The following is a discussion of the financial condition and results of operations ofFossil Group, Inc. and its subsidiaries for the fourteen week period endedApril 4, 2020 (the "First Quarter") as compared to the thirteen week period endedMarch 30, 2019 (the "PriorYear Quarter "). 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 the consumer through our retail stores and commercial websites and through third-party distributors in countries where we do not maintain a physical presence. Our products are offered at varying price points to meet the needs of our customers, whether they are value conscious or luxury oriented. Based on our extensive 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. Domestically, we sell our products through a diversified distribution network that includes department stores, specialty retail locations, specialty watch and jewelry stores, Company-owned retail and outlet stores, mass market stores and through our FOSSIL® website and third-party websites. Our wholesale customer base includes, among others, Amazon, Best Buy, Dillard's, Kohl's, Macy's, Nordstrom,Saks Fifth Avenue , Target and Wal-Mart. Inthe United States , our network of Company-owned stores included 56 retail stores located in premier retail sites and 101 outlet stores located in major outlet malls as ofApril 4, 2020 . In addition, we offer an extensive collection of our FOSSIL brand products on our website, www.fossil.com, as well as proprietary and licensed watch and jewelry brands through other managed and affiliated websites. Internationally, our products are sold to department stores, specialty retail stores and specialty watch and jewelry stores in approximately 150 countries worldwide through 23 Company-owned foreign sales subsidiaries and through a network of approximately 80 independent distributors. Internationally, our network of Company-owned stores included 168 retail stores and 122 outlet stores as ofApril 4, 2020 . Our products are also sold through licensed and franchised FOSSIL retail stores, retail concessions operated by us and kiosks in certain international markets. In addition, we offer an extensive collection of our FOSSIL brand products on our websites in certain countries. Our business is subject to economic cycles, retail industry conditions and the impact of tariffs on our products. Purchases of discretionary fashion accessories, such as our watches, handbags, sunglasses and other products, tend to decline during recessionary periods when disposable income is low and consumers are hesitant to use available credit. In addition, acts of terrorism, acts of war and military action both in theU.S. and abroad can have a significant effect on economic conditions and may negatively affect our ability to procure our products from manufacturers for sale to our customers. Our business is also 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 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 contract manufacturers' control. Future sales and earnings growth are also contingent upon our ability to anticipate and respond to changing fashion trends and consumer preferences in a timely manner while continuing to develop innovative products in the respective markets in which we compete. As is typical with new products, including our lines of connected accessories, market acceptance of new designs and products that we may introduce is subject to uncertainty. In addition, we generally make decisions regarding product designs several months in advance of the time when consumer acceptance can be measured. We believe that we can drive long-term growth with brand building, innovation through design, fashion and new materials and introducing new technology and functionality into our accessories, while continuing to provide a solid value proposition to consumers across all of our brands. Our international operations are subject to many risks, including foreign currency fluctuations and risks related to the global economy. Generally, a strengthening of theU.S. dollar against currencies of other countries in which we operate will reduce the translated amounts of sales and operating expenses of our subsidiaries, which results in a reduction of our consolidated operating income. We manage these currency risks by using derivative instruments. The primary risks managed by using derivative instruments are the future payments by non-U.S. dollar functional currency subsidiaries of intercompany inventory transactions denominated inU.S. dollars. We enter into foreign exchange forward contracts ("forward contracts") to 28 -------------------------------------------------------------------------------- manage fluctuations in global currencies that will ultimately be used to settle suchU.S. dollar denominated inventory purchases. Known or Anticipated Trends: Based on our recent operating results and current perspectives on our operating environment, we anticipate certain trends will continue to impact our operating results: InMarch 2020 , a novel strain of coronavirus ("COVID-19") was declared a global pandemic by theWorld Health Organization . Our business operations and financial performance for the First Quarter were materially impacted by COVID-19. This 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." During this period, we are 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 pandemic. By the end of the First Quarter, the impact of COVID-19 resulted in the closure of the majority of our stores and many of our wholesale partners' stores. As of the date of this filing, certain regional and local governments have lifted or modified restrictions and orders. While we have reopened a limited number of stores, these stores have been impacted by a decrease in retail traffic and reduced hours at many locations. The reopening of our stores and our wholesale partners' stores that remain closed is dependent on a number of factors, including, but not limited to, the lifting of any government restrictions and implementation of safety protocols. While we believe the closed stores will open over stages during the next several months, we cannot reasonably estimate the impact such closures will have on our retail and wholesale sales and overall results. We expect revenue declines to continue in our retail and wholesale channels as consumers react to, or otherwise practice, "social distancing" and other safety measures. Further, we expect a larger decline in revenues in the second quarter of 2020, as a significant number of our retail and