Fossil posts Q2 sales drop of 13 percent, lowers outlook

Fossil Group, Inc. reported second quarter worldwide net sales totalled 322 million dollars, decreasing 13 percent.

The company is downgrading its guidance for the full year 2023 to reflect results from the second quarter, continued declines in the wholesale channels in the Americas and Europe and a more gradual sales recovery in China than previously estimated.

Fossil expands Transform and Grow Plan The company is expanding its previously announced Transform and Grow Plan (TAG Plan), which has now expanded beyond operating expense reductions to include gross margin improvements.

The expanded TAG Plan is expected to generate approximately 300 million dollars of annualised operating income benefits by the end of 2025. In connection with the plan, the company expects to incur charges of approximately 35 million dollars in 2023, and approximately 100 million dollars to 120 million dollars over the duration of the program.

With these measures, the goal is to achieve adjusted gross margins in the low to mid 50 percent range and adjusted operating margins of approximately 10 percent.

Commenting on the development, Kosta Kartsotis, the company’s chairman and CEO, stated: “By expanding our Transform and Grow Plan, we are taking bold and significant steps to reshape our business and financial model. Partnering with Alvarez & Marsal, a leading consulting firm, has brought additional insights and enabled a broader and more comprehensive review of our business. As a result, we have tripled the size of our original program to 300 million dollars in annualised benefits by 2025.”

Review of Fossil’s Q2 results

The company said in a statement that Fossil brand sales grew slightly in traditional watches, more than offset by declines in smartwatches and leathers, resulting in a total brand sales decline of 8 percent in constant currency.

The company’s net sales, in constant currency, declined 19 percent in Europe, 13 percent in Americas and 5 percent in Asia versus the same quarter last year.

Wholesale sales decreased 19 percent while direct to consumer sales declined 4 percent on a constant currency basis. Within the direct to consumer channels, comparable retail sales grew 3 percent. Traditional watch sales declined 8 percent in constant currency, primarily due to declines in the Americas and Europe.

Smartwatch sales decreased 46 percent reflecting lower consumer demand across geographies and channels and our deemphasis of the category as compared to the prior year period.

The leathers category decreased 6 percent and jewellery sales declined 19 percent in constant currency during the second quarter.

Fossil’s operating performance in Q2

Operating loss for the quarter was 35 million dollars compared to 11 million dollars a year ago. Adjusted operating loss reached 28 million dollars compared to 8 million dollars last year.

Gross profit totaled 156.7 million dollars, while gross margin decreased 290 basis points to 48.7 percent. Loss before income taxes was 33.5 million dollars, adjusted EBITDA was 15.4 million dollars or 4.8 percent.

The company added that net loss expanded to 26.5 million dollars with net loss per diluted share of 51 cents, while adjusted net loss reached 20.4 million dollars with adjusted net loss per diluted share of 40 cents.

Fossil updates 2023 outlook

For fiscal year 2023, Fossil now expects worldwide net sales declines of approximately 5 percent to 10 percent versus prior guidance of net sales declines of 5 percent to growth of 1 percent.

The Company now expects adjusted operating margin to be negative 2 percent to negative 4 percent of net sales, down from prior guidance of flat to 3 percent.