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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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| (Mark One) | | |
x☒ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the Fiscal Year Ended | December 30, 20172023 |
| OR |
¨☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to |
Commission File Number 0-19848001-41040
FOSSIL GROUP, INC.
(Exact name of registrant as specified in its charter)
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| Delaware | | 75-2018505 |
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Delaware
(State or other jurisdiction of
incorporation or organization)
| | 75-2018505
(I.R.S. Employer
Identification No.)
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| 901 S. Central Expressway, | Richardson, | Texas | | 75080 |
| (Address of principal executive offices) | | 75080
(Zip Code) |
Registrant's telephone number, including area code: (972) 234-2525
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Ticker Symbol | | Name of each exchange on which registered |
| Common Stock, $0.01 par value | | FOSL | | NASDAQ Global SelectThe Nasdaq Stock Market LLC |
| 7.00% Senior Notes due 2026 | | FOSLL | | The Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x☐ No ¨☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨☐ No x☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| Large Accelerated Filer | | | | | | | | |
Large accelerated filer ¨
☐ | | Accelerated filer | Accelerated filer x
☒ | | Non-accelerated filer | Non-accelerated filer ¨
(Do not check if a
smaller reporting company)☐
| | Smaller reporting company ¨ |
☒ | | Emerging growth company¨ |
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒
The aggregate market value of Common Stock,common stock, $0.01 par value per share, (the "Common Stock"), held by non-affiliates of the registrant, based on the last sale price of the Common Stockcommon stock as reported by the NASDAQ Global Select Market on July 1, 20172023 was $323.3$116.7 million. For purposes of this computation, all officers, directors and 10% non-passive beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such officers, directors or 10% non-passive beneficial owners are, in fact, affiliates of the registrant.
As of February 20, 2018, 48,645,361March 1, 2024, 52,491,710 shares of Common Stockcommon stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement to be furnished to shareholders in connection with its 20182024 Annual Meeting of Stockholders are incorporated by reference in Part III, Items 10-14 of this Annual Report on Form 10-K.
FOSSIL GROUP, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 30, 20172023
INDEX
In this Form 10-K,Annual Report, references to "we," "our,"“we,” “our,” “us,” "Fossil" and the "Company"“Company” refer to Fossil Group, Inc., including its consolidated subsidiaries as of December 30, 2023 ("fiscal 2023"), December 31, 2022 ("fiscal 2022") and its subsidiariesJanuary 1, 2022 ("fiscal 2021").
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K ("Annual Report"), including the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and “Business,” contains forward-looking statements based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include all statements that are not historical facts and generally may be identified by terms such as “believe,” “may,” “will,” “should,” “seek,” “forecast,” “outlook,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “predict,” “potential,” “plan,” “expect” or the negative or plural of these words or similar expressions. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Annual Report under the section entitled “Risk Factors” in Item 1A of Part I and elsewhere, and in other reports we file with the U.S. Securities and Exchange Commission (the "SEC"). In addition, many of the foregoing risks and uncertainties are, and could be, exacerbated by pandemics and any worsening of the global business and economic environment. While forward-looking statements are based on reasonable expectations of our management at the time that they are made, you should not rely on them. We undertake no obligation to revise or update publicly any forward-looking statements for any reason, except as required by applicable law.
Summary Risk Factors
Our business is subject to a consolidated basis.number of risks and uncertainties that may affect our business, results of operations and financial condition, or the trading price of our common stock. These risk factors may not be exhaustive. We operate in a continually changing business environment, and new risks and uncertainties emerge from time to time. Management cannot predict such new risks and uncertainties, nor can it assess the extent to which any of the risk factors below or any such new risks and uncertainties, or any combination thereof, may impact our business. These risks are more fully described in Part I, Item 1A. "Risk Factors". These risks include, among others, the following:
Pandemic and Public Health Risks
•any impacts from pandemics and actions taken by governments, businesses, and individuals in response to pandemics.
Strategic Risks
•our restructuring program may not be successful or we may not fully realize the expected cost savings and/or operating efficiencies from our restructuring plans;
•our ability to anticipate and respond to changing fashion, functionality and product trends;
•our ability to continue to develop innovative products;
•our ability to execute our e-commerce business;
•consumer acceptance of new products, features or technology;
•our ability to grow our sales is dependent on our business strategy;
•the cost and stakeholder approval of our sustainability practices;
•climate change and other environmental impacts.
Operational Risks
•supply chain disruptions resulting from changes in U.S. trade policy with China or as a result of a pandemic;
•loss of any of our license agreements for globally recognized fashion brand names;
•effectively managing our retail store operations;
•supply shortages for certain key components in our products;
•seasonality of our business;
•the success of the shopping malls and retail centers in which our stores are located;
•loss of key facilities;
•fluctuations in the price, availability and quality of raw materials and any impact of inflation;
•problems with, or loss of, our assembly factories or manufacturing sources;
•we do not maintain long-term contracts with our customers;
•we face intense competition in the specialty retail and e-commerce industries and some competitors are substantially larger than us;
•we face competition from traditional competitors as well as competitors in the wearable technology category;
•any material disruption of our information systems;
•factors affecting international commerce and our international operations;
•changes in economic and social conditions in Asia, particularly China, and disruptions in international travel and shipping;
•loss of key senior management or failure to attract and retain key employees.
Risks related to our Indebtedness
•we are highly leveraged;
•our failure to comply with the covenants contained in our debt agreements;
•our borrowings may fluctuate significantly;
•our indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations;
•our ability to generate sufficient cash flows to meet our debt service obligations;
•we may incur significantly more debt, including secured debt;
•we could face a downgrade in our debt ratings;
•our indebtedness exposes us to interest rate risk;
•we have restrictive covenants in our secured asset-based revolving credit agreement.
Financial Risks
•we may not achieve consistent profitability or positive cash flows;
•a significant portion of our cash, cash equivalents and investments are held by our foreign subsidiaries;
•changes in the mix of product sales demand;
•impact of potential changes to international tax rules;
•incurring impairment charges;
•increased competition from online only retailers and a highly promotional retail environment;
•our license agreements may require minimum royalty commitments, regardless of the level of product sales under these agreements;
•foreign currency fluctuations;
Legal, Compliance and Reputational Risks
•a data security or privacy breach;
•violations of laws and regulations, or changes to existing laws or regulations in the U.S. or internationally;
•tariffs or other restrictions placed on imports from China and any retaliatory trade measures taken by China;
•loss of our intellectual property rights;
•infringing the intellectual property rights of others;
•failure by an independent manufacturer or license partner to use acceptable labor practices, otherwise comply with laws or suffer reputation harm.
Risks Relating to our Common Stock
•failure to meet the continued listing requirements of Nasdaq could result in a delisting of our securities;
•activist shareholders could negatively affect our business;
•rapid and substantial increases or decreases in our stock price, regardless of developments in our business;
•our organizational documents contain anti-takeover provisions;
•failure to meet our financial guidance or achieve other forward-looking statements we have provided to the public.
General Risks
•any deterioration in the global economic environment, and any resulting declines in consumer confidence and spending;
•the effects of economic cycles, terrorism, acts of war and retail industry conditions;
•foreign government regulations and U.S. trade policy;
•inherent limitations in control systems could lead to error or fraud that is not detected.
Trademarks, service marks, trade names and copyrights
We use our FOSSIL, MICHELE, RELIC, SKAGEN and ZODIAC trademarks, as well as other trademarks, on watches, our FOSSIL and SKAGEN trademarks on jewelry, and our FOSSIL trademark on leather goods and other fashion accessories in the U.S. and in a significant number of foreign countries. We also use FOSSIL, WATCH STATION INTERNATIONAL and WSI as trademarks on retail stores and FOSSIL, SKAGEN, WATCH STATION INTERNATIONAL, WSI, ZODIAC and MICHELE as trademarks on online e-commerce sites. This Annual Report may also contain other trademarks, service marks, trade names and copyrights of ours or of other companies with whom we have, for example, licensing agreements to produce, market and distribute products. Solely for convenience, the trademarks, service marks, trade names and copyrights referred to in this Annual Report may be listed without the TM, SM, © and ® symbols, as applicable, but we will assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors, if any, to these trademarks, service marks, trade names and copyrights.
PART I
Item 1. Business
GeneralCompany
We are a global design, marketinginnovation and distribution company that specializesspecializing in consumer fashion accessories. Our principal offeringsproducts include an extensive line of men's and women's fashion watches, and jewelry, handbags, small leather goods, belts and sunglasses. In the watchWe design, develop, market and jewelry product categories, we have a diverse portfolio of globally recognizeddistribute products under our owned brands FOSSIL, SKAGEN, MICHELE, RELIC and ZODIAC and licensed brand names under which our products are marketed. Our products are distributed globally through various distribution channels, including wholesale in countries where we have a physical presence, direct to the consumer through our retail storesbrands ARMANI EXCHANGE, DIESEL, DKNY, EMPORIO ARMANI, KATE SPADE NEW YORK, MICHAEL KORS, and commercial websites and through third-party distributors in countries where we do not maintain a physical presence. Our products are offered at varying price points to meet the needs of our customers, whether they are value-conscious or luxury oriented.TORY BURCH. Based on our extensive range of accessory products, brands, distribution channels and price points, we are able to target style-conscious consumers across a wide age spectrum on a global basis.
Domestically,Operating Strategy
Our goal is to drive shareholder value and make a positive impact on our people, planet and communities. We continue to operate in a very challenging business environment for our product offerings. In early 2023, we sellinitiated our Transform and Grow plan (“TAG”), which was initially designed to reduce operating expenses, improve operating margins and advance our path to profitable growth. In August 2023, as a result of a more comprehensive business review, we expanded TAG to address a broader transformation and capture a greater level of benefits.
Under the expanded program, the “Transform” aspect of TAG focuses on optimizing our core categories, brands, geographies and channels. Through this wider lens, we intend to restructure our operations to achieve improved gross margins, lower operating expenses and to reduce our working capital requirements. This comprehensive initiative encompasses various domains such as:
•organization and operating model optimization;
•sourcing and cost of goods sold opportunities;
•pricing, promotion, and markdown improvements;
•end-to-end product planning and inventory management enhancements;
•indirect procurement efficiencies, including marketing and information technology areas;
•logistics and distribution center operations efficiencies;
•store rationalization and optimization programs.
Under TAG, the Company is targeting approximately $300 million of annualized operating income benefits by the end of 2025. In addition to the economic benefits of TAG, the Company expects to significantly improve its operating model, moving from a decentralized, regional focused organization to a global brand and commercial model. We expect these changes will enable us to:
•adapt our operations to more effectively address challenges through enhanced global focus, top-down alignment, and decision-making rigor;
•instigate an ongoing, sustainable operating model, underscored by a culture of enhanced accountability;
•establish a more effective and efficient leadership structure.
The “Growth” aspect of TAG consists of investing in three key growth pillars to drive sustained and profitable revenue growth. These growth pillars are: (1) revitalizing the FOSSIL brand, (2) maximizing our licensed brand portfolio in watches and jewelry and (3) growing our premium watch offerings. We believe that these growth pillars are best enabled by our digital transformation, marketing capabilities and technology investments.
To execute TAG, we have established a Transformation Office. The Transformation Office is composed of members of our senior management supported by a leading management consulting firm specializing in assisting companies in complex reorganizations. Additionally, the Board of Directors has established a Special Board Committee to provide primary board oversight of the Transformation Office and drive accountability, timeliness and results of the program.
As we execute against the entire scope of TAG, we have an opportunity to improve our operating fundamentals, right size our cost structure, and return to sales growth. Aided by these measures, our long-term goal is to achieve adjusted gross margins above 50% and adjusted operating margins of approximately 10%.
Segments
We report segment information based on the “management approach”. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company's reportable segments.
We manage our business primarily on a geographic basis. The Company's reportable operating segments are comprised of (i) Americas, (ii) Europe and (iii) Asia. Each reportable operating segment includes sales to wholesale and distributor customers, and sales through Company-owned retail stores and e-commerce activities based on the location of the selling entity. The Americas segment primarily includes sales to customers based in Canada, Latin America and the United States. The Europe segment primarily includes sales to customers based in European countries, the Middle East and Africa. The Asia segment primarily includes sales to customers based in Australia, Greater China, India, Indonesia, Japan, Malaysia, New Zealand, Singapore, South Korea and Thailand. Each reportable operating segment provides similar products and services.
Brands
We are home to a collection of world-class owned and licensed brands that share our passion for design, innovation and doing good. We make distinctive watches and lifestyle accessories, bringing each brand to life through an extensive global channel and distribution network. We believe that the way we use our time matters, and we’ve made it our goal to create lasting change at the intersection of fashion and technology, while investing in the communities around the world where we live, work and play.
Our consumer-first mindset drives every decision we make. By capitalizing on fashion trends and leveraging proprietary data and insights, we are able to deliver relevant, high-value products and experiences to consumers across a diversifieddiverse range of price points, style preferences and geographies.
Brand Building
Our ambition is to capture a greater share of the growing global accessories market with a collection of the world's most distinctive brands. We are investing in and strengthening each brand within our diverse owned and licensed portfolio, connecting with customers across price point, channel, geography and styles.
The ability to build and activate strong lifestyle brands is key to our success. Our multi–channel model delivers engaging experiences directly to our consumers through our owned channels of distribution, networkdirect 1P marketplaces and via third party distributors. Being consumer-first means we walk in their shoes, learning from first party data, as well as fashion and style trends, to deliver relevant and memorable brand experiences.
Proprietary Brands
Our owned brands include FOSSIL, SKAGEN, MICHELE, RELIC and ZODIAC.
FOSSIL
FOSSIL is a leading global lifestyle accessories brand inspired by creativity and ingenuity, dedicated to connecting people to what matters most: time. FOSSIL takes pride in creating timeless and exceptionally crafted watches, leather goods and jewelry designed to accompany you on every journey life presents. Today, we are on a mission, continuing our decade-long commitment to "Make Time For Good," while building a dynamic, multi-channel organization connecting with customers all over the world.
SKAGEN
Since 1989, SKAGEN has been inspired by the city of Skagen and the Danish coastline. SKAGEN embraced Danish minimalism, creating slim styles and color combinations that includes department stores, specialty retail locations, specialtyreflect coastal living—an understated style that’s still authentic to the brand today. Denmark has much to celebrate. As SKAGEN honors its heritage, the brand is expanding its range of influence to include areas of relevance that are of the moment.
MICHELE
MICHELE timepieces are an extension and reflection of the women who wear them. Every MICHELE watch is built to celebrate feminine ambition and boldness—a reminder of all a woman has accomplished as she builds her legacy. MICHELE's beautifully-feminine timepieces use precise Swiss movements, genuine gemstones and diamonds, and premium
finishes. Each luxury timepiece is distinctly and recognizably MICHELE with signature elements and bold art deco-inspired details.
RELIC
RELIC by Fossil is an American watch and lifestyle brand creatively delivering accessible, updated casual designs. With each of our signature watches and accessories, we create styles that fit your everyday lifestyle.
ZODIAC
With a rich legacy dating back to 1882, ZODIAC is dedicated to excellence in precision, bold design and craftsmanship with authentic Swiss horology. Today, ZODIAC creates exclusive watches that maintain historical authenticity to vintage models while incorporating contemporary updates, proprietary movements and always-improving functionality.
Licensed Brands
Our main licensed brands include ARMANI EXCHANGE, DIESEL, DKNY, EMPORIO ARMANI, KATE SPADE NEW YORK, MICHAEL KORS, and TORY BURCH. As a result of our vertical integration, we are uniquely positioned to launch an accessory category, such as watches, in partnership with a licensor in a timely and consistent manner. All of our major licensing relationships are exclusive for the brands we license and include traditional watches, and for certain other brands, smartwatches and/or jewelry.
Products
We design, develop, market and distribute accessories across a variety of product categories: traditional watches, jewelry, stores, Company-ownedhandbags, small leather goods, belts and sunglasses. Additionally, we manufacture and/or distribute private label brands, as well as branded products purchased for resale in certain of our other branded retail stores. The following table sets forth certain information with respect to the breakdown of our net sales and outlet stores, mass market storespercentage change among proprietary, licensed and throughother brands for the fiscal years indicated (in millions, except for percentage data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
| | 2023 | | 2022 | | 2021 |
| | Dollars | | % Change | | Dollars | | % Change | | Dollars |
| Net sales | | | | | | | | | |
| Proprietary | $ | 720.4 | | | (10.8) | % | | $ | 807.7 | | | (6.0) | % | | $ | 859.3 | |
| Licensed | 631.0 | | | (19.3) | | | 781.7 | | | (17.2) | | | 944.3 | |
| Other | 61.0 | | | (34.4) | | | 93.0 | | | 40.1 | | | 66.4 | |
| Total | $ | 1,412.4 | | | (16.0) | % | | $ | 1,682.4 | | | (10.0) | % | | $ | 1,870.0 | |
Traditional Watches
Watches are our FOSSIL® website.core global business. Sales of watches for fiscal years 2023, 2022 and 2021 accounted for approximately 77.6%, 77.9% and 80.9%, respectively, of our consolidated net sales.
Licensed Brands
We have entered into multi-year, worldwide exclusive license agreements for the manufacture, distribution and sale of watches bearing the brand names of certain globally recognized fashion brands. The following table sets forth information with respect to our primary watch licenses:
| | | | | | | |
| Brand | | | Expiration Date 1 |
| ARMANI EXCHANGE | | | 12/31/2026 |
| DIESEL | | | 12/31/2027 |
| DKNY | | | 12/31/2024 |
| EMPORIO ARMANI | | | 12/31/2026 |
| KATE SPADE NEW YORK | | | 12/31/2025 |
| MICHAEL KORS | | | 12/31/2025 |
| | | |
| | | |
| TORY BURCH | | | 12/30/2028 |
(1) Subject to early termination in certain circumstances
We also license certain internationally known brand names, such as Skechers, for limited distribution in select markets. Our wholesale customer base includes, among others, Amazon, Best Buy, Dillard's, JCPenney, Kohl's, Macy's, Neiman Marcus, Nordstrom, Saks Fifth Avenue, Targetlicense agreement with DKNY expires at the end of 2024, and Wal-Mart.we do not plan to renew the license.
Fashion Accessories
In addition to our core watch business, we also design and create handbags, small leather goods, and belts across certain of our owned brands and jewelry under our owned brands and certain licensed brands. In the United States ("U.S.") and certain international markets, we generally market our fashion accessory lines through the same distribution channels as our watches using similar marketing approaches. Our fashion accessories are typically sold in locations adjacent to watch departments, in store or online, which may lead to purchases by persons who are familiar with our watch brands. Sales of our accessory lines accounted for 20.5%, 19.8% and 16.9% of our networkconsolidated net sales in fiscal years 2023, 2022 and 2021, respectively.
The following table sets forth information about our fashion accessories:
| | | | | | | |
| Brand | Accessory Category | | |
| DIESEL | Jewelry | | |
| EMPORIO ARMANI | Jewelry | | |
| FOSSIL | Handbags, small leather goods, belts, eyewear, jewelry | | |
| MICHAEL KORS | Jewelry | | |
| SKAGEN | Jewelry | | |
Licensed Eyewear
We have a license agreement with the Safilo Group for both FOSSIL branded sunglasses and optical frames worldwide, which expires on December 31, 2028. The license agreement provides for royalties to be paid to us based on a percentage of Company-owned stores included 80 retail stores located in premier retail sitesnet sales and 123 outlet stores located in major outlet malls asincludes certain guaranteed minimum royalties. Sales of December 30, 2017. In addition, we offer an extensive collectionlicensed eyewear accounted for approximately 0.6%, 0.5% and 0.4% of products through both ownedour consolidated net sales for fiscal years 2023, 2022 and third party websites.2021, respectively.
Internationally, ourStores
Our products are sold to department stores, specialty retail stores, and specialty watch and jewelry stores inacross approximately 150 countries worldwide through 23 Company-owned foreign sales subsidiaries and through a network of approximately 8065 independent distributors. Our products are offered on airlines and cruise ships and in international Company-owned retail stores. Internationally, our network of Company-owned stores included 208130 retail stores and 133172 outlet stores as of December 30, 2017. Our2023. In certain international markets, our products are also sold through licensed and franchised FOSSIL retail stores, retail concessions operated by us and kioskskiosks.
We also operate stores under the WATCH STATION and WSI brands, in certain international markets,which we partner with some of the world's most iconic brands to curate a unique collection of designer watches and jewelry for women and men. We offer a robust online and in-store experience in the United States, Europe and Asia that connects our customers to the stories, trends and latest innovations in the world of watches.
