FOSSIL GROUP, INC. The following is a discussion of the financial condition and results of operations ofFossil Group, Inc. and its subsidiaries for the thirteen week periods endedJuly 2, 2022 (the "Second Quarter") andJuly 3, 2021 (the "PriorYear Quarter "), and the twenty-six week periods endedJuly 2, 2022 (the "Year To Date Period") andJuly 3, 2021 (the "Prior Year YTD Period"). This discussion should be read in conjunction with the condensed consolidated financial statements and the related notes thereto.
Overview
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 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. Known or Anticipated Trends
Based on our recent operating results and current perspectives on our operating environment, we anticipate the following trends will continue to impact our operating results:
COVID-19: Our business operations and financial performance continue to be materially impacted by COVID-19. The COVID-19 pandemic has negatively affected the global economies, disrupted global supply chains and financial markets, and led to significant travel and transportation restrictions, including periodic mandatory closures of non-essential businesses and orders to shelter-in-place. The lockdowns and travel restrictions, particularly inChina , have had a significant adverse impact on our sales throughout the Year To Date Period, and we expect that to continue. We remain focused on protecting the health and safety of our employees, customers and suppliers to minimize potential disruptions and supporting the community to address challenges posed by the global COVID-19 pandemic. Supply Chain and Inflation: Our business is subject to the risks inherent in global sourcing supply. We rely on domestic and foreign suppliers to provide us with merchandise in a timely manner and at favorable prices. 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. Among our foreign suppliers,China is the source of a substantial majority of our imports. We have experienced, and expect to continue to experience, increased international transit times, particularly for our leathers products and packaging, as well as inflation on our shipping costs for a majority of our products. A disruption in the flow of our imported merchandise fromChina or a material increase in the cost of those goods or transportation without any offsetting price increases may significantly decrease our profits. In addition, recent historic high rates of inflation, including increased fuel and food prices, has led to a softening of consumer demand in our categories and may lead to further challenges to grow our sales. Foreign Currencies: The rapid strengthening of theU.S. dollar relative to major foreign currencies unfavorably impacted our net sales and profitability in the Year To Date Period, and we expect foreign currency translation will continue to negatively impact our financial results in fiscal year 2022 when compared with fiscal year 2021. Inventory Levels: By the end of the Second Quarter of 2022, a slowing of consumer demand has resulted in excess inventory in the marketplace. With higher marketplace inventories and a rapidly changing economic environment, retailers are rationalizing their inventory needs. Because we expect marketplace inventories to remain elevated, we are adjusting future inventory purchases. Russia-Ukraine Conflict: Our operations inRussia consist of sales through a third-party distributor. Sales to this distributor are currently on hold. Our sales inRussia are not material to our financial results. We have no other operations, including supply chain, inRussia orUkraine . However, the continuation of theRussia -Ukraine military conflict and/or an 31 --------------------------------------------------------------------------------
escalation of the conflict beyond its current scope may weaken the global economy and could result in additional inflationary pressures and supply chain constraints.
Data Security: We depend on information technology systems, the Internet and
computer networks for a substantial portion of our retail and e-commerce
businesses, including credit card transaction authorization and processing. We
also receive and store personal information about our customers and employees,
the protection of which is critical to us. In the normal course of our business,
we collect, retain, and transmit certain sensitive and confidential customer
information, including credit card information, over public networks. Despite
the security measures we currently have in place, our facilities and systems and
those of our third party service providers have been, and will continue to be,
vulnerable to theft of physical information, security breaches, hacking
attempts, computer viruses and malware, ransomware, phishing, lost data and
programming and/or human errors. To date, none of these risks, intrusions,
attacks or human error have resulted in any material liability to us. While we
carry insurance policies that would provide liability coverage for certain of
these matters, if we experience a significant security incident, we could be
subject to liability or other damages that exceed our insurance coverage, and we
cannot be certain that such insurance policies will continue to be available to
us on economically reasonable terms, or at all, or that any insurer will not
deny coverage as to any future claim.
Business Strategies and Outlook: Notwithstanding the COVID-19 pandemic, we plan
to execute the following strategies to enhance our brands, grow our revenue and
improve profitability. The first strategic initiative is to increase brand
excitement by crafting compelling stories that build upon brand equities for
both owned and licensed brands across our product categories. Key to this
strategy is our ongoing effort in innovation in our product categories and
marketing capabilities, where we aim to build larger communities of brand
loyalists. Our second strategic initiative is to increase digital engagement and
online sales over the long-term. While digital sales have trended down year on
year, we continue to invest in our owned e-commerce sites around the world and
in third party marketplaces to enhance our direct to consumer engagement, which
we believe can build long-term customer value. Our third strategic initiative is
to optimize our operations. We initiated the New World Fossil - Transform to
Grow ("NWF 2.0") initiative in 2019 aimed to further simplify our operations and
to reallocate resources toward growth, and we achieved our $250 million run-rate
savings goal in 2021. Although we are nearing completion of our NWF 2.0 program,
we will continue to optimize our operations with further reductions to our store
footprint, expense reductions and increased focus on inventory management and
supply chain efficiency. Our fourth strategic initiative is to expand our
opportunity in mainland China and India . In these countries, we are continuing
to execute against a strategy centered around localized marketing and segmented
assortments. Although the impact of COVID-19 is likely to disrupt our growth
trajectory in the short to intermediate term, we continue to view mainland China
and India as compelling long-term opportunities. With the current headwinds,
including inflation and recessionary pressures, we will focus on managing our
working capital and inventory levels. This will include selling down our current
inventory and possibly reducing our open to buy in early 2023.