wholesale partners' stores may be closed for the whole period. For certain of our stores that have reopened inAsia , we are seeing trends in traffic down approximately fifty percent, but conversions up approximately 70% to 80%. During the periods in which our stores and our wholesale partners' stores have been closed, we have seen strong growth trends in our direct and wholesale e-commerce channels. We expect for these trends to continue, as consumers continue to focus on online shopping options. We have taken certain cost saving and other actions, and plan to take further actions, to address the decrease in revenues and cash flow and other impacts on our business as a result of COVID-19 in order to maintain liquidity and in order to remain in compliance with financial covenants. Examples of some of these actions include the following: Board of Director and Executive Compensation: We implemented base salary reductions for each of our executive officers for an indefinite time period. Further, the cash fees for all non-employee directors serving on our Board of Directors were deferred for the First Quarter until the end of 2020 and the cash fees were reduced by twenty percent for the second quarter of fiscal year 2020. Other Employee Actions: We have implemented base salary reductions for a substantial number of our employees globally. We also implemented weekly work hour reductions (e.g., from 40 hours to 32 or 24 hours) and have implemented work-reduction furloughs for certain other employees. We closed all of our corporate offices at various times in 2020. Many of our offices inAsia andEurope have reopened in some capacity with health and safety guidelines in place. Our offices in theU.S. remain closed with plans to reopen in some capacity in July. We believe our employees have been successful in transitioning to a virtual working environment. Office and Retail Location Expenses: We have entered into agreements, or are in discussions with, most of our retail and corporate office landlords to modify rent payments, receive other concessions or otherwise reduce our operating costs for these locations. Other Expense Reductions: We have also extended the payment terms with a number of our vendors and suppliers globally and have agreements, or are in discussions with, licensors of certain third party trademarks to reduce our royalty obligations in fiscal 2020. In addition, we plan to reduce marketing and capital spending and eliminate all non-business critical spending for the balance of 2020. 2020 Operating Expenses: Selling, general and administrative expenses ("SG&A") for 2020 is now expected to be several million dollars lower than 2019 and our original plan for 2020. Our NWF 2.0 initiative is being expanded to include additional expense reduction programs which are partly dependent on the length and depth of the COVID-19 pandemic impact. Expense reductions are expected to be primarily driven by additional store closings and rent concessions, reduced compensation levels, lower marketing investment, and fewer discretionary expenses. 29 -------------------------------------------------------------------------------- Capital Expenditures: Capital expenditures for 2020 are expected to be approximately$5 million to$7 million , compared to prior guidance of approximately$25 million . This reduction reflects the deferral or cancellation of certain planned investments. Management believes our cost reduction plans are probable of being successfully implemented, which will result in adequate cash flows to support our ongoing operations and to meet our covenant requirements for one year following the date these financial statements are issued. Our Term Loan Facility (as defined in "Note 15-Debt Activity") contains certain affirmative and negative covenants. We have entered into a new amendment to our Term Loan Facility to amend, among other things, certain of these financial covenants as a result of the impact of COVID-19 on our business. Refer to "Note 15-Debt Activity" for additional details on the Term Loan Facility. We are currently in compliance with our covenants and are forecasting to remain in compliance for the year following the date that these financial statements are issued. Due to the uncertainty related to the duration of COVID-19, we could experience material further decreases to revenues and cash flows and may experience difficulty in remaining in compliance with financial covenants under the Term Loan Facility, as amended. For a more complete discussion of the risks facing our business, see "Part I, Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedDecember 28, 2019 and "Part II, Item 1A. Risk Factors" of this Quarter Report on Form 10-Q. Results of Operations Executive Summary. Since the onset of the COVID-19 pandemic, we have acted to protect our employees, partners and communities worldwide, adapted to rapidly changing circumstances, mitigated business disruption and strengthened our financial position. In the preceding "General" section, we have described some of the cost reduction and cash management steps we have taken to date. During the First Quarter, net sales decreased 16% (15% in constant currency), as compared to the PriorYear Quarter . We generated a net loss of$85.6 million in the First Quarter as compared to a net loss of$12.2 million in the PriorYear Quarter . In January and February, worldwide net sales were above our expectations, reflecting increased sales of our older generation connected product driven by liquidation activity in theAmericas , as well as improved performance in our core business including traditional leathers and watches. As the majority of stay-at-home mandates took effect in March, the combination of retail store closures and reduced wholesale sales had a considerable impact on our First Quarter net sales and profitability. From a global business perspective, we experienced store closures at our wholesale partners and Fossil owned locations as early as February in theAsia Pacific region. This of course accelerated in March as the virus spread toEurope and theAmericas . The stay-at-home orders and restrictions on travel have driven a channel shift away from brick and mortar and towards e-commerce. The investments we have been making in our digital capabilities left us well prepared to service significantly higher demand levels. During the First Quarter, we completed the implementation of our new global e-commerce platform, which provides us with a flexible and responsive system that integrates