Fossil Group (NASDAQ:FOSL) reported its Fourth Quarter and Full Year 2023 Earnings, announcing a strategic review of their business model and a focus on strengthening their balance sheet through potential debt and equity financing options. The company is actively executing its Transform and Grow (TAG) plan, targeting $300 million in annualized benefits by 2025, and has begun streamlining operations by exiting the smartwatch category and closing underperforming stores.
Fossil Group anticipates worldwide net sales of around $1.2 billion in 2024, with an adjusted operating margin between negative 3% and negative 5%. They expect to face macroeconomic challenges but aim to return to historical gross margin levels in the mid-50s percentage range.
Key Takeaways
- Fossil Group is undergoing a strategic review and considering financing options to improve their financial position.
- The TAG plan is expected to bring $300 million in annualized benefits by 2025, with $100 million targeted for 2024.
- Fossil Group is exiting the smartwatch market and plans to close about 50 retail locations in 2024.
- They forecast worldwide net sales of approximately $1.2 billion for 2024, with an adjusted operating margin of negative 3% to negative 5%.
- The company is working to stabilize the business amidst expected challenges from consumer spending patterns and market softness.
Company Outlook
- Fossil Group projects a decline in traditional watch sales, balanced by growth in the Fossil brand and markets like India.
- Q1 sales for 2024 are expected to be the weakest, with improvement anticipated as the year progresses.
- The company intends to achieve positive free cash flow and stabilize core revenue trends despite a challenging macroeconomic climate.
Bearish Highlights
- Fossil expects macro-driven pressures to impact consumer spending, leading to category and channel softness.
- There will be an exit from the smartwatch category and a reduction in retail footprint, contributing to sales challenges.
- The company is bracing for softer consumer spending, particularly in Europe and China.
Bullish Highlights
- The TAG plan has already achieved $125 million in annualized benefits, contributing to a 6% decline in SG&A expenses.
- Gross margins are improving, driven by product margin gains and reduced freight costs.
- Fossil Group is focusing on growth opportunities in India and other emerging markets.
Misses
- The company experienced declines in the smartwatch category and anticipates a negative impact on net sales from store and concession closures.
- Restructuring costs in fiscal year 2023 amounted to $49 million.
Q&A Highlights
- Fossil Group is exploring financing options, including debt and equity, to fortify their balance sheet.
- They are also considering the monetization of building assets in Europe as a part of their financial strategy.
- The company is committed to returning to profitable growth through its restructuring efforts and TAG program.
InvestingPro Insights
As Fossil Group (FOSL) navigates through its strategic review and restructuring efforts, it's essential to consider the company's financial health and market performance. Based on recent data from InvestingPro, Fossil is operating with a significant burden of debt and may struggle with making interest payments, as highlighted by two InvestingPro Tips. This is particularly relevant as the company looks at financing options to improve its financial position.
InvestingPro Data reveals a market capitalization of just $42.51 million, reflecting the company's diminished size after a challenging period. The Price / Book multiple as of the last twelve months ending Q4 2023 stands at a low 0.18, suggesting the market values the company at a fraction of its book value. This could indicate that the market perceives Fossil's assets as potentially overvalued or that the company is undervalued, depending on the context of its balance sheet.
Moreover, the company's revenue has seen a decline of 16.05% over the last twelve months as of Q4 2023, which aligns with the challenges Fossil has noted in its earnings report, including the impact of exiting the smartwatch category and store closures.
For investors looking for more comprehensive analysis and additional metrics, InvestingPro offers a wide array of tips, with 17 more tips available for Fossil Group, which can be found at https://www.investing.com/pro/FOSL. These tips could provide further insights into the company's performance and potential investment risks or opportunities.
Investors interested in deepening their analysis can take advantage of a special offer using the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, which includes access to these valuable InvestingPro Tips.