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 ended
Operating Segments We operate our business in three segments which are divided into geographies. Net sales for each geographic segment are based on the location of the selling entity, and each reportable segment provides similar products and services.Americas : TheAmericas segment is comprised of sales from our operations inthe United States ,Canada andLatin America . Sales are generated through diversified distribution channels that include wholesalers, distributors, and direct to consumer. Within each channel, we sell our products through a variety of physical points of sale, distributors and e-commerce channels. In the direct to consumer channel, we had 157 Company-owned stores as of the end of the Second Quarter and an extensive collection of products available through our owned websites.Europe : TheEurope segment is comprised of sales to customers based in European countries, theMiddle East andAfrica . Sales are generated through diversified distribution channels that include wholesalers, distributors and direct to consumer. Within each channel, we sell our products through a variety of physical points of sale, distributors, and e-commerce channels. In the direct to consumer channel, we had 113 Company-owned stores as of the end of the Second Quarter and an extensive collection of products available through our owned websites.Asia : TheAsia segment is comprised of sales to customers based inAustralia ,China (includingHong Kong ,Macau andTaiwan ),India ,Indonesia ,Japan ,Malaysia ,New Zealand ,Singapore ,South Korea andThailand . Sales are generated through diversified distribution channels that include wholesalers, distributors and direct to consumer. Within each channel, we sell our products through a variety of physical points of sale, distributors, and e-commerce channels. In the direct to consumer channel, we had 79 Company-owned stores as of the end of the Second Quarter and an extensive collection of products available through our owned websites. 32 --------------------------------------------------------------------------------
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 discussion contains 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 fiscal 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. Reconciliations between constant currency financial information and the most directly comparable GAAP measure are included where applicable. Adjusted EBITDA, Adjusted Operating Income (Loss), Adjusted Net Income (Loss) and Adjusted Earnings per Share: Adjusted EBITDA, Adjusted operating income (loss), Adjusted net income (loss) and Adjusted earnings per share are non-GAAP financial measures. We define Adjusted EBITDA as our income (loss) before income taxes, plus interest expense, amortization and depreciation, impairment expense, other non-cash charges, stock-based compensation expense, restructuring expense and unamortized debt issuance costs included in loss on extinguishment of debt minus interest income. We define Adjusted operating income (loss) as operating income (loss) before impairment expense and restructuring expense. We define Adjusted net income (loss) and Adjusted earnings per share as net income attributable toFossil Group, Inc. and diluted earnings per share, respectively, before impairment expense, restructuring expense and unamortized debt issuance costs included in loss on extinguishment of debt. We have included Adjusted EBITDA, Adjusted operating income (loss), Adjusted net income (loss) and Adjusted earnings per share herein because they are widely used by investors for valuation and for comparing our financial performance with the performance of our competitors. We also use these non-GAAP financial measures to monitor and compare the financial performance of our operations. Our presentation of Adjusted EBITDA, Adjusted operating income (loss), Adjusted net income (loss) and Adjusted earnings per share may not be comparable to similarly titled measures other companies report. Adjusted EBITDA, Adjusted operating income (loss), Adjusted net income (loss) and Adjusted earnings per share are not intended to be used as alternatives to any measure of our performance in accordance with GAAP. Digital Sales: We continue to accelerate our investments and capabilities in our global digital platform, and digital sales provide an important metric for our company. The digital space provides unique ways of engaging our customers. Digital sales include sales on our own e-commerce sites, global third party platforms, and wholesale dot com sites.
Comparable Retail Sales: Both stores and e-commerce sites are included in comparable retail sales in the thirteenth month of operation. Stores that experience a gross square footage change of 10% or more due to an expansion and/or relocation are removed from the comparable store sales base, but are included in total sales. These stores are returned to the comparable store sales base in the thirteenth month following the expansion and/or relocation. Comparable retail sales also exclude the effects of foreign currency fluctuations.
Store Counts: Store counts continue to provide a key metric for management. Over time, we have made progress right-sizing our fleet of stores, focusing on closing our least profitable stores, and the size and quality of our store fleet have a direct impact on our sales and profitability. Total Liquidity: We define total liquidity as cash and cash equivalents plus available borrowings on our revolving credit facility. We monitor and forecast total liquidity to ensure we can meet our financial obligations.
Components of Results of Operations
Revenues from sales of our products, including those that are subject to
inventory consignment agreements, are recognized when control of the product is
transferred to the customer and in an amount that reflects the consideration we
expect to be entitled in exchange for the product. We accept limited returns
from customers. We continually monitor returns and maintain a provision for
estimated returns based upon historical experience and any specific issues
identified. Product returns are accounted for as reductions to revenue and cost
of sales and increases to customer liabilities and other current assets to the
extent the returned product is resalable.
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Cost of Sales includes raw material costs, assembly labor, assembly overhead
including depreciation expense, assembly warehousing costs and shipping and
handling costs related to the movement of finished goods from assembly locations
to sales distribution centers and from sales distribution centers to customer
locations. Additionally, cost of sales includes customs duties, product
packaging cost, royalty cost associated with sales of licensed products, the
cost of molding and tooling and inventory shrinkage and damages.
Gross Profit and gross profit margin are influenced by our diversified business
model that includes, but is not limited to: (i) product categories that we
distribute; (ii) the multiple brands, including both owned and licensed, we
offer within several product categories; (iii) the geographical presence of our
businesses; and (iv) the different distribution channels we sell to or through.
The attributes of this diversified business model produce varying ranges of
gross profit margin. Generally, on a historical basis, our fashion branded
traditional watch and jewelry offerings produce higher gross profit margins than
our smartwatches and leather goods offerings. In addition, in most product
categories that we offer, brands with higher retail price points generally
produce higher gross profit margins compared to those of lower retail priced
brands. However, smartwatches carry relatively lower margins than our other
major product categories. Gross profit margins related to sales in our Europe
and Asia businesses are historically higher than our Americas business,
primarily due to the following factors: (i) premiums charged in comparison to
retail prices on products sold in the U.S. ; (ii) the product sales mix in our
international businesses, in comparison to our Americas business, is comprised
more predominantly of watches and jewelry that generally produce higher gross
profit margins than leather goods; and (iii) the watch sales mix in our Europe
and Asia businesses, in comparison to our Americas business, are comprised more
predominantly of higher priced licensed brands.
Operating Expenses include selling, general and administrative ("SG&A"), other
long-lived asset impairments and restructuring charges. SG&A expenses include
selling and distribution expenses primarily consisting of sales and distribution
labor costs, sales distribution center and warehouse facility costs,
depreciation expense related to sales distribution and warehouse facilities, the
four-wall operating costs of our retail stores, point-of-sale expenses,
advertising expenses and art, design and product development labor costs. SG&A
also includes general and administrative expenses primarily consisting of
administrative support labor and support costs such as treasury, legal,
information services, accounting, internal audit, human resources, executive
management costs and costs associated with stock-based compensation.
Restructuring charges include costs to reorganize, refine and optimize our
Company's infrastructure and store closures under our New World Fossil
initiatives.