with our marketing programs. We believe this has been a critical factor in our ability to drive traffic and conversion on Fossil.com. In recent weeks, the re-opening of wholesale doors and FOSSIL retail stores have started to phase in across all geographies and channels. We have been proactively reducing incoming inventory and working closely with our wholesale partners to align on the best path forward. Due to the timing of the First Quarter closures, we expect the second quarter of fiscal year 2020 to be more challenging from a net sales perspective. We have previously outlined our four strategic priorities for fiscal year 2020. Notwithstanding the COVID-19 pandemic, these strategies remain highly relevant and we believe they will be important to our long-term success. The first strategic initiative is delivering compelling storytelling and innovation. Our second strategic initiative is commercial transformation, which is one of two strategic initiatives we are accelerating due to the current operating environment created by the pandemic. We have deployed substantial resources toward increasing our digital capabilities in recent years and that is helping us serve our customers during this time of heightened e-commerce demand. We have invested in a robust set of tools that can support a larger direct to consumer business in the future. Our third strategic initiative is expanding our opportunity inChina andIndia . In these countries we are continuing to execute against a strategy centered around localized marketing and segmented assortments. The impacts of COVID-19 may disrupt our growth trajectory in the short to intermediate term, but we continue to viewChina andIndia as compelling long-term opportunities. Under our NWF 2.0 program, our fourth strategic initiative, we have been driving greater efficiency in our processes and workstreams throughout the organization and right-sizing our cost structure. In 2019, operating expense was reduced by nearly$50 million . Given the current environment and our perspective on the future state of business, we have made the strategic decision to accelerate and expand our NWF 2.0 program. Specifically, we are shifting a portion of the temporary savings from our 30 --------------------------------------------------------------------------------
COVID-19 specific actions into permanent reductions. This is expected to
generate incremental benefits of approximately
During the First Quarter, sales of FOSSIL branded products decreased 15% (14% in constant currency), as compared to the PriorYear Quarter , with declines across all major product categories. FOSSIL brand watch sales decreased 16% (15% in constant currency) during the First Quarter. Our multi-brand global watch portfolio declined 15% (14% in constant currency) during the First Quarter compared to the PriorYear Quarter , with traditional watch sales declining mid-double digits in constant currency and connected watch sales declining mid-single digits. While most brands in the portfolio decreased, TORY BURCH® and ARMANI EXCHANGE® increased. Excluding store closures, business exits and the extra week in the First Quarter, our core sales declined in the mid-teens, with favorability in January and February offset by the impact of COVID-19 across all channels in March. Global comparable retail sales, which include our stores and our own e-commerce decreased 14% on a 14-week calendar basis. Prior to COVID-19 store closures, comparable retail sales were trending up 1% in the First Quarter, with positive comparable sales inAmericas outlet stores and e-commerce inAsia andEurope and partially offset by comparable sales declines inAmericas e-commerce and full-price stores in all regions. During the First Quarter, our gross profit margin rate decreased to 35.9% compared to 53.3% in the PriorYear Quarter . The gross margin contraction was largely driven by increased liquidation and inventory valuation adjustments of older generation connected watches and minimum licensed product royalties resulting from decreased sales due to the impacts of COVID-19. First quarter margins also included softness in retail margins driven by promotions, higher inventory costs and increased markdown activity. These pressures were partially offset by margin optimization efforts through our New World Fossil programs as well as favorable regional and product mix. Currency favorably impacted the gross profit margin rate by approximately 10 basis points. Total operating expenses, including$20 million of non-cash charges related to operating lease right-of-use and intangible asset impairment and$9 million of restructuring expenses, increased 2.5% in the First Quarter, compared to the PriorYear Quarter . During the First Quarter, our financial performance resulted in a net loss of$1.69 per diluted share and included NWF restructuring charges of$0.15 per diluted share. The PriorYear Quarter resulted in a net loss of$0.25 per diluted share and included a gain on sale of intellectual property of$0.33 per diluted share and restructuring charges of$0.16 per diluted share. Currencies, including both the translation impact on operating earnings and the impact of foreign currency hedging contracts, unfavorably impacted earnings in the First Quarter by$0.12 per diluted share. 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 intoU.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 weakerU.S. dollar and are affected negatively by a strongerU.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 inthe 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 theU.S. dollar are translated intoU.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. 