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 and twenty-six week periods endedJuly 3, 2021 (the "Second Quarter" and "Year To Date Period") as compared to the thirteen and twenty-seven week period endedJuly 4, 2020 (the "PriorYear Quarter " and "Prior Year YTD Period"). 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 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. The vast majority of our products are sourced internationally, with a substantial percentage of our watch and jewelry products assembled or manufactured by entities that are majority owned by us. This vertical integration of our business allows for better flow of communication, consistent quality, product design protection and improved supply chain speed, while still allowing us to utilize non-owned production facilities for their unique capabilities and to cover production needs over internal capabilities. 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 166 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 133 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 ,Greater China ,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 87 Company-owned stores as of the end of the Second Quarter and an extensive collection of products available through our owned websites. Our consolidated gross profit margin is 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 watch and jewelry offerings produce higher gross profit margins than our 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, and connected products carry relatively lower margins than traditional products. Gross profit margins related to sales in ourEurope andAsia businesses are historically higher than ourAmericas business, primarily due to the following factors: (i) premiums charged in comparison to retail prices on products sold in theU.S. ; (ii) the product sales mix in our international businesses, in comparison to ourAmericas business, is comprised more predominantly of watches and jewelry that generally produce higher gross profit margins than leather goods; and (iii) the watch 30 -------------------------------------------------------------------------------- sales mix in ourEurope andAsia businesses, in comparison to ourAmericas business, are comprised more predominantly of higher priced licensed brands. Our business is 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 contractor manufacturers' control. 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 mandatory closures of non-essential businesses and orders to "shelter-in-place." 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. Despite the introduction of new vaccines to fight the virus, the time to administer vaccines on a global scale along with the emergence of new variants of the virus continue to cast uncertainty on global consumer behavior. As a result, we expect continuing disruptions in consumer spending patterns and traffic in traditional brick and mortar distribution channels. 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. 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 expand our opportunity in mainlandChina andIndia . 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 mainlandChina andIndia as compelling long-term opportunities. Our fourth 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 re-allocate resources toward growth, and we completed our$250 million in run-rate savings goal in 2021. In addition to our NWF 2.0 program, we expect to optimize our operations with further reductions to our store footprint and increased focus on inventory management and supply chain efficiency. 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/A for the fiscal year endedJanuary 2, 2021 and "Part II, Item 1A. Risk Factors" of our subsequent Quarterly Reports on Form 10-Q.
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. Comparable Retail Sales
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
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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 are
calculated on a comparable
calendar period. Therefore, the percentage change in comparable sales for 2021
were calculated on a 26-to-26 week basis to
normalize the 27-week Prior Year YTD Period with the 26-week Year To Date
Period. Comparable retail sales also exclude the effects of foreign currency
fluctuations.
Results of Operations
Quarterly Periods Ended July 3, 2021 and July 4, 2020
Consolidated Net Sales . Net sales increased $151.9 million , or 58.6% (51.3% in
constant currency), for the Second Quarter as compared to the Prior Year
Quarter , primarily driven by increased store foot traffic relative to the Prior
Year Quarter , which was impacted by widespread temporary retail store and
wholesale closures due to the COVID-19 pandemic, and partially offset by our
smaller store base. 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 41% of worldwide net sales. Digital sales increased 15%
(10% in constant currency) in the Second Quarter as compared to the Prior Year
Quarter . Global comparable retail sales increased 12% primarily due to increased
foot traffic in the Second Quarter relative to the Prior Year Quarter , which was
impacted by widespread temporary closures in our owned stores due to COVID-19.
We have reduced our store footprint by 50 stores since the end of the Prior Year
Quarter .
