Q4 2024 Fossil Group Inc Earnings Call

Thomson Reuters StreetEvents

Thu, Mar 13, 2025, 4:50 AM 15 min read

Participants

Christine Greany; Blueshirt Group LLC, Managing Director; Fossil Group Inc

Franco Fogliato; Chief Executive Officer, Director; Fossil Group Inc

Andrew Skobe; Interim Chief Financial Officer; Fossil Group Inc

Presentation

Operator

Good afternoon ladies and gentlemen, and welcome to the Fossil Group fourth quarter and full year 2024 earnings call.
(Operator Instructions)
This conference calls being recorded and may not be reproduced in whole or in part without written permission from the company.
Now, I'll turn to call over to Christine Greany of The Blueshirt Group to begin.

Christine Greany

Hello, everyone, and thank you for joining us.
With me on the call today is Franco Fogliato, Chief Executive Officer; and Andrew Skobe, Interim Chief Financial Officer.
Before we begin, 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, 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 as well as certain non-GAAP financial measures. Please note that you can find a reconciliation of actual results to constant currency results and other information regarding non-gap 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 on fossilgroup.com.
There you will also find a supplemental presentation which outlines our Q4 results, turnaround plan and outlook.
With that, I'll now turn the call over to Franco.

Franco Fogliato

We are pleased to have concluded the year with fourth quarter results that exceed our top and bottom line guidance, as our early initiatives have already started to gain traction.
Most notably, we extended gross margins, reduced cost, and delivered positive adjusted operating margins. I'm incredibly grateful to our global teams for their hard work and dedication to Fossil.
During my first six months in the CEO, we moved swiftly and took a number of pivotal actions to set up the business for long term success while formulating a comprehensive turnaround plan.
We're clear eyed about the amount of work required to execute this tournament, and we are energized by the opportunity in front of us. We have tremendous optimism and confidence in our ability to propel the business forward, fueled by our core foundational assets, iconic brands, innovative design, global reach, and talented teams.
Fossil has a meaningful 40 year history of making watches accessible to consumers around the globe. We have a unique design, manufacturing, and selling capabilities worldwide in the Americas, Europe, and Asia.
Our strong brand equity is also reflected in our global industry rankings. Time Magazine ranked Fossil number four in 2024 in the global watch market and more recently in late February. Our Fossil watching was awarded the fashion jewel of the Year 2025 at the Norgenta trade show in Germany.
Our plans reflect the op opportunity we see to unleash these assets and optimize them more effectively. We have moved quickly to implement change and create a path for the country to return to profitable growth.
We have introduced a turnaround plan centered on three primary pillars refocusing on our core, right sizing our cost structure and strengthening our balance sheet. Diving into our first turnaround pillar in focusing on our core.
This start with building an operating model that is brand led and consumer focused. We are returning to our core with a renewed emphasis on traditional watches on our Fossil brand platform as well as our go to market execution.
We are well on the way of four major initiatives. Launching a new Fossil brand platform, leveraging our core licensed brands, including Armani, courses and diesel. Optimizing our global wholesale footprint and driving channel profitability.
Number one is bringing a new Fossil brand platform to life, which we are executing with both strategic and tactical moves. Last month, we went live with a new website which reflects an elevated product platform focused on watches and innovation.
We will also be leveraging the unique skills and competency at our innovation labs in Dallas, BM, Switzerland, and Hong Kong to develop and deliver exciting new products. In the coming months, we will be emphasizing heritage brand storytelling across all business dimensions.
This will be visible to consumer beginning this summer with the launch of an extensive omnichannel campaign featuring Fossil brand celebrity ambassador Nick Jonas. The campaign is part of our broader strategy to double down on a funnel tactics to reintroduce the Fossil brand to new and existing consumer.
As our new Fossil brand platform evolves, we believe there will be an opportunity to extend our pricing architecture, enabling us to extend our reach and further strengthen our position in the traditional watch market.
Turning to our sacre initiative, leveraging our core licensed brands, we have already made excellent progress. Last month, we announced the extension of our license agreement for Micro Corps. This partnership goes back 20 years and is very important to Fossil Group.
We look forward to growing our course watch and July business together in the coming years as their company continues to drive the brand turnout. Next, we have made progress towards achieving minimal royalty reduction with some of our long time licensed brand partners, who we continue to prioritize.
Lastly, we are reintegrating the in-store presentation for our licensed brands within the wholesale channel. This includes greater investment in point of sales and in-store presentation, and a renewed focus on the specialty watch channel.
Optimizing our global footprint is the third key initiative under our pillar to refocus on our core. We are prioritizing scalable markets, which included the US, Germany, France and India. These are among our most important geographies where we have a strong presence and a significant brand awareness.
In parallel with our focus on these markets, we have made the strategic decision to transition smaller international geographies within Europe and Asia to a distributor model. This will allow us to build a more competitive and profitable model in key markets.
Leveraging the local knowledge and regional expertise of distributors will enable us to lower our operating expenses, enable strong flow of gross profit to the bottom line, and positioning us to drive long term and scalable growth.
