Fossil Group, Inc. (NASDAQ:FOSL) Q1 2024 Earnings Call Transcript

Fossil Group, Inc. (NASDAQ:FOSL) Q1 2024 Earnings Call Transcript May 8, 2024

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Operator: Good afternoon, ladies and gentlemen, and welcome to the Fossil Group First Quarter 2024 Earnings Call. At this time, all parties are in a listen-only mode. This conference call is being recorded and may not be reproduced in whole or in part without written permission from the Company. Now I’ll turn the call over to Christine Greany of The Blueshirt Group to begin.

Christine Greany: Hello, everyone, and thank you for joining us. With us today on the call Jeff Boyer, Interim CEO; and Sunil Doshi, Chief Financial Officer. I would like to remind you that information made available during this conference call contains forward-looking information, and actual results could differ materially from those that will be discussed during this call. Fossil Group’s policy on forward-looking statements and additional information concerning a number of factors that could cause actual results to differ materially from such statements is readily available in the Company’s Form 8-K, 10-Q and 10-K reports filed with the SEC. In addition, Fossil assumes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

During today’s call, we will refer to constant currency results. Please note that you can find a reconciliation of actual results to constant currency results and other information regarding non-GAAP financial measures discussed on this call in Fossil’s earnings release, which was filed today on Form 8-K and is available in the Investors section of fossilgroup.com. Now I’ll turn the call over to Jeff to begin.

Jeff Boyer: Good afternoon, everyone, and thank you for joining us. As we reported earlier today, we delivered first quarter net sales and operating margin in line with our expectations. As we continue to navigate challenging top line trends, our ability to drive gross margin expansion and reduced costs, enabled us to narrow our operating loss and improve our free cash flow from a year ago. Benefits from our Transform & Grow Plan are at the core of our improved gross margin and our reduction in operating costs, execution of the broad-based program, which spans seven work streams started in 2023. P&L benefits were realized starting last year and are expected to accelerate meaningfully in ’24 and carry into ’25. About half of the work streams in TAG are designed to structurally improve our gross margins.

First quarter gross margin was up 300 basis points versus last year and reflects benefits from the exit of our smartwatch category improved product margins in our core categories and lower freight costs. Our work streams on product sourcing and supply chain are expected to generate benefits in the latter part of 2024, enabling us to deliver year-over-year improvement in gross margin. Importantly, our TAG initiatives have us on track to historical gross margin levels in the mid-50s over the next two years. The balance of our TAG work streams are focused on taking costs out of our expense structure with the goal of: a, recalibrating our operating model for greater efficiency and lower fixed costs; b, driving savings in our procurement practices; and c, optimizing our direct channel operating costs.

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Q&A Session

Our Q1 operating expenses declined 20% compared to a year ago reflecting savings across headcount, labor and services, which were initiated in 2023. We anticipate that our initiatives will continue to generate year-over-year OpEx declines in the remaining quarters of 2024. Notwithstanding the progress we made across all the work streams in TAG, our sales remained under pressure, and we are working urgently to stabilize the trend line. Broadly speaking, we see three major themes playing out in our revenue base, which we anticipate will continue throughout 2024. First, about half of our revenue base is beginning to stabilize. Performance in the following areas of the business was approximately flat to last year in Q1, Fossil traditional watches and jewelry globally on a comp basis — India, which overall remains a solid market for us.

Our value brands sold through value channels like general merchandisers and off-price and our higher-priced products that are sold through more premium specialty channels. Let me provide some color on those. From a macro perspective, we see consumers generally favoring value. Wholesale customers are leaning into value products as sellout remains reasonable in this price tier. At the same time, sell in and sell out of more premium-priced products have also shown durability. The Indian market, where we’ve invested significantly over the years continues to grow with our marketing and brand building investments across Fossil cores Armani Exchange. Lastly, we continue to see improvement in our Fossil traditional watch business fueled by our digital strategies and capabilities, broad distribution and investments in marketing and products.

Over the past several quarters, Fossil traditional watch, which is among our largest categories, has been one of our most stable. The second theme an offset in the stable quarter, I just described, is persistent challenges in two other parts of our business, our licensed fashion watch brands and our leathers category. Collectively, these two areas comprise over 40% of our revenue and were down about 30% in Q1. In the U.S. and Europe, our most recent industry data highlights that fashion watch is contracted in the mid-price category in the wholesale channel. Additionally, greater trend continues to be down high double digits as economic challenges are impacting consumer demand in the category. We anticipate these headwinds will continue in 2024 and we’ve reflected that in our revenue outlook.

Looking longer term, we expect this segment of the traditional watch business to stabilize and rebound behind the repositioning efforts of our major licensed brands. Lastly, as we previously communicated, we’ve been closing low to negative profit contribution retail stores at lease exploration and have exited the smartwatch category. While these delivered actions create a headwind to sales in 2024, they are operating income accretive. On our year-end earnings call in March, we outlined four near-term priorities critical to driving our turnaround. As a reminder, those include advancing our TAG plan, strengthen our balance sheet, stabilizing our business and conducting a strategic review. Let me update you on each of these areas. Our first priority is the sharp execution of our Transform & Grow Plan.

As we’ve previously shared with you, TAG is a comprehensive restructuring program across nearly all elements of our operations. The organization has been hard at work across seven work streams and the program is driving material results into the P&L in 2024. The headline here is that we’re on track to achieve $100 million of annualized benefits in 2024 in addition to last year’s $125 million. On the gross margin side, the largest source of value is expected to come through our product sourcing and supply chains beginning in the second half of the year. As I mentioned earlier, we’ve also started to realize benefits from SKU rationalization as well as pricing and promotional initiatives. Actions to simplify our organization in 2023 translated to a significant reduction in operating expenses in Q1 and will continue to benefit SG&A throughout 2024.

We executed meaningful workforce reductions in ’23, which are driving benefits into the P&L this year. The leadership and resiliency of our teams through these changes has been strong and very much appreciated. Within our TAG plan, we are also tackling the cost of service providers through a significant number of RFPs and are in the process of driving cost reductions through efficiencies in our labor models across both stores and concessions. We have accomplished much under our current TAG program, we are identifying additional operating model efficiencies and expect to go after incremental opportunities across channels, categories and geographies. Turning to our second priority. We’re making progress towards strengthening the balance sheet and improving our liquidity position.

During the first quarter, we had minimal cash usage. And as expected, we received a U.S. tax refund of $57 million in mid-April derived from provisions within the CARES Act, which provides us an important source of incremental cash to execute our plans in 2024. Additionally, we’re continuing to pursue asset monetization opportunities, including the sale of real estate in Europe, which we estimate could yield about $10 million to $15 million in net cash proceeds by the end of this year. With these actions and through continued disciplined management of working capital, we expect to be free cash flow positive in fiscal year 2024. Next, we are taking aggressive actions to stabilize the business. We will continue to pivot resources and capital into segments of our business that were more stable and have room to grow.

As I mentioned, this includes investing behind fossil traditional watches and jewelry, [India] our value brands and our premium price brands. We’re also working closely with our licensors to manage contraction in our fashion brands [amidst] category declines in these price points brand transitions and challenging macro conditions in large markets like China. We are managing these brand contractions by protecting the price and margin architecture in our category for the long-term health of our business. Though we’re seeing some bright spots from new product introductions, merchandising initiatives and emerging markets, they are not yet significant enough to offset the broader category and brand challenges in our major markets. Finally, while our strategic actions create a top line headwind, we will continue to optimize our store portfolio and should be nearly fully out of the smartwatch business by the end of Q2.