The following table sets forth consolidated net sales by segment (dollars in
millions):
For the 13 Weeks Ended July 3, 2021 For the 13 Weeks Ended July 4, 2020 Growth (Decline)
Percentage Percentage Percentage As Percentage Constant
Net Sales of Total Net Sales of Total Dollars Reported Currency
Americas $ 176.7 43.0 % $ 105.8 40.8 % $ 70.9 67.0 % 64.0 %
Europe 124.4 30.3 79.5 30.7 44.9 56.5 44.3
Asia 103.5 25.2 69.2 26.7 34.3 49.6 40.8
Corporate 6.3 1.5 4.5 1.8 1.8 40.0 37.8
Total $ 410.9 100.0 % $ 259.0 100.0 % $ 151.9 58.6 % 51.3 %
In the Second Quarter, the translation of foreign-based net sales into U.S.
dollars increased reported net sales by $19.1 million , including favorable
impacts of $9.7 million , $6.1 million and $3.2 million in our Europe , Asia and
Americas segments, respectively, as compared to the Prior Year Quarter .
Net sales information by product category is summarized as follows (dollars in
millions):
For the 13 Weeks Ended July 3, 2021 For the 13 Weeks Ended July 4, 2020 Growth (Decline)
Percentage Percentage Percentage As Percentage Constant
Net Sales of Total Net Sales of Total Dollars Reported Currency
Watches $ 329.4 80.2 % $ 209.5 80.9 % $ 119.9 57.2 % 49.8 %
Leathers 33.3 8.1 26.6 10.3 6.7 25.2 20.7
Jewelry 36.9 9.0 15.2 5.9 21.7 142.8 129.6
Other 11.3 2.7 7.7 2.9 3.6 46.8 41.6
Total $ 410.9 100.0 % $ 259.0 100.0 % $ 151.9 58.6 % 51.3 %
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Stores. The following table sets forth the number of stores on the dates
indicated below:
July 4, 2020 Opened Closed July 3, 2021
Americas 194 2 30 166
Europe 153 2 22 133
Asia 89 1 3 87
Total stores 436 5 55 386
During the Second Quarter, we closed 9 stores and opened no new stores
Americas Net Sales . Americas net sales increased $70.9 million , or 67.0% (64.0%
in constant currency), during the Second Quarter in comparison to the Prior Year
Quarter . In the region, sales increased in the U.S. and Mexico and declined in
Canada . Sales increases in our wholesale and store channels, primarily due to
increased traffic, more than offset sales decreases in owned e-commerce.
Comparable retail sales increased strongly during the Second Quarter, driven by
traffic increases in our retail stores compared to the Prior Year Quarter due to
the COVID-19 pandemic.
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 13 Weeks Ended July 3, 2021 For the 13 Weeks Ended July 4, 2020 Growth (Decline)
Percentage Percentage Percentage As Percentage Constant
Net Sales of Total Net Sales of Total Dollars Reported Currency
Watches $ 142.3 80.5 % $ 84.5 79.9 % $ 57.8 68.4 % 65.2 %
Leathers 20.8 11.8 17.4 16.4 3.4 19.5 17.8
Jewelry 11.5 6.5 2.7 2.6 8.8 325.9 322.2
Other 2.1 1.2 1.2 1.1 % 0.9 75.0 66.7
Total $ 176.7 100.0 % $ 105.8 100.0 % $ 70.9 67.0 % 64.0 %
Europe Net Sales . Europe net sales increased $44.9 million , or 56.5% (44.3% in
constant currency), during the Second Quarter in comparison to the Prior Year
Quarter . Across Europe , sales increased in most major markets, with the largest
increases in Germany and France , primarily due to relatively less COVID-19
pandemic related travel restrictions and temporary store closures in the Second
Quarter than in the Prior Year Quarter . Comparable retail sales declined
modestly during the Second Quarter, driven by retail store increases more than
offset by owned e-commerce declines. Foot traffic in our stores increased in the
Second Quarter, compared to the Prior Year Quarter .