Results of Operations
Quarterly Periods Ended
ConsolidatedNet Sales . Net sales decreased$39.7 million , or 9.7% (5.4% in constant currency), for the Second Quarter as compared to the PriorYear Quarter , with sales declines in all three regions. In the Second Quarter, digital sales, which include sales from our owned e-commerce channels, third party e-commerce platforms and wholesale dot com, were 35% of worldwide net sales and decreased 25.5% (21.4% in constant currency) compared to the PriorYear Quarter . The sales declines in digital were partially offset by retail store sales growth driven by increased foot traffic in our brick and mortar stores. Global comparable retail sales grew 16.3% primarily due to increased store sales partially offset by sales declines in our owned e-commerce websites. From a category perspective, traditional watch sales decreased 11.0%, (7.0% in constant currency), driven by traditional watch sales declines in EMPORIO ARMANI in mainlandChina due to COVID-19 related traffic disruptions and inMICHAEL KORS within ourAmericas wholesale channel. Declines were partially offset by FOSSIL traditional watch sales growth, particularly inIndia andCanada . Net sales of smartwatches decreased 22.5% (18.0% in constant currency) compared to the PriorYear Quarter , as reduced consumer demand and less promotional activity led to lower sell-through and higher inventory levels in certain key wholesale customers, resulting in lower replenishment orders in theU.S. 34 --------------------------------------------------------------------------------
The following table sets forth consolidated net sales by segment (dollars in millions):
For the 13 Weeks Ended July 2, 2022 For the 13 Weeks Ended July 3, 2021 Growth (Decline)
Percentage Percentage Percentage As Percentage Constant
Net Sales of Total Net Sales of Total Dollars Reported Currency
Americas $ 168.3 45.3 % $ 176.7 43.0 % $ (8.4) (4.8) % (4.3) %
Europe 107.9 29.1 124.4 30.3 (16.5) (13.3) (3.2)
Asia 92.6 24.9 103.5 25.2 (10.9) (10.5) (6.4)
Corporate 2.4 0.7 6.3 1.5 (3.9) (61.9) (60.3)
Total $ 371.2 100.0 % $ 410.9 100.0 % $ (39.7) (9.7) % (5.4) %
Net sales information by product category is summarized as follows (dollars in
millions):
For the 13 Weeks Ended July 2, 2022 For the 13 Weeks Ended July 3, 2021 Growth (Decline)
Percentage Percentage Percentage As Percentage Constant
Net Sales of Total Net Sales of Total Dollars Reported Currency
Watches:
Traditional watches $ 258.7 69.7 % $ 290.6 70.8 % $ (31.9) (11.0) % (7.0) %
Smartwatches 33.4 9.0 43.1 10.5 (9.7) (22.5) (18.0)
Total watches $ 292.1 78.7 % $ 333.7 81.3 % $ (41.6) (12.5) (8.5)
Leathers 35.9 9.7 33.3 8.1 2.6 7.8 11.5
Jewelry 33.9 9.1 32.6 7.9 1.3 4.0 12.0
Other 9.3 2.5 11.3 2.7 (2.0) (17.7) (13.8)
Total $ 371.2 100.0 % $ 410.9 100.0 % $ (39.7) (9.7) % (5.4) %
In the Second Quarter, the translation of foreign-based net sales into U.S.
dollars decreased reported net sales by $17.7 million , including unfavorable
impacts of $12.5 million , $4.3 million and $0.8 million in our Europe , Asia and
Americas segments, respectively, as compared to the Prior Year Quarter .
Stores. The following table sets forth the number of stores on the dates
indicated below:
July 3, 2021 Opened Closed July 2, 2022
Americas 166 0 9 157
Europe 133 1 21 113
Asia 87 4 12 79
Total stores 386 5 42 349
Americas Net Sales . Americas net sales decreased $8.4 million , or 4.8% (4.3% in
constant currency), during the Second Quarter in comparison to the Prior Year
Quarter . In the region, sales decreases in the U.S. and Mexico were partially
offset by a sales increase in Canada . Sales decreased in our wholesale and owned
e-commerce channels, while sales in our stores channel grew moderately, largely
due to increased store traffic. Comparable retail sales were modestly positive
during the Second Quarter, primarily due to increased store sales partially
offset by sales declines in our owned e-commerce websites.
The following table sets forth product net sales and the changes in product net
sales on both a reported and constant-currency basis from period to period for
the Americas segment (dollars in millions):
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For the 13 Weeks Ended July 2, 2022 For the 13 Weeks Ended July 3, 2021 Growth (Decline)
Percentage Percentage Percentage As Percentage Constant
Net Sales of Total Net Sales of Total Dollars Reported Currency
Watches:
Traditional watches $ 118.7 70.5 % $ 122.7 69.4 % $ (4.0) (3.3) % (2.8) %
Smartwatches 15.4 9.2 23.9 13.5 (8.5) (35.6) (35.4)
Total watches $ 134.1 79.7 % $ 146.6 82.9 % $ (12.5) (8.5) (8.1)
Leathers 22.6 13.4 20.8 11.8 1.8 8.7 9.5
Jewelry 9.3 5.5 7.3 4.1 2.0 27.4 28.0
Other 2.3 1.4 2.0 1.2 % 0.3 15.0 16.2
Total $ 168.3 100.0 % $ 176.7 100.0 % $ (8.4) (4.8) % (4.3) %
Europe Net Sales . Europe net sales decreased $16.5 million , or 13.3% (3.2% in
constant currency), during the Second Quarter in comparison to the Prior Year
Quarter . Across the Eurozone , sales decreased in most markets, with the greatest
decreases in Germany and France . Comparable retail sales increased moderately
during the Second Quarter as growth in store sales, driven by increased traffic,
was partially offset by decreased owned e-commerce sales.
The following table sets forth product net sales and the changes in product net
sales on both a reported and constant-currency basis from period to period for
the Europe segment (dollars in millions)
For the 13 Weeks Ended July 2, 2022 For the 13 Weeks Ended July 3, 2021 Growth (Decline)
Percentage Percentage Percentage As Percentage Constant
Net Sales of Total Net Sales of Total Dollars Reported Currency
Watches:
Traditional watches $ 70.4 65.2 % $ 81.8 65.7 % $ (11.4) (13.9) % (4.2) %
Smartwatches 10.3 9.5 13.3 10.7 (3.0) (22.6) (12.7)
Total watches $ 80.7 74.7 % $ 95.1 76.4 % $ (14.4) (15.1) (5.4)
Leathers 5.3 4.9 6.4 5.1 (1.1) (17.2) (6.8)
Jewelry 18.6 17.2 20.2 16.2 (1.6) (7.9) 3.2
Other 3.3 3.2 2.7 2.3 0.6 22.2 34.3
Total $ 107.9 100.0 % $ 124.4 100.0 % $ (16.5) (13.3) % (3.2) %
Asia Net Sales. Net sales in Asia decreased $10.9 million , or 10.5% (6.4% in
constant currency), during the Second Quarter in comparison to the Prior Year
Quarter . The sales decrease was largely driven by mainland China and
predominately in the EMPORIO ARMANI brand. COVID-19 policies in mainland China ,
which include restrictions on travel abroad, continued to negatively affect
sales across all channels and also impacted other key markets that have
historically benefited from China tourism. The sales decline was partially
offset by sales growth in India , largely in FOSSIL watches. Comparable retail
sales increased significantly during the Second Quarter, driven by increased
store sales as a result of traffic growth, partially offset by decreased
e-commerce sales.
