Fossil Group, Inc. Reports First Quarter 2022 Financial Results

First Quarter Highlights

• First quarter worldwide net sales increased to $376 million, up 4% on a reported basis and 6% in constant currency, led by constant currency sales growth of 20% and 6% in the Europe and Americas regions, respectively.
• Net sales for traditional watches grew 10% in constant currency, with 22% and 20% growth in the Americas and Europe regions, respectively.
• Operating loss of $14 million compared to $17 million a year ago. Adjusted operating loss of $11 million compared to $5 million last year.
• During the first quarter of fiscal 2022, the Company invested $10 million in repurchasing 989,000 shares of the Company’s common stock at an average price of $10.11 per share.

“We are pleased to deliver strong first quarter revenue performance amidst an increasingly challenging macro environment,” said Kosta Kartsotis, Chairman and CEO. “Results were highlighted by notable strength in the U.S. and Europe, as well as continued momentum in traditional watches and jewelry.”

“As the quarter progressed, external headwinds intensified, marked by the onset of the Ukraine crisis, Covid lockdowns in China and global inflationary pressures. While our teams are continuing to execute well amidst the fluid macro environment, we are adopting a more conservative near-term outlook to reflect these transitory factors that are affecting our international business, as well as the impact of a strengthening U.S. dollar. Importantly, we remain confident that our digitally-led, omni-channel model will support long-term growth and profitability, enabling us to build meaningful value for our shareholders in the years ahead.”

First Quarter 2022 Operating Results

Amounts referred to as “adjusted” as well as “constant currency” are non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to their closest reported GAAP measures are included at the end of this press release.

• Net sales totaled $375.9 million, an increase of 4% on a reported basis and 6% in constant currency compared to $363.0 million in the first quarter of fiscal 2021. Net sales, in constant currency, grew 20% in Europe and 6% in the Americas while decreasing 10% in Asia versus the same quarter last year. Traditional watch sales grew 10% in constant currency in the first quarter compared to the prior year period. Net sales in smartwatches decreased 26% in constant currency largely driven by the Americas as compared to the prior year period which included the launch of LTE product and older generation product liquidation. Total digital sales were down 17% vs the prior year period and reflected 34% of our sales mix compared to 43% in the prior year period. Lower digital sales were primarily due to COVID driven lockdowns in mainland China and traffic shifts from owned e-commerce to brick and mortar distribution.
• Gross profit totaled $184.3 million compared to $182.6 million in the first quarter of 2021. Gross margin decreased 130 basis points to 49.0% versus 50.3% a year ago and primarily reflected increased freight and duty costs of approximately 180 basis points and unfavorable regional mix. These costs were partially offset by decreased promotional activity and reduced smartwatch product liquidation.
• Operating expenses totaled $198.6 million compared to $199.4 million a year ago. As a percentage of net sales, operating expenses were 52.8% in the first quarter of 2022 compared to 54.9% in the prior year first quarter. Selling, general and administrative (“SG&A”) expenses were $195.7 million compared to $187.4 million in the first quarter of 2021. As a percentage of net sales, SG&A expenses were 52.1% in the first quarter of 2022 compared to 51.6% in the prior year first quarter, largely driven by increased labor costs and investments in our strategic initiatives which were only partially offset by reduced store costs associated with a lower store count.
• Operating loss was $14.3 million compared to $16.8 million in the first quarter of 2021. Operating margin was (3.8)% in the first quarter of 2022 compared to (4.6)% in the prior year first quarter. Adjusted operating loss totaled $11.4 million compared to $4.8 million in the first quarter of 2021. Adjusted operating margin was (3.0)% in the first quarter of 2022 compared to (1.3)% in the prior year first quarter.
• Interest expense decreased to $4.0 million compared to $7.3 million in the first quarter of 2021, primarily driven by reduced debt issuance costs amortization and a lower debt balance.
• Other income (expense) was income of $1.6 million compared to income of $1.9 million in the first quarter of 2021.
• Income (loss) before income taxes was $(16.7) million compared to $(22.2) million in the first quarter of 2021.
• Adjusted EBITDA was $(1.7) million, or (0.5)% of net sales in the first quarter of 2022 and $7.5 million, or 2.1% in the prior year period.
• Net loss totaled $21.5 million with net loss per diluted share of $0.41, which compares to a net loss of $24.4 million and net loss per diluted share of $0.47 in the prior year period. Adjusted net loss for the first quarter was $19.3 million with adjusted loss per diluted share of $0.37 compared to adjusted net loss of $14.9 million with adjusted loss per diluted share of $0.29 in the prior year period. During the first quarter of 2022, currencies unfavorably affected loss per diluted share by approximately $0.02.

Balance Sheet Summary

As of April 2, 2022, the Company had cash and cash equivalents of $163 million. Inventories at the end of the first quarter of 2022 totaled $386 million, an increase of 20% versus a year ago. Total debt was $184 million.

During the first quarter of fiscal 2022, the Company invested $10.0 million in repurchasing 989,000 shares of the Company’s common stock at an average price of $10.11 per share. As of April 2, 2022 the Company had remaining authority to repurchase $20.0 million of its common stock.

Outlook

The Company is updating its guidance for full year 2022 to reflect the current estimated impact of foreign currency translation, as well as COVID-19-related restrictions in China and geopolitical uncertainty in Europe on its international business.

For fiscal year 2022, the Company now expects worldwide net sales growth of approximately flat to 3% versus prior guidance of 2% to 6%. This updated guidance includes an estimated foreign currency negative impact of 350 basis points, which compares to our prior estimate of 250 basis points for the full year. The Company anticipates that the impact of foreign currency translation will be most acute in the second and third quarters, with an estimated negative impact to net sales of 500 basis points. Updated net sales guidance for 2022 also includes an estimated impact of 150 basis points due to slowed revenue growth, primarily in our international markets.

The Company is reducing adjusted operating margin(1) guidance by 50 basis points for the full year and now expects adjusted operating margin of 5.5% to 6.5% compared to prior guidance of 6.0% to 7.0%.

(1) A reconciliation of adjusted operating margin, a non-GAAP financial measure, to a corresponding GAAP measure is not available on a forward-looking basis without unreasonable efforts due to the high variability and low visibility of certain income and expense items that are excluded in calculating adjusted operating margin.

Constant Currency Financial Information

The following table presents the Company’s business segment and product net sales on a constant currency basis which are non-GAAP financial measures. To calculate net sales on a constant currency basis, net sales for the current fiscal year period for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average rates during the comparable period of the prior fiscal year. The Company presents constant currency information to provide investors with a basis to evaluate how its 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.

Adjusted EBITDA, Adjusted operating income (loss), Adjusted net income (loss) and Adjusted earnings (loss) per share

Adjusted EBITDA, Adjusted operating income (loss), Adjusted net income (loss) and Adjusted earnings (loss) per share are non-GAAP financial measures. We define Adjusted EBITDA as our net income (loss) before the impact of income tax expense (benefit), 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 (loss) per share as net income (loss) attributable to Fossil Group, Inc. and diluted earnings (loss) 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 (loss) 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 both 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 (loss) 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 (loss) per share are not intended to be used as alternatives to any measure of our performance in accordance with GAAP.

The following tables reconcile Adjusted EBITDA to the most directly comparable GAAP financial measure, which is income (loss) before income taxes. Certain line items presented in the tables below, when aggregated, may not foot due to rounding.

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.