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 3, 2021 For the 13 Weeks Ended July 4, 2020 Growth (Decline)
Percentage Percentage Percentage As Percentage Constant
Net Sales of Total Net Sales of Total Dollars Reported Currency
Watches $ 95.1 76.4 % $ 62.2 78.2 % $ 32.9 52.9 % 40.8 %
Leathers 6.4 5.1 5.0 6.3 1.4 28.0 16.0
Jewelry 20.2 16.2 11.4 14.3 8.8 77.2 64.0
Other 2.7 2.3 0.9 1.2 % 1.8 200.0 188.9
Total $ 124.4 100.0 % $ 79.5 100.0 % $ 44.9 56.5 % 44.3 %
Asia Net Sales. Net sales in Asia increased $34.3 million , or 49.6% (40.8% in
constant currency), during the Second Quarter in comparison to the Prior Year
Quarter . Sales increased in most brands during the Second Quarter, most notably
in EMPORIO ARMANI® and FOSSIL®. Sales also increased in most major markets
across Asia , led by mainland China and India . Comparable retail sales increased
strongly during the Second Quarter, driven by traffic increases in our retail
stores compared to the Prior Year Quarter due to the COVID-19 pandemic.
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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):
For the 13 Weeks Ended July 3, 2021 For the 13 Weeks Ended July 4, 2020 Growth (Decline)
Percentage Percentage Percentage As Percentage Constant
Net Sales of Total Net Sales of Total Dollars Reported Currency
Watches $ 91.0 87.9 % $ 62.8 90.8 % $ 28.2 44.9 % 36.5 %
Leathers 6.1 5.9 4.1 5.9 2.0 48.8 39.0
Jewelry 5.2 5.0 1.1 1.6 4.1 372.7 336.4
Other 1.2 1.2 1.2 1.7 - - -
Total $ 103.5 100.0 % $ 69.2 100.0 % $ 34.3 49.6 % 40.8 %
Gross Profit. Gross profit of $221.8 million in the Second Quarter increased
57.8% in comparison to $140.6 million in the Prior Year Quarter , driven by the
increase in sales. Our gross profit margin rate decreased to 54.0% in the Second
Quarter compared to 54.3% in the Prior Year Quarter . The year-over-year decrease
primarily reflects a non-recurrence of reduced minimum licensor royalty costs in
the Prior Year Quarter and increased Americas regional sales mix. These
decreases were largely offset by improved product and channel mix, a favorable
currency impact and reduced tariffs.
Operating Expenses. Total operating expenses in the Second Quarter were $207.5
million , or 50.5% of sales, compared to $177.4 million , or 68.5% of sales, in
the Prior Year Quarter . SG&A expenses were $200.5 million in the Second Quarter
compared to $163.5 million in the Prior Year Quarter , reflecting higher
marketing and compensation costs as a result of the depressed activity in the
Prior Year Quarter during the macro uncertainty related to the COVID-19
pandemic. As a percentage of net sales, SG&A expenses decreased to 48.8% in the
Second Quarter as compared to 63.1% in the Prior Year Quarter . Operating
expenses in the Second Quarter included $5.7 million of restructuring costs,
primarily related to professional services, store closures and employee costs,
while the Prior Year Quarter included $10.5 million in restructuring costs.
Other long-lived asset impairments in the Second Quarter were $1.3 million
compared to $3.4 million in the Prior Year Quarter , due to lower retail store
impairment. The translation of foreign-denominated expenses during the Second
Quarter increased operating expenses by $7.7 million as a result of the weaker
U.S. dollar.
Operating Income (Loss). Operating income in the Second Quarter was $14.3
million as compared to an operating loss of $36.8 million in the Prior Year
Quarter . The improvement in operating income (loss) was primarily driven by
increased sales in the Second Quarter due to COVID-19 related retail closures in
the Prior Year Quarter . As a percentage of net sales, operating margin was 3.5%
in the Second Quarter compared to (14.2)% in the Prior Year Quarter . Operating
margin in the Second Quarter included a favorable impact of 260 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 3, 2021 Ended July 4, 2020 Dollars Percentage 2021 2020
Americas $ 36.6 $ 4.8 $ 31.8 662.5 % 20.7 % 4.5 %
Europe 22.0 (9.3) 31.3 336.6 17.7 (11.7)
Asia 14.8 7.1 7.7 108.5 14.3 10.3
Corporate (59.1) (39.4) (19.7) (50.0)
Total operating income
(loss) $ 14.3 $ (36.8) $ 51.1 138.9 % 3.5 % (14.2) %
Interest Expense. Interest expense decreased by $1.3 million during the Second
Quarter compared to the Prior Year Quarter , primarily driven by a lower debt
balance.