31 -------------------------------------------------------------------------------- Quarterly Periods EndedApril 4, 2020 andMarch 30, 2019 ConsolidatedNet Sales . Net sales decreased$74.6 million or 16.0% (14.7% in constant currency), for the First Quarter as compared to the PriorYear Quarter , primarily as a result of the ongoing COVID-19 pandemic. During the First Quarter, watch sales decreased$56.3 million or 15.4% (14.0% in constant currency), our jewelry business decreased$8.0 million or 25.6% (24.4% in constant currency) and our leathers products decreased$6.6 million or 12.2% (11.3% in constant currency). In the beginning of the First Quarter, sales results were positively impacted by increased off-price and liquidation sales of connected inventory. Due to the ongoing COVID-19 pandemic, sales began to slow in February inAsia and in March in theAmericas andEurope , due to store closures in our direct to consumer and wholesale channels. Excluding store closures, business exits and the extra week in the First Quarter, as a percentage of net sales, our core sales declined in the mid-teens. Our direct business also decreased mid-teens during the First Quarter, largely driven by temporary store and concession closures due to COVID-19 and permanent store closures since the PriorYear Quarter , while we continued strong e-commerce growth inAsia . We have reduced our store footprint by 14 stores since the end of the PriorYear Quarter and expect to reduce it further during the remainder of fiscal year 2020. Net sales information by product category is summarized as follows (dollars in millions): For the 14 Weeks Ended April For the 13 Weeks Ended March 4, 2020 30, 2019 Growth (Decline) Percentage Percentage Percentage Percentage As Constant Net Sales of Total Net Sales of Total Dollars Reported Currency Watches$ 309.9 79.3 %$ 366.2 78.7 %$ (56.3 ) (15.4 )% (14.0 )% Leathers 47.3 12.1 53.9 11.6 (6.6 ) (12.2 ) (11.3 ) Jewelry 23.2 6.0 31.2 6.7 (8.0 ) (25.6 ) (24.4 ) Other 10.3 2.6 14.0 3.0 (3.7 ) (26.4 ) (26.4 ) Total$ 390.7 100.0 %$ 465.3 100.0 %$ (74.6 ) (16.0 )% (14.7 )% In the First Quarter, the translation of foreign-based net sales intoU.S. dollars decreased reported net sales by$6.0 million , including unfavorable impacts of$3.1 million ,$2.8 million and$0.1 million in ourEurope ,Asia andAmericas segments, respectively, when compared to the PriorYear Quarter . The following table sets forth consolidated net sales by segment (dollars in millions): For the 14 Weeks Ended April For the 13 Weeks Ended March 4, 2020 30, 2019 Growth (Decline) Percentage Percentage Percentage Percentage As Constant Net Sales of Total Net Sales of Total Dollars Reported Currency Americas$ 152.9 39.1 %$ 190.4 40.9 %$ (37.5 ) (19.7 )% (19.6 )% Europe 128.2 32.8 153.3 33.0 (25.1 ) (16.4 ) (14.3 ) Asia 106.2 27.2 116.9 25.1 (10.7 ) (9.2 ) (6.8 ) Corporate 3.4 0.9 4.7 1.0 (1.3 ) (27.7 ) (29.8 ) Total$ 390.7 100.0 %$ 465.3 100.0 %$ (74.6 ) (16.0 )% (14.7 )% AmericasNet Sales .Americas net sales decreased$37.5 million or 19.7% (19.6% in constant currency), during the First Quarter in comparison to the PriorYear Quarter . During the First Quarter, watches decreased$29.0 million or 19.6% (19.5% in constant currency), our jewelry category decreased$5.2 million or 56.5% (56.5% in constant currency) and our leathers business decreased$2.8 million or 9.1% (9.1% in constant currency). In the region, sales declined in theU.S. ,Mexico andCanada . Comparable retail sales were moderately negative on a 14-week calendar basis (modestly positive prior to COVID-19 related closures) during the First Quarter, driven by our strong outlet stores performance, which benefited from increased connected product liquidations prior to COVID-19 closures. 32 -------------------------------------------------------------------------------- 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 theAmericas segment (dollars in millions): For the 14 Weeks For the 13 Weeks Ended Ended April 4, 2020 March 30, 2019 Growth (Decline) Percentage Percentage Net Sales Net Sales Dollars As Reported Constant Currency Watches $ 119.3 $ 148.3$ (29.0 ) (19.6 )% (19.5 )% Leathers 28.0 30.8 (2.8 ) (9.1 ) (9.1 ) Jewelry 4.0 9.2 (5.2 ) (56.5 ) (56.5 ) Other 1.6 2.1 (0.5 ) (23.8 ) (23.8 ) Total $ 152.9 $ 190.4$ (37.5 ) (19.7 )% (19.6 )% EuropeNet Sales .Europe net sales decreased$25.1 million or 16.4% (14.3% in constant currency) during the First Quarter in comparison to the PriorYear Quarter . Watches decreased$18.3 million or 15.7% (13.7% in constant currency), jewelry declined$3.3 million or 15.9% (13.9% in constant currency) and our leathers business declined$2.0 million or 17.5% (14.9% in constant currency). Across theEurozone , sales were down in all major markets with the greatest declines inGermany , theU.K. andItaly . Comparable retail sales were moderately negative on a 14-week calendar basis (flat prior to COVID-19 related closures), with comparable retail store decreases in full price stores offset by e-commerce and outlet growth prior to COVID-19 closures. 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 theEurope segment (dollars in millions): For the 14 Weeks For the 13 Weeks Ended Ended April 4, 2020 March 30, 2019 Growth (Decline) Percentage Percentage Constant Net Sales Net Sales Dollars As Reported Currency Watches $ 97.9 $ 116.2$ (18.3 ) (15.7 )% (13.7 )% Leathers 9.4 11.4 (2.0 ) (17.5 ) (14.9 ) Jewelry 17.5 20.8 (3.3 ) (15.9 ) (13.9 ) Other 3.4 4.9 (1.5 ) (30.6 ) (28.6 ) Total $ 128.2 $ 153.3$ (25.1 ) (16.4 )% (14.3 )% Asia Net Sales. Net sales inAsia decreased$10.7 million or 9.2% (6.8% in constant currency). During the First Quarter as compared to the PriorYear Quarter , our watch category decreased$8.9 million or 8.8% (6.2% in constant currency), while our leathers category decreased$1.9 million or 16.1% (14.4% in constant currency), and our jewelry category increased$0.5 million or 41.7% (same in constant currency). Net sales increases in January were more than offset by declines later in the First Quarter as the COVID-19 pandemic spread. EMPORIO ARMANI® watches posted single digit sales increases, while most other brands decreased. Sales decreased in all major markets acrossAsia , except for mainlandChina , where sales growth was driven by both the wholesale channel and third-party e-commerce. Excluding store closures, business exits and the extra week in the First Quarter,Asia's core sales declined in the mid-single digits. Comparable retail sales were moderately negative on a 14-week calendar basis (also moderately negative prior to COVID-19 related closures), with strong e-commerce growth driven by effective marketing more than offset by comparable retail store declines prior to COVID-19 closures. 33 -------------------------------------------------------------------------------- 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 theAsia segment (dollars in millions): For the 14 Weeks For the 13 Weeks Ended Ended April 4, 2020 March 30, 2019 Growth (Decline) Percentage Percentage Constant Net Sales Net Sales Dollars As Reported Currency Watches $ 92.7 $ 101.6$ (8.9 ) (8.8 )% (6.2 )% Leathers 9.9 11.8 (1.9 ) (16.1 ) (14.4 ) Jewelry 1.7 1.2 0.5 41.7 41.7 Other 1.9 2.3 (0.4 ) (17.4 ) (17.4 ) Total $ 106.2 $ 116.9$ (10.7 ) (9.2 )% (6.8 )% The following table sets forth the number of stores by concept on the dates indicated below: April 4, 2020 March 30, 2019 Americas Europe Asia Total Americas Europe Asia Total Full price accessory 82 78 57 217 85 88 53 226 Outlets 114 74 35 223 116 74 38 228 Full priced multi-brand - 4 3 7 - 4 3 7 Total stores 196 156 95 447 201 166 94 461 During the First Quarter, we closed ten stores and opened six new stores. 