The following table sets forth product net sales and the changes in product net
sales on both a reported and constant-currency basis from period to period for
the Asia segment (dollars in millions):
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For the 13 Weeks Ended July 2, 2022 For the 13 Weeks Ended July 3, 2021 Growth (Decline)
Percentage Percentage Percentage As Percentage Constant
Net Sales of Total Net Sales of Total Dollars Reported Currency
Watches:
Traditional watches $ 69.5 75.1 % $ 85.1 82.2 % $ (15.6) (18.3) % (14.7) %
Smartwatches 7.8 8.4 5.9 5.7 1.9 32.2 40.3
Total watches $ 77.3 83.5 % $ 91.0 87.9 % $ (13.7) (15.1) (11.2)
Leathers 8.0 8.6 6.1 5.9 1.9 31.1 38.5
Jewelry 6.0 6.5 5.2 5.0 0.8 15.4 20.9
Other 1.3 1.4 1.2 1.2 0.1 8.3 11.8
Total $ 92.6 100.0 % $ 103.5 100.0 % $ (10.9) (10.5) % (6.4) %
Gross Profit. Gross profit of $191.3 million in the Second Quarter decreased
13.7% in comparison to $221.8 million in the Prior Year Quarter . Our gross
profit margin rate decreased to 51.6% in the Second Quarter compared to 54.0% in
the Prior Year Quarter . The year-over-year decrease primarily reflects a
non-recurrence of the prior year's tariff reductions, increased freight costs
and an unfavorable currency impact. These costs were partially offset by
favorable product mix and pricing increases and net foreign currency hedging
contract gains in the current year as compared to net foreign currency hedging
contract losses last year.
Operating Expenses. Total operating expenses in the Second Quarter decreased by
2.5% to $202.3 million or 54.5% of net sales, in comparison to $207.5 million or
50.5% of net sales in the Prior Year Quarter . As a percentage of net sales, SG&A
expenses increased to 53.7% in the Second Quarter as compared to 48.8% in the
Prior Year Quarter , largely driven by increased compensation costs and
investments in our digital initiatives, which were partially offset by a decline
in marketing expenses and reduced store costs resulting from lower store count.
Operating expenses in the Second Quarter included $2.9 million of restructuring
costs, primarily related to employee costs, while the Prior Year Quarter
included $5.7 million in restructuring costs. The translation of
foreign-denominated expenses during the Second Quarter decreased operating
expenses by $8.5 million as a result of the stronger U.S. dollar.
Operating Income (Loss). Operating loss in the Second Quarter was $10.9 million
as compared to operating income of $14.3 million in the Prior Year Quarter . As a
percentage of net sales, operating margin was (2.9)% in the Second Quarter
compared to 3.5% in the Prior Year Quarter . Operating margin rate in the Second
Quarter included an unfavorable impact of 90 basis points due to changes in
foreign currencies.
Operating income (loss) by segment is summarized as follows (dollars in
millions):
For the 13 Weeks For the 13 Weeks Change Operating Margin %
Ended July 2, 2022 Ended July 3, 2021 Dollars Percentage 2022 2021
Americas $ 30.7 $ 36.6 $ (5.9) (16.1) % 18.2 % 20.7 %
Europe 14.8 22.0 (7.2) (32.7) 13.8 17.7
Asia 12.4 14.8 (2.4) (16.2) 13.3 14.3
Corporate (68.8) (59.1) (9.7) (16.4)
Total operating income
(loss) $ (10.9) $ 14.3 $ (25.2) (176.2) % (2.9) % 3.5 %
Interest Expense. Interest expense decreased by $2.2 million during the Second
Quarter compared to the Prior Year Quarter , primarily driven by reduced debt
issuance costs amortization and a lower borrowing rate.
Other Income (Expense)-Net. During the Second Quarter, other income
(expense)-net was expense of
Provision for Income Taxes. Income tax expense for the Second Quarter was$2.0 million , resulting in an effective income tax rate of (11.8)%. For the PriorYear Quarter , income tax expense was$8.1 million , resulting in an effective income tax rate of 110.5%. The effective tax rate in the Second Quarter was favorable as compared to the PriorYear Quarter due to a lower structural rate on foreign income. No tax benefit has been accrued on the Second QuarterU.S. tax losses and certain foreign tax losses due to the uncertainty of whether they can be used in the future. The Second Quarter tax rate was negative 37 --------------------------------------------------------------------------------
because foreign income tax expense was accrued on certain foreign entities with positive taxable income while the consolidated results were a loss.
Net Income (Loss) Attributable toFossil Group, Inc. Second Quarter net income (loss) attributable toFossil Group, Inc. was a net loss of$19.1 million , or$0.37 per diluted share, in comparison to a net loss of$1.2 million , or$0.02 per diluted share, in the PriorYear Quarter . During the Second Quarter, currencies unfavorably affected loss per diluted share by approximately$0.04 . Adjusted Net Income (Loss). Adjusted net loss for the Second Quarter was$16.6 million with adjusted loss per diluted share of$0.33 compared to adjusted net income of$4.3 million with adjusted income per diluted share of$0.08 in the PriorYear Quarter . Adjusted EBITDA. The following table reconciles Adjusted EBITDA to the most directly comparable GAAP financial measure, which is income (loss) before income taxes. Certain line items presented in the table below, when aggregated, may not foot due to rounding (dollars in millions). For the 13 Weeks Ended July, 2 2022 July 3, 2021 % of Net Dollars % of Net Sales Dollars Sales Income (loss) before income taxes$ (16.9) (4.6)%$ 7.3 1.8 % Plus: Interest expense 4.3 6.5 Amortization and depreciation 5.8 7.5 Impairment expense 0.2 1.3 Other non-cash charges (0.2) (0.4) Stock-based compensation 3.8 2.5 Restructuring expense 2.9 5.7 Less: Interest income 0.2 0.1 Adjusted EBITDA$ (0.3) (0.1) %$ 30.3 7.4 % 38