Marketing
Our marketing approach meets the consumer wherever they are, both online and offline. We create the best possible brand experience through a blend of art and science, which means that we prioritize both data-driven decision-making and creativity in our marketing approach. At our core, we are storytellers and demand generators and have the ability to craft beautiful products and deliver brand experiences worth talking about.
We have an in-house global marketing team with representation across our regions serving both our owned and licensed brands, to better connect with consumers and drive sustained engagement and awareness. This capability works across channels, including digital marketing, social media, social commerce, email marketing, Customer Relationship Management, partner marketing and brand and performance media. We are also experienced brand builders, with in-house brand development, PR, content and integrated marketing teams, in addition to a dynamic global creative studio.
We have built proprietary algorithms to support the profitable flow-through of marketing investment, optimized across channels, brands and countries. We deliver increasingly better personalization through ongoing test-and-learn methods as well as owned websitesthrough consumer insights and third party websites in certain countries.predictive analytics capabilities we have built over the past few years.
We are a Delaware corporation formed in 1991strategically increasing our marketing investment and are telling fewer stories better so that our consumers understand the successorenduring role our brands play in their lives.
Distribution
We distribute our products globally through regional warehouses with our warehouse in Dallas, Texas serving the Americas, our warehouse in Eggstätt, Germany serving Europe and our warehouse in Hong Kong serving Asia. For those countries in which our products are distributed, but where we don’t have a physical presence, we use third-party distributors. From our regional warehouses, our products are shipped to subsidiary warehouses, distributors, wholesale accounts or directly to customers in selected markets. Our extensive distribution network allows us to reach a Texas corporation formeddiverse global customer base. We sell our products through a range of channels including e-commerce, Company-owned retail stores, department and specialty retail stores, airlines, mass markets and concessions.
Digital
Our holistic e-commerce efforts include three forms of digital channels. First, our owned global e-commerce websites for our brands deliver mobile-friendly experiences, personalized content, and seamless omni-channel integration with retail stores, including buy online pick up in 1984. In 1993,store, curbside pickup and ship from store. Second, we completed an initial public offering of 13,972,500 sharessell our products to leading third-party online retailers and our wholesalers’ e-commerce websites. Third, we directly sell to consumers on major third-party platforms.
Our e-commerce capabilities and total revenue contribution continue to grow as a part of our common stock. Domestically, we conduct a majoritytotal business. In fiscal year 2023, our digital sales comprised 38% of consolidated net sales. This included sustained positive comps on our operations through Fossil Partners, L.P., a Texas limited partnership formedowned e-commerce channels year-over-year. We will continue to invest in 1994 of which we are the sole general partner. We also conduct operations domestically andgrowing our e-commerce capabilities in certain international markets through various owned subsidiaries. Our principal executive offices are located at 901 S. Central Expressway, Richardson, Texas 75080, and our telephone number at that address is (972) 234-2525. Our European headquarters is located in Basel, Switzerland, and our Asian headquarters is located in Hong Kong. Our common stock is traded on the NASDAQ Global Select Market under the trading symbol FOSL. We make available free of charge through our website at www.fossilgroup.com our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the U.S. Securities and Exchange Commission ("SEC"). You may also obtain any materials we file with, or furnish to, the SEC on its website at www.sec.gov.
Business segments
Our operations and financial reporting are primarily divided into three distinct geographic segments: (i) Americas; (ii) Europe; and (iii) Asia. Each segment includes wholesale, retail and e-commerce activities based on the geographic location of those activities. Except to the extent that differences between operating segments are material to an understanding of our business taken as a whole, the description of our business in this report is presented on a consolidated basis. Corporate expenses include certain administrative, legal, accounting, technology support costs, equity compensation costs, payroll costs attributable to executive management, brand management, product development, art, creative/product design, marketing, strategy, compliance and back office supply chain expenses. For financial information about our operating segments and geographic areas, refer to Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in Part II, Item 7 and Note 18—Major Customer, Segment and Geographic Information to our consolidated financial statements set forth in Part II, Item 8 of this Annual Report on Form 10-K.
Business strengths
We believe that we have several business strengths which allow us to differentiate ourselves and achieve our key operating and financial goals. These business strengths include:
Brand strength. We believe a brand's image, individuality, consistency and connection with its customers is paramount in building and sustaining the brand. We believe that our FOSSIL brand name is recognized on a global basis as an American vintage-inspired aspirational lifestyle brandfiscal year 2024, with a focus on fashion accessories. The FOSSIL brand has developed from its origin as a watch brand to encompass other accessory categories, including handbags, belts, small leather goods, jewelryimproving the end-to-end consumer experience, creating stronger CRM journeys via first party data and sunglasses. We believe the FOSSIL brand is one of our most valuable assets, serves as a foundational piece of our businessbringing more engaging and remains very marketable across product lines, geographic areas and distribution channels. We have continued to develop, acquire or license other nationally or internationally recognized brand names, such as ARMANI EXCHANGE®, CHAPS BY RALPH LAUREN®, DIESEL®, DKNY®, EMPORIO ARMANI®, KARL LAGERFELD®, KATE SPADE NEW YORK®, MARC JACOBS®, MICHAEL KORS®, MICHELE®, MISFIT®, RELIC®, SKAGEN®, TORY BURCH® and ZODIAC®, in order to appeal to a wide range of consumers. Our industry is highly competitive and subject to changing preferences in style, taste and price points. The success of our business model depends upon offering a wide range of branded products that appeal to the various tastes and fashion preferences of our customers. We must also maintain the relevance of these products by continually anticipating customer needs and desires as they relate to both the brands and categories of products we offer. We have teams of designers and brand specialists assigned to each of our brands. The objectives of these designers and brand specialists are to immerse themselves in their assigned brand and product area, identify their customers' preferences, interpret global fashion trends and develop style-right offerings to generate volume purchasing. By owning the vast majority of our global distribution, we are also able to create and execute consistent pricing strategies and brand image presentations that protect and enhance our proprietary brands and those of our licensors.
Licensing strength. Since 1997, we have attracted highly recognized and respected brand names to license within our watch and jewelry portfolios. We believe we attract such quality brands due to our ability to provide them with access to our global design, production, distribution and marketing infrastructure. As a result of our vertical integration, we, unlike many of our competitors, can offer an integrated solution to launch or increase an accessory category presence on a worldwide basis in a consistent, timely and focused manner. All of our major licensing relationships are exclusive to us and the licensors, which substantially minimizes risks to the licensor associated with dealing with multiple licensees in different geographic regions. Additionally, in order to develop a broader relationship and maintain brand consistency across the accessory categories, we have broadened our infrastructure, which allows us to expand our licensing activities to products beyond the watch category, such as our DIESEL, EMPORIO ARMANI and MICHAEL KORS jewelry product lines.
Breadth of brands and retail price points. Through the multiple brands we distribute, we have developed a broad spectrum of retail price points. Within our watch collections, core retail price points vary from approximately $7 in the mass market channel up to retail price points of $5,995 in the luxury distribution channel, although the majority of our collections focus on price points ranging from $85 to $600. The breadth of our brands allows us to anchor a brand to a given price point range and distribution channel, thereby maintaining a consistent brand image while focusing on the quality/value relationship important to the customer and not diluting the brand through overlapping distribution channels. Our breadth of price points allows us to cater to various age and income groups while continuing to participate in sales consistently, regardless of a shift in income or the price/value preferences of our customers.
Wearable technology. We are leveraging our owned technology platform along with our partnership with Google to add incremental functionality to our fashion accessoriesaccessible experiences across our portfolio of brands. Our in-house engineering team keeps us on the leading edge of technology, while providing a scalable, cost efficient infrastructure to support our growing connected accessory line of products. Due to the scale we have recently achieved in wearables,channels.
Manufacturing and by leveraging our scale in traditional watches, we are able to drive supply chain efficiencies, reduce costs and improve margins, and we believe we are in a unique position to compete in the evolving wristwear business.Sourcing
International penetration. Since our initial public offering in 1993, we have continued to extend our reach beyond the U.S. by forming and acquiring internationally-based subsidiaries, licensing and developing internationally recognized brands and investing in the growth of our business within many major countries of the world. Net sales generated outside the U.S. were 58.5%, 55.4% and 53.8% for fiscal years 2017, 2016 and 2015, respectively.
Breadth of distribution channels. Our products are sold through multiple distribution channels including department stores, specialty retail stores, specialty watch and jewelry stores, mass market stores, consumer electronics stores, cruise ships, airlines, Company-owned retail stores, licensed and franchised FOSSIL stores, retail concessions operated by us and e-commerce sites. As we expand our presence in existing distribution channels and add new distribution channels, as well as develop new product lines and expand our geographic reach, our revenues have become less dependent on any one distribution
channel or geographic region. Our Company-owned retail stores and websites allow us to enhance the related brand image by offering a targeted message to the customer, showcasing the array of product availability, influencing the merchandising and presentation of the products and testing new product introductions.
In-house creative team. Since our inception, we have developed a talented pool of creative individuals who design our retail stores, websites, products, packaging, graphics, presentation displays and marketing materials, allowing us to deliver a unique and cohesive style and image for each of our brands. We believe our emphasis on constant innovation and distinctive design has made us a leader in the branded accessory category.
International sourcing.The vast majority of our products are sourced internationally, with a substantial percentage of our watches and jewelry products assembled or manufactured by entities that are majority owned by us.internationally. Most watch product sourcing from Asia is coordinated through our Hong Kong subsidiary, Fossil (East) Limited ("(“Fossil East"East”). During fiscal year 2017, approximately 55% of our non-Swiss made watch production was assembled or procured through wholly or majority owned factories. This vertical integration of our business allows for better flow of communication, consistent quality, product design protection and improved supply chain speed, while still allowing us to utilize non-owned production facilities for their unique capabilities and to cover production needs over internal capacities. Establishing ourWe have some limited watch assembly operations through owned facilities near the component manufacturers also allows us to operate a more efficient supply chain. In addition, althoughin India and Switzerland. Although we do not have long-term contracts with our unrelated watch and accessory manufacturers, we maintain long-term relationships with several manufacturers. These relationships developed due to the significant length of time we have conducted business with the same manufacturers. We believe that we are able to exert significantsome operational control with regard to our principal watch assemblers because of our level of ownership and long standinglong-standing relationships. In addition, we believe that the relative size of our business with non-owned watch manufacturers gives us priority within their production schedules. Furthermore, the manufacturers understand our quality standards, which allow us to produce quality products and reduce the delivery time to market, improvingsupporting overall operating margins. We have also added new facilities and relationships for manufacturing our wearable technology products as well as enhanced our own factories to enable assembly and production of hybrid smart watches. Increased volume in the wearables category would allow us to further reduce costs through improved volume pricing and enable our suppliers to continue to invest in automation.
Centralized distribution. We distribute substantially all of our products sold in North America from our warehouse and distribution centers located in Texas. In Europe, we distribute our products primarily through our warehouse and distribution center located in Germany. In Asia, we primarily distribute our products through our distribution warehouse located in Hong Kong and through smaller distribution warehouses in those countries where we maintain a physical presence. We believe our centralized distribution capabilities in the U.S. and Europe enable us to reduce inventory risk, increase flexibility in achieving delivery requirements of our customers and maintain cost advantages as compared to our competitors.
Operating cash flow. Our business model has historically generated strong operating cash flows, including $0.2 billion in fiscal year 2017, and $0.8 billion and $1.6 billion over the past three fiscal years and five fiscal years, respectively. This strong cash flow has allowed us to fund debt repayments and invest in our New World Fossil initiative. For more information on our New World Fossil initiative, see Note 19—Restructuring to our consolidated financial statements set forth in Part II, Item 8 of this Annual Report on Form 10-K.
Information systems. Operating and managing a global company requires sophisticated and reliable management information systems to assist in the planning, order processing, production and distribution functions and accounting of each relevant business. We mainly operate an SAP Enterprise Resource Planning system ("ERP") in the U.S. and most of Europe. For our subsidiaries in Asia, we operate Microsoft's Dynamics Navision Enterprise Resource Planning System ("Navision"). Our e-commerce platform is based on IBM's WebSphere Commerce platform and Adobe's Experience Manager platform. We continue to invest in other feature/functions and e-commerce infrastructure, which will allow us to provide a branded and omni-channel web experience in key markets. We operate SAP's IS Retail platform combined with the Aptos point-of-sale in Americas and Europe and the WINCOR point-of-sale in Asia. Our products are principally distributed from three primary warehouses, one located in Texas near our headquarters, one located in southern Germany and the other located in Hong Kong. Our facilities in Texas and Germany utilize sophisticated automated material handling equipment and software designed to improve accuracy, speed and quality in our warehousing operations.
For financial reporting, we use software solutions from Oracle Corporation: Hyperion Financial Management, Essbase and Hyperion Planning. This software was implemented in 2014 to increase the overall efficiency of our consolidation and financial reporting process, provide an analytical application to view and interpret data, and to improve predictability in the budgeting and forecasting process.
Operating strategy
Our goal is to drive shareholder value by increasing profits and cash flows. While we currently operate in challenging retail, watch, leather and jewelry environments, we intend to leverage our business strengths while continuing to undergo a significant transformation to strengthen our business model. We plan to achieve our business strategy by focusing on the following strategic initiatives:
Improve profitability. While we expect sales to contract in the near future due to store closures and the expiration of our ADIDAS and BURBERRY licenses, we intend to improve overall profitability. We believe that closing certain stores and exiting certain unprofitable businesses as part of our restructuring plan can positively impact our net income. In addition, we are seeking to improve our gross margins through increasing economies of scale with our wearables products, through renegotiation of pricing with our suppliers and by further reducing other supply chain costs. While we will incur additional restructuring expenses in fiscal year 2018, we plan to lower our base expenses by leveraging lower sales with lower variable expenses and by achieving organizational efficiencies. We are also focused on improving our return on working capital and further reducing our outstanding debt position.
Innovation. We remain committed to succeeding in the traditional watch, leathers and jewelry categories, and are supported by our in-house creative teams which continue to innovate with new designs, colors and materials. We believe our vertical structure, size and scale and both owned and licensed portfolios give us advantages over our competition in these categories. While wearables continue to grow the overall watch market, traditional products still retain a large percentage of the overall watch market and represent a significant opportunity. We plan to continue to introduce new brands through the development of proprietary brands or through licensing arrangements with recognizable global fashion lifestyle brands to attract a wide range of consumers with differing tastes and lifestyles.
Our strength in innovation has expanded into smartwatches, in both display and hybrid models. While our smartwatches retain each brand's style and fashion, they continue to add additional functionality and applications, improving the overall user experience. Since our connected business began, it has allowed us to expand our addressable market through new distribution channels. Our objective remains to bring fashion, branding and style to the connected watch business by tailoring the technology that our customers want with each of our brand's unique point of view. We will continue to launch new formats of both display and hybrid smartwatches, and we believe these new offerings will continue to support growth in our connected products category.
E-commerce and digitalization. With consumers' shopping preferences continuing to evolve beyond traditional retail stores, we are seeking further reduction of our store fleet and continuing to invest in our digital infrastructure and e-commerce capabilities. We plan to expand our digital capabilities for consumer insight, analytics and the use of data throughout the organization. We will continue to collaborate with our wholesale partners to optimize online performance, and we will seek out opportunities to expand our direct to consumer e-commerce into new markets. Based on the success of our social media campaigns in fiscal year 2017, we intend to expand our social media programs, including our celebrity influencer campaigns, to increase our social media platform engagement. Additionally, we plan to continue to expand our omni-channel initiatives across more of our global markets.
Industry overview
Traditional watches
We believe that the current traditional watch market can generally be divided into four segments. One segment of the market consists of fine watches characterized by internationally known brand names such as Audemars Piguet, Cartier, Omega, Patek Philippe, Piaget and Rolex. Watches offered in this segment are usually made of precious metals or stainless steel and may be set with precious gems. These watches are almost exclusively manufactured in Switzerland and are sold by trade jewelers and in the fine jewelry departments of select department stores and other purveyors of luxury goods at retail prices ranging from $4,000 to in excess of $20,000. Selected limited editions of our MICHELE line compete in this market. A second segment of the traditional watch market consists of fine premium branded and designer watches produced in Switzerland and Asia such as Gucci, Movado, Raymond Weil, Seiko, TAG Heuer and Tissot. These watches are sold at retail prices generally ranging from $495 to $4,000. Our EMPORIO ARMANI, EMPORIO ARMANI Swiss, MICHELE, and ZODIAC lines generally compete in this market segment. A third segment of the traditional watch market consists of watches sold by mass marketers, which typically consist of digital and analog watches manufactured in Asia. Well-known brands in this segment include Armitron, Casio and Timex. Retail prices in this segment range from $7 to $60. We compete in this segment through the design and production of private label watch products for Kmart, Target and Wal-Mart.
The fourth segment of the traditional watch market consists of moderately priced watches characterized by contemporary fashion and well-known fashion brand names. Moderately priced watches are typically produced in China or Hong Kong and
are sold by department stores and specialty stores at retail prices ranging from $60 to $1,000. We target this market segment with our FOSSIL, RELIC and SKAGEN lines, along with our principal competitors, including the companies that market watches under the Anne Klein II, Guess?, Kenneth Cole and Swatch brand names, whose products attempt to reflect emerging fashion trends in accessories and clothing. Our ARMANI EXCHANGE, DIESEL, DKNY, KARL LAGERFELD, MARC JACOBS, KATE SPADE NEW YORK, MICHAEL KORS and TORY BURCH lines generally compete in this segment as well. We believe that a number of consumers regard branded fashion watches not only as timepieces, but also as fashion accessories, and that has historically resulted in consumers owning multiple watches that may differ significantly in terms of style, features and cost.
Traditional watches typically utilize either a mechanical or quartz-analog movement to maintain their time keeping function. Mechanical watches utilize intricate arrangements of wheels, jewels and winding and regulating mechanisms to keep time, while quartz-analog watches are precisely calibrated to the regular frequency of the vibration of a quartz crystal powered by a battery. Although quartz-analog movements typically maintain their time keeping functions more precisely than mechanical movements, mechanical movements are prized for their craftsmanship and are generally associated with high-end luxury.
Wearable technology / connected accessories
Wearable technology has quickly emerged as a meaningful segment within accessories as consumers continue to be drawn to technology enabled products that complement their connected lifestyles. Our industry research strongly correlates this segment with younger and largely female aspirational fashion customers. We believe there is a major opportunity to combine fashion and technology, important attributes to consumers wearing these devices, to differentiate ourselves from competitors. With our Misfit technology platform, we believe we are in position to lead this convergence of fashion and technology by bringing leading-edge technology across our world-class portfolio of brands through our global distribution.
We believe our wearables market is broken up into two distinct segments. The first segment is touchscreen smart watches which includes highly visible products such as the Apple Watch and Samsung Gear S3. In 2017, we partnered closely with Google to expand our Android Wear watch offerings from FOSSIL and MICHAEL KORS and to introduce new Android Wear devices under the EMPORIO ARMANI, DIESEL and MISFIT brands. Our latest generation of products includes slimmer cases, brighter displays and new functionality, serving both iPhone and Android phone users across more than 50 countries globally.
The second segment is hybrid smart watches. Hybrid smart watches combine the attractive aesthetics of a traditional analog watch with embedded technology to enhance a consumer’s life without detracting from his or her sense of style. This is an emerging market that has a limited number of brands competing, including technology companies like Withings and Samsung, as well as traditional watch brands like Movado. In the hybrid category, we have scaled this technology platform across 14 brands, including six new brand introductions in 2017 under the TORY BURCH, MICHELE, MARC JACOBS, DKNY, ARMANI EXCHANGE and RELIC brands.
Fashion accessories
In addition to watches, the fashion accessories market also includes an array of products such as small leather goods, handbags, belts, sunglasses and jewelry. We believe that a number of consumers view accessories as fashion statements, and as a result, purchase brand name, quality items that complement other fashion items. These fashion accessory products are generally marketed through department stores, e-commerce sites, specialty retailers and mass merchandisers, depending upon price and quality. Higher price point items include products offered by fashion names such as Louis Vuitton and Prada.
Moderately priced fashion accessories are typically marketed in department stores and are characterized by contemporary fashion and well-known brand names at reasonable price points, such as our FOSSIL and RELIC brands. We currently offer small leather goods, handbags, belts and sunglasses for both men and women through department stores, e-commerce sites and specialty retailers in the moderate to upper-moderate price ranges. Our competitors in this market include companies such as Coach, Guess?, Kenneth Cole, Liz Claiborne and Nine West. In addition, we currently offer fashion jewelry sold under the DIESEL, EMPORIO ARMANI, FOSSIL, MICHAEL KORS and SKAGEN brands.