Full transcript - Fossil Inc (FOSL) Q4 2023:
Operator: Good afternoon, ladies and gentlemen, and welcome to the Fossil Group Fourth Quarter and Full Year 2023 Earnings Call. At this time, all parties are in a listen-only mode. 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: Hello, everyone, and thank you for joining us. With us today on the call are Jeff Boyer, Interim CEO; and Sunil Doshi, Chief Financial 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, 10-Q and 10-K 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. During today's call, we will refer to constant currency results. Please note that you can find a reconciliation of actual results to constant currency results. 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 now turn the call over to Jeff Boyer to begin.
Jeff Boyer: Thanks, Christine. I'm pleased to be taking on the role of interim CEO, having spent nearly 17 years with Fossil on both the Board of Directors and the executive leadership team, I have a deep working knowledge of the operating model, the organization and our underlying profitability potential. As Chief Operating Officer, I was one of the key architects of our Transform and Grow Plan and have played a critical role in driving execution of those initiatives, which remain on track. Importantly, I've worked side-by-side with Kosta for nearly two decades, which will make for a seamless transition in the coming months. Together with our experienced leadership team, we're going to ensure continuity as we continue to advance our tag plan in order to lay the foundation for a profitable business model. In connection with the earnings release today, we also announced that the Company is conducting a strategic review of its business model, considering additional debt and equity financing options and pursuing actions to strengthen the balance sheet. What we want to make clear today is that we're taking steps to maximize shareholder value, and we have sufficient liquidity to operate the business for the foreseeable future. This past year has been more challenging than we anticipated, reflecting three key factors: one, macro-driven economic conditions globally; two, wholesale channel dynamics; and three, persistent pressure on consumer spending in China, one of our most important markets. Against this difficult backdrop, we took aggressive actions to rationalize unprofitable segments of our business. This included exiting our smartwatch business and closing underperforming stores. Excluding these actions, we ended 2023 with core top line trends contracting approximately 10%. The most important thing we want you to hear from us today is we're committed to improving performance and we're all hands-on deck to further advance our TAG plan and strengthen liquidity. As Interim CEO, I'm prioritizing the following: Stabilizing the business, advancing our TAG plan, strengthening our balance sheet and conducting a broader strategic review of our operating model. I'll discuss each of these in greater detail. First and foremost, we're taking steps to stabilize the business and improve our financial position. In 2023, we closed 45 underperforming stores, and in Q4, we made the strategic decision to exit the smartwatch category. While these actions contributed to our top line headwinds, they did not materially contribute to operating margins. More importantly, these actions help us refocus the Company on our most profitable and productive core categories, enable us to further streamline our operations. In 2024, we expect to close approximately 50 retail doors as we exit underperforming locations through natural lease expirations, and we expect to fully exit our smartwatch inventory in the first half of 2024. These actions will also enable us to refocus our inventory investments into higher-margin, faster-turning categories, like traditional watches and jewelry. Regarding this reinvestment in core categories, note that the fourth quarter execution of our Revitalization Strategy for Fossil brand drove some of the best results within our portfolio. Global traditional watch sales for the Fossil brand grew in Q4 of last year and our direct-to-consumer channels, comp sales in traditional watch and jewelry grew mid-single digits. Additionally, we're seeing gross margin growth in the Fossil brand continue thus far in 2024 in our core watch and jewelry categories. Our second priority is our TAG plan, which remains on track to capture $300 million of annualized benefits by 2025. As a reminder, our plan to achieve these benefits is anchored by three core objectives; driving sales productivity, reengineering end-to-end operations and streamlining overhead costs and improving capital efficiency. Our teams delivered solid execution in 2023, and we captured approximately $125 million in annualized benefits. This was driven primarily by company-wide headcount reductions where we streamlined our regional and corporate functions to be more centrally led and dramatically reduced our smartwatch cost structure. Additionally, our initiatives on SKU management, inventory management and price management, drove improvements to inventory productivity and traditional watch product margins. We ended 2023 with inventory down 33%, better overall inventory composition and improved product margin architecture heading into 