-------------------------------------------------------------------------------- Adjusted Operating Income (Loss), Adjusted Net Income (Loss) and Adjusted Earnings (Loss) per Share. The following tables reconcile Adjusted operating income (loss), Adjusted net income (loss) and Adjusted earnings (loss) per share to the most directly comparable GAAP financial measures, which are operating income (loss), net income (loss) attributable toFossil Group, Inc. and diluted earnings (loss) per share, respectively. Certain line items presented in the table below, when aggregated, may not foot due to rounding. For the 13 Weeks EndedJuly 2, 2022 ($ in millions, except per share Other Long-Lived
Restructuring
data): As Reported Asset Impairment Expenses As Adjusted Operating income (loss)$ (10.9) $ 0.2 $ 2.9$ (7.8) Operating margin (% of net sales) (2.9) % (2.1) % Interest expense $ (4.3) $ - $ -$ (4.3) Other income (expense) - net (1.7) - - (1.7) Income (loss) before income taxes (16.9) 0.2 2.9 (13.8) Provision for income taxes 2.0 - 0.6 2.6 Less: net income attributable to noncontrolling interest (0.2) - - (0.2) Net income (loss) attributable to Fossil Group, Inc.$ (19.1) $ 0.2 $ 2.3$ (16.6) Diluted earnings (loss) per share$ (0.37) $ - $ 0.04$ (0.33) For the 13 Weeks Ended July 3, 2021 ($ in millions, except per share Other Long-Lived Restructuring data): As Reported Asset Impairment Expenses As Adjusted Operating income (loss) $ 14.3 $ 1.3 $ 5.7$ 21.3 Operating margin (% of net sales) 3.5 % 5.2 % Interest expense $ (6.5) $ - $ -$ (6.5) Other income (expense) - net (0.5) - - (0.5) Income (loss) before income taxes 7.3 1.3 5.7 14.3 Provision for income taxes 8.1 0.3 1.2 9.6 Less: Net income attributable to noncontrolling interest (0.4) - - (0.4) Net income (loss) attributable to Fossil Group, Inc. $ (1.2) $ 1.0 $ 4.5 $ 4.3 Diluted earnings (loss) per share$ (0.02) $ 0.02 $ 0.09$ 0.08
Fiscal Year To Date Periods Ended
ConsolidatedNet Sales . Net sales decreased$27.0 million or 3.5% (0.1% in constant currency) for the Year To Date Period as compared to the Prior Year YTD Period. Sales declines were primarily driven byAsia , where declines inChina more than offset sales growth inIndia as compared to the Prior Year YTD Period. Our net sales inChina have been negatively affected by COVID-19 restrictions during the Year To Date Period and our most significant sales declines were in EMPORIO ARMANI traditional watches, as compared to the Prior Year YTD Period. In the Year To Date Period, digital sales were 34% of worldwide net sales and decreased 22.0% (19.1% in constant currency) compared to the Prior Year YTD Period. Global comparable retail sales increased 14.0% primarily due to increased store traffic and was partially offset by sales declines in our owned e-commerce websites. 39
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The following table sets forth consolidated net sales by segment (dollars in millions):
For the 26 Weeks Ended July 2, 2022 For the 26 Weeks Ended July 3, 2021 Growth (Decline)
Percentage Percentage Percentage As Percentage Constant
Net Sales of Total Net Sales of Total Dollars Reported Currency
Americas $ 330.2 44.2 % $ 329.2 42.5 % $ 1.0 0.3 % 0.6 %
Europe 232.4 31.0 233.7 30.2 (1.3) (0.6) 7.7
Asia 179.4 24.0 202.1 26.1 (22.7) (11.2) (8.3)
Corporate 5.0 0.8 9.0 1.2 (4.0) (44.4) (43.3)
Total $ 747.0 100.0 % $ 774.0 100.0 % $ (27.0) (3.5) % (0.1) %
Net sales information by product category is summarized as follows (dollars in millions):
For the 26 Weeks Ended July 2, 2022 For the 26 Weeks Ended July 3, 2021 Growth (Decline)
Percentage Percentage Percentage As Percentage Constant
Net Sales of Total Net Sales of Total Dollars Reported Currency
Watches:
Traditional watches $ 520.1 69.6 % $ 533.0 68.9 % $ (12.9) (2.4) % 0.7 %
Smartwatches 71.4 9.6 96.0 12.4 (24.6) (25.6) (22.4)
Total watches $ 591.5 79.2 % $ 629.0 81.3 % $ (37.5) (6.0) (2.8)
Leathers 70.1 9.4 67.5 8.7 2.6 3.9 6.8
Jewelry 68.6 9.2 58.7 7.6 9.9 16.9 23.3
Other 16.8 2.2 18.8 2.4 (2.0) (10.6) (6.6)
Total $ 747.0 100.0 % $ 774.0 100.0 % $ (27.0) (3.5) % (0.1) %
In the Year To Date Period, the translation of foreign-based net sales into U.S.
dollars decreased reported net sales by $26.2 million , including unfavorable
impacts of $19.2 million , $5.9 million and $1.0 million in in our Europe , Asia
and Americas segments, respectively, compared to the Prior Year YTD Period.
Americas Net Sales . Americas net sales increased $1.0 million , or 0.3% (0.6% in
constant currency), during the Year To Date Period in comparison to the Prior
Year YTD Period. We saw growth in our retail store channel while our e-commerce
and wholesale channels declined. Geographically, sales growth in Canada was
partially offset by sales declines in the U.S. and Mexico . Comparable retail
sales were moderately positive during the Year To Date Period, primarily due to
increased store traffic and were partially offset by sales declines in our owned
e-commerce websites.
