quarter. Turning to category performance, sales trends improved sequentially across the board. Total watches declined 21% in constant currency. Traditional watch sales declined 24%, and connected watch sales decreased 5%. From a mix perspective, connected represented 19% of total watch sales in the quarter. Looking at gross margin. Third quarter gross margin expanded 120 basis points to 52.8% versus a year ago. The increase was primarily driven by favorable channel and region mix as well as fewer markdowns compared to prior year. We are anticipating a fairly promotional fourth quarter, but we believe our initiatives around product assortment and a higher mix of e-commerce and Asia sales will help us partially offset those pressures. Total operating expenses, which includes trade name impairment and restructuring costs, decreased more than $75 million or about 26%. Excluding trade name impairment and restructuring costs, SG&A expense was $207 million in the third quarter, down substantially compared to $264 million a year ago. This reflects structural cost reductions across several buckets, including payroll, marketing, travel, professional fees and services and contract labor. Structural cost reductions are generally a result of our New World Fossil 2.0 program, which remains on track to achieve our targeted savings of $100 million for the full year 2020. Looking further ahead, as Kosta mentioned, we're taking advantage of lease expirations to capture additional expense savings within our real estate portfolio. In the fourth quarter, we expect to close approximately 10 locations for a total of approximately 40 closures in full year 2020. From an earnings perspective, we generated significant improvement in adjusted EBITDA and operating income. Adjusted EBITDA came in at $44 million versus $41 million a year ago, while operating income increased to $18 million versus a $9 million loss in Q3 of last year. Diluted EPS was $0.31 in the quarter and included New World Fossil restructuring charges of $0.09 per diluted share. That's an improvement compared to a loss of $0.51 per diluted share in the prior year, which included noncash intangible asset impairment charges of $0.25 and restructuring expenses of $0.11, both on a diluted per share basis. Moving to the balance sheet and cash flow. We ended the third quarter with total liquidity of $356 million, consisting of $324 million of cash and cash equivalents and $32 million availability under our revolver. Total debt at quarter end was $239 million. Quarter end inventory totaled $360 million. That's down 37% from a year ago, primarily reflecting high levels of Gen 4 connected watch inventory last year. We have moved through the majority of our Gen 4 inventory thus far in 2020 and expect to clear through remaining goods by year-end. As we enter the holiday season and plan for 2021, we are maintaining a conservative posture. Considering the current landscape, including the most recent lockdown measures in Europe, we anticipate that fourth quarter net sales on a reported basis will decline in the range of 30% to 40% versus last year. We are continuing to manage for liquidity and expect to end Q4 with a cash balance between $300 million and $325 million, which will leave us well positioned to meet our upcoming capital requirements in the first quarter of next REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us 4 ©2020 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.
NOVEMBER 11, 2020 / 10:00PM GMT, Q3 2020 Fossil Group Inc Earnings Call year. Now I'll turn the call back to Christine to take us through some questions. QUESTIONS AND ANSWERS Christine Greany The Blueshirt Group, LLC - MD Thanks, Jeff. I have a few questions that are top of mind for investors that I'd like to turn to for a moment. The first one is for Kosta. Kosta, as you said, holiday is rapidly approaching. How do you feel about Fossil's positioning overall in terms of innovation and brand heat? And what's new on the product front for this season? Kosta N. Kartsotis Fossil Group, Inc. - Chairman & CEO Well, we actually think we're in pretty good shape considering the environment. And if you look at our brands, so Fossil, Michael Kors, Armani and Diesel, just to name a few, along with all the different product offerings we've put in the market, including traditional watches, smartwatches, jewelry and handbags, these are all great gifts for the holiday season, and we feel like we're in pretty good shape. Our teams have been doing everything they can to drive innovation across the portfolio, brands and categories, especially in our connected and traditional watch categories. So overall, we feel we're very well positioned during the holidays. On the connected watch front, our Gen 5 and our Gen 5E smartwatches have new capabilities like extended battery life, always-on display, enhanced sleep and fitness tracking and the new smaller size than Gen 5E should be a very strongly supported feature by consumers. And then, of course, there's Hybrids, which is really a unique product. For customers who love to look at traditional watches, but want the functionality of a connected watch, our HR Hybrid serves that bill. So including notifications and other smartwatch features, it has a heart rate sensor, activity tracking, sleep monitoring. And the best thing of all is the battery life is a 2-week time period, so you don't have to charge it up very night. In the traditional watch category, consumers are continuing to respond particularly well to our Emporio Armani product in China, and we're seeing increasing interest in Kors' product, both in China and in the United States. Broadly speaking, we are seeing improving trends and our brands returning to their classic looks with logos and strong signature elements. In Fossil, we're seeing strong response in sports and athletic trends, especially in our diver watch, which comes in a lot of different shapes, sizes and colors and should be a strong seller for holiday. I would also