2024. In 2024, we expect to capture another $100 million potentially more in annualized benefits from our TAG plan. The largest area of savings is expected to come from our supply chain activities where we have successfully renegotiated a number of significant sourcing contracts. Cash benefits begin in the first quarter this year, with P&L benefits materializing in the second half. These actions are expected to drive gross margin expansion this year and help us return to historical gross margin levels, which were in the mid-50s over the next two years. Our third priority we are focused on is strengthening our balance sheet. We are pursuing opportunities to better leverage and monetize the Company's assets through additional financing and the sale of our European facilities. In addition, we're expecting to receive a U.S. tax refund of approximately $56 million associated with NOL carryback provisions from the CARES Act, more on these efforts from Sunil shortly. Lastly, as we outlined in our earnings press release today, we announced a strategic review of our current business model and capital structure. This review will include efforts to further optimize our business model with appropriate changes to our overall operations as well as additional structural cost reductions. We expect this effort will further expand on our current TAG plan and could include additional debt and equity financing options including monetization of various assets. Our action plan for 2024 is focused with a high sense of urgency on top line stabilization and improved profitability. The guidance we're providing for 2024 is based on the underlying trends we saw exiting 2023 as well as the strategic actions we're taking to stabilize the business. Our outlook calls for worldwide net sales of approximately $1.2 billion, which includes about $100 million in year-over-year negative sales impact resulting from store closures and our exit from the smartwatch category. We expect that underlying business trends will continue to be challenged by macro-driven pressures affecting consumer spending, category and channel softness and brand dynamics among some of our key licensing partners. We're acting quickly to leverage our core strengths in people, implement our TAG plans and improve our financial condition to make Fossil a leaner, stronger and more durable business. We are fortunate to have incredible teams across the organization who are passionate about the Company, committed to our purpose and dedicated to winning as we continue to execute our TAG plan. We appreciate the support of our shareholders and look forward to updating you on our progress throughout the year. Now I'll turn the call over to Sunil to discuss Q4 results and provide more granularity around our financial objectives and outlook.
Sunil Doshi: Thanks, Jeff. Fourth quarter net sales totaled $421 million, down 16% versus last year or down 17% in constant currency. Adjusted operating margin was negative 2% for the quarter and negative 6.5% for the fiscal year. Fourth quarter cash flow from operations was $49 million, and we ended the year with $117 million in cash and $181 million in liquidity. For the full year, cash flow used in operations was $59 million and improved versus the prior year as we manage working capital levels down during the year. Diving deeper into our Q4 sales trends. In the fourth quarter, approximately 7 points of the overall 17-point constant currency sales decline came from store closures and lower smartwatch sales. As Jeff noted, in the fourth quarter, we exited the smartwatch category and began to more aggressively move through our inventory. We also completed the rationalization of our smartwatch infrastructure costs in Q4. With the decision to exit the category, we have pivoted our future inventory purchases to drive better ROI and faster turn categories like traditional watch and jewelry. Heading into 2024, we will lap approximately $60 million in smartwatch sales from 2023 with minimal expected liquidation sales in 2024. While this will be a top line headwind to our fiscal year 2024 sales, we believe the reduced infrastructure costs and placing more inventory and higher-margin sales in traditional watch and jewelry will drive better longer-term financial outcomes for the Company. Excluding the 7-point impact that primarily came from store closures and smartwatches, fourth quarter net sales declined about 10 points versus last year. The majority of that 10-point sales headwind came from our largest license brands, where sales in traditional watch and jewelry were down versus the year ago period in both our wholesale and direct channels. In the wholesale channel, particularly in the Americas and Europe, Q4 sales declines did moderate from the very steep sales declines we saw earlier in the year, consistent with our retail customers reporting more balanced stock levels. Underlying sell-out trends, however, remained negative in the quarter. As inventory levels appear to be more balanced, we anticipate that retailers will maintain conservative inventory purchasing behavior to limit overstocking risk. In Asia, licensed brand revenue in the wholesale channel was down modestly with declines in Mainland China and other distributor markets, offsetting double-digit growth in India, Japan and Korea. In the Fossil