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 were adjusted to normalize the 14-week First Quarter with the 13-week PriorYear Quarter . The COVID-19 pandemic led to the closing of the majority of our stores during the First Quarter. As a result, comparable retail sales have been calculated both with and without the normalization for COVID-19 store closure impacts. Comparable retail sales also exclude the effects of foreign currency fluctuations. Gross Profit. Gross profit of$140.4 million in the First Quarter decreased 43.4% in comparison to$247.9 million in the PriorYear Quarter . Gross profit margin rate decreased to 35.9% in the First Quarter compared to 53.3% in the PriorYear Quarter . The gross margin contraction was primarily driven by increased liquidation and inventory valuation adjustments of older generation connected products and minimum licensed product royalties resulting from decreased sales due to the impact of COVID-19. First Quarter margins also included softness in retail margins driven by promotions, higher inventory costs and increased markdown activity. These pressures were partially offset by margin optimization efforts through our New World Fossil programs as well as favorable regional and product mix. Currency favorably impacted the gross profit margin rate by approximately 10 basis points. Operating Expenses. Total operating expenses in the First Quarter increased by$6.8 million , or 2.5%, to$274.7 million compared to$267.9 million in the PriorYear Quarter . Operating expenses in the First Quarter included$9.4 million of restructuring costs, primarily related to employee costs, professional services and store closures, while the PriorYear Quarter included$10.2 million in restructuring costs. First Quarter operating expenses also included approximately$20 million of non-cash charges related to operating lease right-of-use and intangible asset impairment, and minimum marketing royalties. During the First Quarter, the MICHELE® trade name was partially impaired, resulting in a non-cash intangible asset impairment charge of$2.5 million . The translation of foreign-denominated expenses during the First Quarter decreased operating expenses by approximately$3.1 million as a result of the strongerU.S. dollar. As a percentage of net sales, SG&A expenses increased to 67.3% in the First Quarter as compared to 55.4% in the PriorYear Quarter . Operating Income (Loss). Operating income (loss) was a loss of$134.3 million in the First Quarter as compared to a loss of$19.9 million in the PriorYear Quarter . During the First Quarter, the increased operating loss was primarily driven by COVID-19 impacts on sales, gross margin and non-cash asset impairments. As a percentage of net sales, operating margin (loss) was (34.4)% in the First Quarter compared to (4.3)% in the PriorYear Quarter . Operating margin rate in the First Quarter included an unfavorable impact of 20 basis points due to changes in foreign currencies. 34 --------------------------------------------------------------------------------
Operating income (loss) by segment is summarized as follows (dollars in millions):
For the 14 Weeks Ended For the 13 Weeks Ended Change Operating Margin % April 4, 2020 March 30, 2019 Dollars Percentage 2020 2019 Americas $ (61.6 ) $ 10.9$ (72.5 ) (665.1 )% (40.3 )% 5.7 % Europe (2.7 ) 14.3 (17.0 ) (118.9 ) (2.1 ) 9.3 Asia 11.2 21.0 (9.8 ) (46.7 ) 10.6 18.0 Corporate (81.2 ) (66.1 ) (15.1 ) 22.8 Total operating income (loss) $ (134.3 ) $ (19.9 )$ (114.4 ) 574.9 % (34.4 )% (4.3 )% Interest Expense. Interest expense decreased by$0.7 million during the First Quarter compared to the PriorYear Quarter as a result of a smaller borrowing base for the majority of the First Quarter. Other Income (Expense)-Net. During the First Quarter, other income (expense)-net changed unfavorably to a net expense of$7.3 million in comparison to a net gain of$25.9 million in the PriorYear Quarter , which included a$21.6 million gain on the sale of intellectual property toYear Quarter . Provision for Income Taxes. Income tax benefit for the First Quarter was$63.7 million , resulting in an effective income tax rate of 42.7%. For the PriorYear Quarter , income tax expense was$9.6 million , resulting in an effective income tax rate of (446.1)%. The effective tax rate in the First Quarter differed from the PriorYear Quarter primarily due to changes enacted in the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, which was signed into law onMarch 27, 2020 . The CARES Act allowsU.S. taxpayers to carry back a net operating loss ("NOL") arising in tax years 2018, 2019 and 2020 to prior years when the tax rate was 35%. The Company recognized aU.S. tax benefit from the First Quarter tax loss, which will be carried back to offset taxable income reported in 2015. The Company will receive a refund of 2015 taxes as well as a portion of 2014 taxes due to the application of foreign tax credits that can be carried back. The PriorYear Quarter effective tax rate was negative since income tax expense was accrued on certain foreign entities with positive taxable income and because no benefit was recognized for losses in theU.S. and certain other foreign jurisdictions. Due to the Global Intangible Low-Taxed Income ("GILTI") provision of the Tax Cuts and Jobs Act, certain foreign income is included inU.S. taxable income effectively absorbing theU.S. NOLs, eliminating the availability of any future tax benefit or loss carryback. Net Income (Loss) Attributable toFossil Group, Inc. First Quarter net income (loss) attributable toFossil Group, Inc. was a loss of$85.6 million , or$1.69 per diluted share, in comparison to a net loss of$12.2 million , or$0.25 per diluted share, in the PriorYear Quarter . Diluted earnings (loss) per share in the First Quarter included restructuring charges of$0.15 per diluted share. Diluted earnings (loss) per share in the PriorYear Quarter included a gain on sale of intellectual property of$0.33 per diluted share and restructuring charges of$0.16 per diluted share. Currency fluctuations unfavorably impacted diluted earnings per share by$0.12 during the First Quarter. Liquidity and Capital Resources Our cash and cash equivalents balance at the end of the First Quarter was$245.4 million , including$181.3 million held in banks outside theU.S. , in comparison to cash and cash equivalents of$271.4 million at the end of the PriorYear Quarter and$200.2 million at the end of fiscal year 2019. 