like to add that while we are very well positioned for the holiday season and have great new product in the market, we are retaining a conservative posture regarding sales. The health and safety issues are critical to all of us, and we expect that this will cause a shift to online shopping. But in any case, we are well prepared globally to help keep everyone safe and to deliver great product to our customers during the holiday season. Christine Greany The Blueshirt Group, LLC - MD Great. Thanks, Kosta. Jeff, can you help us understand how you're thinking about cash and liquidity in the fourth quarter? And then also your liquidity outlook for early next year? Jeffrey N. Boyer Fossil Group, Inc. - CFO, COO & Treasurer Sure, Christine. Given the ongoing uncertainty in the consumer environment, maintaining a strong liquidity position is absolutely one of our most important goals in the near term. As we look at our fourth quarter, we expect our liquidity position to remain fairly stable overall. We are expecting solid operating cash flow in the fourth quarter, which we'll use to fund our working capital needs. As we move into next year, we will have some contraction in our capital structure due to some required term loan amortization as well as reductions in our revolver due to lower inventory levels as we exit the year. So in the first half of next year, we expect to utilize some of our available liquidity to fund these structural changes as well as to bring some of our working capital balances closer to historical levels. Given our current outlook, we expect to have adequate liquidity throughout next year. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us 5 ©2020 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.
NOVEMBER 11, 2020 / 10:00PM GMT, Q3 2020 Fossil Group Inc Earnings Call Christine Greany The Blueshirt Group, LLC - MD Thank you, Jeff. A question now for Greg around digital. At a high level, how should we think about Fossil's digital agenda? And then if you can provide some granularity around digital sales and marketing, that would be great. Gregory A. McKelvey Fossil Group, Inc. - Executive VP & Chief Commercial Officer We've developed 3 pillars to our digital growth strategy. The first is our near-complete e-commerce migration to one global cloud-based platform in partnership with Salesforce. In addition to providing efficiencies and an improved customer experience overall, we're seeing a sustained 60% or greater increase in our conversion rate versus prior year and meaningful increases in average order value as a result of the features our teams have implemented, which include artificial intelligence-driven cross-sell and upsell, which serves up targeted and personalized content and recommendations throughout the online customer journey; a digital wallet suite that gives our customers an easy and flexible transaction, now also including an interest-free installment option powered by PayPal; an augmented reality tool that allows our customers to virtually try on a watch on their own wrist using the camera on their mobile device; a virtual selling pilot, where at the click of a button, our customers can enjoy the expert advice and personalization of an in-store sales associate who can not only offer advice, but also fulfill the order right there using our ship-from-store capability. Not only is this a great customer experience, it is also a really efficient use of our sales associates, store infrastructure and inventory assets. And lastly, our e-commerce, IT and logistics teams have partnered to not only rapidly implement and scale modern-day fulfillment capabilities, including buy online, pickup in-store; ship from store and curbside pickup, but also to significantly expand our e-commerce capacity in our warehouses to near flawlessly handle unforecasted and sustained peaks in online demand throughout the year. The work the teams have done is truly inspiring, but to see it show up in the results so quickly tells us we're definitely on the right track. Our second pillar is to be the watch category leader with the major third-party e-commerce marketplaces globally. So far this year, we've had great success partnering with Amazon, Tmall, JD.com, Zalando, Myntra and Flipkart, to name a few. But we are just getting started and are quickly leveraging learnings and best practices across our teams globally to fully unlock the growth that these global online marketplaces offer as they aggregate more consumers onto their platforms. And our third digital strategy pillar is to be the leader in our category, generating online sales by applying advanced digital marketing and analytics capabilities to uncover and create high ROI strategies and tactics and then aggressively increase marketing investment on a dynamic and daily basis. At the heart of this strategy is an emphasis on customer data acquisition and delivering sustained increases in customer lifetime value. Given the accretive economics of our e-commerce channel and relatively high average order value, the math in our business is telling us we have a significant opportunity to profitably accelerate our rate of customer data acquisition and then use automated post-purchase journeys in Salesforce to dramatically increase repeat purchase. We are extremely excited about the progress our teams are making so far this year and expect to see continued strong sales growth in our digital business over the holidays and for a number of years in the future. Christine Greany The Blueshirt Group, LLC - MD Thanks, Greg. Appreciate that. Now I'll turn the call back to Kosta for some closing comments. Kosta N. Kartsotis Fossil Group, Inc. - Chairman & CEO Well, thanks to everyone for joining us today. We greatly appreciate the ongoing support of our investors and wish everyone a healthy and safe holiday. Operator Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us 6 ©2020 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.
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