Other Income (Expense)-Net. During the Second Quarter, other income
(expense)-net was an expense of $0.5 million in comparison to income of $0.9
million in the Prior Year Quarter . The year-over-year change was primarily
driven by net transactional currency losses in the Second Quarter compared with
net transactional currency gains in the Prior Year Quarter .
Provision for Income Taxes. Income tax expense for the Second Quarter was $8.1
million , resulting in an effective income tax rate of 110.5%. For the Prior Year
Quarter , income tax benefit was $20.8 million , resulting in an effective income
tax rate of 47.6%. The effective tax rate in the Second Quarter was unfavorable
as compared to the Prior Year Quarter since no tax benefit was accrued on the
U.S. net operating loss ("NOL"), unlike in the Prior Year Quarter . The Global
Intangible Low-Taxed Income ("GILTI") provision of the Tax Cuts and Jobs Act
requires the inclusion of certain foreign income in the tax
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return which will absorb most of the U.S. NOL. Foreign income taxes are also
paid on this same foreign income, resulting in double taxation. The remaining
U.S. NOL is offset with a valuation allowance since there is no certainty of any
future tax benefit. The Prior Year Quarter tax rate benefited from the enactment
of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, which was
in effect in the Prior Year Quarter but expired in 2021. The CARES Act allowed
U.S. taxpayers to carry back a net operating loss arising in tax years 2018,
2019 and 2020 to prior years when the tax rate was 35%. In the Prior Year
Quarter , we recognized a U.S. tax benefit from fiscal year 2019 and 2020 tax
losses, which were carried back to offset taxable income reported in prior
years. No tax benefit has been accrued on the Second Quarter U.S. tax losses and
certain foreign tax losses due to the uncertainty of whether they can be used in
the future.
Net Income (Loss) Attributable to Fossil Group, Inc. Second Quarter net income
(loss) attributable to Fossil Group, Inc. was a net loss of $1.2 million , or
$0.02 per diluted share, in comparison to a net loss of $22.5 million , or $0.44
per diluted share, in the Prior Year Quarter . Diluted earnings (loss) per share
in the Second Quarter included restructuring charges of $0.09 per diluted share.
Diluted earnings (loss) per share in the Prior Year Quarter included
restructuring charges of $0.16 per diluted share. Currency fluctuations
favorably impacted diluted earnings per share by $0.13 during the Second
Quarter.
35-------------------------------------------------------------------------------- Fiscal Year To Date Periods EndedJuly 3, 2021 andJuly 4, 2020 ConsolidatedNet Sales . Net sales increased$124.3 million or 19.1% (14.2% in constant currency) for the Year To Date Period as compared to the Prior Year YTD Period. We experienced sales increases in all three geographic segments and in the watches and jewelry product categories, while leathers decreased. In the Year To Date Period, digital sales, which include sales from our owned e-commerce channels, third party e-commerce platforms and wholesale dot com, were 41% of worldwide net sales. Digital sales increased 28% (23% in constant currency) in the Year To Date Period, compared to the Prior Year YTD Period. Comparable retail sales decreased 2% on a 26-week calendar basis during the Year To Date Period. Although traffic significantly increased in the Second Quarter, it remains down for the Year To Date Period compared to the Prior Year YTD Period, due to the significant traffic declines in the first quarter of fiscal year 2021 related to the COVID-19 pandemic. The following table sets forth consolidated net sales by segment (dollars in millions): For the 26 Weeks Ended July 3, 2021 For the 27 Weeks Ended July 4, 2020 Growth (Decline) Percentage Percentage Percentage As Percentage Constant Net Sales of Total Net Sales of Total Dollars Reported Currency Americas$ 329.2 42.5 %$ 258.7 39.8 %$ 70.5 27.3 % 25.8 % Europe 233.7 30.2 207.8 31.9 25.9 12.5 4.1 Asia 202.1 26.1 175.4 27.0 26.7 15.2 9.2 Corporate 9.0 1.2 7.8 1.3 1.2 15.4 14.1 Total$ 774.0 100.0 %$ 649.7 100.0 %$ 124.3 19.1 % 14.2 % In the Year To Date Period, the translation of foreign-based net sales intoU.S. dollars increased reported net sales by$31.8 million , including favorable impacts of$17.3 million ,$10.6 million and$3.8 million in ourEurope ,Asia andAmericas segments, respectively, compared to the Prior Year YTD Period.