Our products
We design, develop, market and distribute watches, wearable technology, handbags, jewelry, belts and small leather goods under proprietary and licensed brand names. Additionally, we manufacture or distribute private label brands as well as branded products we purchase for resale in certain of our non-FOSSIL branded retail stores. The following table sets forth certain information with respect to the breakdown of our net sales and percentage of growth between proprietary, licensed and other brands for the fiscal years indicated (in millions, except for percentage data).
|
| | | | | | | | | | | | | | | | | |
| | Fiscal Year |
| | 2017 | | 2016 | | 2015 |
| | Dollars | | % Change | | Dollars | | % Change | | Dollars |
| Net sales | |
| | |
| | |
| | |
| | |
|
| Proprietary | $ | 1,371.9 |
| | (7.2 | )% | | $ | 1,479.0 |
| | 1.4 | % | | $ | 1,458.6 |
|
| Licensed | 1,311.4 |
| | (9.5 | ) | | 1,449.6 |
| | (12.1 | ) | | 1,648.7 |
|
| Other | 104.9 |
| | (7.8 | ) | | 113.8 |
| | (6.3 | ) | | 121.5 |
|
| Total | $ | 2,788.2 |
| | (8.4 | )% | | $ | 3,042.4 |
| | (5.8 | )% | | $ | 3,228.8 |
|
Traditional and connected watch products
We offer an extensive line of branded lifestyle watches under our proprietary brands and, pursuant to license agreements, under some of the most prestigious brands in the world. Sales of watches for fiscal years 2017, 2016 and 2015 accounted for approximately 78.9%, 76.6% and 76.7%, respectively, of our consolidated net sales.
Proprietary brands. The following table sets forth information about our primary proprietary brand watches:
|
| |
Brand | Suggested
Retail Price
Point Range
|
FOSSIL | $85 - 295 |
MICHELE | $345 - 5,995 |
MISFIT | $60 - 220 |
RELIC | $45 - 150 |
SKAGEN | $95 - 295 |
ZODIAC | $595 - 1,800 |
Licensed brands. We have entered into multi-year, worldwide exclusive license agreements for the manufacture, distribution and sale of watches bearing the brand names of certain globally recognized fashion companies. The following table sets forth information with respect to our primary licensed watch products:
|
| | | |
Brand | Suggested
Retail Price
Point Range
| | Expiration
Date*
|
ARMANI EXCHANGE | $100 - 295 | | 12/31/2023 |
CHAPS | $75 - 195 | | 12/31/2020 |
DIESEL | $100 - 495 | | 12/31/2025 |
DKNY | $95 - 275 | | 12/31/2019 |
EMPORIO ARMANI | $175 - 2,995 | | 12/31/2023 |
KARL LAGERFELD | $125 - 300 | | 12/31/2020 |
KATE SPADE NEW YORK | $150 - 350 | | 12/31/2025 |
MARC JACOBS | $150 - 300 | | 12/31/2020 |
MICHAEL KORS | $195 - 550 | | 12/31/2024 |
TORY BURCH | $195 - 395 | | 12/31/2018 |
* subject to early termination
Sales of our licensed watch products accounted for 43.1% of our consolidated net sales for fiscal year 2017. Our MICHAEL KORS product sales, including jewelry, accounted for 22.6% of our consolidated net sales for fiscal year 2017.
Private label and other. We design, market and source manufacturing of certain retailers' private label and owned brand watches or as premium and incentive items for use in various corporate events. Under these arrangements, we perform design and product development functions, as well as act as a sourcing agent for our customers by contracting for and managing the manufacturing process, purchasing and inspecting the finished product and arranging for shipment. Participation in the private label and premium businesses provides us with certain advantages, including increased assembly volume, which may reduce the costs of assembling our other products, and the strengthening of business relationships with our manufacturing sources.
Fashion accessories
In order to leverage our design and marketing expertise and our close relationships with our principal retail customers, primarily in the U.S. and Europe, we have developed a line of fashion accessories for both men and women, including belts, handbags, jewelry and small leather goods. Our handbags are made of a variety of fine leathers and other materials that emphasize classic styles and incorporate a variety of creative designs. Our small leather goods are typically made of fine leathers or other man-made materials and include items such as coin purses, cosmetic bags, mini-bags and wallets. Our jewelry lines include bracelets, cufflinks, earrings, necklaces and rings marketed under the DIESEL, EMPORIO ARMANI, FOSSIL, MICHAEL KORS and SKAGEN brands and typically include materials such as base metals, stainless steel, semi-precious stones and sterling silver. We offer 100% UV protected fashion sunglasses under our FOSSIL brand. We currently sell our fashion accessories through a number of our existing major department store and specialty retail store customers, as well as through our Company-owned retail stores, www.fossil.com and other internationally-owned e-commerce sites. In the U.S. and certain international markets, we generally market our fashion accessory lines through the same distribution channels as our watches using similar in-store presentations, graphics and packaging. These fashion accessories are typically sold in locations adjacent to watch departments, which may lead to purchases by persons who are familiar with our watch brands. Sales of our accessory lines accounted for 19.7% of our consolidated net sales in fiscal year 2017 and 21.6% of our consolidated net sales in both fiscal years 2016 and 2015.
The following table sets forth information about our fashion accessories:
|
| | | |
Brand | Accessory Category | | Suggested
Retail Price
Point Range
|
DIESEL | Jewelry | | $50 - 150 |
EMPORIO ARMANI | Jewelry | | $65 - 295 |
FOSSIL | Bags
Small Leather Goods
Belts
Eyewear
Jewelry
| | $88 - 448
$12 - 148
$24 - 58
$55 - 135
$14 - 98
|
MICHAEL KORS | Jewelry | | $45 - 595 |
RELIC | Handbags
Small Leather Goods
Belts
| | $40 - 78
$22 - 40
$22 - 32
|
SKAGEN | Handbags
Small Leather Goods
Jewelry
| | $165 - 295
$35 - 175
$35 - 90
|
Licensed eyewear
In January 2014, we entered into a license agreement with the Safilo Group for both FOSSIL branded sunglasses and optical frames worldwide. The license agreement provides for royalties to be paid to us based on a percentage of net sales and includes certain guaranteed minimum royalties. Sales of licensed eyewear for fiscal years 2017, 2016 and 2015 accounted for approximately 0.4%, 0.4% and 0.5%, respectively, of our consolidated net sales.
Design and development
We believe one of our key strengths is our internal creative team. Our watch and accessory products are created and developed by our in-house design staff primarily located in the U.S., Germany, Hong Kong and Switzerland. When developing products under our various licensed brands, we often coordinate our efforts with our licensors' design teams to provide for a more fluid design approval process and to fully incorporate the image of the respective brand into the product. Product design ideas are drawn from various sources and are reviewed and modified by our design staff to ensure consistency with our existing product offerings and the themes and images associated with our brands. Senior management is actively involved in the design process.
In order to respond effectively to changing consumer preferences, we attempt to stay abreast of emerging lifestyle and fashion trends impacting our product categories. In addition, we attempt to take advantage of the constant flow of information from our customers, retail stores and e-commerce sites regarding the retail performance of our products. We review weekly sales reports provided by a substantial number of our customers, as well as daily sales reports generated from our Company-owned retail stores and e-commerce sites, containing information with respect to sales and inventories by product category and style. Once a trend in the retail performance of a product category or style has been identified, our design and marketing staff review their product design decisions to ensure that key features of successful products are incorporated into future designs. Other factors having an influence on the design process include the availability of components, the capabilities of the factories that will manufacture the products for us and the anticipated retail prices and profit margins for the products. Our creative teams have access to our product design archives and are regularly updated on all the various new components, hardware and materials that become available. Over the last few years, our focus has been on transforming our approach in design and development from an assortment-rich offering to an iconic platform presentation. This has enhanced our ability to develop and share compelling stories within the platforms through a narrower range of product offerings, thereby reducing inventory risk and improving lead times. We initially developed this approach in our watch business, and we are now applying a similar approach to our leather and jewelry businesses.
We differentiate our products from those of our competitors principally by incorporating into our product designs innovations in fashion details, including variations in the materials and treatments used for dials, crystals, cases, straps and bracelets for our watches and innovative details and treatments in our other accessories. We also incorporate certain proprietary technology or integrate our suppliers' technologies in certain of our wearables products. In some instances, we believe that such innovations have allowed us to achieve significant improvements in consumer acceptance of our product offerings. We believe that the substantial experience of our design staff will assist us in maintaining our current leadership position in the watch category, continuing to enhance our handbag offering and expanding the scope of our product offerings.
Marketing and promotion
Our marketing strategy for each of our proprietary brands is to deliver a consistent and engaging brand experience to the consumer regardless of where the consumer comes into contact with the brand. This includes point-of-sale merchandise displays, retail stores, our websites, digital advertising, catalogs, print marketing and product packaging. We are especially focused on strengthening our digital marketing ecosystem, which includes investing in e-commerce, improving our Customer Relationship Management ("CRM") capabilities, continuing to build a seamless omni-channel experience (like Buy Online, Pickup In Store) and investing in influencer marketing. Our holistic global marketing approach encourages ongoing communication with our customers, fosters brand loyalty and facilitates engagement and repeat purchases. In addition, we are attracting, educating and engaging our newest customer segment - the smart watch customer - through robust customer profiling and targeted communication strategies.
We participate in cooperative advertising programs with our major retail customers, whereby we share the cost of certain of their advertising and promotional expenses. An important facet of the marketing process involves the use of in-store visual support and other merchandising materials, including packages, signs, posters and fixtures. Through the use of these materials, we differentiate the space used to sell our products from other areas of our customers' stores. We also develop strong digital programs to continue to drive engagement and conversation across all channels.
Our in-house art department designs and develops packaging, advertising, marketing and other promotional aspects of our products. Senior management is involved in monitoring our advertising and promotional activities to ensure that all of our communications strengthen our brands, engage consumer audiences and ultimately drive sales.
Sales and customers
General. Domestically, we sell our products in retail locations in the U.S. through a diversified distribution network that includes department stores, specialty retail locations, specialty watch and jewelry stores and mass market stores. For our FOSSIL, MICHELE and licensed branded products, our primary department store customers include Bloomingdales, Dillard's, Macy's, Neiman Marcus, Nordstrom and Saks Fifth Avenue. For our RELIC brand, our primary customers include JCPenney and Kohl's. For our SKAGEN brand, our primary customers include Dillard's, Macy's and Nordstrom. Many of our licensed branded products are also sold through each respective licensor's boutique stores and websites. We maintain sales offices in several major cities across the U.S. staffed with sales associates to assist in managing our department and specialty store accounts. We also sell certain of our FOSSIL branded products at Company-owned FOSSIL retail stores and outlet stores located throughout the U.S., and through our website at www.fossil.com. In addition, we sell certain of our proprietary and licensed watch products, as well as upscale watch brands of other companies, such as Citizen and Swiss Army, at our Company-owned Watch Station International retail stores in the U.S. and through our website at www.watchstation.com.
We maintain subsidiary offices in Australia, Austria, Canada, China, Denmark, France, Germany, Hong Kong, India, Italy, Japan, Malaysia, Mexico, the Netherlands, Poland, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, the United Kingdom and Vietnam. Our European headquarters is located in Basel, Switzerland, and our Asian headquarters is located in Hong Kong.
Internationally, our products are sold to department stores and specialty retail stores in approximately 150 countries worldwide through 23 Company-owned foreign subsidiaries, a network of approximately 80 independent distributors, Company-owned retail stores and websites and licensed or franchised FOSSIL retail stores, retail concessions operated by us and kiosks. Foreign distributors generally purchase products from us at prices established by us for international sales and resell them to department stores and specialty retail stores. We generally receive payment from our foreign distributors in U.S. dollars. We generally do not have long-term contracts with any of our retail customers. All transactions between us and our retail customers are conducted on the basis of purchase orders, which generally require payment of amounts due to us on a net 30 day basis for most of our U.S.-based customers and up to 120 days for certain international customers. No customer accounted for 10% or more of our consolidated net sales in fiscal years 2017, 2016 or 2015. Net sales for geographic segments are based on the location of the selling entity. For more information on our geographic segments, see Note 18—Major Customer, Segment and Geographic Information to our consolidated financial statements set forth in Part II, Item 8 of this Annual Report on Form 10-K.
United States sales. For fiscal years 2017, 2016 and 2015, U.S. sales accounted for 41.5%, 44.6% and 46.2% of our consolidated net sales, respectively, and the aggregate sales to our 10 largest U.S. customers represented approximately 20.0%, 21.0% and 21.3% of consolidated net sales, respectively.
International sales. For fiscal years 2017, 2016 and 2015, Europe sales accounted for 34.9%, 32.9% and 33.1% of consolidated net sales, respectively, Asia sales accounted for 17.9%, 16.9% and 15.4% of consolidated net sales, respectively, and other international sales accounted for 5.7%, 5.6% and 5.3% of consolidated net sales, respectively. Net sales from Germany accounted for more than 10% of our consolidated net sales and were approximately $406.2 million, $467.7 million and $505.4 million in fiscal years 2017, 2016 and 2015, respectively.
Company-owned stores
Our various retail store formats focus on creating emotional connections with our customers through an intense branding experience and personalized customer service. We strive to provide an inviting and welcoming environment for our customers that enhances our brand image and seek brand loyalty by continually delivering innovative vintage-inspired products that meet our customers' tastes. Our goal is to provide the customer with a consistent brand experience and message across the various channels we serve, including our retail stores, wholesale partners and e-commerce channels. Our on-going investments in our omni-channel initiatives help facilitate this goal and are critical components of our growth strategy going forward.
The following table sets forth the number of stores by concept as of December 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 30, 2017 | | December 31, 2016 |
| | Americas | | Europe | | Asia | | Total | | Americas | | Europe | | Asia | | Total |
| Accessory stores | 108 |
| | 106 |
| | 59 |
| | 273 |
| | 122 |
| | 119 |
| | 63 |
| | 304 |
|
| Outlets | 136 |
| | 74 |
| | 46 |
| | 256 |
| | 143 |
| | 73 |
| | 45 |
| | 261 |
|
| Full priced multi-brand | — |
| | 8 |
| | 7 |
| | 15 |
| | — |
| | 8 |
| | 12 |
| | 20 |
|
| Total stores | 244 |
| | 188 |
| | 112 |
| | 544 |
| | 265 |
| | 200 |
| | 120 |
| | 585 |
|
Accessory stores
We operate full-price FOSSIL and SKAGEN accessory retail stores ("Accessory Stores") in order to broaden the recognition of our brand names. Accessory Stores carry a full assortment of FOSSIL or SKAGEN watches and other accessories. At the end of fiscal year 2017, the average size of our Accessory Stores was 1,500 square feet, but each store can vary in size based on its geographic location. For example, our international-based stores are generally smaller in square footage than our U.S.-based stores due to smaller retail store configurations generally available in international markets. The table below sets forth information about our Accessory Stores for the last five fiscal years:
|
| | | | | | | | | | | | | | | | | | | | |
| Fiscal Year | Open At Beginning of Period | | Opened During Period | | Closed During Period | | Open at End of Period | | Total Gross Square Footage (in thousands) | | Percentage Increase (Decrease) in Square Footage | | Average Gross Square Footage Per Retail Store |
| 2013 | 260 |
| | 30 |
| | 14 |
| | 276 |
| | 402.3 |
| | 10.7 | % | | 1,458 |
|
| 2014 | 276 |
| | 29 |
| | 16 |
| | 289 |
| | 432.2 |
| | 7.4 | % | | 1,496 |
|
| 2015 | 289 |
| | 45 |
| (1) | 13 |
| | 321 |
| | 496.4 |
| | 14.9 | % | | 1,546 |
|
| 2016 | 321 |
| | 10 |
| | 27 |
| | 304 |
| | 467.8 |
| | (5.8 | )% | | 1,539 |
|
| 2017 | 304 |
| | 2 |
| | 33 |
| | 273 |
| | 409.6 |
| | (12.4 | )% | | 1,500 |
|
(1) Includes stores added through our acquisition of the South Africa-based distributor S.Keren Watch Group ("SKWG").
Outlet stores
The majority of our outlet stores are FOSSIL branded and are located at select outlet malls throughout the U.S. and in certain international locations. We also operate outlets under the SKAGEN and Watch Station International names. Our outlets operating under the FOSSIL and SKAGEN names not only increase our brand awareness, but also enable us to liquidate excess inventory generally at significantly better prices than we would obtain through third-party liquidators. We generally discount excess inventory products in our outlet stores from 30% to 60% off our suggested retail price. The table below sets forth information about our outlet stores during the last five fiscal years:
|
| | | | | | | | | | | | | | | | | | | | |
| Fiscal Year | Open At Beginning of Period | | Opened During Period | | Closed During Period | | Open at End of Period | | Total Gross Square Footage (in thousands) | | Percentage Increase (Decrease) in Square Footage | | Average Gross Square Footage Per Retail Store |
| 2013 | 162 |
| | 46 |
| | 2 |
| | 206 |
| | 427.9 |
| | 20.1 | % | | 2,077 |
|
| 2014 | 206 |
| | 41 |
| | 4 |
| | 243 |
| | 497.4 |
| | 16.2 | % | | 2,047 |
|
| 2015 | 243 |
| | 29 |
| (1) | 2 |
| | 270 |
| | 543.0 |
| | 9.2 | % | | 2,011 |
|
| 2016 | 270 |
| | 6 |
| | 15 |
| | 261 |
| | 525.8 |
| | (3.2 | )% | | 2,015 |
|
| 2017 | 261 |
| | 7 |
| | 12 |
| | 256 |
| | 505.1 |
| | (3.9 | )% | | 1,973 |
|
(1) Includes stores added through our SKWG acquisition.
Other retail and e-commerce
We sell certain of our proprietary and licensed brand watches, as well as watches manufactured by other companies, in our Watch Station International stores.
We have an agreement with the House of Fraser ("HOF"), a U.K.-based department store, which allows us to operate a watch and jewelry department in certain HOF stores. Under this agreement, we own the inventory within the HOF store, provide the labor to operate the department and pay HOF a commission on the retail sales generated in the stores. As of December 30, 2017, we operated the watch and jewelry department in 52 HOF stores and HOF Online, although we do not include the number of locations associated with this arrangement in our retail store count.
Internet sales. Our U.S. e-commerce website for FOSSIL branded products is www.fossil.com. We also operate e-commerce websites in Australia, France, Germany, Italy, Japan and the United Kingdom. We also ship to Canada and Mexico through the use of a third-party e-commerce website to process transactions. Each of our websites features a full selection of geographically specific FOSSIL branded products. Certain of our websites also provide customer service, company news and shareholder information. Our websites are continually updated to provide a fresh look and an easy-to-navigate interface that enhances our brand image, while allowing consumers a pleasing shopping experience or a preview of what they may find at their local store carrying the brand. Since its launch, the www.fossil.com website has been promoted consistently in support of online brand and direct sales goals. Our online marketing efforts include the following: search/keyword marketing programs through major search partners including Google, Bing and Yahoo!; regular e-mail communications sent using our e-mail service provider to over one million registered consumers; product and promotional banners presented on affiliate networks and display banner networks; and online brand initiatives through social networks such as Facebook, Twitter, Instagram, Pinterest, YouTube, WeChat and Weibo in support of viral and traditional brand initiatives. We have leveraged our e-commerce infrastructure through websites to support our licensed and owned brands, including www.michele.com, www.misfit.com, www.skagen.com and www.watchstation.com.
Facilitating our wholesale distribution
We utilize an in-house sales staff and, to a lesser extent, independent sales representatives to promote the sale of our products to retail accounts. Our in-house sales personnel receive a salary and, in some cases, a commission based on a percentage of sales attributable to specified accounts. Independent sales representatives generally do not sell competing product lines and are under contracts with us that are generally terminable by either party upon notice ranging from 15 days to six months. These independent contractors are primarily compensated on a commission basis.
We have developed an approach to managing the retail sales process that involves monitoring our customers' sales and inventories by product category and style, primarily through electronic data interchange. We review weekly selling and inventory information to ensure our products are properly stocked and replenished on a timely basis. We also assist many of our customers in the conception, development and implementation of their marketing programs. We also participate in cooperative advertising programs with our major retail customers. We believe that management of the retail sales process has resulted in close relationships with our principal wholesale customers, often allowing us to influence the mix, quantity and timing of their purchasing decisions.