brand, fourth quarter sales in traditional watches and jewelry were flat year-over-year and comparable retail sales in these categories were positive low single digits. Brand sales in leathers and smartwatches were down year-over-year. Underlying performance was supported by strong execution of our Made For You campaign, digital enablement tools, and a sharper product assortment, which drove better results in our direct-to-consumer channels. In Michele, our owned premium brand for women's watches sales were up double digits as wholesale customers took advantage of better spending dynamics in this consumer segment. Turning to gross margins. Q4 gross margins were up 40 basis points versus last year. Most of the gross margin gains came from product margin improvement in our core categories, where initiatives from SKU rationalization, assortment architecture and reduced promotions in our direct-to-consumer channels drove better results. Lower freight costs also contributed to the year-over-year gross margin improvement. Partially offsetting these gains were declines in gross margin in our smartwatch category and anniversarying gains from the settlements of forward currency contracts in the prior year period. SG&A expenses in the fourth quarter were down $25 million year-over-year or 11%. Reductions were primarily attributable to lower store operating costs on fewer stores as well as lower compensation and administrative costs resulting from our TAG initiative. Stepping back and looking more broadly at our TAG plan, with the organizational head count reduction in late 2023, we realized approximately $125 million in annualized benefits. Approximately $50 million was realized in year, which helps us drive an overall SG&A decline of 6%. Restructuring costs incurred in fiscal year 2023 were $49 million. Now turning to our outlook for fiscal year 2024. In 2024, our outlook includes worldwide net sales of approximately $1.2 billion, with an adjusted operating margin of negative 3% to negative 5%. As Jeff shared, we are focused on executing our TAG plan and strengthening our balance sheet. Benefits from TAG are a critical component to driving improved financial performance in fiscal year 2024 and offset the underlying decline in revenue that we have forecast. Having captured approximately $125 million in annualized benefits in 2023, we are focused on capturing at least another $100 million in annualized benefits in fiscal year 2024, which would significantly accelerate our progress towards achieving our $300 million target. Importantly, our guidance for fiscal year 2024 reflects our expectation that our TAG initiatives will help drive gross margin expansion and SG&A reduction versus the prior year. Gross margin improvement is primarily expected to be driven by sourcing benefits from our TAG initiatives, coupled with a continued focus on assortment architecture and SKU rationalization as well as product mix benefits resulting from minimal smartwatch sales in 2024. Lower SG&A in 2024 is expected to be driven by benefits from our TAG plan and lower store operating costs. Our net sales guidance of approximately $1.2 billion assumes approximately $100 million of negative impact from our store and concession closure plans and the lapping of last year's smartwatch sales. We anticipate that performance in our core traditional watch category will be down with comp growth in the Fossil brand, offset by declines in our largest license brands, in part due to brand repositioning, and also reflecting our expectation for softer consumer spending in our categories in Europe and in China. Additionally, we anticipate growth in traditional watches in India and other smaller but emerging markets. Looking at the cadence of the year, we expect Q1 sales to be the softest, partly due to timing of wholesale shipments between quarter one and quarter two with sequential improvement for the remainder of the year. We are also focused on strengthening our balance sheet to provide additional cushion to our liquidity. We are in the late stages of the process of receiving an approximate $56 million tax refund from the U.S. government associated with provisions in the CARES Act. We are also actively pursuing financing options and monetization of our remaining two owned building assets in Europe. Free cash flow, which we defined as cash from operations less CapEx, is estimated to be positive in 2024, reflecting a modest reduction in working capital from lower inventory and the expected receipt of the tax refund I just described. 2024 will be a year of transition for Fossil Group as we are in the middle of our TAG program and continue to aggressively restructure our business model, lap the exit of less productive categories, rationalize our store portfolio and focus on stabilizing our core revenue trends in a challenging macroeconomic environment. With that, I'd like to turn the call back to Jeff for some closing remarks.
Jeff Boyer: Thanks, Sunil. As Sunil and I shared with you, we're working diligently and taking prudent actions to stabilize the business and maximize shareholder value, all of which is underpinned by our commitment to returning Fossil Group to profitable growth as quickly as possible. Thank you to everyone for listening in today.
Operator:
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