Fossil Group, Inc. (NASDAQ:FOSL) Q3 2023 Earnings Call Transcript

Fossil Group, Inc. (NASDAQ:FOSL) Q3 2023 Earnings Call Transcript November 9, 2023

Operator: Good afternoon, ladies and gentlemen and welcome to the Fossil Group Third Quarter 2023 Earnings Conference Call. [Operator Instructions] This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company. I will now turn the call over to Christine Greany of The Blueshirt Group to begin.

Christine Greany: Hello, everyone and thanks for joining us today. With us on the call are Kosta Kartsotis, Chairman and CEO; Jeff Boyer, Chief Operating Officer; 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 the 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, you will, excuse me – 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 Kosta to begin.

Kosta Kartsotis: Thanks, Christine. Good afternoon, everyone and thanks for joining us today. The third quarter proved more difficult than expected mostly because of headwinds in the wholesale channel in Europe and because of soft consumer spending in China. From a high level perspective, we are facing challenging category consumer and channel dynamics. While working against these headwinds, including tough macro conditions globally, we remain focused on our objectives, most notably, the execution of our Transform and Grow Plan, which we are making solid progress on. Three quarters into the TAG plan, which we announced in February, we are tracking to deliver the cost of goods and operating expense savings we previously outlined, which are expected to drive approximately $300 million in annualized operating income benefit by the end of 2025.

Year to date in 2023, we have captured approximately $80 million in annualized expense savings. Under the extended plan we announced last quarter, we are advancing our strategies to improve our sourcing practices and to further streamline roles and responsibilities across the organization. Both of these initiatives are laying the groundwork to help us generate improved operating margins in 2024. Our third quarter net sales decline of 21% primarily reflects ongoing headwinds in the wholesale channel in both the Americas and Europe and a slower than expected recovery in Greater China. The overall decline includes approximately five points of headwinds related to declines in our smartwatch business and due to store closures. Importantly, we are seeing some encouraging signs in our core FOSSIL brand where our product and marketing initiatives are bolstering our traditional watch sales, which were up 2% and up 11% in the U.S. and India, respectively.

See also 11 Best Dividend Stocks on Robinhood and 11 Best S&P 500 Stocks To Buy According to Ray Dalio’s Bridgewater Associates.

Q&A Session

To address the industry wide pressure in the wholesale channel, we have put a dedicated team in place that is focused on driving sell-through in key accounts globally. We also have a number of initiatives underway to improve performance in third-party e-commerce. We are using our increasing digital capabilities to collaborate with our largest digital accounts in order to optimize their holiday sales on our products. In our direct-to-consumer channel, our owned e-commerce platform continues to drive results with sales up 8% in the quarter. Our investments in people and technology are paying off as our teams were able to increase their capability to drive sales and margin in the channel. Overall, we are aggressively addressing the challenges impacting our business in order to improve performance.

We are taking actions to strengthen our operating model, right-size our cost structure, and to restore growth. The key pillars under our growth plan include revitalizing the FOSSIL brand, maximizing our licensed brand portfolio for watches and jewelry, and expanding our premium watch offerings. Under our FOSSIL brand revitalization strategy, we are making highly targeted investments in marketing to support our key initiatives across traditional watches, jewelry, and leathers. Over the past year, we have conducted extensive consumer insight work to better understand our target consumer. The results of this deep dive led to the successful launch of our global brand campaign in early September, which debuted with special Fashion Week events in both Paris and New York.

The campaign revealed a broad-based overhaul of creative expression across all our touch points in both traditional and digital media. Early reads tell us it’s driving more consumers into the funnel, evidenced by global traffic increases to our website in the United States and in Europe. In India our wholesale partners and end consumers also responded well to the brand’s campaign and overall positioning. More recently, we launched a FOSSIL brand collaboration with Disney in celebration of their 100th anniversary. In October, we unveiled our first release of watches, leather goods, and jewelry, including a capsule of limited-edition products made for collectors. There is more to come under this collaboration, which we’re supporting with targeted campaigns leading up to the holidays.

We are fortunate to have an experienced team and a strong partnership with Alvarez & Marsal, underpinned by a highly disciplined operational approach to execution. Together, we have laid out a clear path to reduce cost, improve efficiencies, and drive sales productivity. We have taken decisive actions in 2023 to reshape our business model and focus on our most compelling and profitable opportunities to advance our goals and drive the business forward. The revised guidance we are providing today reflects the early traction we’re gaining under TAG, offset by a soft consumer spending environment globally. Looking at 2024, we are confident that we will narrow our sales declines and leverage our TAG initiatives to drive year-over-year improvement in operating income performance.

More on this from Sunil shortly. We appreciate the dedication and hard work of our teams throughout the organization and the ongoing support of our shareholders. And we remain committed to delivering shareholder value as we continue to deliver against the benchmarks of our TAG plan. I’ll now turn the call over to Sunil to discuss the financials.

Sunil Doshi: Thanks, Kosta, and good afternoon, everyone. There are three topics I’d like to review as part of our Q3 update. First, our Q3 results were below our expectations with headwinds similar to those we shared on our Q2 call. We are updating our forecast for Q4 based on current ordering levels in wholesale and trends in our retail stores, and a slower than planned response to peak selling events in key markets like China. We are making solid progress on our Transform and Grow Plan, capturing operating expense reductions that we outlined at the beginning of the year and executing against initiatives that will drive benefits into the next couple of years. As a reminder, our Transform and Grow plan outlined a total of $300 million in annualized benefits to be realized by fiscal year 2025.

We are on track to capture $50 million of expense reductions in fiscal year 2023 and now estimate to capture $135 million to $150 million of benefits in fiscal year 2024. With that, let me step through our third-quarter results in more detail. Global sales were $344 million, down 21% or down 22% in constant currency. The impact of foreign currencies in the third quarter was a 100 basis point tailwind to sales, about 1 point lower than our prior estimates based on the strengthening dollar during the quarter. From an operating margin perspective, foreign currencies were a 10 basis point headwind. In addition, we did have approximately a $10 million or roughly 2 point headwind on our revenue results due to a timing shift from Q3 into Q4, primarily related to wholesale shipments in China.

Sales into the wholesale channel represented our biggest headwind for sales declined 25% in constant currency. Regionally, year-over-year declines in wholesale shipments into the Americas and Europe lagged their respective sell-out trends. Sales in China declined primarily due to the timing shift that I mentioned, and also reflecting a softening in underlying consumption on the primary e-commerce platforms that we operate on. Similar to last quarter, about 5 points or approximately $21 million of the Q3 sales decline can be traced to softness in our smartwatch business as well as our store rationalization initiatives. From a year-to-date perspective, these same two factors also represented about 5 points of the year over year to sales decline.