The following table sets forth product net sales and the changes in product net
sales on both a reported and constant-currency basis from period to period for
the Americas segment (dollars in millions):
For the 26 Weeks Ended July 2, 2022 For the 26 Weeks Ended July 3, 2021 Growth (Decline)
Percentage Percentage Percentage As Percentage Constant
Net Sales of Total Net Sales of Total Dollars Reported Currency
Watches:
Traditional watches $ 234.6 71.0 % $ 218.0 66.2 % $ 16.6 7.6 % 7.9 %
Smartwatches 32.7 10.0 53.1 16.2 (20.4) (38.4) (38.4)
Total watches $ 267.3 81.0 % $ 271.1 82.4 % $ (3.8) (1.4) (1.2)
Leathers 41.8 12.7 40.5 12.3 1.3 3.2 3.7
Jewelry 17.2 5.2 14.2 4.3 3.0 21.1 21.7
Other 3.9 1.1 3.4 1.0 0.5 14.7 14.9
Total $ 330.2 100.0 % $ 329.2 100.0 % $ 1.0 0.3 % 0.6 %
40-------------------------------------------------------------------------------- EuropeNet Sales .Europe net sales decreased$1.3 million , or 0.6% (increase of 7.7% in constant currency), during the Year To Date Period in comparison to the Prior Year YTD Period. The decline was primarily in FOSSIL watch sales and was partially offset by growth inMICHAEL KORS versus the Prior Year YTD Period. Strong retail stores growth partially offset declines in our wholesale and e-commerce channels as consumers returned to brick and mortar stores. Comparable retail sales in the region also increased strongly during the Year To Date Period. The following table sets forth product net sales and the changes in product net sales on both a reported and constant-currency basis from period to period for theEurope segment (dollars in millions): For the 26 Weeks Ended July 2, 2022 For the 26 Weeks Ended July 3, 2021 Growth (Decline) Percentage Percentage Percentage As PercentageConstant Net Sales of TotalNet Sales of Total Dollars Reported Currency Watches: Traditional watches$ 151.6 65.2 %$ 152.8 65.4 %$ (1.2) (0.8) % 7.0 % Smartwatches 22.9 9.9 26.9 11.5 (4.0) (14.9) (6.5) Total watches$ 174.5 75.1 %$ 179.7 76.9 %$ (5.2) (2.9) 5.0 Leathers 12.7 5.5 12.7 5.4 - - 8.5 Jewelry 39.8 17.1 36.5 15.6 3.3 9.0 18.7 Other 5.4 2.3 4.8 2.1 0.6 12.5 23.9 Total$ 232.4 100.0 %$ 233.7 100.0 %$ (1.3) (0.6) % 7.7 % Asia Net Sales.Asia net sales decreased$22.7 million , or 11.2% (8.3% in constant currency), during the Year To Date Period in comparison to the Prior Year YTD Period. Sales declines were primarily driven by mainlandChina as a result of COVID-19 policies. Strong growth inIndia partially offset sales declines during the Year To Date Period as compared to the Prior Year YTD Period. Sales increases in the FOSSIL brand were more than offset by sales declines in the EMPORIO ARMANI brand. For the Year To Date Period, comparable retail sales increased significantly. The following table sets forth product net sales and the changes in product net sales on both a reported and constant-currency basis from period to period for theAsia segment (dollars in millions): For the 26 Weeks Ended July 2, 2022 For the 26 Weeks Ended July 3, 2021 Growth (Decline) Percentage Percentage Percentage As PercentageConstant Net Sales of TotalNet Sales of Total Dollars Reported Currency Watches: Traditional watches$ 133.9 74.6 %$ 161.1 79.7 %$ (27.2) (16.9) % (14.4) % Smartwatches 15.8 8.8 15.9 7.9 (0.1) (0.6) 4.7 Total watches$ 149.7 83.4 %$ 177.0 87.6 %$ (27.3) (15.4) (12.7) Leathers 15.6 8.7 14.3 7.1 1.3 9.1 13.7 Jewelry 11.7 6.5 8.1 4.0 3.6 44.4 47.2 Other 2.4 1.4 2.7 1.3 (0.3) (11.1) (4.1) Total$ 179.4 100.0 %$ 202.1 100.0 %$ (22.7) (11.2) % (8.3) % Gross Profit. Gross profit of$375.7 million in the Year To Date Period decreased$28.8 million , or 7.1%, in comparison to$404.4 million in the Prior Year YTD Period. Gross profit margin rate decreased to 50.3% in the Year To Date Period compared to 52.3% in the Prior Year YTD Period. The gross profit margin rate declined largely due to increased freight costs, a non-recurrence of the prior year's tariff reductions and an unfavorable currency impact. These costs were partially offset by decreased promotional activity and increased net foreign currency hedging contract gains in the Year To Date Period as compared to the Prior Year YTD Period. Operating Expenses. For the Year To Date Period, total operating expenses decreased to$400.9 million compared to$406.8 million in the Prior Year YTD Period. As a percentage of net sales, SG&A expenses increased to 52.9% in the Year To Date Period as compared to 50.1% in the Prior Year YTD Period mainly driven by increased compensation costs and 41 -------------------------------------------------------------------------------- investments in our digital initiatives, which were partially offset by a decline in marketing expenses and reduced store costs resulting from lower store count. During the Year To Date Period, we incurred restructuring costs of$5.4 million in comparison to restructuring costs of$13.3 million in the Prior Year YTD Period. We incurred other long-lived asset impairment charges of$0.5 million in the Year To Date Period compared to charges of$5.8 million in the Prior Year YTD Period. The translation of foreign-denominated expenses during the Year To Date Period decreased operating expenses by$12.8 million as a result of the strongerU.S. dollar. Operating Income (Loss). Operating income (loss) was a loss of$25.2 million in the Year To Date Period as compared to a loss of$2.4 million in the Prior Year YTD Period. The increase in operating loss was primarily due to the decline in net sales and margin rate in the Year To Date Period. As a percentage of net sales, operating margin was (3.4)% in the Year To Date Period as compared to (0.3)% in the Prior Year YTD Period and was negatively impacted by approximately 60 basis points due to changes in foreign currencies. Operating income (loss) by segment is summarized as follows (dollars in millions): For the 26 For the 26 Weeks Change Operating Margin % Weeks Ended Ended July 3, July 2, 2022 2021 Dollars Percentage 2022 2021 Americas$ 54.6 $ 62.6 $ (8.0) (12.8) % 16.5 % 19.0 % Europe 34.4 27.1 7.3 26.9 14.8 11.6 Asia 21.3 26.6 (5.3) (19.9) 11.9 13.1 Corporate (135.5) (118.7) (16.8) (14.2) Total operating income (loss)$ (25.2) $ (2.4) $ (22.8) (950.0) % (3.4) % (0.3) % Interest Expense. Interest expense decreased by$5.5 million during the Year To Date Period, primarily driven by reduced debt issuance costs amortization and a lower borrowing rate. Other Income (Expense)-Net. During the Year To Date Period, other income (expense)-net was a net expense of$0.1 million in the Year to Date Period compared to net income of$1.4 million in the Prior Year YTD Period. This change was largely driven by increased net foreign currency losses during the Year To Date Period as compared to the Prior Year YTD Period. Provision for Income Taxes. Income tax expense for the Year To Date Period was$6.7 million , resulting in an effective income tax rate of (19.9)%. The Prior Year YTD Period income tax expense was$10.2 million resulting in an effective tax rate of (68.4)%. The Year to Date Period effective tax rate was favorable to the Prior Year YTD Period due to a lower structural rate on foreign income. No tax benefit has been accrued on the Year to Date PeriodU.S. tax losses and certain foreign tax losses due to the uncertainty of whether they can be used in the future. The Year to Date Period and the Prior Year YTD Period effective tax rates were negative because income tax expense was accrued on foreign entities with positive taxable income while the consolidated results were a loss. Net Income (Loss) Attributable toFossil Group, Inc. For the Year To Date Period, we had a net loss of$40.6 million , or$0.78 per diluted share, in comparison to a loss of$25.6 million , or$0.50 per diluted share, in the Prior Year YTD Period. Diluted loss per share in the Year To Date Period, as compared to the Prior Year YTD Period, was negatively impacted$0.06 per diluted share due to the currency impact of a strongerU.S. dollar. Adjusted Net Income (Loss). Adjusted net loss for the Year To Date Period was$35.9 million with adjusted loss per diluted share of$0.69 compared to adjusted net loss of$10.6 million with adjusted loss per diluted share of$0.21 in the Prior Year YTD Period. Adjusted EBITDA. 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 table below, when aggregated, may not foot due to rounding (dollars in millions). 42 --------------------------------------------------------------------------------
For the 26 Weeks Ended
July, 2 2022 July 3, 2021
Dollars % of Net Sales Dollars % of Net Sales
Income (loss) before income taxes $ (33.6) (4.5)% $ (14.9) (1.9) %
Plus:
Interest expense 8.3 13.9
Amortization and depreciation 11.9 16.4
Impairment expense 0.5 5.8
Other non-cash charges (0.3) (0.8)
Stock-based compensation 6.1 4.3
Restructuring expense 5.4 13.3
Less:
Interest income 0.3 0.2
Adjusted EBITDA $ (2.0) (0.3) % $ 37.8 4.9 %
Adjusted Operating Income (Loss), Adjusted Net Income (Loss) and Adjusted
Earnings (Loss) per Share. The following tables reconcile Adjusted operating
income (loss), Adjusted net income (loss) and Adjusted earnings (loss) per share
to the most directly comparable GAAP financial measures, which are operating
income (loss), net income (loss) attributable to Fossil Group, Inc. and diluted
earnings (loss) per share, respectively. Certain line items presented in the
table below, when aggregated, may not foot due to rounding.