Thus far, we have transitioned five countries Denmark, Finland, Norway, Poland and Sweden and expected to transition additional markets this year. The final initiative to help to refocus on our core is driving channel profitability.
We are deploying a two-pronged approach, which includes prioritizing the W channel and transforming our direct to consumer business model.
Starting with the wholesale, we're working to improve our in-store presence through enhanced visa merchandizing, point of sale displays, and sales education designed to increase the visibility of our brands, improve ease of purchase and drive conversion.
Another critical component of our strategy is to become increasingly less promotional in our D2C channels. Our initial action in Q4 have already started to bear free, translating to an improving gross margin profile across all channels.
We believe this will also help to bolster our relationships with our partners around the globe. Looking at our direct to consumer business, we believe there is a significant opportunity to strengthen our model, becoming smaller but much more profitable.
This starts with delivering a seamless omnichannel experience in creating platforms for personalized journeys that drive a strong consumer engagement across e-commerce and retail stores.
As I just mentioned, we reduced our income promotion and activity in Q4. In addition to improving our gross margin performance. This also resulted in higher quality traffic to our website and increased EUR, which has continued in Q1 2025.
While this tactic is expected to create a near term headwinds to sur, we anticipate it will drive more profitable growth over the long term.
From a retail store perspective, we aim to strengthen execution by emphasizing traditional watches, highlighting personalization, upgrading our store operating model, and optimizing our fleet with the expected closure of approximately 50 stores in 2025.
Moving now to our second turnaround pillar, why sizing the cost structure. As we noted in today's press release, we made the decision to conclude our TA program in 2024 which generated approximately $280 million of annualized P&L benefits across gross margin and SG&A over a two year period.
We are now taking action to further align our cost structure to the newly defined strategy, scope and scales we are outlining today.
In 2025, we expect to capture SG&A savings of approximately $100 million compared to 2024 to a series of initiatives. This includes a corporate workforce reduction, which occurred in late February, the reduced costs associated with the transition of smaller international markets to a distributor model, and the closing of approximately 50 Fossil retail stores.
We also expected to divest certain non-core assets and will seek to identify additional cost reduction opportunities which may generate incremental savings this year.
Wrapping up with our turnaround pillar, strengthening the balance sheet. We ended the year with $177 million of liquidity, which provides us with a runway to execute the plans we are outlining today.
We're actively working towards monetizing non-core assets and what avenues that will allow us to improve working capital and strengthen liquidity. At the same time, we continue working with our advisor to address our upcoming debt debt maturities.
We're pleased that the initial action under our turnaround plan are already beginning to take hold and generate tangible results. There are five major areas of improvement today I want to light.
First, we achieve adjusted operating profitability in Q4 and deliver results ahead of expectations. Second, in Q4, we saw improving performance in our US wholesale business, which has continued into 2025.
Next, we brought down promotional levels, which is translating to a higher gross margin profile. In Q4, gross margins expanded at 630 basis points versus the prior year to 53.9%. Additionally, we moved swiftly to transition selecting international markets to a more profitable distributor model.
Signing agreements for five countries thus far and positioning us to deliver long term and scalable growth in those geographies. Lastly, we brought in a celebrity ambassador with an incredibly high profile and deep cultural relevance.
We believe that our partnership with Nick Jonas in the campaign we are launching the second half of this year has the potential to really move the needle for the Fossil brand. We are standing a powerful leadership bench. Last month we appointed Joe Martin as our new Chief Commercial Officer to lead our global sales effort.
And ensure consistency across across branded regions. The creation of this role is part of a broader organizational redesign to help us execute our brand led and consumer focused strategy. We also announced the appointment of Antonio Carriro as Chief Digital Information Officer and general manager of the EMEA region.
Antonio's background in digital and deep knowledge of the watch market would be strong efforts to drive an omnichannel experience and strengthening the customer journey. Running out our team is Randy Gribbin, highly seasoned finance executive who we just announced today as our incoming CFO.
I'm incredibly proud of our teams throughout the organization. We've been working fast and furious to generate these results and lay the groundwork for a return to profitable growth. The path to get there is clear.
In 2025, we will be resetting the top line predominantly driven by store closure and lower levels of promotional activity. However, we anticipate that our cost actions, ongoing expense control, and improved gross margin will enable us to narrow our adjusted operating laws on a full year basis versus 2024.
We believe the new business model we are outlining today will set us up to return to profitable growth in the coming years. In 2026, we expected to be adjusted operating profitable on a smaller sales base.
For the full year in 2027, we expected the business to generate a mid single digit adjusted operating margin in positive free cash flow on a worldwide net sales base of more than EUR 800 million. We are committed to the journey ahead and have a strong commission that our 21 plan will allow us to build long term shareholder value.
We greatly appreciated the support of all of our stakeholders and look forward to keeping you update on our progress.
Now I will turn to the call to Andy review the fourth quarter financial results and provide a more detailed discussion of our financial guidance.