Net sales information by product category is summarized as follows (dollars in millions):
For the 26 Weeks Ended July 3, 2021 For the 27 Weeks Ended July 4, 2020 Growth (Decline)
Percentage Percentage Percentage As Percentage Constant
Net Sales of Total Net Sales of Total Dollars Reported Currency
Watches $ 621.0 80.3 % $ 519.4 79.9 % $ 101.6 19.6 % 14.7 %
Leathers 67.5 8.7 73.9 11.4 (6.4) (8.7) (11.9)
Jewelry 66.7 8.6 38.4 5.9 28.3 73.7 64.8
Other 18.8 2.4 18.0 2.8 0.8 4.4 -
Total $ 774.0 100.0 % $ 649.7 100.0 % $ 124.3 19.1 % 14.2 %
36-------------------------------------------------------------------------------- AmericasNet Sales .Americas net sales increased$70.5 million , or 27.3% (25.8% in constant currency), during the Year To Date Period in comparison to the Prior Year YTD Period. During the Year To Date Period, sales increased in most brands in our watch portfolio, with the largest increases in MICHAEL KORS® and FOSSIL. Geographically, sales increased in theU.S. andMexico , and declined inCanada . Comparable retail sales in the region increased moderately on a 26-week calendar basis during the Year To Date Period, driven by improved conversion while traffic was flat to the Prior Year YTD Period. The following table sets forth product net sales and changes in product net sales on both a reported and constant-currency basis from period to period for theAmericas segment (dollars in millions): For the 26 Weeks Ended July 3, 2021 For the 27 Weeks Ended July 4, 2020 Growth (Decline) Percentage Percentage Percentage As Percentage Constant Net Sales of Total Net Sales of Total Dollars Reported Currency Watches$ 263.2 80.0 %$ 203.7 78.7 %$ 59.5 29.2 % 27.7 % Leathers 40.5 12.3 45.4 17.5 (4.9) (10.8) (11.9) Jewelry 22.2 6.7 6.7 2.6 15.5 231.3 225.4 Other 3.3 1.0 2.9 1.2 0.4 13.8 17.2 Total$ 329.2 100.0 %$ 258.7 100.0 %$ 70.5 27.3 % 25.8 % EuropeNet Sales .Europe net sales increased$25.9 million , or 12.5% (4.1% in constant currency), during the Year To Date Period in comparison to the Prior Year YTD Period. During the Year To Date Period, most of the brands in the portfolio increased, with the largest sales increases inMICHAEL KORS , FOSSIL and EMPORIO ARMANI, and driven mainly by increases in digital sales. Comparable retail sales in the region decreased significantly on a 26-week calendar basis during the Year To Date Period, driven by traffic declines due to the COVID-19 pandemic. The following table sets forth product net sales and the changes in product net sales on both a reported and constant-currency basis from period to period for theEurope segment (dollars in millions): For the 26 Weeks Ended July 3, 2021 For the 27 Weeks Ended July 4, 2020 Growth (Decline) Percentage Percentage Percentage As Percentage Constant Net Sales of Total Net Sales of Total Dollars Reported Currency Watches$ 179.7 76.9 %$ 160.1 77.0 %$ 19.6 12.2 % 4.1 % Leathers 12.7 5.4 14.5 7.0 (1.8) (12.4) (19.3) Jewelry 36.4 15.6 28.9 13.9 7.5 26.0 16.6 Other 4.9 2.1 4.3 2.1 0.6 14.0 2.3 Total$ 233.7 100.0 %$ 207.8 100.0 %$ 25.9 12.5 % 4.1 % Asia Net Sales.Asia net sales increased$26.7 million , or 15.2% (9.2% in constant currency), during the Year To Date Period in comparison to the Prior Year YTD Period. Sales of EMPORIO ARMANI increased while SKAGEN® and FOSSIL declined in the Year To Date Period as compared to the Prior Year YTD Period. The majority of the region's sales increase came from mainlandChina , while sales inSouth Korea declined. For the Year To Date Period, comparable retail sales declined slightly on a 26-week calendar basis, driven by traffic declines due to the COVID-19 pandemic. 