Fossil Group Reports Narrowed Losses in Q3 2024 Amid Continued Revenue Challenges

For the third quarter of 2024, Fossil Group, Inc. (FOSL) faced an adjusted net loss per share of 51 cents. This is an improvement over the adjusted loss of 93 cents per share reported in the same period last year.

Total revenues reached $287.8 million, a 16.4% decline from $344.1 million a year earlier. Factors contributing to this drop include weak sales across multiple product categories and channels, alongside strategic decisions like exiting the smartwatch market and closing certain retail locations. These changes negatively impacted revenues by six percentage points.

The quarterly results reflect a mix of both reductions in revenue and improvements in operational efficiencies. While sales fell, Fossil experienced an increase in gross margin, largely due to initiatives from the Transform and Grow (TAG) Plan. This plan also effectively reduced selling, general, and administrative expenses, which fell by 16% from the previous year because of decreased compensation and other cost-cutting efforts.

The TAG Plan aims to achieve $300 million in annualized operating income benefits by 2025, with approximately $125 million realized in 2023 and at least $100 million expected in 2024.

Key Business Metrics

Regional Sales Performance

Americas

Sales in the Americas were $121.3 million, down from $152.6 million. This reflects a 20% decline in constant currency terms, attributed to consumer weakness and challenges in various sales channels.

Europe

European sales reached $97 million, an 11% decline on a constant currency basis, following similar issues faced in the Americas.

Asia

Asia reported $69 million in sales, a 17% decrease in constant currency terms compared to Q3 2023, largely due to reduced consumer demand.

Product Category Sales

Watches

Watch sales totaled $227.2 million, down from $270 million in the same quarter of 2023. Traditional watch sales saw a 12% decline in constant currency, while smartwatch sales fell sharply as Fossil exited that category.

Leather Goods and Jewelry

Leather products and jewelry experienced declines of 28% and 10% in constant currency terms, respectively, due to overall weak demand in accessories and discretionary spending.

Financial Highlights

Gross Margin

Fossil’s gross margin improved to 49.4%, up from 47% in the prior year’s quarter. This increase is largely linked to the TAG Plan, which improved product margins by moving away from lower-margin categories like smartwatches. However, rising royalty costs slightly offset these improvements.

Operating Expenses

Operating expenses totaled $166.7 million, a decrease from $208.1 million last year, thanks to improved efficiencies from the TAG Plan.

Operating Loss

Fossil’s operating loss was $24.5 million, significantly reduced from the $46.4 million loss reported in the third quarter of 2023. The adjusted operating loss also improved, narrowing to $18.7 million from $31.1 million, thanks to successful cost-cutting measures.

Net Loss

Fossil recorded a net loss of $32 million in Q3 2024, an improvement from the $61.1 million net loss in the same quarter last year. The adjusted net loss, which excludes restructuring and impairment charges, was $27.4 million, down from an adjusted net loss of $49 million in Q3 2023.

Balance Sheet Overview (As of Sept. 28, 2024)

Fossil held cash and cash equivalents of $106.3 million, a decline from $116.1 million a year earlier. Total assets dropped significantly to $812.4 million from $1.1 billion in the previous year.

Long-term debt was recorded at $173.4 million, down from $255.9 million. Short-term debt increased to $2.3 million from $0.5 million. Shareholders’ equity also decreased sharply, falling to $161.9 million from $278.8 million as of September 30, 2023.

Management Outlook

Fossil updated its guidance for 2024, projecting net sales of approximately $1.1 billion. This forecast considers an expected negative impact of about $100 million due to the exit from the smartwatch market and store closures, along with anticipated ongoing challenges in consumer demand. The adjusted operating margin is expected to be between (6) and (8)%. Additionally, Fossil expects to see positive free cash flow for the year, boosted by approximately $57 million in tax refunds received in the second quarter of 2024.

Strategic Developments

In March 2024, Fossil announced a strategic business review. This review aims to reassess its business model and capital structure, potentially leading to additional operational changes beyond those included in the TAG Plan. Adjustments might involve further cost reductions, debt refinancing, or asset sales. The company has brought in Evercore as a financial advisor to assist with the restructuring process. These efforts are designed to better position Fossil for sustainable growth and improved financial health in a challenging retail landscape.