Executive Summary / Key Takeaways

• Fossil Group is executing a comprehensive turnaround plan focused on refocusing on core traditional watches and key brands, rightsizing its cost structure, and strengthening the balance sheet.
• Early results show tangible progress, with Q1 2025 demonstrating sequential improvement in core sales decline, significant gross margin expansion to 61.3%, and a swing to positive adjusted operating income of $10 million (4.3% margin).
• The company is strategically resetting its top line in 2025 through store closures and reduced promotions to drive higher profitability, targeting approximately $100 million in SG&A savings.
• Management is confident in mitigating potential tariff impacts through a global footprint, supply chain flexibility, pricing actions, and geodiversification, even if China rates reach 145%.
• Key factors for investors to monitor include the execution of cost savings initiatives, successful debt refinancing efforts for upcoming 2026 maturities, and the impact of the macroeconomic environment and tariff policies on consumer demand and profitability.

The Weight of Time: A Legacy Undergoing Transformation

Fossil Group, Inc., a name long synonymous with fashion accessories, particularly watches, has built its business over decades on a diverse portfolio of owned and licensed brands distributed globally through wholesale, retail stores, and e-commerce. This extensive reach and brand ecosystem have historically been foundational strengths, allowing the company to target style-conscious consumers across a wide age spectrum and various price points. However, like many players in the consumer discretionary space, Fossil has faced significant headwinds from evolving consumer preferences, macroeconomic volatility, and shifts in the retail landscape.

The company's recent history reflects a determined effort to adapt. Following its Transform and Grow (TAG) plan, which concluded in fiscal 2024 and yielded $280 million in annualized operating income benefits over two years, Fossil has embarked on a new, comprehensive Turnaround Plan. This strategic pivot, centered on refocusing the business, rightsizing its cost structure, and strengthening the balance sheet, aims to restore profitable growth in a challenging environment. The core of this renewed focus lies in traditional watches, leveraging the strength of the Fossil brand platform and key licensed brands, alongside optimizing its go-to-market execution.

Within this strategic framework, Fossil emphasizes innovation, particularly in design and product development, supported by its innovation labs. While the company has strategically exited the smartwatch category, citing lower margins and shifting focus, its historical engagement in this area highlights a capability in integrating technology into fashion accessories. The current technological emphasis appears to be on enhancing the core product offerings through design innovation (like the Raquel and Machine series) and improving the digital consumer experience through e-commerce optimization and the exploration of AI use, as overseen by the new Chief Digital Information Officer. This approach contrasts with competitors like Swatch Group , which leverages proprietary material science for durability, or Movado Group , which has shown advantages in smartwatch battery life and processing speed. Fossil's strength lies more in its brand-led design process and broad distribution capabilities rather than a specific, quantifiable technological moat in manufacturing or component performance compared to these specialized players.

The competitive landscape is dynamic and fragmented. Fossil competes directly with companies like Movado Group (MOV) in mid-tier watches and jewelry, Tapestry (TPR) and Capri Holdings (CPRI) in handbags and accessories (often through licensed brands), and Guess? (GES) across various fashion accessories. Larger players like Swatch Group (SWGAY) dominate segments of the watch market with both luxury and accessible brands, while technology giants like Apple (AAPL) pose indirect competition in the wearable space. Fossil's broad brand portfolio and extensive global distribution network, including a significant physical retail footprint (though undergoing rationalization), provide a competitive advantage in reach and brand recognition. However, the company has lagged some peers in recent growth rates, profitability metrics, and supply chain efficiency, facing higher debt levels compared to some rivals like MOV and SWGAY.

Performance Reflecting Strategic Shifts

The early results under the new Turnaround Plan signal tangible progress. In the first quarter of fiscal year 2025, Fossil reported net sales of $233.3 million, an 8.5% decrease (6.2% in constant currency) compared to the prior year quarter. While the top line remains pressured by overall category and consumer softness, notably in leathers (-37.0% constant currency) and jewelry (-13.3% constant currency), the core sales decline narrowed to 8%, a sequential improvement from the 12% decline in Q4 2024. This improvement was supported by a 6.0% constant currency increase in wholesale sales, partially offset by a 24.3% constant currency decline in direct-to-consumer sales, impacted by store closures and reduced promotional activity.

Crucially, the strategic decision to exit the smartwatch category, which contributed approximately 520 basis points to the total sales decline, alongside a focus on higher-margin traditional watches and reduced promotions, drove significant gross margin expansion. Gross profit increased to $143 million in Q1 2025, and the gross profit margin rate surged to 61.3%, an impressive 880 basis point increase from 52.4% in the prior year quarter. This expansion also benefited from improved product margins in core categories, favorable product mix, and reduced freight costs.