37 -------------------------------------------------------------------------------- The following table sets forth product net sales and the changes in product net sales on both a reported and constant-currency basis from period to period for theAsia segment (dollars in millions): For the 26 Weeks Ended July 3, 2021 For the 27 Weeks Ended July 4, 2020 Growth (Decline) Percentage Percentage Percentage As Percentage Constant Net Sales of Total Net Sales of Total Dollars Reported Currency Watches$ 177.0 87.6 %$ 155.6 88.7 %$ 21.4 13.8 % 8.0 % Leathers 14.3 7.1 14.0 8.0 0.3 2.1 (4.3) Jewelry 8.1 4.0 2.8 1.6 5.3 189.3 171.4 Other 2.7 1.3 3.0 1.7 (0.3) (10.0) (16.7) Total$ 202.1 100.0 %$ 175.4 100.0 %$ 26.7 15.2 % 9.2 % Gross Profit. Gross profit of$404.4 million in the Year To Date Period increased$123.5 million , or 43.9%, in comparison to$281.0 million in the Prior Year YTD Period primarily due to the increase in net sales. Gross profit margin rate increased to 52.3% in the Year To Date Period compared to 43.2% in the Prior Year YTD Period. The gross profit margin rate increased primarily due to decreased liquidation and inventory valuation adjustments of older generation connected products, which most heavily impacted the first quarter of fiscal year 2020. Additionally, the gross profit margin rate was favorably impacted by currency changes, reduced levels of minimum licensed product royalties, which were elevated in the Prior Year YTD Period as a result of reduced sales due to the impact of COVID-19, and reduced tariffs. Operating Expenses. For the Year To Date Period, total operating expenses decreased to$406.8 million , or 52.6% of sales, compared to$452.1 million , or 69.6% of sales, in the Prior Year YTD Period. SG&A expenses were$387.8 million in the Year To Date Period compared to$409.2 million in the Prior Year YTD Period, mainly due to corporate and regional infrastructure reductions and lower store costs as a result of store closures and was partially offset by increased marketing costs. As a percentage of net sales, SG&A expenses decreased to 50.1% in the Year To Date Period as compared to 63.0% in the Prior Year YTD Period, mainly driven by the contraction of sales in the Prior Year YTD Period due to the COVID-19 pandemic. During the Year To Date Period, we incurred restructuring costs of$13.3 million in comparison to restructuring costs of$19.9 million in the Prior Year YTD Period. We incurred no non-cash intangible asset impairment charges in the Year To Date Period compared to charges of$2.5 million in the Prior Year YTD Period. The translation of foreign-denominated expenses during the Year To Date Period increased operating expenses by$14.5 million as a result of the weakerU.S. dollar. Operating Income (Loss). Operating loss was$2.4 million in the Year To Date Period as compared to$171.1 million in the Prior Year YTD Period. The reduced operating loss primarily resulted from the$124.3 million increase in net sales due to the effects of the COVID-19 pandemic in the Prior Year YTD Period, improved margin rate and reduced operating expenses in the Year To Date Period compared to the Prior Year YTD Period. As a percentage of net sales, operating margin was (0.3)% in the Year To Date Period as compared to (26.3)% in the Prior Year YTD Period and was positively impacted by approximately 180 basis points due to changes in foreign currencies. Operating income (loss) by segment is summarized as follows (dollars in millions): For the 26 Weeks For the 27 Change Operating Margin Ended July 3, Weeks Ended 2021 July 4, 2020 Dollars Percentage 2021 2020 Americas$ 62.6 $ (32.3) $ 94.9 293.8 % 19.0 % (12.5) % Europe 27.1 (10.5) 37.6 358.1 11.6 (5.1) Asia 26.6 19.1 7.5 39.3 13.1 10.9 Corporate (118.7) (147.4) 28.7 19.5 Total operating income (loss)$ (2.4) $ (171.1) $ 168.7 98.6 % (0.3) % (26.3) % Interest Expense. Interest expense decreased by$1.5 million during the Year To Date Period primarily driven by a lower debt balance. Other Income (Expense)-Net. During the Year To Date Period, other income (expense)-net was net income of$1.4 million in the Year to Date Period compared to net expense of$6.4 million in the Prior Year YTD Period. This change was primarily driven by reduced net foreign currency losses during the Year To Date Period as compared to the Prior Year YTD Period. 