We believe that our sales approach has historically accounted for high retail turnover in our products, which can result in attractive profit margins for our wholesale customers. We believe that the resulting profit margins for our wholesale customers encourage them to devote greater selling space to our products within their stores. We are also able to work closely with buyers for our wholesale customers in determining the mix of products a store should carry. In addition, we believe that the buyers' familiarity with our sales approach has facilitated, and should continue to facilitate, the introduction of new products through our existing distribution network.
We permit the return of damaged or defective products. In addition, although we have no obligation to do so, we accept limited amounts of product returns from our wholesale customers in other instances. Accordingly, we provide allowances for the estimated amount of product returns. The allowances for product returns as of the end of fiscal years 2017, 2016 and 2015 were $75.2 million, $66.9 million and $68.7 million, respectively. We have not historically experienced returns in excess of our aggregate allowances.
Backlog
It is the practice of a substantial number of our customers not to confirm orders by delivering a formal purchase order until a relatively short time prior to the shipment of goods. As a result, the amount of unfilled customer orders includes confirmed orders and orders that we believe will be confirmed by delivery of a formal purchase order. A majority of such amounts represent orders that have been confirmed. The remainder of such amounts represents orders that we believe, based on industry practice and prior experience, will be confirmed in the ordinary course of business. Our backlog at a particular time is affected by a number of factors, including seasonality and the scheduling of the manufacture and shipment of our products. Accordingly, a comparison of backlog from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments. At the end of fiscal year 2017, we had unfilled customer orders of approximately $74.1 million, compared to $104.5 million and $84.9 million at the end of fiscal years 2016 and 2015, respectively.
Manufacturing
Watches and jewelry. During fiscal year 2017, approximately 55% of the watches we procured from Asia were assembled or procured through our two majority-owned entities. The remaining watches we procured from Asia were assembled by approximately 39 unrelated factories located primarily in China and Hong Kong, which includes almost all the production and assembly of our display, digital and mass market watches. During fiscal year 2017, our Swiss-made watches were assembled primarily by two of our majority-owned entities and three third-party factories in Switzerland. During fiscal year 2017, approximately 63% of our jewelry products were manufactured by one of our majority-owned entities. The remaining 37% of our jewelry products were manufactured by approximately 18 factories located primarily in China. Although we have no ownership interest in these unrelated watch and jewelry factories, Fossil East maintains oversight and control of the supply chain from design through final delivery of the finished product as it does with our related factories. We believe substantial ownership of the assembly factories that produce a significant amount of our fashion watches and jewelry is critical to our operating model, as we believe this allows us to keep our designs proprietary, control the size of our production runs and vertically manage our supply chain.
The principal components used in the assembly of our watches are cases, crystals, dials, hands, movements and connected modules, bracelets and straps. These components are obtained from a large number of suppliers located principally in China, Hong Kong, India, Italy, Japan, South Korea and Thailand. The majority of the movements, cases, dials, bracelets and hands used in the assembly of our watches are supplied by eleven principal vendors. During fiscal years 2017, 2016 and 2015, two vendors were responsible for supplying approximately 49%, 37% and 43% of our case and bracelet components, respectively. Additionally, three vendors were responsible for supplying approximately 78%, 76% and 73% of our movements in fiscal years 2017, 2016 and 2015, respectively. The principal materials used in the manufacture of our jewelry products are base metals, stainless steel, semi-precious stones or silver jewelry with 18K gold plating on top. These components are primarily obtained from the same factories that we use for our watches. Except for the two case and bracelet vendors and the three movement vendors noted above, we do not believe that our business is materially dependent on any single component supplier.
We believe that we have established and maintain close relationships with a number of component manufacturers and assembly factories primarily located in China, Hong Kong and Switzerland. The loss of any one of these manufacturers could temporarily disrupt shipments of certain of our watch and jewelry products. In addition, we believe that losing one or more of the component vendors, watch assembly factories or jewelry manufacturers could have a material impact on our ability to source these products and meet our sales plans. Our future success will generally depend upon our ability to maintain close relationships with, or ownership of, our current watch assembly and jewelry manufacturing factories and to develop long-term relationships with other vendors and manufacturers that satisfy our requirements for price, quality and production flexibility.
Other Accessories. During fiscal year 2017, all of the manufacturing of our handbags, small leather goods and belts was outsourced. We believe that our policy of outsourcing the production of these product categories allows us flexibility in selecting our suppliers while avoiding significant capital expenditures, build-ups of work-in-process inventory and the costs of managing a substantial production work force.
General. We have a Code of Conduct for Manufacturers ("Manufacturer Code") that sets forth the corporate responsibility requirements for our suppliers, including compliance with international labor and human rights standards and environmental laws and regulations. Before supplying products to us, our manufacturers sign an agreement that includes a commitment to abide by our Manufacturer Code. For more information on our Manufacturer Code, see "Code of Conduct for Manufacturers."
Our products are assembled or manufactured according to plans that reflect management's estimates of product performance based on recent sales results, current economic conditions and prior experience with manufacturing sources. The average lead time from the commitment to purchase products through the production and shipment thereof ranges from two to four months for our watches, leather goods, and jewelry. We believe that the close relationships, including ownership interests in some cases, we have established and maintain with our principal assembly or manufacturing sources constitute a significant competitive advantage and allow us to quickly and efficiently introduce innovative product designs and alter production in response to the retail performance of our products.
Code of Conduct for Manufacturers
We are committed to ethical and responsible conduct in all of our operations and respect for the rights of all individuals. We strive to ensure that human rights are upheld for all workers involved in our supply chain, and that individuals experience safe, fair and non-discriminatory working conditions. In addition, we are committed to compliance with applicable environmental requirements and are committed to seeing that all of our products are manufactured and distributed in compliance with applicable environmental laws and regulations. We expect that our business partners will share these commitments, which we enforce through our Manufacturer Code.
Our Manufacturer Code specifically requires our manufacturers to not use child, forced or involuntary labor and to comply with applicable environmental laws and regulations. We provide training to our factories related to our Manufacturer Code and the applicable laws in the country in which the factory is located. The training provides the factories with a more in-depth explanation of our Manufacturer Code.
In addition to the contractual obligation, we evaluate our suppliers' compliance with our Manufacturer Code through audits conducted both by our employees and third-party compliance auditing firms. In most cases, the audits are announced. If we believe that a supplier is failing to live up to the standards of our Manufacturer Code, we may terminate the supplier or provide the supplier with an opportunity to remedy the non-compliance through the implementation of a corrective action plan. For those suppliers on a corrective action plan, we will work with the supplier as necessary to help them understand the non-compliance and provide advice on how to remedy the non-compliance. We conduct a follow-up audit to confirm compliance after the implementation of the corrective action plan. Should the supplier continue to fail to meet our standards, we may seek to eliminate such supplier from our supply chain.
Quality control
Our quality control program attempts to ensure that our products meet the standards established by our product development and quality staff. SamplesDevelopment samples of products are inspected by us prior to placing orders with factories to ensure compliance with our technical design specifications.designs. We also typically inspect or audit inspections of "top of production" prototypessamples of each product for compliance before or at the start of commencing production. The operations of ourthe Hong Kong and Chinese
factories that produce our products are monitored on a periodic basis by Fossil East, and the operations of our Swiss factories are monitored on a periodic basis by Montres Antima SA, one of our foreign operating subsidiaries. Substantially all of
Intellectual Property
We use our FOSSIL, MICHELE, RELIC, SKAGEN and ZODIAC trademarks, as well as other trademarks, on watches, our FOSSIL and SKAGEN trademarks on jewelry, and certain of our FOSSIL trademark on leather goods and other fashion accessories are inspected by personnel of Fossil East or by the assembly/manufacturing facility prior to shipment to our distribution centers. Final inspections, on a sampling basis, occur when the products are received in our distribution centers. We believe that our policy of inspecting our products at the assembly/manufacturing facility, upon receipt at our distribution facilities and prior to shipment to our customers is important to maintain the quality, consistency and reputation of our products.
Distribution
Upon completion of assembly/manufacturing, the majority of our products are shipped to one of our warehousing and distribution centers in Texas, Germany or Hong Kong, from which they are shipped to subsidiary warehouses or directly to customers in selected markets. Our centralized warehouse and distribution facilities allow us to maximize our inventory management and distribution capabilities and more readily meet the varying distribution requirements placed on us by our customers at a lower cost. Our facilities in Texas and Germany are equipped with automated material handling equipment operated by software from SAP and Manhattan Associates. The automated equipment and operating systems, in conjunction with the continual sampling of our outgoing orders prior to shipment, are important in maintaining the quality, accuracy, speed and reputation of our products and distribution service.
Our warehouse and distribution facilities in Texas operate in a special purpose sub-zone established by the U.S. Department of Commerce Foreign Trade Zone Board. This sub-zone provides the following economic and operational advantages to us: (i) we do not have to pay duty on imported merchandise until it leaves the sub-zone and enters the U.S. market; (ii) we do not have to pay any U.S. duty on merchandise if the imported merchandise is subsequently shipped to locations outside the U.S. and; (iii) we do not have to pay local property tax on inventory located within the sub-zone.
Information technology systems
General. We believe that automation, reliable and scalable systems, accurate reporting and rapid flow of communication is essential to maintain our competitive position and support our key operating and financial goals. Therefore, we continue to invest in computer hardware, system applications and telecommunication networks. Our information technology systems consist of a wide spectrum of financial, distribution, human resources, merchandising, planning, point-of-sale, supply chain and other solutions. Where possible and cost effective, we leverage our various systems on a global basis, which enhances the accuracy, timeliness and accessibility of the relevant data.
Inventory control. We maintain inventory control systems at our facilities that enable us to track each product from the time it is shipped from our factory through shipment to our customers, or consumer in the case of our retail stores, concessions and websites. To facilitate this tracking, a significant number of foreign countries. We also use FOSSIL, WATCH STATION INTERNATIONAL, and WSI as trademarks on retail stores and FOSSIL, SKAGEN, WATCH STATION INTERNATIONAL, WSI, ZODIAC and MICHELE as trademarks on online e-commerce sites. We have taken steps to establish or provide additional protection for our trademarks by registering or applying to register our trademarks for relevant classes of products sold by us are pre-ticketed and bar coded. Our inventory control systems report shipping, sales and individual stock keeping unit level inventory information. We manage the retail sales process by monitoring customer sales and inventory levels ofin each country where our products by product category and style, primarily through electronic data interchange. We believe thatare sold in addition to certain foreign countries where it is our distribution capabilities enable usintent to reduce inventory risk and increase flexibility in responding to the delivery requirements ofmarket our customers. Our management believes that our electronic data interchange efforts will continue to growproducts in the future as customers focus further on increasing operating efficiencies. In
addition, we maintain systems thatfuture. We also have rights in certain copyrights and designs both in the United States and in other countries where our products are designed to track inventory movement through our Company-owned stores. We monitor store inventory movement through review of detailed sales transaction records, which are accumulated on each store’s point-of-sale system.
Enterprise resource planning. We have implemented SAP ERP in our Americas and Europe operations. This software is installed on a single site platform located in our U.S. headquarters facility. The software currently supports the human resources, sales and distribution, inventory planning, retail merchandising and operational and financial reporting systems of our U.S. businesses and most subsidiary operations in Europe. It also supports manufacturing operations in India and Europe. Additionally, we have implemented other non-SAP systems for the purpose of merchandise planning and product lifecycle management.principally sold.
We continue to monitorexplore innovations in the growthdesign and assembly of our subsidiary sales operations in Asiaproducts. As a result, we have been granted, and will migrate these operations at the appropriate timehave pending, various U.S. and international design and utility patents related to effectively benefit from our global SAP platform. However, we do operate SAP human resource, financial planningcertain product designs, features, and warehouse management modules in Hong Kong to provide efficiencies to further support our regional warehouse in Hong Kong and the related supply chain associated with our local country operations, including our Company-owned retail stores throughout Asia. We have implemented Navision as our standard system throughout mosttechnologies. As of December 30, 2023, none of our Asia distributionpatents were material to our business.
We rely upon unpatented trade secrets, know-how, and manufacturing subsidiary operations. The Navision system supports many of the same functions ascontinuing technological innovation to develop and maintain our SAP system on a local country level.
Enterprise performance management systems.competitive position. We have implemented customized Hyperion financial reporting software from Oracle Corporation. The software increases the efficiency ofstrive to protect our consolidationtrade secrets and reporting processother proprietary information through agreements with current and provides a more dynamic way to view and analyze data. The Hyperion planning tool also provides more dynamic and robust budgeting and forecasting capabilities.
Product lifecycle management. We have implemented Dassault Systems Enovia in ourprospective product development function. This system enablespartners, confidentiality agreements with employees, consultants and others that may have access to our global product development process acrossproprietary information and through the use of other security measures.
We aggressively protect our multiple brandstrademarks and product categories. In addition to aligning this process, the platform enables a global solution for collaboration, sample management, design tool integration,trade dress and calendar management.
Cyber/Data security. Our business involves the receiptpursue infringement claims both domestically and storage of personal information about customers and employees, the protection of which is critical to us. If we experience a significant breach of customer, employee, and/or company data it could attract a substantial amount of media attention, damage our customer relationships and reputation and result in lost sales, fines, or lawsuits. Our Board of Directors and/or our Audit Committee review our data security risks and strategy on a regular basis, and we have obtained insurance liability coverage for certain data security or privacy breaches.
IT support services. Our global IT support operations are managed by us within a managed service model with a global IT service provider in order to gain long-term IT operational maturity, resource flexibility and improved financial leverage of our IT support costs related to: service desk, application support, administration and infrastructure administration.
Warranty and repair
Our watch products are covered by limited warranties against defects in materials or workmanship. Historically, our FOSSIL and RELIC watch products sold in the U.S. have been covered for warranty periods of 11 years and 12 years, respectively, and our SKAGEN branded watches have been covered by a lifetime warranty. Beginning in 2017, these brands are covered by a two year warranty. Generally, all other products, including leathers and jewelry, sold in the U.S.internationally. We also pursue counterfeiters both domestically and internationally are covered by a comparable one to two year warranty. The majority of our defective watch products returned by consumers in the Americas are processed at our repair facilities in Texas while defective watch products returned by consumers in Europe are processed at our repair facilities in France. We also maintain repair facilities at a majority of our subsidiaries,through third-party online monitoring tools and through leads generated internally, as well as through our network of third-party distributors to handle repairs which are minor in nature or are not convenient to onebusiness partners worldwide.
Seasonality
Our business has a seasonal pattern, with a significant portion of our centralized repair facilities. In most cases, defective products under warranty are repaired by our personnel or third-party distributors. We attempt to retain adequate levels of component parts to facilitate after-sales service of our watches, even after specific styles are discontinued. We have a component parts system that trackssales occurring during the inventory of our various component replacement parts that can be utilized by our repair facilities for identifying stock levels and availability for procurement. Watch and non-watch products under warranty that cannot be repaired in a cost-effective manner are replaced by us at no cost to the customer. Our warranty liability at the end of fiscal years 2017, 2016 and 2015 was $19.4 million, $15.4 million and $13.7 million, respectively. Our warranty liability is estimated using historical warranty repair expense. As changes occur in sales volumes and warranty costs, the warranty accrual is adjusted as necessary. Due to the nature of connected products, their warranty costs are usually more than traditional products. A shift in product mix from traditional to connected products generally results in an increase in our warranty liabilities. Repair servicesend-of-year holiday period.
Significant Customer
No customer accounted for approximately 1.2%10% or more of our consolidated net sales in fiscal year 2017, 1.2%years 2023, 2022 or 2021.
Competition
The businesses in fiscal year 2016which we compete are highly competitive and 1.1%fragmented. Our traditional watch business generally competes with a number of established manufacturers, importers and distributors, including Armitron, Citizen, Gucci, Guess?, Kenneth Cole, LVMH Group, Movado, Raymond Weil, Seiko, Swatch, Swiss Army, TAG Heuer and Timex. In addition, our leather goods, sunglasses, and jewelry businesses compete with a large number of established companies that have significant experience developing, marketing and distributing such products. Our competitors include distributors that import watches and accessories from abroad, U.S. companies that have established foreign manufacturing relationships and companies that produce accessories domestically.
In addition, we face intense competition in fiscal year 2015.the watch market from smartwatches from technology brands such as Apple, Garmin and Samsung, and from fitness brands such as Fitbit. Many of these brands have significantly more resources than we do in areas such as product development and marketing. While we did compete in the smartwatch category for a number of years, we recently decided to exit this category to focus our resources on our traditional watch offerings. We believe our design and branding are strong competitive advantages in the traditional watch market.
Although the level and nature of competition varies among our product categories and geographic regions, we compete on the basis of style and technical features, price, value, quality, brand name, advertising, marketing, distribution and customer service. Our ability to identify and respond to changing fashion trends and consumer preferences, to maintain existing relationships and develop new relationships with manufacturing sources, to deliver quality merchandise in a timely manner, to manage the retail sales process, and to continue to integrate technology into our business model are important factors in our ability to compete. Our distinctive business model of owning the distribution in many key markets and offering a globally recognized portfolio of proprietary and licensed products allows for many competitive advantages over smaller, regional or
local competitors. This allows us to bypass a local distributor's cost structure in certain countries, resulting in more competitively priced products, while also generating higher product and operating margins.
Governmental regulationsRegulation
Imports and import restrictions.Import Restrictions
Most of our products are assembled or manufactured overseas. As a result, the U.S. and countries in which our products are sourced or sold may from time to time modify existing or impose new quotas, duties (including antidumpinganti-dumping or countervailing duties), tariffs or other restrictions in a manner that adversely affects us. For example, our products imported tofor distribution in the U.S. are subject to U.S. customs duties, and in the ordinary course of our business, we may from time to time be subject to claims by the U.S. Customs Service for duties and other charges. Factors that may influence the modification or imposition of these restrictions include the determination by the U.S. Trade Representative that a country has denied adequate intellectual property rights or fair and equitable market access to U.S. firms that rely on intellectual property, trade disputes between the U.S. and a country that leads to withdrawal of "most favored nation" status for that country and economic and political changes within a country that are viewed unfavorably by the U.S. government. We cannot predict the effect these events would have on our operations, if any, especially in light of the concentration of our assembly and manufacturing operations in Hong Kong, and mainland China.
General.General
We are subject to laws regarding customs, tax, employment, privacy, truth-in-advertising, consumer product safety, zoning and occupancy and other laws and regulations that regulate and/or govern the importation, promotion and sale of consumer products and our corporate, retail and distribution operations.
Intellectual propertyCompliance and Trade
Trademarks.Code of Conduct for Manufacturers ("Manufacturer Code")
We use our FOSSIL, MICHELE, MISFIT, RELIC, SKAGENare committed to ethical and ZODIAC trademarks, as well as other trademarks, on certainresponsible conduct in all of our watches, smart watches, activity trackers, jewelry, leather goodsoperations and other fashion accessories inrespect for the U.S. and in a significant numberrights of foreign countries. We also use FOSSIL, SKAGEN, WATCH STATION INTERNATIONAL®, and WSI® as trademarks on retail stores and FOSSIL, SKAGEN, WATCH STATION INTERNATIONAL, WSI, MISFIT, ZODIAC and MICHELE as trademarks on online e-commerce sites. We have taken steps to establish or provide additional protection for our trademarks by registering or applying to register our trademarks for relevant classes of products in each country where our products are sold in addition to certain foreign countries where it is our intent to market our products in the future. Each registered trademark may be renewable indefinitely, so long as we continue to use the mark in the applicable jurisdiction and make the appropriate filings when required. We aggressively protect our trademarks and trade dress and pursue infringement both domestically and internationally. We also pursue counterfeiters both domestically and internationally through third party on-line monitoring and through leads generated internally, as well as through our business partners worldwide.
Patents. We continue to explore innovations in the design and assembly of our watch, smart watch, activity tracker and related products. As a result, we have been granted, and have pending, various U.S. and international design and utility patents related to certain of our product designs, features, and technologies. As of December 30, 2017, none of our patents were material to our business.
License agreements. A significant portion of our sales and net income is, and is expected to continue to be, derived from the sales of products produced under licensing agreements with third-parties. Under these license agreements, we generally have the right to produce, market and distribute certain products utilizing the brand names of other companies. Our significant license agreements have various expiration dates between 2018 and 2025.
