Fossil Group, Inc. (NASDAQ:FOSL) is a global design, marketing, and distribution company that specializes in consumer fashion accessories. The company's principal offerings include an extensive line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts, and sunglasses. Fossil Group operates in three geographic segments: Americas, Europe, and Asia.

Financials

In fiscal year 2023, Fossil Group reported annual net sales of $1,412,384,000, a decrease of 7.6% compared to the prior year. The company's annual net income was -$157,088,000, and its annual operating cash flow was -$59,459,000, with annual free cash flow of -$69,352,000.

For the first quarter of 2024, Fossil Group reported net sales of $254,884,000, a 21.6% decrease (21.5% in constant currency) compared to the prior year quarter. The company's gross profit margin improved by 300 basis points to 52.4% in the first quarter, driven by benefits from its Transform & Grow (TAG) plan, including the exit of the smartwatch category, improved product margins in core categories, and lower freight costs.

Operating expenses in the first quarter decreased by 20% year-over-year to $162,698,000, reflecting savings across headcount, labor, and services initiated in 2023. As a result, Fossil Group narrowed its operating loss to $29,206,000 in the first quarter, compared to a loss of $37,308,000 in the prior year quarter.

The company's first quarter results were in line with its expectations, and its full-year 2024 guidance remains unchanged, with net sales expected to be approximately $1,200,000,000 and an adjusted operating margin loss of 3% to 5%. Fossil Group expects to achieve over $100 million in P&L benefits in 2024 from its TAG plan, which is driving improvements in both gross margin and SG&A.

Geographic Performance

Geographically, Fossil Group's first quarter net sales decreased across all three of its segments. In the Americas, net sales declined 20.2% (20.8% in constant currency) to $110,017,000, driven by decreases in the FOSSIL brand. Europe net sales decreased 25.5% (26.5% in constant currency) to $78,720,000, and Asia net sales declined 18.1% (15.5% in constant currency) to $65,538,000.

Product Category Performance

From a product category perspective, traditional watch sales decreased 17.3% (same in constant currency) to $186,561,000, while smartwatch sales declined 63.5% (63.6% in constant currency) to $8,877,000 as the company continued to exit the category. Leathers sales decreased 31.5% (31.3% in constant currency) to $27,584,000, and jewelry sales decreased 9.3% (9.0% in constant currency) to $26,263,000.

Business Overview

Fossil Group's management has identified three key themes underlying its revenue performance in the first quarter and the broader business environment. Approximately half of the company's revenue base is beginning to stabilize, with Fossil traditional watches, jewelry, and the Indian market performing relatively flat year-over-year. However, the company continues to face persistent challenges in its licensed fashion watch brands and leathers category, which collectively comprise over 40% of revenue and were down approximately 30% in the first quarter.

Additionally, the company's strategic actions, such as closing underperforming retail stores and exiting the smartwatch category, have created a headwind to sales in 2024, but are expected to be operating income accretive.

Strategic Initiatives

To address these challenges, Fossil Group has outlined four near-term priorities: 1) advancing its TAG plan, 2) strengthening its balance sheet, 3) stabilizing the business, and 4) conducting a strategic review. The company is making progress on each of these fronts.

Under the TAG plan, Fossil Group is driving material results into its P&L, with $100 million in annualized benefits expected in 2024, in addition to the $125 million achieved in 2023. The company is focused on improving gross margins through product sourcing and supply chain initiatives, as well as reducing operating expenses through organizational simplification and procurement efficiencies.

Liquidity

Regarding its balance sheet, Fossil Group ended the first quarter with $113 million in cash and $10 million available under its revolving credit facility. The company expects to be free cash flow positive in fiscal year 2024, aided by a $57 million tax refund received in April 2024 and continued working capital management.

Outlook

To stabilize the business, Fossil Group is pivoting resources and capital into more stable and growing segments, such as Fossil traditional watches and jewelry, its value brands, and premium-priced products. The company is also working closely with its licensors to manage the contraction in its fashion watch brands.

Finally, Fossil Group is conducting a strategic review of its business model and capital structure, with the goal of maximizing shareholder value. The company has appointed two new independent board members with significant experience in retail, consumer operations, turnarounds, and finance to provide oversight and fresh thinking during this transformational period.

Conclusion

Fossil Group is navigating a challenging operating environment, but is making progress on its key priorities to drive transformation and improve its financial performance. The company's focus on executing its TAG plan, strengthening its balance sheet, and stabilizing the business are critical steps in its journey to return to profitability and create long-term value for shareholders.