Fossil’s Third Quarter 2019 Financial Report Shows Sales Decline, Outlines Way Forward
In its financial results for the fiscal third quarter that ended September 28, Fossil Group, Inc. (PPAI 196495, S8) reports worldwide net sales of $539.5 million, down $69.3 million or 11 percent—down $58.9 million in constant currency for a 10 percent decline—compared to the third quarter of fiscal 2018. It notes that the slip in third quarter worldwide net sales versus the prior year was primarily due to negative currency effects, store closures and business exits, lower inventory liquidation levels and a reduction of sales in the lower margin off-price channel.
“For the third quarter, sales performance was in line with our guidance range with sales improving sequentially from the second quarter across most geographies and all categories,” says Kosta Kartsotis, chairman and CEO. “The quarter also saw progress on key initiatives, including double-digit growth in Asia, strong global e-commerce expansion driven by double-digit online watch category growth, and robust performance from our Generation 5 connected watches. Our overall sales performance, however, was not up to our goals, and we are highly focused on bringing about a positive change in our top-line trajectory. In addition, we continue to reduce our overall cost structure in order to improve profitability and expand our capacity to invest in high growth areas.”
Kartsotis adds, “We continue to bring exciting new innovations to the market across traditional and connected watch categories, while also accelerating our investments in digital. We believe these actions will help our current sales trends. We also expect to realize increased efficiencies from our New World Fossil 2.0 Transform to Grow initiative. That said, we recognize these programs will take time. We remain confident in our strategy and believe we have the right team, operating platform and balance sheet strength to achieve sustained long-term profitable growth and deliver increased value for our stakeholders.”
Fossil’s report attributes a decline of 18 percent in the third quarter in the Americas region and 16 percent in Europe to headwinds in the wholesale channel. These declines were partially offset by performance in the Asia region where sales grew nine percent, or 11 percent in constant currency, driven by strong watch category and e-commerce channel performance in mainland China, India and South Korea. Watches declined in the Americas and Europe and increased in Asia.
Fossil says that during the third quarter of fiscal 2019, gross margin decreased 200 basis points to 51.6 percent and points to increased inventory valuation adjustments, an unfavorable currency impact of approximately 90 basis points and factory cost absorption on lower sales volumes as the primary driver of the change. Additionally, a change in certain customer relationships in India occurred in the quarter which resulted in costs that were previously recorded within operating expenses now being recorded to product costs. These unfavorable impacts were offset by a decrease in off-price sales mix with improved margins, benefits generated by the company's New World Fossil margin improvement initiatives and favorable region and product mix from higher margin sales in Asia.
The company reports third quarter operating expenses of $287.7 million, including $7 million in restructuring costs primarily related to employee costs and professional services and $16.6 million in non-cash intangible asset impairment charges. The prior fiscal year third quarter operating expenses included $6.1 million of restructuring costs. Selling, general and administrative expenses decreased $33.7 million as compared to the third quarter of fiscal 2018 primarily as a result of store closures since the third quarter of last year, corporate and regional infrastructure reductions driven by the NWF initiatives and the currency effects of a stronger dollar.
Operating income for the third quarter of fiscal 2019 was a loss of $9.2 million, as compared to $22.7 million in the third quarter of fiscal 2018. This decrease was driven by lower sales and gross profit margin, non-cash intangible asset impairment charges and a $6.1 million unfavorable impact from currency changes, partially offset by reduced operating expenses. Also during the quarter, interest expense decreased $2.5 million to $7.4 million. Income tax expenses were $6.9 million in the third quarter of fiscal 2019 and included an unfavorable impact from the GILTI provision of the Tax Cuts and Jobs Act and the recognition of deferred tax asset valuation allowances. Fossil’s net income for the third quarter of fiscal 2019 represented a loss of $25.9 million compared to $5 million for the third quarter of fiscal 2018.
The company reports that over the next several years, it will continue to transform its business model to address changes in consumer behaviors and their purchases of traditional watches and connected devices, as well as jewelry and leathers. During this transformation project, Fossil believes the following operating metrics are the most appropriate performance measures: net sales, gross margin, operating expenses, operating margin, other income (expense), interest expense, and income (loss) before income taxes.