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. 35 -------------------------------------------------------------------------------- We have taken various actions to mitigate the impact of the current economic crisis on our financial position, with a focus on financial liquidity enhancements, cost reduction measures, capital preservation and inventory management. In addition to these temporary savings, we plan to address permanent cost reductions under our New World Fossil 2.0 restructuring project. We believe our cost reduction plans, if successfully executed, will result in adequate cash flows to support our ongoing operations. For the First Quarter, we had an operating cash flow deficit of$77.1 million . A net loss of$85.4 million and a decrease in working capital items of$56.0 million was partially offset by net non-cash items of$64.3 million . We had net debt borrowings of$120.6 million and capital expenditures of$2.9 million . We increased our borrowings under the Revolving Facility (as defined below) as a precautionary measure to increase our cash position, provide liquidity for a sustained period and to preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 outbreak. Accounts receivable, net of allowances, decreased by 23.3% to$153.4 million at the end of the First Quarter compared to$199.9 million at the end of the PriorYear Quarter . Days sales outstanding for our wholesale businesses remained flat at 55 days for the First Quarter and the PriorYear Quarter . Customers delaying payments as well as a change in certain customer relationships inIndia which accelerated revenue recognition from time of sell-through to sell-in with no change in timing of required payments increased aged receivables offset by increased markdowns and participation in early payment discount programs. Inventory at the end of the First Quarter was$439.7 million , which increased by 14.5% from the end of the PriorYear Quarter ending inventory balance of$384.1 million , largely driven by an increase in the weeks of supply, as sales plans decreased sharply as a result of reduced consumer demand resulting from COVID-19. At the end of the First Quarter, we had net working capital of$503.9 million compared to net working capital of$492.0 million at the end of the PriorYear Quarter . At the end of the First Quarter, we had$21.1 million of short-term borrowings and$298.5 million in long-term debt. For fiscal year 2020, we expect total capital expenditures to be approximately$5 million to$7 million , compared to prior guidance of approximately$25 million , in order to maintain liquidity and in order to remain in compliance with financial covenants. Of this amount, we expect approximately 60% will be for retail store renovations and enhancements, approximately 30% will be for technology and facilities maintenance, and approximately 10% for strategic growth, including investments in global concessions and technology. Our capital expenditure budget and allocation to the foregoing investments are estimates and are subject to change. We believe that cash flows from operations combined with existing cash on hand and amounts available under our credit facilities will be sufficient to fund our working capital needs and planned capital expenditures for the next twelve months. OnSeptember 26, 2019 , we andFossil Partners, L.P. (together with the Company, the "U.S. Borrowers"), as theU.S. borrowers, andFossil Group Europe GmbH (the "Swiss Borrower"),Fossil Asia Pacific Limited (the "Hong Kong Borrower"),Fossil (Europe) GmbH (the "German Borrower"),Fossil (UK) Limited (the "UK Borrower" and theUK Borrower, together with the Swiss Borrower and the German Borrower, the "European Borrowers") andFossil Canada Inc. (the "Canadian Borrower"), as the non-U.S. borrowers, certain other of our subsidiaries from time to time party thereto designated as borrowers (includingFossil France SA , the "French Borrower", and the French Borrower, together with theU.S. Borrowers, the European Borrowers, the Hong Kong Borrower and the Canadian Borrower, the "ABL Borrowers"), and certain of our subsidiaries from time to time party thereto as guarantors, entered into an asset-based revolving credit agreement (as amended, the "Revolving Facility") withJPMorgan 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. andWells Fargo Bank, National Association as joint bookrunners and joint lead arrangers, andCitizens Bank, N.A. andWells Fargo Bank, National Association , as co-syndication agents and each of the lenders from time to time party thereto (the "ABL Lenders"). In addition, we, as borrower, entered into a term credit agreement (the "Term Credit Agreement") withJPMorgan Chase Bank, N.A . as administrative agent (the "Term Agent"),JPMorgan Chase Bank, N.A .,Citizens Bank , National Association andWells Fargo Securities, LLC , as joint bookrunners and joint lead arrangers and the lenders party thereto (the "Term Loan Lenders"). The Revolving Facility provides that the ABL Lenders may extend revolving loans in an aggregate principal amount not to exceed$275.0 million at any time outstanding (the "Revolving Credit Commitment"), of which up to$160.0 million is available under aU.S. facility, an aggregate of$70.0 million is available under a European facility,$30.0 million is available under aHong Kong facility,$10.0 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 onSeptember 26, 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 (the "Line Cap") 36 -------------------------------------------------------------------------------- equal to the lesser of the total Revolving Credit Commitment and the aggregate borrowing bases under theU.S. facility, the European facility, theHong Kong facility, the French facility and the Canadian facility. Loans under the Revolving Facility may be made inU.S. dollars, Canadian dollars, euros,Hong Kong dollars or pounds sterling. OnMarch 24, 2020 , theU.S. Borrowers provided notice to the ABL Agent for an alternate base rate borrowing of$71.0 million under the Revolving Facility effectiveMarch 25, 2020 , the Hong Kong Borrower provided notice to the ABL Agent for a Eurodollar borrowing of$10.0 million under the Revolving Facility effectiveMarch 30, 2020 and the European Borrowers provided notice to the ABL Agent for a Eurodollar borrowing of €19.0 million under the Revolving Facility effectiveMarch 30, 2020 . We increased our borrowings under the Revolving Facility as a precautionary measure to increase our cash position, provide liquidity for a sustained period and to preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 outbreak. 