Other. We rely upon unpatented trade secrets, know-how, and continuing technological innovation to develop and maintain our competitive position, particularly in the wearable technology space.all individuals. We strive to protectensure that human rights are upheld for all workers involved in our trade secretssupply chain, and other proprietary information through agreementsthat individuals experience safe, fair and non-discriminatory working conditions. In 2021, we launched the Fossil GroupHuman Rights Policy. This further supports our commitment to human rights within our entire supply chain.
In addition, we are committed to compliance with currentapplicable environmental requirements and prospective product development partners, confidentiality agreements with employees, consultants and othersare committed to seeing that may have access to our proprietary information and through the use of other security measures.
Seasonality
Although the majorityall of our products are not seasonal,manufactured and distributed in compliance with applicable environmental laws and regulations. We expect that our business partners will share these commitments, which we enforce through our Manufacturer Code.
Our Manufacturer Code specifically requires our manufacturers to not use child, forced or involuntary labor and to comply with applicable environmental laws and regulations. We provide training to our factories related to our Manufacturer Code and the applicable laws in the country in which the factory is seasonal by nature. A significant portionlocated. The training provides the factories with a more in-depth explanation of our net sales and operating income is generated during the third and fourth quarters of our fiscal year, which includes the "back to school" and Christmas seasons. Additionally, as our retail and e-commerce sales continue to maintain a significant percentage of our sales mix, they will benefit our sales and profitability in our fiscal fourth quarter, generally at the expense of our fiscal first and second quarters when it is more difficult to leverage our retail and e-commerce expenses against the related sales. The amount of net sales and operating income generated during our fiscal fourth quarter also depends upon the anticipated level of retail sales during the Christmas season, as well as general economic conditions and other factors beyond our control. Manufacturer Code.
In addition to the amount of net sales and operating income generated duringcontractual obligation, we evaluate our fiscal first quarter depends in part upon the actual level of retail sales during the Christmas season. For example, lower levels of inventory heldsuppliers' compliance with our Manufacturer Code through audits conducted both by our wholesale customers atemployees and third-party compliance auditing firms. In most cases, the end of the Christmas season may result in higher levels of restocking orders placed by them during our fiscal first quarter.
Competition
The businesses in which we competeaudits are highly competitive and fragmented. We believe that the current market for traditional watches can be divided into four segments, ranging from lower price point watches that are typically distributed through mass market channels to luxury watches at higher price points that are typically distributed through fine watch departments of upscale department stores or upscale specialty watch and fine jewelry stores. Our watch business generally competes in these segments with a number of established manufacturers, importers and distributors, including Armitron, Citizen, Gucci, Guess?, Kenneth Cole, LVMH Group, Movado, Raymond Weil, Seiko, Swatch, Swiss Army, TAG Heuer and Timex. In addition, our leather goods, sunglasses, and jewelry businesses compete with a large number of established companies that have significant experience developing, marketing and distributing such products. In all of our businesses, we compete with numerous manufacturers, importers and distributors who may have significantly greater financial, distribution, advertising and marketing resources than us. Our competitors include distributors that import watches and accessories from abroad, U.S. companies that have established foreign manufacturing relationships and companies that produce accessories domestically.
We believe the risk of significant new competitors for traditional watches is mitigated to some extent by barriers to entry such as high startup costs and the development of long-term relationships with customers and manufacturing sources. However, in the expanding wearable technology industry we face competition from technology brands such as Apple and Samsung, from fitness brands such as Fitbit, as well as from many established traditional watch manufacturers that have launched wearable technology products. As this segment evolves and grows, there will likely be increased competition as well. However, we believe our design, branding, significant scale and distribution are strong competitive advantages.
Although the level and nature of competition varies among our product categories and geographic regions,announced. If we believe that a supplier is failing to live up to the standards of our Manufacturer Code, we competemay terminate the supplier or provide the supplier with an opportunity to remedy the non-compliance through the implementation of a corrective action plan.
Trade
Our warehouse and distribution facility in Dallas, Texas operates in a special purpose sub-zone established by the U.S. Department of Commerce Foreign Trade Zone Board. This sub-zone provides the following economic and operational advantages to us: (i) we do not have to pay duty on imported merchandise until it leaves the sub-zone and enters the U.S. market; (ii) we do not have to pay any U.S. duty on merchandise if the imported merchandise is subsequently shipped to locations outside the U.S.; and (iii) we do not have to pay local property tax on inventory located within the sub-zone.
Information Systems
Enterprise Resource Planning
We utilize SAP ERP in our U.S. operations and throughout most of our European operations to support our human resources, sales and distribution, inventory planning, retail merchandising and operational and financial reporting systems of
our business, and Navision in our Asian operations to support many of the same functions on a local country level. We also use tools provided by salesforce.com, inc. to globally support our brand websites, marketing and customer initiatives.
Enterprise Performance Management Systems
We have implemented customized Hyperion financial reporting software from Oracle Corporation. The software increases the efficiency of our consolidation and reporting process and provides a more dynamic way to view and analyze data. The Hyperion planning tool also provides more dynamic and robust budgeting and forecasting capabilities.
Point-of-Sale System
We began the global implementation of a new point-of-sale system in 2023 at our retail stores beginning in Europe with additional implementation in the Americas and Asia planned in 2024. This point-of-sale system will significantly enhance our omni-channel capabilities allowing us to better serve our customers across channels with inventory and fulfillment.
Customer Data Platform
We utilize a next generation, cloud-based Customer Data Platform (CDP) to better capture, identify, and manage our customer narrative and further enable our sales programs and interactive marketing initiatives in a more personalized, secure and dynamic manner.
Customer Master Data Migration
We transitioned our master customer data from an on-premise, proprietary data repository to a cloud native, industry standard design based on the basis of styleGoogle Cloud Platform (GCP) architecture, in order to better secure and technical features, price, value, quality, brand name, advertising,improve the long-term performance and integration for future key marketing, distributionanalytics, AI, and customer service. We believe that our ability to identify and respond to changing fashion trends and consumer preferences (including wearable technology), to maintain existing relationships and develop new relationships with manufacturing sources, to deliver quality merchandise in a timely manner, to manage the retail sales process, and to continue to integrate technology into our business model are important factors in our ability to compete. We also believe that our distinctive business model of owning the distribution in many key markets and offering a globally recognized portfolio of proprietary and licensed products allows for many competitive advantages over smaller, regional or local competitors. This "ownership of the market" allows us to bypass the local distributor's cost structure in certain countries, resulting in more competitively priced products while also generating higher product and operating margins.systems.
EmployeesHuman Capital Resources
As of December 30, 2017, we employed2023, our global team consisted of approximately 12,300 persons, including approximately 7,300 persons employed by6,100 people, with 4,300 based in our foreign operatinginternational subsidiaries.
None of our domestic or foreign-based employees are represented by a trade union. However, certain European-based employees are represented by work councils, which include certaina number of our current employees who negotiate with management on behalf of all the applicable employees.
Our Commitment
We pride ourselves on being a purpose driven consumer-centric organization where our employees have never experiencedthe opportunity to thrive. We aim to attract, develop and retain top talent through compelling employment opportunities, competitive compensation, and benefits, and fostering personal development within a purposeful work stoppageenvironment.
Workforce Composition
Our global presence spans the Americas (38%), Europe (30%), and consider our working relationshipAsia-Pacific (32%), with a diverse workforce where 62% are women and 38% are men. In the U.S., including corporate, retail, and distribution employees, 59% of employees identify as black and indigenous people of color (“BIPOC”), 40% identify as white, and 1% did not self-identify.
We're dedicated to fostering an environment where diversity, equity, and inclusion (DE&I) propel both our employees and the company forward. Our commitment to DE&I is guided by our five key objectives:
1.Growing our knowledge. We understand DE&I is a continuous journey, centralizing our efforts on education through various platforms like online communities, Employee Resource Groups (ERGs), and mandatory training on unconscious bias and inclusion. Celebrating cultural moments and fostering open discussions on DE&I issues are also pivotal.
2.Increasing our Diversity. Our aim to increase BIPOC and female representation has led to nearly 50% of our external hires being BIPOC the past year, a 4% increase over the previous year. Initiatives like the WINGEd! (Women Inspired to Network and Grow through Education) program, which focuses on growing skills around self-awareness, confidence, the value of risk, and career ownership, is one of the key items that has helped us to have 54% of our global leaders and 46% of senior leadership being female.
3.Creating a more inclusive and equitable environment for all employees. For four years, the Human Rights Campaign has recognized us as a top employer for LGBTQ+ employees. We've seen a 30% increase in ERG participation, emphasizing support across diverse employee groups. Our ERGs have organized over 71 events, engaging more than 12,000 participants.
4.Driving accountability. We've linked executive compensation to DE&I achievements and integrated DE&I into our leadership programs, aiming for transparency in our DE&I goals.
5.Leveraging our diversity to benefit external stakeholders. Our influence extends beyond our company. We actively participate in industry DE&I councils and initiatives like the Black in Fashion Council and CEO Action for Diversity and Inclusion. Our efforts include creating products supporting causes like the HBCU 20x20 program and organizing career development events for students.
Through these efforts, we're not just promoting diversity and inclusion internally but also making a meaningful impact in the community and industry.
Engaging the Fossil Group Workforce
We are committed to fostering a vibrant workplace where engagement thrives. Our aim is to cultivate a high-performance culture enriched with individuals possessing the necessary skills and behaviors to drive company success and achieve personal excellence daily.
By regularly surveying our employees, we gain valuable insights into their viewpoints, motivations, and the areas where we, as an organization, can enhance our operations. This process is crucial for building and maintaining genuine engagement. Our findings consistently highlight the importance of career growth and development, effective communication, recognition, a clear understanding of the company's future, attractive compensation and benefits, and the chance to contribute to something greater.
To align our employees' aspirations with our business objectives, we have developed a workplace culture that includes:
•Comprehensive health and wellness benefits;
•Dynamic two-way communication strategies;
•Employee development programs that foster value creation;
•A performance management system that encourages growth opportunities through company support;
•Meaningful recognition mechanisms;
•A values-driven culture and workplace environment.
To maintain our status as a competitive and fair employer where every individual feels esteemed, we employ a standardized compensation framework. This system ensures equitable pay by defining, documenting, and benchmarking positions against local market standards, utilizing third-party, leading-edge salary data to establish fair pay ranges for each role.
The Future of the Fossil Group Workforce
In our journey toward shaping the future of work, councilsthis past year has been pivotal for us in listening and learning how to craft the optimal employee experience while propelling our business forward. We have continued with a hybrid working model, thoughtfully balancing the demand for flexibility with the necessity of face-to-face interactions that spur creativity, efficient execution, and personal development. Additionally, we have streamlined our operational framework, transitioning from a regionally dispersed model to a more unified structure, enhancing our overall efficiency.
In line with our commitment to a direct-to-consumer strategy, we have significantly increased our digital investments, achieving notable strides in assembling a worldwide team and substantially boosting our technical ability. Our ongoing investment in our Digital U program underscores our dedication to equipping our employees with advanced digital skills, ensuring they are well-versed in the latest digital practices.
Oversight
Our Board of Directors and related board committees are actively involved in areas associated with excellence in human resource management and related oversight of certain policies, practices, and outcomes – including compensation, DE&I, employee development, engagement, and succession planning. We share our employee survey results with our Board of Directors to keep them apprised of related sentiments, interests, and concerns. The Nominating and Corporate Governance
Committee helps to oversee ESG matters. The Audit Committee regularly participates in discussions with our leadership team to ensure oversight of enterprise-level risks and mitigation plans on various topics, including those associated with human capital risk. The Audit Committee also engages in regular review of the Company’s monitoring and enforcement of our Code of Conduct and Ethics and compliance. The Compensation and Talent Management Committee reviews and approves matters associated with compensation, benefits, and equity awards for qualifying employees. This work includes oversight of executive compensation and company goals that are part of executives’ annual performance reviews. These same goals serve as the foundation for the Company’s employee annual cash bonus plan. Our Board of Directors also established in 2023 a Special Committee of the Board to oversee the Company's strategic transformation initiatives, including those relating to our organizational structure.
We take pride in the strides we have made toward creating a work environment that is not only rewarding, but also deeply engaging and inspiring for our team members. In a world that evolves rapidly, our commitment to cultivating our culture remains steadfast. To surpass our goals and realize our ambitions, we are dedicated to a cycle of listening, learning, and collaboration. We aim to set impactful objectives, foster innovation, and maintain transparency about our journey, including both our achievements and the challenges we face. This approach solidifies our position as a prime choice for talented individuals who are both high-performing and highly engaged.
Corporate Social Responsibility
As a global business, we are aware of our environmental and social impact. Our corporate social responsibility (CSR) strategy, "Make Time for Good," aims to drive positive change across our operations and beyond. It sets measurable objectives in key areas of environmental and social sustainability.
"Make Time for Good" focuses on three pillars:
a.Good for Planet: Reducing our environmental footprint through sustainable design and operations.
b.Good for Communities: Supporting empowerment initiatives and improving community well-being.
c.Good for People: Promoting inclusion within our workforce.
Our latest CSR report, also serving as our UN Global Compact Communication on Progress, outlines our achievements and future goals. Access the report athttps://www.fossilgroup.com/sustainability/ to see how we are making a difference.
Available Information
Our website address is www.fossilgroup.com. The information on our website (including the CSR report) is not, and shall not be deemed to be, good.a part of this Annual Report on Form 10-K or incorporated into any other filings we make with the SEC. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), are available free of charge on our website as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. In addition, the SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including Fossil Group, that are electronically filed with the SEC.
General
We are a Delaware corporation formed in 1991 and are the successor to a Texas corporation formed in 1984. Our principal executive offices are located at 901 S. Central Expressway, Richardson, Texas 75080, and our telephone number at that address is (972) 234-2525. Our common stock is traded on the NASDAQ Global Select Market under the trading symbol FOSL.
Item 1A. Risk Factors
The statements containedIn addition to the risks described elsewhere in this Annual Report on Form 10-K thatreport, set forth below is a summary of the material risks related to an investment in our securities. These risks, some of which have occurred and/or are occurring and any of which could occur in the future, are not historical facts, including, butthe only ones we face. Additional risks not limitedpresently known to statements regardingus or that we currently deem immaterial may also have an adverse effect on us. If any of these risks actually occur, our expected financial position,business, results of operations, cash flows and financial condition could be materially and adversely impacted, which might cause the value of our securities to decline.
Pandemic and Public Health Risks
A pandemic has had in the past, and may have in the future, a material adverse impact on our business, operations, liquidity, financial condition and results of operations.
The recent COVID-19 pandemic caused global uncertainty and disruption in the geographic regions in which we run our business and financing plans foundwhere our suppliers, third-party manufacturers, retail stores, wholesale customers and consumers are located, particularly in Item 1. Business and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements withinChina.
Future public health epidemics or outbreaks could also adversely impact our business. The extent to which a new public health epidemic or outbreak impacts our operations will depend on future developments, including the meaningduration of the Securities Litigation Reform Actoutbreak, the severity of 1995the outbreak and involvethe actions to contain the outbreak or treat its impact, among others. Depending on the severity of a numberfuture outbreak, we may experience significant disruptions to our business operations. In addition, the spread and impact of an outbreak could adversely impact demand for our products, our ability to operate our stores and warehouse facilities, or our supply chain, all of which could adversely affect our future sales, operating results and overall financial performance. In addition, to the extent an outbreak adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in the risk factors included herein, or may affect our operating and uncertainties. The words "may", "believes", "expects", "plans", "intends", "anticipates" and similar expressions identify forward-looking statements. These forward-looking statements are based onfinancial results in a manner that is not presently known to us.
Strategic Risks
Our restructuring program may not be successful or we may not fully realize the expected cost savings and/or operating efficiencies from our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be thoserestructuring plans.
In February 2023, we announced that we anticipate.had implemented a restructuring plan entitled “Transform and Grow”. In August 2023, we expanded the financial goals of TAG beyond operating expense reductions to include gross margin improvements, which are expected to drive incremental operating income benefits over the next three years. The actualexpanded TAG plan is expected to generate approximately $300 million of annualized operating income benefits by the end of 2025. Restructuring plans present significant potential risks that may impair our ability to achieve anticipated operating enhancements and/or cost reductions, or otherwise harm our business, including higher than anticipated costs in implementing TAG, management distraction and employee attrition in excess of headcount reductions. If this program is not successful, then our results of the future events described in such forward-looking statementsoperations and financial condition could differbe materially from those stated in such forward-looking statements.
Our actual results may differ materially due to the risks and uncertainties discussed in this Annual Report on Form 10-K, including those discussed below. Accordingly, readers of this Annual Report on Form 10-K should consider these factors in evaluating, and are cautioned not to place undue reliance on, the forward-looking statements contained herein. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Risk Factors Relating to Our Businessadversely affected.
Our success depends upon our ability to anticipate and respond to changing fashion, functionality and product trends.
Our success depends upon our ability to anticipate and respond to changing fashion, functionality and product trends and consumer preferences in a timely manner. The purchasing decisions of consumers are highly subjective and can be influenced by many factors, such as brand image, marketing programs, functionality, and product features and design. Our success depends, in part, on our ability to anticipate, gauge and respond to these changing consumer preferences in a timely manner while preserving the authenticity and the quality of our brands. Although we attempt to stay abreast of emerging lifestyle and fashion trends and technology advances affecting accessories, any failure by us to identify and respond to such trends could adversely affect consumer acceptance of our existing brand names and product lines, which in turn could result in inventory valuation reserves and adversely affect sales of our products. If we misjudge the market for our products, we may be faced with a significant amount of unsold finished goods inventory, which could adversely affect our results of operations. In recent years, we have experienced decreasing net sales across allcertain of our product categories; in particular, net sales of watches have declined, reflecting the decline in the traditional watch market. If we are unable to adjust our product offerings and reverse the decrease in net sales, our results of operations and financial condition could be adversely affected.
Our success depends upon our ability to continue to develop innovative products, including wearable technology.products.
Our success depends upon our ability to continue to develop innovative products in the respective markets in which we compete. Wearable technology is a growing category of fashion that offers customers new functionality with accessories, including jewelry and smart watches. Our ability to respond to consumer preferences for wearable technology will depend in part on establishing successful partnerships with or acquiring companies that are involved in developing wearable technology. If we are unable to establish such partnerships or make meaningful acquisitions, this could negatively impact our ability to meet customer demands for wearable technology. Additionally, we may be unable to enhance and develop our products to satisfy consumer demands for wearable technology or we may fail to do so in a timely manner or at competitive prices. We may also fail to understand or estimate correctly the dynamics of this new market, such as reserves for sales returns, warranty reserves, inventory reserves or the allowance for bad debts attributable to this new product category. The process of developing new products is complex and uncertain, and involves time, substantial costs and risks, which are further magnified when the development process involves a transition to a new technology platform.risks. Our
inability or the inability of our partners, for technological or other reasons, some of which may be beyond our or our partners' control, to enhance, develop, manufacture, distribute and monetize wearable technology products in a timely manner, or at all, in response to changing consumer preferences for wearable technology, could have a material adverse effect on our business, results of operations and financial condition or could result in our products not achieving market acceptance or becoming obsolete. If we are unable to successfully introduce new products, or if our competitors introduce new or superior products, customers may purchase increasing amounts of products from our competitors, which could adversely affect our sales and results of operations. Further, it
If we are unable to effectively execute our e-commerce business strategy and provide a reliable digital experience for our customers, our reputation and operating results may take time to establishbe harmed.
E-commerce has increasingly comprised a stable positionlarger portion of our net revenues and was particularly impacted by the COVID-19 pandemic, which drove an acceleration in the wearableshift to online shopping. The success of our e-commerce business depends, in part, on third parties and factors over which we have limited control, including changing consumer preferences, both domestically and abroad, and promotional or other advertising initiatives employed by our wholesale customers or other third parties on their e-commerce sites. Any failure on our part, or on the part of our third-party digital partners, to provide attractive, reliable, secure and user-friendly e-commerce platforms could negatively impact our consumers’ shopping experience, resulting in reduced website traffic, diminished loyalty to our brands and lost sales.
The success of our business also depends on our ability to continue to develop and maintain a reliable digital experience for our customers. We strive to give our customers a seamless omni-channel experience both in stores and online across devices. Potential friction points in the consumer experience could negatively impact our ability to compete with other brands, which could adversely impact our business.
In addition, we must keep up to date with competitive technology categorytrends, including the use of new applications, enhancements and releases, and digital marketing tools. Failure to innovate and keep abreast of technology and improving the consumer experience could adversely affect digital sales and damage our brand and reputation.
