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Fossil (FOSL) Q1 Loss Widens Y/Y, Sales Fall on Store Closures

Zacks Equity Research

Fossil Group, Inc. FOSL released first-quarter 2020 results, wherein both top and bottom lines deteriorated year over year. Results were affected by coronavirus-led store closures. Other retailers like American Eagle AEO, Abercrombie & Fitch ANF and Foot Locker FL have also suffered due to store closures amid the pandemic.

Though Fossil did not offer any financial guidance, it expects COVID-19 to keep sales under pressure throughout 2020, with the second quarter bearing the largest impact. Shares of Fossil have tanked 51.6% year to date compared with the industry’s decline of 27.4%.



Quarter in Detail

Fossil reported a loss of $1.69 per share, wider than a loss of 25 cents in the year-ago period.

Worldwide net sales of $390.7 million declined 16% from the prior-year quarter, mainly due to coronavirus impacts. Due to the outbreak, most of Fossil’s wholesale partner stores were shut from mid-March. On a constant-currency (cc) basis, worldwide net sales fell 15% year over year.

Further, global retail comps declined 14% at cc on a 14-week calendar basis, though the same was up 1% before COVID-19-related store closures.

Fossil’s gross profit plummeted 43.4% to $140.4 million, while the gross margin contracted 17.4 percentage points to 35.9%, mainly due to liquidation and higher inventory valuation adjustments of older generation connected products along with lowest licensed product royalties due to lower sales led by the pandemic.

The company posted an operating loss of $134.3 million wider than a loss of $19.9 million in the year-ago quarter. This was accountable to the effect of coronavirus on sales, gross margin as well as non-cash asset impairments.

Category-Wise & Region-Wise Results

Category-wise, sales of watches slumped 56% to $310 million in the quarter. Sales in the leather and jewelry businesses tumbled 7% year over year to $47 million and 8% to $23 million, respectively. Sales in other businesses were $11 million, down 3% on a year-over-year basis.

Sales dropped 37% and 25% to $153 million and $128 million in the Americas and Europe, respectively. In Asia, sales decreased 11% to $106 million. Corporate sales dipped 1% to $4 million.

Other Financial Updates

Fossil has undertaken several measures to ensure employee safety, including store closures. Also, the company has been focused on curtailing costs and enhancing the financial position amid the pandemic. In the first quarter, the company drew down $100 million under its $275-million credit facility; curtailed operating costs including payroll, marketing and contract labor; largely reduced planned capital expenditures for 2020 and lowered incoming inventory to manage working capital.

As of the quarter-end, Fossil had total liquidity of $278 million, including cash and cash equivalents of $245.4 million and $33 million available under its revolving credit facility. Management expects to end the second quarter with cash and cash equivalents of around $200 million and about $30 million under its revolving credit facility. As of Apr 4, 2020, long-term debt and shareholders’ equity were $298.5 million and $416.4 million, respectively.

The company operated 447 stores as of Apr 4, including 217 full-priced accessory, seven full-priced multi-brand and 223 outlet stores. Out of all Fossil stores, 196 are located in the Americas, 156 in Europe and 95 in Asia.

Update on NWF 2.0

In 2019, the company began the New World Fossil 2.0 - Transform to Grow initiative (or NWF 2.0), which is aimed at improving the gross margin and lowering operating expenses by $200 million over 2019-2021.  The company expanded this initiative owing to the challenges associated with COVID-19. It now expects its cost-containment efforts to generate savings of $100 million in 2020 compared with $50 million expected earlier.

Outlook

Management did not offer any financial guidance due to the uncertainty surrounding coronavirus. However, the company expects worldwide net sales to tank 60-70% in the second quarter due to closure of Fossil stores as well as wholesale partner stores for a major part of the quarter. Reduction in retail and wholesale sales is expected to be compensated by e-commerce strength.

Notably, the company has started reopening its Fossil retail stores globally in a phased manner and the reopening is likely to be over by June-end, subject to regulatory approvals. The company is also working with its wholesale partners to reopen all Fossil stores in a phased manner. Further, the company is focused on augmenting digital growth and capturing organizational efficacies amid the crisis. To this end, Fossil is on track with digital investments, which include the recent completion of its new global e-commerce platform. This platform has helped the company cater to the rising demand of customers.

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