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 percentage of eligibleU.S. finished goods inventory and (y) 65% of the lower of cost or market value of eligibleU.S. finished goods inventory, plus (ii) 85% of the eligibleU.S. accounts receivable, plus (iii) 90% of eligibleU.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. Eurodollar loans under theU.S. facility will bear interest at the adjusted LIBO rate plus the applicable rate, and Eurodollar loans under the Canadian facility, European facility, French facility andHong Kong facility will bear interest at the LIBO rate plus the applicable rate. Base rate loans under theU.S. facility will bear interest at the alternate base rate plus the applicable rate. Under the Canadian facility, Canadian prime rate loans will bear interest at the Canadian prime rate plus the applicable rate, and Canadian dollar loans will bear interest at the CDOR rate plus the applicable rate. Under theHong Kong facility,Hong Kong dollar loans will bear interest at the HIBOR rate plus the applicable rate. Each swingline loan shall bear interest at the overnight LIBO rate plus the applicable rate for overnight LIBO rate loans. The applicable rate varies from 1.25% to 1.75% for adjusted LIBO, CDOR and HIBOR rate loans and from 0.25% to 0.75% for alternate base rate and Canadian prime rate loans depending on our average daily excess availability under the Revolving Facility for the most recently ended fiscal quarter, which is an amount equal to (x)(1) the lesser of the total revolving commitments then in effect and (2) the aggregate borrowing base, minus (y) the total credit exposure of all ABL Lenders at such time. The Revolving Facility also includes a commitment fee, payable quarterly in arrears, of 0.250% or 0.375% determined by reference to the average daily unused portion of the overall commitment under the Revolving Facility. The ABL Borrowers will pay the ABL Agent, on the account of the issuing ABL Lenders, an issuance fee of 0.125% for any issued letters of credit. The ABL Borrowers are permitted to voluntarily prepay the revolving loans, in whole or in part, without premium or penalty. The ABL Borrowers may reduce the commitments at any time, in whole or in part, without premium or penalty, in a minimum aggregate principal amount of not less than$5.0 million or increments of$1.0 million in excess thereof. If the total amount of outstanding revolving loans and Letters of Credit exceeds the total commitment under the Revolving Facility, the ABL Borrowers must prepay the revolving loans in an amount equal to such excess. During any periods (each, a "Covenant Period") while availability under the Revolving Facility is less than the greater of (x) 15% of the Line Cap and (y)$30,000,000 , we will be subject to a financial covenant which requires us to not permit the fixed charge coverage ratio to be less than 1.00 to 1.00 on the first day of such Covenant Period or the last day of each fiscal quarter during such Covenant Period. The ABL Borrowers have the right to request an increase to the commitments under the Revolving Facility or any subfacility in an aggregate principal amount not to exceed$75.0 million in increments no less than$10.0 million , subject to certain terms and conditions as defined in the Revolving Facility, including that the Term Loan Facility has been amended, restated or otherwise modified to permit any additional commitments. The Revolving Facility is secured by guarantees by us and certain of our domestic subsidiaries. Additionally, we and our subsidiaries have granted liens on all or substantially all of our assets in order to secure the obligations under the Revolving Facility. In addition, the non-U.S. borrowers from time to time party to the Revolving Facility are required to enter into security instruments with respect to all or substantially all of their assets that can be pledged under applicable local law, and certain of their respective subsidiaries may guarantee the respective non-U.S. obligations under the Revolving Facility. 37 -------------------------------------------------------------------------------- The Term Credit Agreement provides for term loans to us in the aggregate principal amount of$200 million . Proceeds from the Term Credit Agreement were reduced by a$12 million original issue discount, which is presented as a reduction of the Term Credit Agreement Loan Facility on the Company's condensed consolidated balance sheet and will be amortized to interest expense over the life of the term loan. The Term Credit Agreement expires and is due and payable onSeptember 26, 2024 , subject to possible extensions. The Term Credit Agreement is required to be prepaid with the net cash proceeds of certain asset sales, insurance and condemnation events, debt and equity issuances, cash dividends received from certain of our subsidiaries and an annual excess cash flow sweep. The Term Credit Agreement also limits the Revolving Credit Commitment under the Revolving Facility to the lesser of the borrowing base or$200.0 million . A payment default under the Revolving Facility triggers a cross default under the Term Loan Facility. The Term Credit Agreement is secured by guarantees by us and certain of our domestic subsidiaries. Additionally, we and such subsidiaries have granted liens on all or substantially all of their assets in order to secure the obligations under the Term Credit Agreement. OnFebruary 20, 2020 , we entered into Amendment No. 1 (the "First Amendment") to the Term Credit Agreement to modify certain terms of the Term Credit Agreement to, among other things, (i) increase the interest rate applicable to the term loans under the Term Credit Agreement (a) in the case of Eurodollar loans, from the adjusted LIBO rate plus 6.50% to the adjusted LIBO rate plus 8.00%, and (b) in the case of alternate base rate loans, from the alternate base rate plus 5.50% to the alternate base rate plus 7.00%; (ii) increase the maximum total leverage ratio permitted from 1.50 to 1.00 as of the last day of each fiscal quarter to (a) 2.75 to 1.00 as of the last day of each fiscal quarter endingApril 4, 2020 ,July 4, 2020 ,October 3, 