For the 26 Weeks Ended July 2, 2022
($ in millions, except per share Other Long-Lived Restructuring
data): As Reported Asset Impairment Expenses As Adjusted Operating income (loss)$ (25.2) $ 0.5 $ 5.4$ (19.3) Operating margin (% of net sales) (3.4) % (2.6) % Interest expense$ (8.3) $ - $ -$ (8.3) Other income (expense) - net (0.1) - - (0.1) Income (loss) before income taxes (33.6) 0.5 5.4 (27.7) Provision for income taxes 6.7 0.1 1.1 7.9 Less: net income attributable to noncontrolling interest (0.3) - - (0.3) Net income (loss) attributable to Fossil Group, Inc.$ (40.6) $ 0.4 $ 4.3$ (35.9)
Diluted earnings (loss) per share
$ 0.08$ (0.69) 43
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44
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For the 26 Weeks Ended July 3, 2021
($ in millions, except per share Other Long-Lived Restructuring
data): As Reported Asset Impairment Expenses As Adjusted
Operating income (loss) $ (2.4) $ 5.7 $ 13.3 $ 16.6
Operating margin (% of net sales) (0.3) % 2.1 %
Interest expense $ (13.9) $ - $ - $ (13.9)
Other income (expense) - net 1.4 - - 1.4
Income (loss) before income taxes (14.9) 5.7 13.3 4.1
Provision for income taxes 10.2 1.2 2.8 14.2
Less: Net income attributable to
noncontrolling interest (0.5) - - (0.5)
Net income (loss) attributable to
Fossil Group, Inc. $ (25.6) $ 4.5 $ 10.5 $ (10.6)
Diluted earnings (loss) per share $ (0.50) $ 0.09
$ 0.20
Liquidity and Capital Resources
Our cash and cash equivalents balance at the end of the Second Quarter was$167.1 million , including$164.9 million held in banks outside theU.S. , in comparison to cash and cash equivalents of$252.3 million at the end of the PriorYear Quarter and$250.8 million at the end of fiscal year 2021. 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. At the end of the Second Quarter, we had net working capital of$543.5 million compared to net working capital of$427.4 million at the end of the PriorYear Quarter . At the end of the Second Quarter, we had$0.6 million of short-term borrowings and$248.9 million in long-term debt including unamortized issuance costs. Operating Activities. Cash provided by operating activities is net income (loss) adjusted for certain non-cash items and changes in assets and liabilities. Cash used in operating activities in the Year To Date Period increased primarily due to cash of$184.8 million used by working capital items and a net loss of$40.3 million , partially offset by net non-cash items of$59.3 million . We accelerated certain inventory receipts in the Year To Date Period when compared to the Prior YTD Period, due to extended transportation lead times and to mitigate potential COVID-19 driven restrictions from our primary supply base in mainlandChina . Investing Activities. Investing cash flows primarily consist of capital expenditures and are offset by proceeds from the sale of property, plant and equipment. The investing cash flows were higher in the Prior Year YTD Period, due to the sale of property, plant and equipment, when compared to the Year To Date Period. Financing Activities. Financing cash flows primarily consist of borrowings and repayments of debt. The increase in financing cash flows was due to net borrowings during the Year To Date Period compared with net repayments during the Prior Year YTD Period under the Revolving Facility. We also repurchased$10.0 million of common stock during the Year To Date Period under our$30.0 million stock repurchase program. Material Cash Requirements. We have obligations as part of our ordinary course of business. Our material cash requirements include: (1) operating lease obligations (see Note 14 Leases within the Condensed Consolidated Financial Statements); (2) debt repayments (see Note 15 Debt Activity within the Condensed Consolidated Financial Statements); (3) non-cancellable purchase obligations; (4) minimum royalty payments; and (5) employee wages, benefits, and incentives. Moreover, we may be subject to additional material cash requirements that are contingent upon the occurrence of certain events, e.g., legal contingencies, uncertain tax positions (see Note 5 Income Taxes within the Condensed Consolidated Financial Statements) and other matters.
For fiscal year 2022, we expect total capital expenditures to be approximately
Sources of Liquidity. We believe cash flows from operations, combined with
existing cash on hand and amounts available under our credit facilities will be
sufficient to fund our cash needs for the foreseeable future, not including
maturities of long-term debt. 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,
45
--------------------------------------------------------------------------------could impact our business and liquidity. In the event our liquidity is insufficient, we may be required to limit our spending or sell assets or equity or debt securities.
The following table shows our sources of liquidity (in millions):
July 2, 2022 July 3, 2021
Cash and cash equivalents $ 167.1 $ 252.3
Revolver availability 53.8 42.1
Total liquidity $ 220.9 $ 294.4
Notes: In November 2021 , we sold $150.0 million aggregate principal amount of
our 7.00% senior notes due 2026 (the "Notes"), generating net proceeds of
approximately $141.7 million . On November 8, 2021 , we used the majority of the
net proceeds from the Notes offering to repay the $122.0 million of outstanding
borrowings under the Term Credit Agreement (as defined below). The remaining net
proceeds were used for general corporate purposes.