38 -------------------------------------------------------------------------------- Provision for Income Taxes. Income tax benefit for the Year To Date Period was$10.2 million , resulting in an effective income tax rate of (68.4)%. The Prior Year YTD Period income tax benefit was$84.5 million resulting in an effective tax rate of 43.8%. The effective tax rate in the Year To Date Period differed from the Prior Year YTD Period primarily due to changes enacted in the CARES Act allowing aU.S. NOL carryback. The Year To Date Period effective tax rate was negative because income tax expense was accrued on certain foreign entities with positive taxable income whereas no income tax benefit was recognized forU.S. and foreign entity losses. Net Income (Loss) Attributable toFossil Group, Inc. For the Year To Date Period, net loss was$25.6 million , or$0.50 per diluted share, in comparison to a loss of$108.1 million , or$2.13 per diluted share, in the Prior Year YTD Period. The year-over-year improvement in net loss was mainly driven by increased sales due to the effects of the COVID-19 pandemic in the Prior Year YTD Period, improved margin rate and reduced operating expenses in the Year To Date Period, compared to the Prior Year YTD Period. Currency fluctuations favorably impacted diluted earnings per share by$0.30 in the Year To Date Period, as compared to the Prior Year YTD Period. Liquidity and Capital Resources Our cash and cash equivalents balance at the end of the Second Quarter was$252.3 million , including$162.8 million held in banks outside theU.S. , in comparison to cash and cash equivalents of$277.6 million at the end of the PriorYear Quarter and$316.0 million at the end of fiscal year 2020. 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. For the Year To Date Period, we had an operating cash flow deficit of$9.8 million . A net loss of$25.1 million and an increase in working capital items of$51.0 million was partially offset by favorable net non-cash items of$66.3 million . During the Year To Date Period, we had net debt payments of$53.7 million and capital expenditures of$3.4 million . Accounts receivable, net of allowances, increased by 44.2% to$187.6 million at the end of the Second Quarter compared to$130.1 million at the end of the PriorYear Quarter , mainly driven by the increase in sales. Days sales outstanding for our wholesale businesses for the Second Quarter decreased to 57 days compared to 72 days in the PriorYear Quarter . Inventory at the end of the Second Quarter was$352.0 million , which decreased by 6.4% from the end of the PriorYear Quarter ending inventory balance of$375.9 million , mainly due to proactive management of inventory balances. At the end of the Second Quarter, we had net working capital of$427.4 million compared to net working capital of$417.9 million at the end of the PriorYear Quarter . At the end of the Second Quarter, we had$38.4 million of short-term borrowings and$139.7 million in long-term debt. For fiscal year 2021, we expect total capital expenditures to be approximately$15 million . Our capital expenditure budget is an estimate, and while it is subject to change, it is also limited by the terms of the Term Credit Agreement (as defined below). OnFebruary 20, 2020 , we entered into Amendment No. 1 to that certain Term Credit Agreement, dated as ofSeptember 26, 2019 , by and among us, as borrower,JPMorgan Chase Bank, N.A ., as administrative agent, and the lenders (the "Term Credit Agreement Lenders") party thereto (as amended to date, 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 . OnJune 5, 2020 , we entered into Amendment No. 3 (the "Third Amendment") to the Term Credit Agreement to further modify certain terms of the Term Credit Agreement to address the financial impact of COVID-19. Under the Term Credit Agreement: (i) amounts outstanding bear interest at (a) the adjusted LIBO rate plus 8.50% for Eurodollar loans, and (b) the alternate base rate plus 7.50% for alternate base rate loans; (ii) a quarterly amortization payment of$10.0 million is required; and (iii) a maximum total leverage ratio of (a) 2.25 to 1.00 is permitted as of the last day of each fiscal quarter endingApril 3, 2021 ,July 3, 2021 andOctober 2, 2021 , and (b) 1.50 to 1.00 as of the last day of each subsequent fiscal quarter. In connection with the Third Amendment, the quarterly test for maximum total leverage ratio was waived for the 39 -------------------------------------------------------------------------------- first three fiscal quarters of fiscal year 2021, and we are required to maintain specified minimum levels of EBITDA during such periods. While the Third Amendment amended, among other things, certain of the financial covenants in the Term Credit Agreement to address the financial impact of COVID-19, any material further decreases to our revenues and cash flows, or the our inability to successfully achieve our cost reduction targets, could result in us not meeting one or more of the amended financial covenants under our Term Credit Agreement within the next twelve months. OnSeptember 26, 2019 , we andFossil Partners L.P. , as theU.S. borrowers, andFossil Group Europe GmbH ,Fossil Asia Pacific Limited ,Fossil (Europe) GmbH ,Fossil (UK) Limited andFossil 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$275.0 million secured asset-based revolving credit agreement (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"). 