2020 andJanuary 2, 2021 , (b) 2.25 to 1.00 as of the last day of each fiscal quarter endingApril 3, 2021 ,July 3, 2021 andOctober 2, 2021 , and (c) 1.50 to 1.00 as of the last day of each subsequent fiscal quarter; (iii) limit the amount of borrowings in aggregate principal amount at any time outstanding under the Revolving Facility to the lesser of the borrowing base thereunder and$200 million ; (iv) extend the applicable periods for certain prepayment fees, so that if we voluntarily prepay the term loans prior toFebruary 20, 2022 , or if we incur certain indebtedness which results in a mandatory prepayment under the Term Credit Agreement prior toFebruary 20, 2022 , we are required to pay a prepayment fee of 2.00% with respect to the principal amount prepaid prior toFebruary 20, 2021 and 1.00% with respect to the principal amount prepaid betweenFebruary 21, 2021 andFebruary 20, 2022 ; and (v) require us to pay the foregoing prepayment fee upon acceleration of the loans under the Term Credit Agreement. OnMay 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 endedApril 4, 2020 to the earlier of (i)July 6, 2020 and (ii) the date on which we are required to file (or do file) with theSEC its quarterly report on Form 10-Q for the fiscal quarter endedApril 4, 2020 . OnJune 5, 2020 , we entered into Amendment No. 3 (the "Third Amendment") to the Term Credit Agreement to modify certain terms of the Term Credit Agreement to, among other things, (i) increase the interest rate applicable to the term loans under the Term Credit Agreement (a) in the case of Eurodollar loans, from the adjusted LIBO rate plus 8.00% to the adjusted LIBO rate plus 8.50%, and (b) in the case of alternate base rate loans, from the alternate base rate plus 7.00% to the alternate base rate plus 7.50%; (ii) (a) require a$15.0 million principal prepayment at the time of the Third Amendment, (b) increase the quarterly amortization payment to be paid onSeptember 30, 2020 to$8.0 million from$5.0 million , and (c) increase each quarterly amortization payment thereafter to$10.0 million ; (iii) change provisions related to prepayment fees such that (a) prepayment fees will be waived for a period of 90 days following the date of the Third Amendment for prepayments in connection with certain refinancings of the term loans and (b) prepayment fees will be 2% for a period of twelve months after such 90-day period, and 1% for next twelve-month period; (iv) reduce the minimum liquidity levels required to be maintained by us at the end of each fiscal month, through and includingNovember 2020 , from$150.0 million to$125.0 million ; (v) waive the quarterly test for maximum total leverage ratio for fiscal year 2020 and the first three fiscal quarters of fiscal year 2021, and during such period require us to maintain specified minimum levels of EBITDA; and (vi) increase the amount of equity interests in certain "first tier" foreign subsidiaries that must be pledged as collateral securing the obligations under the Term Credit Agreement from 65% to 100% of such equity interests. The obligations under the Revolving Facility and the Term Credit Agreement are governed by a customary intercreditor agreement (the "Intercreditor Agreement"). The Intercreditor Agreement specifies that (i) the Term Credit Agreement is secured by a perfected first priority security interest inU.S. fixed assets and (b) a perfected second priority security interest in theU.S. liquid assets and accounts receivable, and (ii) the Revolving Facility is secured by (a) a perfected first priority security interest in theU.S. liquid assets and accounts receivable and (b) a perfected second priority security interest inU.S. fixed assets. 38 -------------------------------------------------------------------------------- The Company had net payments of$10.0 million during the First Quarter under the Term Loan Facility at an average interest rate of 9.0%. The Company had net borrowings of$130.9 million under the Revolving Credit Facility during the First Quarter at an average interest rate of 2.7%. As ofApril 4, 2020 , we had$190.0 million outstanding under the Term Loan Facility and$159.6 million outstanding under the Revolving Credit Facility. We also had unamortized debt issuance costs of$21.3 million , which reduce the corresponding debt liability. In addition, we had$2.7 million of outstanding standby Letters of Credit atApril 4, 2020 . Amounts available under the Revolving Credit Facility are reduced by any amounts outstanding under standby letters of credit. As ofApril 4, 2020 , we had available borrowing capacity of$33.0 million under the Revolving Credit Facility. AtApril 4, 2020 , we were in compliance with all debt covenants related to all our credit facilities. Off Balance Sheet Arrangements As ofApril 4, 2020 , 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 for the fiscal year endedDecember 28, 2019 . 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 for the fiscal year endedDecember 28, 2019 . Forward-Looking Statements The statements contained and incorporated by reference 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," "expects," "plans," "intends," "estimates," "anticipates" and 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; 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 theU.S. dollar; lower levels of consumer spending resulting from a general economic downturn or generally reduced shopping activity caused by public safety or consumer confidence concerns; the performance of our products within the prevailing retail environment; customer acceptance of both new designs and newly-introduced product lines, including risks related to the expanded launch of connected accessories; financial difficulties encountered by customers; the effects of vigorous competition in the markets in which we operate; the integration of the organizations and operations of any acquired businesses into our existing organization and operations; risks related to the success of our restructuring programs; the termination or non-renewal of material licenses, 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. In addition to the factors listed above, our actual results may differ materially due to the other risks and uncertainties discussed in our Quarterly Reports on Form 10-Q and the risks and uncertainties set forth in our Annual Report on Form 10-K for the fiscal year endedDecember 28, 2019 . 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. 39
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