The Notes are our general unsecured obligations. The Notes bear interest at the
rate of 7.00% per annum. Interest on the Notes is payable quarterly in arrears
on February 28 , May 31 , August 31 and November 30 of each year. The Notes mature
on November 30, 2026 . We may redeem the Notes for cash in whole or in part at
any time at our option. Prior to November 30, 2023 , the redemption price will be
$25.00 per $25.00 principal amount of Notes, plus a "make-whole" premium plus
accrued and unpaid interest, if any, to, but excluding, the date of redemption.
On and after November 30, 2023 we may redeem the Notes (i) on or after November
30, 2023 and prior to November 30, 2024 , at a price equal to $25.50 per $25.00
principal amount of Notes, (ii) on or after November 30, 2024 and prior to
November 30, 2025 , at a price equal to $25.25 per $25.00 principal amount of
Notes and (iii) on or after November 30, 2025 , at a price equal to $25.00 per
$25.00 principal amount of Notes, plus (in each case noted above) accrued and
unpaid interest, if any, to, but excluding, the date of redemption.
Term Credit Agreement: On September 26, 2019 , we, as borrower, entered into a
term credit agreement with JPMorgan Chase Bank, N.A ., as administrative agent,
and the lenders party thereto (as amended to date, the "Term Credit Agreement").
On November 8, 2021 , we used the majority of the net proceeds from the Notes
offering to repay all of the outstanding borrowings under the Term Credit
Agreement. In connection with the repayment of the outstanding borrowings under
the Term Credit Agreement, we incurred prepayment fees and accrued interest
costs of $2.6 million and wrote off $7.1 million of debt issuance costs and $4.6
million of original issuance discount related to the Term Credit Agreement.
Revolving Facility: On September 26, 2019 , we and Fossil Partners L.P. , as the
U.S. borrowers, and Fossil Group Europe GmbH , Fossil Asia Pacific Limited ,
Fossil (Europe) GmbH , Fossil (UK) Limited and Fossil Canada Inc. , as the
non-U.S. borrowers, certain other of our subsidiaries from time to time party
thereto designated as borrowers, and certain of our subsidiaries from time to
time party thereto as guarantors, entered into a secured asset-based revolving
credit agreement (the "Revolving Facility") with JPMorgan Chase Bank, N.A . as
administrative agent (the "ABL Agent"), J.P. Morgan AG , as French collateral
agent, JPMorgan Chase Bank, N.A ., Citizens Bank, N.A. and Wells Fargo Bank,
National Association as joint bookrunners and joint lead arrangers, and Citizens
Bank, N.A. and Wells Fargo Bank, National Association , as co-syndication agents
and each of the lenders from time to time party thereto (the "ABL Lenders"). The
Revolving Facility expires and is due and payable on September 26, 2024 .
The Revolving Facility provides that the ABL Lenders may extend revolving loans
in an aggregate principal amount not to exceed $225.0 million at any time
outstanding (the "Revolving Credit Commitment"), of which up to $125.0 million
is available under a U.S. facility, an aggregate of $70.0 million is available
under a European facility, $20.0 million is available under a Hong Kong
facility, $5.0 million is available under a French facility, and $5.0 million is
available under a Canadian facility, in each case, subject to the borrowing base
availability limitations described below. The Revolving Facility also includes
an up to $45.0 million subfacility for the issuance of letters of credit (the
"Letters of Credit"). The French facility includes a $1.0 million subfacility
for swingline loans, and the European facility includes a $7.0 million
subfacility for swingline loans. The Revolving Facility is subject to a line cap
equal to the lesser of the total Revolving Credit Commitment and the aggregate
borrowing bases under the U.S. facility, the European facility, the Hong Kong
facility, the French facility and the Canadian facility. Loans under the
Revolving Facility may be made in U.S. dollars, Canadian dollars, euros, Hong
Kong dollars or pounds sterling.
The Revolving Facility is an asset-based facility, in which borrowing
availability is subject to a borrowing base equal to:(a) with respect to us, the
sum of (i) the lesser of (x) 90% of the appraised net orderly liquidation value
of eligible U.S. finished goods inventory and (y) 65% of the lower of cost or
market value of eligible U.S. finished goods inventory, plus(ii) 85% of the
eligible U.S. accounts receivable, plus (iii) 90% of eligible U.S. credit card
accounts receivable, minus (iv) the aggregate amount of reserves, if any,
established by the ABL Agent; (b) with respect to each non-U.S. borrower (except
for the French Borrower), the sum of (i) the lesser of (x) 90% of the appraised
net orderly liquidation value of eligible foreign finished goods
46
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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.
Year To Date 2022 Activity: We had net borrowings of $106.7 million under the
Revolving Facility during the Year To Date Period at an average interest rate of
1.8%. As of July 2, 2022 , we had $150.0 million outstanding under the Notes and
$106.7 million outstanding under the Revolving Facility. We also had unamortized
debt issuance costs of $7.7 million recorded in long-term debt and $3.7 million
recorded in intangible and other assets-net. In addition, we had $4.5 million of
outstanding standby Letters of Credit at July 2, 2022 . Amounts available under
the Revolving Facility are reduced by any amounts outstanding under standby
Letters of Credit. As of July 2, 2022 , we had available borrowing capacity of
$53.8 million under the Revolving Facility. At July 2, 2022 , we were in
compliance with all debt covenants related to our credit facilities.
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 and estimates 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 endedJanuary 1, 2022 .
Forward-Looking Statements
The statements contained in this Quarterly Report on Form10-Q that are not historical facts, including, but not limited to, statements regarding our expected financial position, results of operations, business and financing plans found in this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 3. Quantitative and Qualitative Disclosures About Market Risk, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve a number of risks and uncertainties. The words "may," "believes," "will," "should," "seek," "forecast," "outlook," "estimate," "continue," "anticipate," "intend," "could," "would," "project," "predict," "potential," "plan," "expect" or the negative or plural of these words or similar expressions identify forward-looking statements. The actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: increased political uncertainty and theUkraine crisis; the effect of worldwide economic conditions; the effect of the COVID-19 pandemic; the impact of inflation; results of tax examinations; significant changes in consumer spending patterns or preferences; interruptions or delays in the supply of key components or products; acts of war or acts of terrorism; loss of key facilities; data breach or information systems disruptions; changes in foreign currency valuations in relation to 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; changes in the mix of product sales; the effects of vigorous competition in the markets in which we operate; compliance with debt covenants and other contractual provisions and meeting debt service obligations; risks related to the success of our business strategy; the termination or non-renewal of material licenses; risks related to foreign operations and manufacturing; changes in the costs of materials and labor; government regulation and tariffs; our ability to secure and protect trademarks and other intellectual property rights; levels of traffic to and management of our retail stores; loss of key personnel 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 endedJanuary 1, 2022 . 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. 47
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