Additionally, the success of our e-commerce business and the satisfaction of our consumers depend on their timely receipt of our products. The efficient flow of our products requires that our distribution facilities have adequate capacity to support the current level of e-commerce operations and any initial results should notanticipated increased levels that may follow from the growth of our e-commerce business. If we encounter difficulties with our distribution facilities, or if any such facilities were to shut down or be takenlimited in capacity for any reason, including as a guaranteeresult of future trends.
fire, other natural disaster, labor disruption, cyberattack or pandemic (including as a consequence of public health directives, quarantine policies or social distancing measures resulting from a pandemic), we could face shortages of inventory, and we could experience disruption or delay, or incur significantly higher costs and longer lead times for distributing our products to our consumers which could result in customer dissatisfaction. Any deterioration in the global economic environment, and any resulting declines in consumer confidence and spending,of these issues could have an adverse effect on our operating resultsbusiness and financial condition.harm our reputation.
Uncertainty in global markets, slowing economic growth, high levels of unemployment and eroding consumer confidence can negatively impact the level of consumer spending for discretionary items. This can affect our business as it is dependent on consumer demand for our products. Global economic conditions remain uncertain, and the possibility remains that domestic or global economies, or certain industry sectors of those economies that are key to our sales, may slow or deteriorate, which could result in a corresponding decrease in demand for ourWe regularly develop new products and negatively impact our results of operations and financial condition.
We have recently expanded, and intend to further expand, the scope of our product offerings,features, and new products introduced by us may not achieve consumer acceptance comparable to that of our existing product lines.
We have recently expanded, and intend to further expand, the scope ofregularly update our product offerings, particularly in the wearable technology space.offerings. As is typical with new products, market acceptance of new designs, features, and products is subject to uncertainty. In addition, we generally make decisions regarding product designs and technology development several months in advance of the time when consumer acceptance can be measured. If trends shift away from our products, if our wearable technology becomes outdatedwe are not able to develop and introduce new compelling products or if we misjudge the market for our product lines, we may be faced with significant amounts of unsold inventory or other conditions which could have a material adverse effect on our financial condition and results of operations.
The failure of new product designs or new product lines to gain market acceptance could also adversely affect our business and the image of our brands. Achieving market acceptance for new products or technology may also require substantial marketing efforts and expenditures to generate consumer demand. These requirements could strain our management, financial and operational resources. If we do not continue to develop innovative products that provide better design technology and performance attributesfeatures than the products of our competitors and that are accepted by consumers, or if our future product lines misjudge consumer demands, we may lose consumer loyalty, which could result in a decline in our sales and market share.
Recently enacted U.S. tax legislationOur ability to grow our sales is dependent upon the implementation of our business strategy, which we may not be able to achieve.
Our ability to grow our sales is dependent on the successful implementation of our business strategy. This includes diversification and innovation of our product offerings, driving our core brands and improving our omni-channel and digital capabilities. If we are not successful in the expansion or development of our product offerings, our new products are not profitable or do not generate sales comparable to those of our existing businesses, we are unable to achieve our digital
transformation goals or our restructuring and savings initiative does not achieve our desired results, our results of operations could be negatively impacted.
We also operate FOSSIL brand stores and other watch stores globally to further strengthen our brand image. As of December 30, 2023, we operated 302 stores worldwide. The costs associated with leasehold improvements to current stores and the costs associated with opening new stores and closing low performing stores, particularly those stores that have seen a significant reduction in traffic, could materially increase our costs of operation and result in impairment charges.
Increased scrutiny from investors and others regarding our corporate social responsibility initiatives, including environmental, social and other matters of significance relating to sustainability, could result in additional costs or risks and adversely impact our reputation.
Investor advocacy groups, large and influential institutional investors, investment funds, other market participants, shareholders and customers have increasingly focused on the environmental, social and governance ("ESG") or “sustainability” practices of companies. These parties have placed increased importance on the implications of the social cost of their investments. If our ESG practices do not meet investor or other industry stakeholder expectations and standards, which continue to evolve, our brand, reputation and customer and employee retention may be negatively impacted. Any sustainability report that we publish or other sustainability disclosure we make may include our policies, practices, metrics or targets on a variety of social and ethical matters, including corporate governance, environmental compliance, employee health and safety practices, human capital management, product quality, supply chain management, and workforce inclusion and diversity. It is possible that stakeholders may not be satisfied with our ESG practices or the speed of adoption. We could also incur additional costs and require additional resources to monitor, report and comply with various ESG practices. Also, our failure, or perceived failure, to meet the standards included in any sustainability disclosure could negatively impact our reputation, employee retention and the willingness of our customers and suppliers to do business with us.
The risks associated with climate change and other environmental impacts and increased focus by stakeholders on corporate responsibility issues, including those associated with climate change, could negatively affect our business results of operations, financial condition and cash flow.operations.
On December 22, 2017, the President signed into law Public Law No. 115-97, commonly referredOur business is susceptible to as the Tax Cuts and Jobs Act, following its passage by the United States Congress. The Tax Cuts and Jobs Act makes significant changes to U.S. federal income tax laws,risks associated with climate change, including changing the corporate tax rate to a flat 21% rate, introducing a capital investment deduction in certain circumstances, placing certain limitations on the interest deduction, modifying the rules regarding the usability of certain net operating losses, and making extensive changes to the U.S. international tax system. The new Global Intangible Low-Taxed Income (“GILTI”) provisions of the Tax Cuts and Job Act requiring the inclusion of certain foreign earnings in U.S. taxable income will increase our effective tax rate in future years. We are not yet able to reasonably estimate the effect of the GILTI provision of the Tax Cuts and Job Act and have not made any adjustments related to potential GILTI tax in our financial statements. If applicable, GILTI tax would first applythrough disruption to our fiscal year 2018supply chain, potentially impacting the production and distribution of our products and availability and cost of raw materials. Increased frequency and intensity of weather events due to climate change could increase the risk of a significant disruption to our operations, including at our global offices and warehouses and transportation and manufacturing partners. There is also increased focus from our stakeholders, including large institutional investors, consumers and employees, on corporate responsibility matters. While we are addressing climate-related issues impacting our business, there can be no assurance that our stakeholders will agree with our strategy or that we will be accounted for as incurred under the period cost method. We are currentlysuccessful in the process of analyzingachieving our goals. In addition, concern over climate change may result in new or additional legal, legislative and regulatory requirements to reduce or mitigate the effects of this new legislationclimate change on the environment. Failure to implement our business, results of operations, financial conditionstrategy or achieve our goals could damage our reputation, causing our investors, consumers or employees to lose confidence in our Company and cash flow. Thebrands, and negatively impact of these new rules is uncertain and could be adverse.our operations.
The effects of economic cycles, terrorism, acts of war and retail industry conditions may adversely affect our business.Operational Risks
Our businesssupply chain may be disrupted by changes in U.S. trade policy with China or as a result of a pandemic.
We rely on domestic and foreign suppliers to provide us with merchandise in a timely manner and at favorable prices. Among our foreign suppliers, China is subject to economic cyclesthe source of a substantial majority of our imports.
We recently experienced increased international transit times and retail industry conditions. Purchasesincreased shipping costs for a majority of discretionary fashion accessories, suchour products, primarily as a result of the COVID-19 pandemic. While our watches, handbags, sunglassestransit times and other products, tend to decline during recessionary periods when disposable income is low and consumers are hesitant to use available credit. In addition, acts of terrorism, acts of war and military action bothshipping costs have improved, any future disruption in the flow of our imported merchandise from China or a material increase in the cost of those goods or transportation without any offsetting price increases may significantly decrease our profits.
New U.S. tariffs or other actions against China and abroad can have a significant effect on economic conditions and may negatively affectany responses by China, could impair our ability to procuremeet customer demand and could result in lost sales or an increase in our products from manufacturers for sale to our customers. Any significant declines in general economic conditions, public safety concerns or uncertainties regarding future economic prospects that affect consumer spending habits couldcost of merchandise. This would have a material adverse effectimpact on consumer purchasesour business and results of our products.operations.
The loss of any of our license agreements pursuant to which a number of our products are produced,for globally recognized fashion brand names may result in the loss of significant revenues and may adversely affect our business.
A significant portion of our salesWe have entered into multi-year, worldwide exclusive license agreements for the manufacture, distribution and net income is, and is expected to continue to be, derived from the salessale of products produced under license agreements with third parties. Under these license agreements, we generally have the right to produce, market and distribute certain products utilizingbearing the brand names of other companies.certain globally recognized fashion brands. We sell products under certain licensed brands, including, but not limited to, ARMANI EXCHANGE, CHAPS, DIESEL, DKNY, EMPORIO ARMANI, KARL LAGERFELD, KATE SPADE NEW YORK, MARC JACOBS, MICHAEL KORS, and TORY BURCH. Sales of our licensed products amounted to approximately 47.0%accounted for 44.7% of our consolidated net sales for
fiscal year 2017,2023, including MICHAEL KORS
product sales, which accounted for approximately 22.6%17.6% of our consolidated net sales, and ARMANI product sales, under the ARMANI brands, which accounted for approximately 12.1%14.0% of our consolidated net sales.
Our significant third-party fashion brand license agreements have various expiration dates between 2018the years 2024 and 2025.2028. In addition, many of ourthese license agreements require us to make minimum royalty payments, spend minimum amounts on marketing, subject us to restrictive covenants or require us to comply with certain other obligations and may be terminated by the licensor if these or other conditions are not met or upon certain events. For example, our license agreement with MICHAEL KORS provides the licensor with a right to terminate some or all of the licensing rights if we fail to meet certain net sales thresholds for two consecutive years. In addition, each of our license agreements with MICHAEL KORS and ARMANI may be terminated byFor fiscal year 2023, we met the licensor effective at the end of 2019 if we fail to meet certain net sales thresholds in 2018.for MICHAEL KORS. If we are unable to achieve the minimum net sales thresholds, minimum marketing spend, restrictive covenants and/or other obligations of a license, in the future, we would need to seek a waiver of the non-compliance from the applicable licensor or amend the agreement to modify the thresholds, covenants or obligations or face the possibility that the licensor could terminate the license agreement before its expiration date. Though waivers may be obtained for non-compliance, we, or the licensor, may instead elect to modify or terminate the license agreement.
In addition, we may be unable to renew our existing license agreements beyond the current term or obtain new license agreements to replace any lost license agreements on similar economic terms or at all. For example, in fiscal year 2017, our licensing agreements with ADIDAS and BURBERRY were not renewed upon their expiration. The failure by us to maintain or renew one or more of our existing license agreements could result in a significant decrease in our sales and have a material adverse effect on our results of operations.
Our restructuring program may not be successful or we may not fully realize the expected cost savings and/or operating efficiencies from our restructuring plans.
As we announced in the fourth quarter of fiscal 2016, we have implemented, and plan to continue to implement, a restructuring plan to reinvent the Company, strengthen the foundation of the Company for the future and support long-term sales growth and profitability objectives. The program is intended to touch all aspects of the business, enhance operating capabilities, create greater efficiencies and take advantage of the Company's considerable scale. We estimate our total restructuring charges will be approximately $150.0 million. During fiscal years 2017 and 2016, we recorded $48.2 million and $27.8 million of restructuring charges, respectively, and we anticipate the remaining restructuring charges will be recorded predominately during fiscal year 2018. Restructuring plans present significant potential risks that may impair our ability to achieve anticipated operating enhancements and/or cost reductions, or otherwise harm our business, including higher than anticipated costs in implementing our restructuring plan, management distraction and employee attrition in excess of headcount reductions. If this program is not successful, then our results of operations and financial condition could be materially adversely affected.
Our Second A&R Credit Agreement subjects us to certain covenants.
On January 29, 2018, the Company, as the U.S. borrower, Fossil Group Europe GMBH, a wholly-owned subsidiary of the Company, as a non-U.S. borrower, and certain of the Company’s foreign subsidiaries from time to time party thereto, entered into a Second Amended and Restated Credit Agreement (the “Second A&R Credit Agreement”) with certain lenders party thereto, Wells Fargo Bank, National Association, as administrative agent and an issuing lender, Bank of America, N.A. and JPMorgan Chase Bank, N.A., as syndication agents, HSBC Bank USA, National Association, Compass Bank and Fifth Third Bank, as documentation agents, and Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and JPMorgan Chase Bank, N.A., as joint lead arrangers and joint bookrunners. The Second A&R Credit Agreement subjects us to certain covenants, including that we maintain a specific consolidated leverage ratio. These covenants may limit how we are able to conduct our business. The terms of any future indebtedness that we incur could include more restrictive covenants or ratios. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants. Our failure to comply with any such covenants could result in an event of default, which, if not cured or waived, could result in our being required to repay those borrowings before their maturity. If we are forced to refinance those borrowings on less favorable terms, our results of operations and financial condition could be adversely affected.
We have recorded impairment charges in the past and may record impairment charges in the future.
We are required, at least annually, or as facts and circumstances warrant, to test trade names to determine if impairment has occurred. We are also required to test property plant and equipment and other long lived assets for impairment as facts and circumstances warrant. Impairment may result from any number of factors, including adverse changes in assumptions used for valuation purposes, such as actual or projected net sales, growth rates, profitability or discount rates, or other variables. If the
testing indicates that impairment has occurred, we are required to record a non-cash impairment charge. Should the value of trade names, property plant and equipment and other long lived assets become impaired, it would have an adverse effect on our results of operations. In fiscal 2017, the Company took a non-cash intangible asset impairment charge of $7.07 per diluted share triggered by the sustained compression of the Company’s market capitalization that occurred throughout most of the latter part of the second fiscal quarter.
Our inability to effectively manage our retail store operations could adversely affect our results of operations.
During fiscal year 2017,2023, our global comparable retail store sales decreased 5.5%2%. During fiscal year 2018,2024, we intend to openanticipate closing approximately five new60 stores globally, and close 60 to 80 stores, depending on lease negotiations.negotiations, and opening a limited number of additional retail stores. The success of our retail business depends, in part, on our ability to open new profitable stores, close low performing stores and renew our existing store leases on terms that meet our financial targets. Our ability to open new stores on schedule or at all, to close low performing stores and to renew existing store leases on favorable terms or to operate them on a profitable basis will depend on various factors, including our ability to:
•identify suitable markets for new stores and available store locations;
•negotiate acceptable lease terms for new locations or renewal terms for existing locations;locations, particularly for those existing locations that have experienced a significant reduction in traffic;
manage and expand our infrastructure to accommodate growth;
•hire and train qualified sales associates;
•develop new merchandise and manage inventory effectively to meet the needs of new and existing stores on a timely basis; and
•maintain favorable relationships with major developers and other landlords; and
avoid construction delays and cost overruns in connection with the build-out of new stores.landlords.
Our plans to manage our store base may not be successful and the opening of new stores in the future may not result in an increase in our net sales even though they increase our costs. Our inability to effectively manage our retail store base could have a material adverse effect on the amount of net sales we generate and on our financial condition and results of operations.
New technologies could render our wearable technology obsolete.
New developments in technology may negatively affect the development or sale of our wearable technology or make such products obsolete. Our inability to enhance our existing wearable technology in a timely manner or to develop and introduce new products that incorporate new technologies and achieve market acceptance in a timely manner could negatively impact our competitive position, which could have a material adverse effect on our business or results of operations.
Increased competition from online only retailers and a highly promotional retail environment may increase pressure on our margins.
The continued increase in e-commerce competitors for retail sales and slowing mall traffic has resulted in significant pricing pressure and a highly promotional retail environment. In addition, the traditional watch market has declined in recent years. These factors may cause us to reduce our sales prices to retailers and consumers, which could cause our gross margin to decline if we are unable to appropriately manage inventory levels and/or otherwise offset price reductions with comparable reductions in our costs. If our sales prices decline and we fail to sufficiently reduce our product costs or operating expenses, our profitability will decline. This could have a material adverse effect on our business, results of operations, and financial condition.
Certain key components in our products come from limited sources of supply, which exposes us to potential supply shortages that could disrupt the manufacture and sale of our products.
We and our contract manufacturers currently purchase a number of key components used to manufacture our products from limited sources of supply for which alternative sources may not be readily available. Any interruption or delay in the supply of any of these components could significantly harm our ability to meet scheduled product deliveries to our customers and cause us to lose sales. Interruptions or delays in supply may be caused by a number of factors that are outside of our and our contract or manufacturers' control. In addition, the purchase of these components on a limited source basis subjects us to risks of price increases and potential quality assurance problems. An increase in the cost of components could make our products less competitive and result in lower gross margins. In the event that we can no longer obtain materials from these limited sources of supply, we might not be able to qualify or identify alternative suppliers in a timely fashion. Any extended
interruption in the supply of any of the key components currently obtained from a limited source or delay in transitioning to a replacement supplier could disrupt our operations and significantly harm our business in any given period. If our supply of certain components is disrupted, our lead times are extended or the cost of our components increases, our business, operating results and financial condition could be materially affected.
Seasonality of our business may adversely affect our net sales, operating income and liquidity.
Our quarterly results of operations have fluctuated in the past and will continue to fluctuate as a result of a number of factors, including seasonal cycles, timing of new product introductions, timing of orders by our customers and mix of product sales demand. Our business is seasonal by nature. A significant portion of our net sales and operating income are generated
during the third and fourth quarters of our fiscal year, which includes the "back to school" and holiday seasons. The amount of net sales and operating income generated during our fiscal fourth quarter depends upon the anticipated level of retail sales during the holiday season, as well as general economic conditions and other factors beyond our control. In addition, the amount of net sales and operating income generated during our fiscal first quarter depends in part upon the actual level of retail sales during the previous holiday season. The seasonality of our business may adversely affect our net sales, operating income and liquidity during the first and fourth quarters of our fiscal year.
The amount of traffic to our retail stores depends heavily on the success of theshopping malls and retail centers in which our stores are located.
There continues to be a decrease in traffic in many of the shopping malls and retail centers in which our stores are located, which was accelerated by the impact of COVID-19, and has resulted in a decrease in traffic to our stores. The resulting decrease in customers for our retail stores has had an adverse effect on our results of operations. Additionally, several national department store anchors have closed or will be closing a number of their locations in shopping malls, which is likely to further decrease traffic and put increasing financial strain on the operators of those shopping mall locations. The loss of an anchor or other significant tenant in a shopping mall in which we have a store, continued declines in traffic to shopping malls or the closure of a significant number of shopping malls in which we have stores, may have a material adverse effect on our results of operations.
We have key facilities in the U.S. and overseas, the loss or shut down of any of which could harm our business.
Our administrative, information technology and distribution operations in the U.S. are conducted primarily from two separate facilities located in the Dallas, Texas area. Our operations internationally are conducted from various administrative, distribution and assembly facilities outside of the U.S., particularly in China, Germany, Hong Kong, India and Switzerland. The complete or temporary loss of use of all or part of these facilities could have a material adverse effect on our business.
Our warehouse and distribution facilities in the Dallas, Texas area are operated in a special purpose sub-zone established by the U.S. Department of Commerce Foreign Trade Zone Board. Although the sub-zone allows us certain tax advantages, the sub-zone is highly regulated by the U.S. Customs Service. This level of regulation may cause disruptions or delays in the distribution of our products out of these facilities. Under some circumstances, the U.S. Customs Service has the right to shut down the entire sub-zone and, therefore, our entire warehouse and distribution facilities. During the time that the sub-zone is shut down, we may be unable to adequately meet the supply requests of our customers and our Company-owned retail stores, which could have an adverse effect on our sales, relationships with our customers, and results of operations, especially if the shutdown were to occur during our third or fourth quarter.
Fluctuations in the price, availability and quality of raw materials could cause delays and increase costs.
Fluctuations in the price, availability and quality of the raw materials used in our products could have a material adverse effect on our cost of sales or ability to meet our customers' demand. The price and availability of such raw materials may fluctuate significantly, depending on many factors, including natural resources, increased freight costs, increased labor costs, especially in China, increased component costs and weather conditions. Recently inflation rates in the U.S. and certain international markets reached levels not seen in decades. While we have recently increased the prices of a number of our products as a result and may implement other price increases in the future, we may not be able to pass on all, or a significant portion of, such higher raw materials prices to our customers or such price increases may not be accepted by our customers, which could impact our margins or result in lost revenues.
We rely on third-party assembly factories and manufacturers; and problems with, or loss of, our assembly factories or manufacturing sources could harm our business and results of operations.