Andrew Skobe

Thank you, Franco. Good afternoon, everyone.
We concluded the year with positive adjusted operating income in Q4 despite a year over year sales decline. This performance reflects our ability to strengthen our gross margin profile and maintain strict cost control.
Fourth quarter net sales totaled $342 million, down 18% in constant currency. 600 basis points of the decline is attributable to our smartwatch exit and store closures. During the quarter, our Fossil traditional watch business increased 2% globally versus the prior year, excluding store closures.
Notably, this positive performance during the holiday season enabled our US boat sale partners to enter 2025 with healthy inventory positions. In fact, after narrowing our sales decline in the US, Post sale during Q4, the channel continues showing signs of improvement in 2025.
Gross margin expanded by 630 basis points compared to last year, coming in at 53.9%. Gross margin included restructuring charges of approximately $8 million or 220 basis points related to the closure of our Swiss manufacturing operations.
Excluding these costs, gross margin increased by 850 basis points. The year over year increase primarily reflects increased product margins in our core categories driven by improved product costing, our exit for connected watches, and reduced promotional activities in our e-commerce business.
SGNA expenses were down $35 million to $172 million compared to last year, representing a 17% decrease from our cost takeout actions. The year over year reductions are attributable to low store operating costs and fewer stores, lower compensation and administrative expenses, and a planned decrease in marketing spend versus the prior year.
During Q4, we closed six stores ending the year with 248 stores, 18% reduction compared to 2023. All of these closures occurred at natural lease expiration with very minimal closing costs.
Turning now to the bottom line, our focus on gross margin expansion and cost reduction enabled us to deliver fourth quarter adjusted operating income of $20 million compared to a loss of $8 million a year ago. This strength translated to a Q4 adjusted operating margin of 6%.
Moving to the balance sheet, we ended the year with total liquidity of $177 million including $124 million in cash and cash equivalents, and $53 million of availability under our revolving credit facility.
Inventory levels decreased by 29% compared to a year ago, which aligns with our expectations. The business generated positive free cash flow of $30 million primarily reflecting the reduction in inventory.
As we execute the turnaround plan that Franco outlined, we are working to strengthen the balance sheet and increase liquidity in 2025. In parallel, we are pursuing non-core asset sales and opportunities to achieve incremental expense savings while also continuing to work with our advisors on our previously announced strategic business review.
Turning out the guidance for the full year of 2025, we expect worldwide net sales to decline in the mid to high teens. This includes an expected impact from store closures of approximately $45 million or 4 percentage points.
We also anticipate an impact to sales from our reduced promotional levels, particularly in our own econ channel. Of note, this guidance excludes impacts from changes to foreign currency exchange rates, potential asset sales, or further softening of the macro environment.
As we think about the cadence of sales, we anticipate our initiatives will gain increasing traction and enable us to narrow our year over year sales decline as we move through the year.
Looking at gross margin. As we focus on driving full price selling model, we expect to see continued improvement in gross margin versus full year 2024. Additionally, in the first half of the year, we expect to see flow through from our annualized benefits of our sourcing initiatives. From a tariff point of view based on what we know today in the scenario planning, we do not anticipate a material gross margin impact.
As Franco mentioned, we are taking actions this year that are expected to generate approximately $100 million of SG&A expense savings in 2025 versus 2024. Three factors are driving the savings. First, we implemented a corporate reduction in force last month.
Next, we expect to continue to rationalize the store portfolio with plans to close approximately 50 stores in 2025. And third, we transition five international markets to a distributor model which brings our operating costs in those markets near zero.
The expected savings do not contemplate additional international regions that may be transitioned to a distributor model in 2025 or the potential sale of non-floor assets. We anticipate these factors will enable us to deliver a full year adjusted operating margin in the negative low single digits.
We appreciate your time this afternoon and we'll be available for follow-up calls.
Now I'll turn the call back to Franco for closing comments.

Franco Fogliato

Thank you, Andy.
I would also like to take the opportunity to thank you for the value you have added during your interim time with the organization and wish you the best going forward.
I'm inspired by our teams who are demonstrating tremendous dedication to Fossil, a commitment to turning around this business. We are all energized by the op opportunity in front of us and look forward to keeping you updated on our progress throughout the year as we strive to build lasting value for our shareholders.

Operator

This concludes today's call. Thank you for joining. You may now disconnect.

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