Release Date: August 08, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Gross margin expanded by 390 basis points compared to last year.
- SG&A expenses were reduced by 18%, reflecting significant cost savings.
- Inventory levels declined by 38% year-over-year, improving working capital.
- The company received a $57 million US tax refund, strengthening liquidity.
- Fossil traditional watches showed positive sales trends, particularly in emerging markets like India.
Negative Points
- Net sales declined by 19% on a constant currency basis.
- The exit from the smartwatch category and store closures negatively impacted sales.
- The wholesale channel in the US and Europe remains challenging.
- Consumer sentiment in China remains soft, affecting sales.
- The company is still experiencing pressure in licensed watch brands and leather categories.
Q & A Highlights
Q: Jeff, what are you doing to stabilize the top-line? And when do you expect to start growing again?
A: We're directing programs and funding against our key and most important top-line opportunities. We've increased our upper funnel marketing programs on a number of brands to generate additional brand heat and demand. As I mentioned previously, earlier today we announced Ashley Graham as the new ambassador for Michele, our luxury women's watch brand, with additional influencers and endorsers planned for our own brands as well as for our licensed watch brand partners. On the inventory front, we're distorting inventory into the brands, categories, and markets that are showing the most substantial growth potential such as traditional watches in emerging markets such as India and Mexico. These efforts are the primary drivers behind the stabilization and growth in about half of our traditional watch business.
Q: Can you help us understand what's happening in the core traditional watch business and how that tracks to overall industry performance?
A: During Q2, about half of our traditional watch business performed consistent with the industry based on NPD data. This includes the Fossil, Armani Exchange, Tory Burch, and Skechers brands. The remaining parts of our business, including our Armani, Kors, and Diesel brands, remain pressured. This is primarily due to softness in China resulting from the weak consumer environment as well as ongoing brand position efforts by some of our licensed brands. Recognize also that our top-line is being impacted by the strategic decisions we made to close stores and exit the smartwatch category.
Q: Given your liquidity levels, Jeff, are you considering buying back equity or bonds?
A: As we look at the business, we do believe that our current valuation levels are not reflective of the long-term potential we see for the business. That said, however, we believe it's very important to maintain financial flexibility given the current macro environment. Under our operating capital allocation framework, deploying resources towards strengthening our business is the highest priority. As you can see in our usage results, the investments in and execution of our TAG plan are driving operational and financial improvements including better bottom line results, and this is our primary focus at this time.
Q: Andy, how many quarters of runway do you have to execute the TAG plan?
A: We believe we have ample runway to continue to execute our TAG plan. We will complete the majority of the TAG initiatives by 2024 with annualized operating income benefits of at least $100 million materializing this year. We also see additional benefit in 2025 and 2026. Also in March 2024, we initiated a strategic review to optimize our current business model, which includes efforts to find additional structural cost reductions as well as explore debt and equity financing options.
Q: What is the status of a potential refinancing out of your upcoming debt maturity?
A: As we discussed, we are assessing potential debt and equity financings as part of our strategic review and we've retained a financial advisor to assist with this process. Importantly, we are reviewing options to support a new financing strategy in place well before the expiration of our current ABL facility in 2027 and our senior notes in 2026.
Q: Could you take us through the puts and takes on cash flow this year?
A: In broad strokes, the seasonal nature of our business and the projected sales decline will require operating cash use in the near-term but we expect to generate positive free cash flow in Q4. Based on the seasonality of our business, cash collections compared to the first half of the year are anticipated to increase for the remainder of 2024. This is consistent with the implied sales increase from the first to second half based on our full year 2024 guidance. Additionally, there will be inventory, freight, and marketing expenditures to support the sales increase in the second half. There will also be increased payments to our licensing partners as well as higher tax payments. From a full year perspective, we have the one-time benefit of the $57 million tax refund received in Q2, in addition to a reduction in overall operating expenses anticipated for the year as we continue to realize the benefits under our TAG plan.
Q: What are the key areas of focus for Fossil Group to return to growth and profitability?
A: During these challenging times, we're focused on four core priorities to position the company to return to growth and profitability: first, advancing our Transform and Grow Plan; second, strengthening our balance sheet; third, stabilizing the business; and fourth, conducting a strategic review of our business model. Our teams are working tirelessly and delivering strong execution on multiple work streams under our TAG Plan. We're encouraged by the operational and financial progress we're seeing as reflected in our margin expansion and cost reduction year-to-date this year.
Q: How is the TAG Plan impacting your financial performance?
A: The efficiencies we're capturing under our TAG Plan are driving significant improvement in gross margin and operating expense. Year-to-date, we're tracking to achieve at least $100 million of annualized benefits from TAG in 2024, and remain on track to achieve expected total plan benefits of $300 million. From a gross margin perspective, we're realizing benefits from SKU rationalization and pricing and promotional initiatives. From an operating expense lens, we're capturing benefits through several actions as we continue to rightsize our cost structure. These include workforce reductions, procurement and indirect cost savings, store closures, rent negotiations, and store labor optimization.
Q: What are the current trends in your retail stores and boutiques?
A: In the second quarter, we saw trend improvements in our own stores and boutiques for traditional watches across our Fossil brand, as well as several of our major licensed brands. Of note, Fossil traditional watches were up 4% in our DTC channels, on a comp sales basis in Q2. In the second half, our teams will focus on additional upper funnel initiatives to drive awareness and heat including, brand ambassador and influencer campaigns. Just this morning, we announced supermodel and entrepreneur Ashley Graham, as a new ambassador for Michele, our luxury women's watch brand. She'll serve as the face of Michele's latest marketing campaign. Similar partnerships are expected in the coming months.
Q: Can you provide an update on your strategic partnerships and licensing agreements?
A: From a licensed brand perspective, we just signed an expansive license agreement with SKECHERS, broadening the scope of our agreement and extending the terms to 2029. Over the past five years, we've grown our SKECHERS watch business by 35% annually. We're extremely excited to continue our partnership with one of the world's fastest-growing brands and look forward to driving further growth on a global scale in the coming years.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