The majority of our watch and jewelry products are currently assembled or manufactured to our specifications by independent entities in China. All of our handbags, small leather goods, belts and soft accessories are produced by independent manufacturers. We have no long-term contracts with these independent assembly factories or manufacturers and compete with other companies for production facilities. All transactions between us and our independent assembly factories or manufacturers are conducted on the basis of purchase orders. We face the risk that these independent assembly factories or manufacturers may not produce and deliver our products on a timely basis, or at all. As a result, we cannot be certain that these assembly factories or manufacturers will continue to assemble or manufacture products for us or that we will not experience operational difficulties with our manufacturers, such as reductions in the availability of production capacity, errors in complying with product specifications, insufficient quality control, shortages of raw materials, failures to meet production deadlines, increases in manufacturing costs or pandemic-related delays. Our future success will depend upon our ability to maintain close relationships with our current assembly factories and manufacturers and to develop long-term relationships with other manufacturers that satisfy our requirements for price, quality and production flexibility. Our ability to establish new manufacturing relationships
involves numerous uncertainties, including those relating to payment terms, costs of manufacturing, adequacy of manufacturing capacity, quality control and timeliness of delivery. Any failure by us to maintain long-term relationships with our current assembly factories and manufacturers or to develop relationships with other manufacturers could have a material adverse effect on our ability to manufacture and distribute our products.
We do not maintain long-term contracts with our customers and are unable to control their purchasing decisions.
We do not maintain long-term purchasing contracts with our customers and therefore have no contractual leverage over their purchasing decisions. A decision by a major department store or other significant customer to decrease the amount of merchandise purchased from us or to cease carrying our products could have a material adverse effect on our net sales and operating strategy.
We face intense competition in the specialty retail and e-commerce industries and the size and resources of some of our competitors are substantially greater than ours, which may allow them to compete more effectively.
We face intense competition in the specialty retail and e-commerce industry where we compete primarily with specialty retailers, department stores and e-commerce businesses that engage in the retail sale of watches and accessories. We believe that the principal basis upon which we compete is the quality and design of merchandise and the quality of customer service. We also believe that price is an important factor in our customers' decision-making processes. Many of our competitors are, and many of our potential competitors may be, larger and have greater financial, marketing and other resources than we have and therefore may be able to adapt to changes in customer requirements more quickly, devote greater resources to the marketing and sale of their products and generate greater national brand recognition than we can, especially in the developing area of omni-channel retailing. Omni-channel retailing may include retail stores, e-commerce sites, mobile channels and other direct-to-consumer points of contact that enhance the consumer’s ability to interact with a retailer in the research, purchase, returning and serving of products. The intense competition and greater size and resources of some of our competitors could have a material adverse effect on the amount of net sales we generate and on our results of operations.
We face competition from traditional accessory competitors as well as competitors in the wearable technology category.
There is intense competition in each of the businesses in which we compete. In all of our businesses, we compete with numerous manufacturers, importers and distributors who may have significantly greater financial, distribution, advertising and marketing resources than us. Our competitors include distributors that import watches and accessories from abroad, U.S. companies that have established foreign manufacturing relationships and companies that produce accessories domestically. In addition, we face continuing competition from technology companies in the smartwatch category, such as Apple, Garmin and Samsung. Many of these technology competitors have significantly greater financial, distribution, advertising and marketing resources than us. In addition, the impact of wearable technology products on sales of our traditional product lines may be materially adverse. Our results of operations and market position may be adversely affected by our competitors and their competitive pressures in the watch, wearable technology and fashion accessory industries.
Any material disruption of our information systems could disrupt our business and reduce our sales.
We are increasingly dependent on information systems to operate our websites, process transactions, manage inventory, monitor sales and purchase, sell and ship goods on a timely basis. We utilize SAP ERP in our U.S. operations and throughout most of our European operations to support our human resources, sales and distribution, inventory planning, retail merchandising and operational and financial reporting systems of our business, and Navision in our Asian operations to support many of the same functions on a local country level. We also use tools provided by salesforce.com, inc. in our CRM initiatives. In fiscal year 2023, we began to implement a new global point of sale system beginning with our European retail stores. We may experience operational problems with our information systems as a result of system failures, viruses, ransomware, computer "hackers" or other causes. These risks may be heightened as a result of our workforce that works remotely. Any material disruption or slowdown of our systems could cause information, including data related to customer orders, to be lost, unavailable or delayed, which could result in delays in the delivery of merchandise to our stores and customers or lost sales, which could reduce demand for our merchandise and cause our sales to decline. Moreover, the failure to maintain, or a disruption in, financial and management control systems could have a material adverse effect on our ability to respond to trends in our target markets, market our products and meet our customers' requirements.
In addition, we have e-commerce and other websites in the U.S. and internationally. In addition to changing consumer preferences and buying trends relating to Internet usage, we are vulnerable to certain additional risks and uncertainties associated with the Internet, including changes in required technology interfaces, website downtime and other technical failures, security breaches, and consumer privacy concerns. Our failure to successfully respond to these risks and uncertainties could reduce e-commerce sales, increase costs and damage the reputation of our brands.
Factors affecting international commerce and our international operations may seriously harm our financial condition.
During fiscal year 2023, we generated 63.6% of our net sales from outside of the U.S. Our international operations are directly related to, and dependent on, the volume of international trade and foreign market conditions. International commerce and our international operations are subject to many risks, some of which are discussed in more detail, including:
•recessions in foreign economies;
•political instability or uncertainty, including as a result of elections, economic instability, geopolitical events and tensions, wars and military conflicts, such as the war in Ukraine, the Israel-Hamas war and tensions between China and Taiwan;
•the adoption and expansion of trade restrictions or the occurrence of trade wars;
•limitations on repatriation of earnings;
•difficulties in protecting our intellectual property or enforcing our intellectual property rights under the laws of other countries;
•longer receivables collection periods and greater difficulty in collecting accounts receivable;
•difficulties in managing foreign operations;
•social, political and economic instability;
•restrictions on travel to and from international locations;
•political tensions between the U.S. and foreign countries;
•compliance with, changes in or adoption of current, new or expanded regulatory requirements;
•our ability to finance foreign operations;
•tariffs and other trade barriers;
•U.S. government licensing requirements for exports; and
•the impact of a pandemic.
The occurrence or consequences of any of these risks may restrict our ability to operate in the affected regions and decrease the profitability of our international operations, which may seriously harm our financial condition.
Because we depend on foreign manufacturing, we are vulnerable to changes in economic and social conditions in Asia, particularly China, and disruptions in international travel and shipping.
Because a substantial portion of our watches and jewelry and certain of our handbags, sunglasses and other products are assembled or manufactured in China, our success will depend to a significant extent upon future economic and social conditions existing in China. If these factories in China are disrupted for any reason, we would need to arrange for the manufacture and shipment of products by alternative sources. While we do have initiatives in place to diversify certain of our manufacturing outside of China, because the establishment of new manufacturing relationships involves numerous uncertainties, including those relating to payment terms, costs of manufacturing, adequacy of manufacturing capacity, quality control and timeliness of delivery, we are unable to predict whether such new relationships would be on terms that we regard as satisfactory. Any significant disruption in our relationships with our manufacturing sources located in China would have a material adverse effect on our ability to manufacture and distribute our products. In addition, restrictions on travel to and from this and other regions, such as the travel restrictions that occurred with COVID-19, and any delays or cancellations of customer orders or the manufacture or shipment of our products, including on account of a pandemic or other health crises, could have a material adverse effect on our ability to meet customer deadlines and timely distribute our products in order to match consumer expectations.
The loss of key senior management personnel or our failure to attract and retain qualified personnel could negatively affect our business.
We depend on our senior management and other key personnel, particularly Kosta N. Kartsotis, our CEO and Chairman.personnel. We do not have "key person" life insurance policies for any of our personnel. TheCompetition for qualified personnel in the fashion industry is intense. Our ability to attract and retain employees, especially in the competitive market for employees with digital experience, is influenced by our ability to offer competitive compensation and benefits, employee morale, our reputation, recruitment by other employers, perceived internal opportunities, non-competition and non-solicitation agreements and macro unemployment rates. The loss of any of our executive officers or other key employees could harm our business.
We must also attract, develop, motivate and retain a sufficient number of qualified retail and distribution center personnel. Historically, competition for talent has been intense and the turnover rate in the retail industry is generally high. There can be no assurance that we will be able to attract or retain a sufficient number of qualified employees in future periods to execute on our business objectives. Additionally, our ability to meet our labor needs while also controlling costs is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation and overtime regulations. If we
are unable to attract, develop, motivate and retain talented employees with the necessary skills and experience, or if changes to our organizational structure, operating results, or business model adversely affect morale, hiring and/or retention, we may not achieve our objectives and our results of operations could be adversely impacted.
Risks Related to our Indebtedness
We are highly leveraged. Our substantial indebtedness and cash flow used in operating activities could adversely affect our ability to service debt or obtain additional financing if necessary.
As of December 30, 2023, we had $212.6 million of outstanding indebtedness, not including $5.1 million of debt issuance costs. We also had $64.0 million of additional borrowing capacity under our Revolving Facility. During fiscal year 2023, we used $59.5 million of cash flows in operating activities.
Our high level of indebtedness and recent negative operating cash flows will continue to restrict our operations. Among other things, our indebtedness will:
•limit our flexibility in planning for, or reacting to, changes in the markets in which we compete;
•place us at a competitive disadvantage relative to our competitors with less indebtedness;
•limit our ability to reinvest in our business;
•render us more vulnerable to general adverse economic, regulatory and industry conditions; and
•require us to dedicate a substantial portion of our cash flow to service our debt.
Our ability to meet our cash requirements, including our debt service obligations, is dependent upon our ability to maintain and improve our operating performance, which is subject to general economic and competitive conditions and to financial, business and other factors, many of which are beyond our control. Although we believe we have sufficient sources of liquidity to meet our anticipated requirements for working capital, debt service and capital expenditures through at least the next twelve months, if our operating results do not meet our expectations or if we experience adverse financial, business and other factors that we do not currently anticipate, we could face liquidity constraints.
If we are unable to service our debt or experience a significant reduction in our liquidity, we could be forced to sell assets, restructure or refinance our debt or raise additional capital through sales of equity or debt, and we may be unable to take any of these actions on satisfactory terms or in a timely manner. Any of these actions may not be sufficient to allow us to service our debt obligations or may have an adverse impact on our business. Our existing debt agreements limit our ability to take certain of these actions. Our failure to generate sufficient operating cash flow to pay our debt obligations could have a material adverse effect on us.
Our debt agreements subject us to certain covenants, which may restrict our ability to operate our business and to pursue our business strategies. Our failure to comply with the covenants contained in our debt agreements, including as a result of events beyond our control, could result in an event of default which could materially and adversely affect our operating results and our financial condition.
On September 26, 2019, the Company and Fossil Partners L.P., as the U.S. borrowers, and Fossil Group Europe GmbH, Fossil Asia Pacific Limited, Fossil (Europe) GmbH, Fossil (UK) Limited and Fossil Canada Inc., as the non-U.S. borrowers, certain other subsidiaries of the Company from time to time party thereto designated as borrowers, and certain subsidiaries of the Company from time to time party thereto as guarantors, entered into a secured asset-based revolving credit agreement (the “Revolving Facility”) with JPMorgan Chase Bank, N.A. as administrative agent, J.P. Morgan AG, as French collateral agent, JPMorgan Chase Bank, N.A., Citizens Bank, N.A. and Wells Fargo Bank, National Association as joint bookrunners and joint lead arrangers, and Citizens Bank, N.A. and Wells Fargo Bank, National Association, as co-syndication agents and each of the lenders from time to time party thereto.
The Revolving Facility imposes, and future financing agreements are likely to impose, affirmative and negative covenants that restrict our activities. These restrictions limit or prohibit our ability to, among other things:
•incur additional indebtedness or issue certain types of stock;
•pay dividends or make other distributions, repurchase or redeem our stock;
•make certain investments;
•prepay, redeem, or repurchase certain debt;
•sell assets and issue capital stock of our restricted subsidiaries;
•incur liens;
•enter into agreements restricting our restricted subsidiaries’ ability to pay dividends, make loans to other related entities or restrict the ability to incur liens;
•enter into transactions with affiliates; and
•consolidate or merge.
These restrictions on our ability to operate our business, along with restrictions that may be contained in agreements evidencing or governing future indebtedness, could seriously harm our business and our ability to grow in accordance with our growth strategy by, among other things, limiting our ability to take advantage of merger and acquisition and other corporate opportunities. In addition, the limitations imposed by financing agreements on our ability to incur additional debt and liens might significantly impair our ability to obtain other financing.
As a result of these restrictions, we may be:
•limited in how we conduct our business;
•unable to raise additional debt or equity financing to operate during general economic or business downturns; or
•unable to compete effectively or to take advantage of new business opportunities.
The Revolving Facility also requires us to maintain a specified financial ratio in certain circumstances. The Revolving Facility contains a fixed charge coverage ratio covenant if our Availability (as defined in the Revolving Facility) falls below a certain threshold. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Sources of Liquidity” for an additional discussion of the financial covenants contained in the Revolving Facility.
Various risks, uncertainties and events beyond our control could affect our ability to comply with any of the covenants in our existing or future financing agreements, which could result in a default under those agreements and under other agreements containing cross-default provisions. A default would permit lenders to accelerate the maturity of the debt under these agreements. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations. We cannot know for certain that we will be granted waivers or amendments to these agreements if for any reason we are unable to comply with these agreements or that we will be able to refinance our debt on terms acceptable to us, or at all. In addition, an event of default under the Revolving Facility would permit the lenders to terminate all commitments to extend further credit under the Revolving Facility and to accelerate the maturity of all outstanding loans under the Revolving Facility. Furthermore, the Revolving Facility is secured by liens on our assets. If we were unable to repay the amounts due and payable under our Revolving Facility, the applicable lenders could proceed against the collateral granted to them to secure that indebtedness.
The Revolving Facility provides the administrative agent considerable discretion to impose reserves and to determine that certain assets are not eligible for inclusion in our borrowing base, which could materially reduce the maximum amount that we are able to borrow at any one time under the Revolving Facility. The administrative agent has imposed reserves previously and may impose reserves in the future. There can be no assurance that the administrative agent under the Revolving Facility will not take such actions. If they do so, the resulting impact of such actions could materially and adversely impair our ability to meet our other obligations as they become due, among other matters.
The maximum amount that we are permitted to borrow under the Revolving Facility is limited, is subject to seasonal fluctuations and is subject to the discretion of the lenders, which may adversely affect our liquidity, results of operations and financial position.
The maximum amount that we are permitted to borrow at any time under the Revolving Facility is limited by a borrowing base that is recalculated monthly or, in some circumstances, more frequently. The borrowing base is a function of, among other things, our eligible accounts receivable, inventory and certain intellectual property. As a result, our access to credit under the Revolving Facility fluctuates depending on the value of the borrowing base eligible assets as of any measurement date. Because our business is seasonal and generates higher net sales and accounts receivable in the third and fourth quarters, our borrowing base is also seasonal and is typically lower during our second and third quarters, which can adversely affect our liquidity during these quarters. In addition, the administrative agent under the Revolving Facility has the discretionary right to impose reserves or to determine that certain assets are not eligible for inclusion in our borrowing base. The administrative agent’s discretionary changes could materially reduce the maximum amount that we are able to borrow at any one time under the Revolving Facility. Our accounts receivable, inventory and intellectual property are pledged to secure our obligations under the Revolving Facility and cannot be used as collateral for any other financings unless we refinance or terminate the Revolving Facility. These limitations on our ability to borrow under the Revolving Facility or another financing may adversely affect our liquidity, results of operations and financial position.
Our indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations.
The Revolving Facility provides that the lenders thereunder may extend revolving loans in an aggregate principal amount not to exceed $225.0 million at any time outstanding, subject to the borrowing base availability limitations. As of December 31, 2023, we had $62.1 million outstanding under the Revolving Facility. The covenants under the Revolving Facility allow us to incur additional indebtedness from other sources in certain circumstances. On November 8, 2021, we sold $150 million aggregate principal amount of our 7.00% Senior Notes due 2026 (the “Senior Notes”). The Senior Notes are general unsecured
obligations of the Company and rank equally in right of payment with all of our existing and future senior unsecured and unsubordinated indebtedness, and rank senior in right of payment to any future subordinated indebtedness. The Senior Notes are effectively subordinated to all of our existing and future secured indebtedness, to the extent of the value of the assets securing such indebtedness, and the Senior Notes are structurally subordinated to all existing and future indebtedness and other liabilities (including trade payables) of our subsidiaries (excluding any amounts owed by such subsidiaries to us).
The base indenture and first supplemental indenture that govern the Senior Notes contain customary events of default and cure provisions. If an event of default (other than an event of default of the type described in the following sentence) occurs and is continuing with respect to the Senior Notes, the trustee may, and at the direction of the registered holders of at least 25% in aggregate principal amount of the outstanding Senior Notes shall, declare the principal of all Senior Notes, together with all accrued and unpaid interest, to be due and payable immediately. If an event of default relating to certain events of bankruptcy, insolvency or reorganization of the Company occurs, the principal of all Senior Notes, together with all accrued and unpaid interest, will become due and payable immediately without further action or notice by the trustee or any holder of the Senior Notes.
A portion of our cash flow will be required to pay interest and principal on our outstanding indebtedness, and we may be unable to generate sufficient cash flow from operations or borrow additional funds under our Revolving Facility or otherwise, to enable us to meet our debt service obligations and fund our other liquidity needs.
Our level of indebtedness could have other important consequences, including the following:
•it limits our ability to borrow money or sell stock to fund our working capital, capital expenditures, acquisitions and debt service requirements;
•it may limit our flexibility in planning for, or reacting to, changes in our business and future business opportunities;
•we are more highly leveraged than some of our competitors, which may place us at a competitive disadvantage;
•it may make us more vulnerable to a downturn in our business or the economy;
•it may increase our cost of borrowing and;
•there would be a material adverse effect on our business and financial condition if we were unable to service our indebtedness or obtain additional financing as needed.
We may not be able to generate sufficient cash flows to meet our debt service obligations and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make payments on and to refinance our indebtedness and to fund operations and planned capital expenditures and other investments in our business will depend on our ability to generate cash from our operations in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. During the fiscal year ended December 30, 2023, we used $59.5 million of cash flows in our operations.
In the future, our business may not generate sufficient cash flow from operations and future sources of capital under the Revolving Facility or otherwise may not be available to us in an amount sufficient to enable us to pay our debt service obligations and to fund our other liquidity needs.
If we complete an acquisition, our debt service requirements could increase. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity, reducing or delaying capital expenditures, strategic acquisitions, investments and alliances or restructuring or refinancing our indebtedness.
The Revolving Facility restricts our ability to take such actions, and in some cases imposes limitations on the use of proceeds that we might receive from such actions. We may not be able to consummate asset sales or other transactions at prices and on terms that we believe are commercially reasonable, or at all, and any proceeds that we do receive may not be available for, or adequate to meet, any debt service obligations then due. These alternative measures may not be successful and may not permit us to meet our debt service obligations.
The maximum amount that we are permitted to borrow at any time under the Revolving Facility is limited by a borrowing base that is recalculated monthly or, in some circumstances, more frequently. If the borrowing base declines or is reduced by the administrative agent to an amount below the then-outstanding amount of loans under the Revolving Facility, we are required to prepay the outstanding loans under the Revolving Facility in an amount that will result in the aggregate amount of outstanding loans being less than the amount of the borrowing base. We may not have sufficient funds to make any such prepayments.
We will need to repay, refinance or restructure all of our debt obligations on or before their respective maturity dates. The maturity date of the Revolving Facility is November 8, 2027, but if the Company has any indebtedness in an amount in
excess of $35.0 million that matures prior to November 8, 2027, the maturity date of the Revolving Facility will be the 91st day prior to the maturity date of such other indebtedness. The maturity date of the Company’s $150.0 million of Senior Notes is November 30, 2026. If the Senior Notes are not repaid or refinanced to a later maturity date in a manner that reduces the balance due on November 30, 2026 to $35.0 million or less, the maturity date of the Revolving Facility will be August 31, 2026. We may not be able to repay, refinance or restructure any of our indebtedness, including the Revolving Facility, on commercially reasonable terms, or at all. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants.
The occurrence of certain specified change of control events would cause an event of default under the Revolving Facility. In such event, we may not be able to repay, refinance or restructure the Revolving Facility, or obtain a waiver of such event of default, on commercially reasonable terms, or at all.