Operating expenses saw a notable reduction, with SG&A decreasing to $133.8 million, or 57.4% of net sales, down from 59.7% in the prior year quarter. These cost reductions, stemming from restructuring programs including a strategic reduction in force and store rationalization, contributed to a significant narrowing of the operating loss from $29.2 million to $6.7 million. On an adjusted basis, the company achieved a positive operating income of $10 million, translating to a 4.3% adjusted operating margin, a substantial swing from a $20 million adjusted operating loss in the prior year quarter. This financial performance, particularly the margin expansion and return to adjusted profitability, underscores the initial effectiveness of the cost-rightsizing and core-focus strategies.

Segment performance in Q1 2025 showed varying trends. The Americas segment saw sales decrease by 8.8% in constant currency, primarily driven by the Fossil brand, although Michael Kors showed moderate growth and U.S. wholesale for core brands grew double digits. Europe's sales increased slightly by 0.5% in constant currency, with wholesale gains offsetting direct channel declines. Asia experienced a 10.4% constant currency sales decrease, largely due to weakness in mainland China and the Emporio Armani brand, partially offset by growth in India. These regional dynamics highlight the importance of geographic diversification and the impact of specific market conditions and brand performance on overall results.

Outlook, Risks, and the Path Ahead

Looking ahead, Fossil's guidance for full year 2025 reflects a strategic reset for future profitability. The company expects worldwide net sales to decline in the mid- to high teens, including an estimated $45 million impact from planned retail store closures. This anticipated top-line contraction is a deliberate outcome of optimizing the store footprint (targeting approximately 50 closures in 2025) and reducing promotional intensity, particularly in the e-commerce channel, to prioritize a full-price selling model and improve brand perception and profitability.

Despite the expected sales decline, management anticipates continued improvement in the bottom line, projecting a full year adjusted operating margin in the negative low single digits. This outlook is underpinned by the expectation of approximately $100 million in SG&A cost savings in 2025 compared to 2024, driven by workforce reductions, store closures, and the transition of smaller international markets to a distributor model. Gross margins are expected to remain strong, benefiting from the strategic shifts and ongoing cost efficiencies.

A critical factor influencing the outlook is the volatile global trade environment, particularly regarding tariffs on goods imported from China. Fossil acknowledges this risk but expresses confidence in its ability to mitigate the full impact, even if China tariff rates escalate significantly (up to 145%). This confidence stems from several strategic levers: a diverse global footprint where over 60% of revenue is generated outside the U.S., long-standing vendor relationships willing to share cost impacts, supply chain redundancy allowing for production reallocation, planned strategic price increases in late Q2 and Q3, and efforts to geodiversify production away from China. The guidance assumes no material softening of the macroeconomic environment or broader consumer demand, which remains a key risk given high inflation and potential recessionary pressures.

Strengthening the balance sheet is another core pillar of the turnaround. The company ended Q1 2025 with $100 million in total liquidity ($78 million cash, $21 million ABL availability). While cash used in operating activities increased in Q1 2025 due to working capital dynamics, the company is actively pursuing initiatives to improve working capital and monetize non-core assets, such as the planned sale-leaseback of its German distribution center expected to close in Q2 2025, which should provide over $20 million in cash.

Addressing upcoming debt maturities in the third and fourth quarters of 2026 is a significant priority, with the company working with strategic advisors on refinancing options. The high level of outstanding indebtedness ($150 million Notes, $20 million Revolving Facility as of April 5, 2025) and the Revolving Facility's springing maturity feature tied to the Notes pose financial risks, potentially limiting flexibility and increasing vulnerability to downturns. The ABL Agent's discretion to impose reserves, as seen with the additional $5 million restructuring reserve in May 2025, and the fixed charge coverage ratio covenant (if triggered) can also constrain borrowing capacity.

Beyond financial risks, operational challenges include managing inventory levels in a cautious wholesale environment and potential disruptions from world conflicts or data security breaches. The concentration of cash holdings in foreign subsidiaries also presents a potential liquidity risk if funds are needed in the U.S. and repatriation is restricted.

Conclusion

Fossil Group is in the midst of a critical transformation, moving decisively to streamline its operations, focus on its core strengths in traditional watches and key brands, and improve its financial health. The Q1 2025 results provide early validation that the Turnaround Plan is gaining traction, particularly in expanding gross margins and reducing operating expenses, leading to a return to adjusted operating profitability. While the path ahead involves a strategic top-line reset and navigating significant macroeconomic and tariff-related uncertainties, management has outlined clear initiatives and expressed confidence in mitigating potential headwinds and addressing debt maturities.

The investment thesis hinges on the successful execution of this turnaround – achieving the targeted cost savings, sustaining gross margin improvements, effectively managing liquidity and refinancing debt, and stabilizing the core business amidst a challenging consumer environment and intense competition. Investors will need to closely monitor the company's progress against its 2025 guidance and the longer-term targets of achieving adjusted operating profitability in 2026 and mid-single-digit adjusted operating margins and positive free cash flow by 2027. The company's ability to leverage its brand equity, distribution network, and design innovation, while effectively managing costs and debt, will be key to unlocking long-term value.