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 , provided that, if on the date that is the 121st day prior to the final maturity date of any class or tranche of term loans under the Term Credit Agreement, any such term loans are outstanding on such date, then the maturity date of the Revolving Facility shall be such date. Unless the maturity of the term loans is extended beyond the current maturity date ofSeptember 26, 2024 , the Revolving Facility will expire and be due and payable onMay 28, 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 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. 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 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. We had net payments of$23.3 million during the Year To Date Period under the Term Credit Agreement at an average interest rate of 10.0%. We had net payments of$30.0 million under the Revolving Facility during the Year To Date Period at an average interest rate of 1.8%. As ofJuly 3, 2021 , we had$128.7 million outstanding under the Term Credit Agreement and$67.5 million outstanding under the Revolving Facility. We also had unamortized debt issuance costs of$14.1 million and an unamortized original issue discount of$5.7 million , which reduces the corresponding debt liability. In addition, we had$4.6 million of outstanding standby letters of credit atJuly 3, 2021 . Amounts available under the Revolving Facility are reduced by any amounts outstanding under standby letters of credit. As ofJuly 3, 2021 , we had available borrowing capacity of$42.1 million under the Revolving Facility. AtJuly 3, 2021 , we were in compliance with all debt covenants related to our credit facilities. Off Balance Sheet Arrangements As ofJuly 3, 2021 , 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/A for the fiscal year endedJanuary 2, 2021 . 40 -------------------------------------------------------------------------------- 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/A for the fiscal year endedJanuary 2, 2021 . Forward-Looking Statements The statements contained 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," "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: 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 and the availability, widespread distribution and use of effective vaccines; significant changes in consumer spending patterns or preferences; interruptions or delays in the supply of key components; 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 COVID-19, a general economic downturn or generally reduced shopping activity caused by public safety (including COVID-19) 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; changes in the mix of product sales; our ability to maintain proper inventory levels; financial difficulties encountered by customers and related bankruptcy and collection issues; the effects of vigorous competition in the markets in which we operate; compliance with debt covenants and other contractual provisions; risks related to the success of our business strategy and restructuring programs; the termination or non-renewal of material licenses; risks related to foreign operations and manufacturing; changes in the costs of materials, labor and advertising; government regulation and tariffs; our ability to secure and protect trademarks and other intellectual property rights; levels of traffic to and management of our retail stores; 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/A for the fiscal year endedJanuary 2, 2021 . 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. 41
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