If we cannot meet our debt service obligations or repay, refinance or restructure our debt obligations on or before their respective maturity dates, or are otherwise in default under our debt agreements, the holders of our debt may accelerate any debt that is not yet due, demand payment of our debt, and, to the extent such debt is secured, foreclose on the assets securing that debt. In any such event, we may not have sufficient assets to repay all of our debt, and the interests of our equity holders and other stakeholders may be materially adversely affected.
We may be able to incur significantly more debt, including secured debt. This could intensify already-existing risks related to our indebtedness.
The terms of the Revolving Facility contain restrictions on our ability to incur additional indebtedness. However, these restrictions are subject to a number of important qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. Accordingly, we could incur significant additional secured indebtedness in the future under the Revolving Facility and significant additional secured and unsecured indebtedness under other debt instruments permitted by the Revolving Facility. As of December 30, 2023, our Revolving Facility provided for unused borrowing capacity under the Revolving Facility of up to $64.0 million. If new debt is added to our current debt levels, the related risks that we now face could intensify.
If we experience liquidity concerns, we could face a downgrade in our debt ratings which could restrict our access to, and negatively impact the terms of, current or future financings or trade credit.
Our ability to obtain financings and trade credit and the terms of any financings or trade credit is, in part, dependent on the credit ratings assigned to our debt by independent credit rating agencies. We cannot provide assurance that any of our current ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances so warrant. A ratings downgrade could adversely impact our ability to access financings or trade credit and increase our borrowing costs.
Our indebtedness exposes us to interest rate risk.
Our earnings are exposed to interest rate risk associated with borrowings under the Revolving Facility. The terms of the Revolving Facility provide for interest on borrowings at a floating rate that is tied to SOFR. SOFR tends to fluctuate based on multiple facts, including general short-term interest rates, rates set by the U.S. Federal Reserve, and other central banks and general economic conditions. We have not hedged our interest rate exposure with respect to our floating rate debt. During fiscal year 2023, our average interest rate on borrowings under the Revolving Facility was 6.5%. If interest rates increase, so will our interest costs, which may have a material adverse effect on our results of operations and financial condition.
The Senior Notes bear interest at a fixed rate of 7.00% per annum. If interest rates decrease, the interest rate on the Senior Notes would not change, and we would not be able to obtain the benefit of reduced interest rates unless we refinanced the Senior Notes. This could put us at a competitive disadvantage to other companies that have floating rate debt. We may not be able to refinance the Senior Notes on commercially reasonable terms, or at all. Any redemption of the Senior Notes prior to November 30, 2025 would trigger a redemption premium. Prior to November 30, 2024, the redemption price would be $25.50 for each $25.00 of Senior Notes, and from November 30, 2024 until November 29, 2025, the redemption price would be $25.25 for each $25.00 of Senior Notes. In addition, any refinancing could be at higher interest rates and may require us to comply with more onerous covenants.
The restrictive covenants in the Revolving Facility are subject to a number of important qualifications, exceptions and limitations, and to amendment.
The restrictive covenants in the Revolving Facility are subject to a number of important qualifications, exceptions and limitations. We may be able to engage in some of the restricted activities, in limited amounts, or in certain circumstances, in unlimited amounts, notwithstanding the restrictive covenants. For example, subject to the satisfaction of certain tests specified in the Revolving Facility, we are permitted to make unlimited distributions to our equity holders. Further, the restrictive
covenants in the Revolving Facility can be amended or waived with the consent of the lenders under the Revolving Facility, who may have interests that are opposed to the interests of our equity holders, the holders of our other debt obligations, and other stakeholders. There can be no assurance that the restrictive covenants in the Revolving Facility will limit our activities.
Financial Risks
We have a recent history of net losses and negative cash flow and may not achieve consistent profitability or positive cash flow in the future.
We have incurred substantial losses and negative cash flow in recent fiscal years. During fiscal years 2023 and 2022, we generated a net loss attributable to Fossil Group, Inc. of $157.1 million and $44.2 million, respectively, and we used $59.5 million and $110.9 million of cash flows in operating activities, respectively. In addition, our cash and cash equivalents have declined from $198.7 million at December 31, 2022 to $117.2 million at December 30, 2023. We will need to generate and sustain increased net sales levels in future periods and reduce expenses in order to become profitable and generate positive cash flow, and even if we do, we may not be able to maintain or increase our level of profitability and cash flow. If we cannot become profitable or generate positive cash flow, our business, results of operations and financial condition could be materially and adversely affected.
A significant portion of our cash, cash equivalents and investments are held by our foreign subsidiaries, which could negatively affect future liquidity needs.
As of December 30, 2023, $104.4 million, or approximately 89% of our cash and cash equivalents were held by our foreign subsidiaries. While we intend to use some of the cash held outside the U.S. to fund our international operations, when we encounter a significant need for liquidity in the U.S. or other location that we cannot fulfill through other internal or external sources, our liquidity requirements could necessitate transfers of existing cash balances between our subsidiaries or to the U.S. Some of our subsidiaries are located in jurisdictions that require foreign government approval before a cash repatriation can occur. If we are unable to transfer existing cash balances in such a situation, our business, results of operations and financial condition could be materially and adversely affected.
Changes in the mix of product sales demand could negatively impact our gross profit margins.
Our gross profit margins are impacted by our sales mix as follows:
Sales channel mix: sales from our direct retail and e-commerce channels typically provide gross margins in excess of our historical consolidated gross profit margins, while sales from our distributor, mass market and off-price channels typically provide gross margins below our historical consolidated gross profit margins.
Product mix: traditional watch and jewelry sales typically provide gross margins in excess of historical consolidated gross profit margins, while leather goods and private label products typically provide gross margins below our historical consolidated gross profit margins.
Geographic mix: international sales typically produce gross margins in excess of our historical consolidated gross profit margins, while domestic sales typically provide gross margins below our historical consolidated gross profit margins.
If future sales from our higher gross margin businesses do not increase at a faster rate than our lower gross margin businesses, our gross profit margins may grow at a slower pace, cease to grow, or decrease relative to our historical consolidated gross profit margin.
The global implementation of Pillar Two may adversely affect our business, results of operations, financial condition and cash flow.
Under The Organization for Economic Cooperation and Development ("OECD") Inclusive Framework, 140 countries agreed to enact a two-pillar solution to reform the international tax rules to address the challenges arising from the globalization and digitalization of the economy. The Pillar Two Global Anti-Base Erosion (GloBE) Rules provide a coordinated system to ensure that multinational enterprises with revenues above EUR 750 million pay a minimum effective tax rate of 15% tax on the income arising in each of the jurisdictions in which they operate. They will be liable to pay a top-up tax for the difference between their GloBE effective tax rate per jurisdiction and the 15% minimum rate. It is the ultimate parent entity of the multinational enterprise that is primarily liable for the GLoBE top-up tax in its jurisdiction’s territory. Therefore, some countries may engage in domestic tax policy reforms in anticipation of the GloBE rules becoming effective and enact their own domestic minimum tax rates to avoid “tax leakage”. Notwithstanding any new local minimum tax regime which may be designed to reduce or eliminate the GloBE top-up tax, additional top-up tax under GLoBE may still be due. This will depend on the local effective tax rate calculation according to the specific rules set out in the Pillar Two implementation guidance. The
technical aspects of the calculation are still being developed. Any increase in corporate tax rates or rules regarding the calculation of taxable income for the top-up tax could adversely affect our business, results of operations, financial condition and cash flow.
We have recorded impairment charges in the past and may record impairment charges in the future.
We are required, at least annually, or as facts and circumstances warrant, to test trade names to determine if impairment has occurred. We are also required to test property plant and equipment and other long lived assets for impairment as facts and circumstances warrant. Impairment may result from any number of factors, including adverse changes in assumptions used for valuation purposes, such as actual or projected net sales, growth rates, profitability or discount rates, or other variables. If the testing indicates that impairment has occurred, we are required to record a non-cash impairment charge. Should the value of trade names, property plant and equipment and other long lived assets become impaired, it could have an adverse effect on our results of operations.
Increased competition from online only retailers and a highly promotional retail environment may increase pressure on our margins.
The continued increase in e-commerce competitors for retail sales and slowing mall traffic has resulted in significant pricing pressure and a highly promotional retail environment, which was heightened by the impact of COVID-19. These factors may cause us to be more promotional with our sales prices to retailers and consumers, which could cause our gross margin to decline if we are unable to appropriately manage inventory levels and/or otherwise offset any price reductions with comparable reductions in our costs. If we have to reduce our sales prices for competitive purposes and we fail to sufficiently reduce our product costs or operating expenses, our profitability will decline. This could have a material adverse effect on our business, results of operations, and financial condition.
Our license agreements may require minimum royalty commitments regardless of the level of product sales under these agreements.
Under our license agreements, we have in the past experienced, and could again in the future experience, instances where our minimum royalty commitments exceeded the royalties payable based upon our sales of the licensed products. Payments of minimum royalties in excess of the royalties based on our sales of the licensed products reduce our margins and could adversely affect our results of operations.
Foreign currency fluctuations could adversely impact our financial condition.
We generally purchase our products in U.S. dollars. However, we source a significant amount of our products overseas and, as such, the cost of these products may be affected by changes in the value of the currencies of these countries, including the Australian dollar, British pound, Canadian dollar, Chinese yuan, Danish krone, euro, Hong Kong dollar, Indian rupee, Japanese yen, South Korean won, Malaysian ringgit, Mexican peso, Norwegian kroner, Singapore dollar, Swedish krona and Swiss franc. Due to our dependence on manufacturing operations in China, changes in the value of the Chinese yuan may have a material impact on our supply channels and manufacturing costs, including component and assembly costs.
In addition, changes in currency exchange rates may also affect the prices at which we sell products in foreign markets. For fiscal years 2023, 2022 and 2021, 63.6%, 63.1% and 63.5% of our consolidated net sales were generated outside of the U.S. In general, our overall financial results are affected positively by a weaker U.S. dollar and are affected negatively by a stronger U.S. dollar as compared to the foreign currencies in which we conduct our business. For example, due to a stronger U.S. dollar in fiscal year 2023, the translation of foreign-based net sales into U.S. dollars decreased our reported net sales by approximately $2.1 million compared to fiscal year 2022. If the value of the U.S. dollar remains at its current levels or strengthens against foreign currencies, particularly against the euro, Chinese yuan, Indian rupee, Canadian dollar, South Korean won, British pound and Japanese yen, our financial condition and results of operations could be materially and adversely impacted. As a result, foreign currency fluctuations may have a material adverse impact on our financial condition and results of operations.
Legal, Compliance and Reputational risks
A data security or privacy breach could damage our reputation, harm our customer relationships, expose us to litigation or government actions, and result in a material adverse effect to our business, financial condition and results of operations.
We depend on information technology systems, the Internet and computer networks for a substantial portion of our retail and e-commerce businesses, including credit card transaction authorization and processing. We also receive and store personal information about our customers and employees, the protection of which is critical to us. In the normal course of our business, we collect, retain, and transmit certain sensitive and confidential customer information, including credit card information, over public networks. Our customers have a high expectation that we will adequately protect their personal information. In addition,
personal information is highly regulated at the international, federal and state level.
While we and our third-party service providers have safeguards in place to defend our systems against intrusions and attacks and to protect our data, we cannot be certain that these measures are sufficient to counter all current and emerging technology threats. Despite the security measures we currently have in place, our facilities and systems and those of our third-partythird party service providers mayhave been, and will continue to be, vulnerable to theft of physical information, security breaches, hacking attempts, computer viruses and malware, ransomware, phishing, lost data and programming and/or human errors. To date, none of these risks, intrusions, attacks or human error have resulted in any material liability to us. While we carry insurance policies that would provide liability coverage for certain of these matters, if we experience a significant security incident, we could be subject to liability or other damages that exceed our insurance coverage, and we cannot be certain that such insurance policies will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. Any electronic or physical security breach involving the misappropriation, loss, or other unauthorized disclosure of confidential or personally identifiable information, including penetration of our network security or those of our third-partythird party service providers, could disrupt our business, severely damage our reputation and our customer relationships, expose us to litigation and liability, subject us to governmental investigations, fines and enforcement actions, result in negative media coverage and distraction to management and result in a material adverse effect to our business, financial condition, and results of operations. In addition, as a result of security breaches at a number of prominent retailers and other companies, the media and public scrutiny of information security and privacy has become more intense and the regulatory environment related thereto has become more uncertain. As a result, we may incur significant costs in complying with new and existing state, federal, and foreign laws regarding protection of, and unauthorized disclosure of, personal information. A successful ransomware attack on our systems could make them inaccessible for a period of time pending the payment of a ransom to unlock the systems or our ability to otherwise restore our access to our systems.
We are subject to laws and regulations in the U.S. and the many countries in which we operate. Violations of laws and regulations, or changes to existing laws or regulations, could have a material adverse effect on our financial condition or results of operations.
Our operations are subject to domestic and international laws and regulations in a number of areas, including, but not limited to, labor, advertising, consumer protection, real estate, product safety, e-commerce, promotions, intellectual property, tax, import and export, anti-corruption, anti-bribery, foreign exchange controls and cash repatriation, data privacy, anti-competition, environmental, health and safety. Compliance with these numerous laws and regulations is complicated, time consuming and expensive, and the laws and regulations may be inconsistent from jurisdiction to jurisdiction, further increasing the difficulty and cost to comply with them. New laws and regulations, or changes to existing laws and regulations, could individually or in the aggregate make our products more costly to produce, delay the introduction of new products in one or more regions, cause us to change or limit our business practices, or affect our financial condition and results of operations. We have implemented policies and procedures designed to ensure compliance with the numerous laws and regulations affecting our business, but there can be no assurance that our employees, contractors, or agents will not violate such laws, regulations or our policies related thereto. Any such violations could have a material adverse effect on our financial condition or operating results.
Reduced lendingTariffs or other restrictions placed on imports from China and any retaliatory trade measures taken by banksChina could materially harm our revenue and results of operations.
Beginning in July 2018, certain of our products have been subject to additional ad valorem duties imposed by the U.S. government on products of China under Section 301 of the Trade Act of 1974. These tariffs, imposed via four successive “Lists” were the result of an April 2018 determination by the Office of the U.S. Trade Representative (“USTR”) that China’s acts, practices, and policies with respect to technology transfer, intellectual property, and innovation are unreasonable or discriminatory and burden or restrict U.S. commerce. In particular, certain of our packaging and handbag products have been subject to an additional 25% ad valorem tariff, based on the first sale export price as imported into the U.S., since July 2018 (“List 1”). Certain of our handbag and wallet products were subject to an additional 10% ad valorem tariff, based on the first sale export price as imported into the U.S., beginning in September 2018, a negativerate that was then raised to 25% ad valorem from June 2019 to present (“List 3”). Finally, smartwatches, certain jewelry products, and several of our traditional watch products were subject to an additional 15% ad valorem tariff, based on the first sale export price as imported into the U.S., beginning in September 2019, a rate that was lowered to 7.5% ad valorem from February 2020 to present (“List 4A”).
USTR is currently conducting a statutory review of these tariffs, but they remain in place during that review and Biden Administration officials have publicly signaled that modifications to the tariffs may not be extensive. Any modifications USTR may make, which are expected by the end of May 2024, could also further impact our products. We continue to monitor these developments for potential risks. We have also joined litigation before the U.S. Court of International Trade challenging the legality of the Section 301 List 3 and List 4A tariffs and seeking refunds of duties paid on imports that were subject to those tariffs. That litigation is ongoing in appeal stages. As a result, it is difficult to accurately estimate the impact on our customers, suppliersbusiness from these tariff actions or similar actions. However, assuming no further offsets from price increases, sourcing changes, or
other changes to trade policy and business partners, which in turn could materially and adversely affect our financial condition, results of operations and liquidity.
Any reduction in lending by banks may have a significant negative impact on businesses around the world. Although we believe that our cash provided by operations and available borrowing capacity under our credit facilities currently provide us with sufficient liquidity, the impact of reduced lending on our customers, business partners and suppliers cannot be predicted and may be quite severe. A disruption in the ability of our significant customers or distributors to access liquidity could cause serious disruptions or an overall deterioration of their businesses, which could lead to a significant reduction in their future orders of our products and the inability or failure on their part to meet their payment obligations to us, anyregulatory rulings, all of which could have a material adverse effect on our financial condition, results of operations and liquidity.
Seasonality of our business may adversely affect our net sales and operating income.
Our quarterly results of operations have fluctuatedare currently under review, the estimated gross profit exposure from the Section 301 tariffs is approximately $2.4 million in the past and may continue to fluctuate as a result of a number of factors, including seasonal cycles, timing of new product introductions, timing of orders by our customers and mix of product sales demand. Our business is seasonal by nature. A significant portion of our net sales and operating income are generated during the third and fourth quarters of our fiscal year which includes2024.
If the "back to school" and Christmas seasons. The amount of net sales and operating income generated during our fiscal fourth quarter depends upon the anticipated level of retail sales during the Christmas season, as well as general economic conditions and other factors beyond our control. In addition, the amount of net sales and operating income generated during our fiscal first quarter depends in part upon the actual level of retail sales during the Christmas season. The seasonality of our business may adversely affect our net sales and operating income during the first and fourth quarters of our fiscal year.
The amount of traffic to our retail stores depends primarily on the success of theshopping malls and retail centers in which our stores are located.
There continues to be a significant decrease in traffic in many of the shopping malls and retail centers in which our stores are located, which has resulted in decreased traffic to our stores. The resulting decrease in customers for our retail stores has had an adverse effect on our results of operations. Additionally, several national department store anchors have closedtariffs continue or will be closing a number of their locations in shopping malls, which is likely to further decrease traffic and put increasing financial strain on the operators of those shopping mall locations. The loss of an anchor or other significant tenant in a shopping mall in which we have a store, or the closure of a significant number of shopping malls in which we have stores, may have a material adverse effect on our results of operations.
We have key facilities in the U.S. and overseas, the loss or shut down of any of which could harm our business.
Our administrative, information technology and distribution operations in the U.S. are conducted primarily from two separate facilities located in the Dallas, Texas area. Our operations internationally are conducted from various administrative, distribution and assembly facilities outside of the U.S., particularly in China, Germany, Hong Kong, Vietnam and Switzerland. The complete or temporary loss of use of all or part of these facilities could have a material adverse effect on our business.
Our warehouse and distribution facilities in the Dallas, Texas area are operated in a special purpose sub-zone established by the U.S. Department of Commerce Foreign Trade Zone Board. Although the sub-zone allows us certain tax advantages, the sub-zone is highly regulated by the U.S. Customs Service. This level of regulation may cause disruptions or delays in the distribution of our products out of these facilities. Under some circumstances, the U.S. Customs Service has the right to shut down the entire sub-zone and, therefore, our entire warehouse and distribution facilities. During the time that the sub-zone is shut down,increase, we may be unablerequired to adequately meet the supply requests ofraise our customers and our Company-owned retail stores,prices, which could have an adverse effect on our sales, relationships with our customers, and results of operations, especially if the shutdown were to occur during our third or fourth quarter.
Our ability to grow our sales is dependent upon the implementation of our business strategy, which we may not be able to achieve.
Our ability to grow our sales is dependent on the successful implementation of our business strategy. This includes diversification of our product offerings, continuing to develop wearable technology, improving our omni channel capabilities and strategic acquisitions. If we are not successful in the expansion or development of our product offerings or our new products are not profitable or do not generate sales comparable to those of our existing businesses, our results of operations could be negatively impacted.
We also operate FOSSIL brand stores and other non-FOSSIL branded stores globally to further strengthen our brand image. As of December 30, 2017, we operated 544 stores worldwide. The costs associated with leasehold improvements to current stores and the costs associated with opening new stores and closing low performing stores could materially increase our costs of operation.
Our business could be harmed if we fail to maintain proper inventory levels.
We maintain an inventory of selected products that we anticipate will be in high demand. We may be unable to sell the products we have ordered in advance from manufacturers or that we have in our inventory. Inventory levels in excess of customer demand may result in inventory write-downs or the sale of excess inventory at prices below our standard levels. These events could significantly harm our operating results and impair the image of our brands. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply quality products in a timely manner, we may
experience inventory shortages, which might result in unfilled orders, negatively impact customer relationships, diminish brand loyalty and result in lost revenues, any of which could harm our business.
Our license agreements may require minimum royalty commitments regardless of the level of product sales under these agreements.
Under our license agreements, we have in the past experienced, and could again in the future experience, instances where our minimum royalty commitments exceeded the royalties payable based upon our sales of the licensed products. Payments of minimum royalties in excess of the royalties based on our sales of the licensed products reduce our margins and could adversely affect our results of operations.
Fluctuations in the price, availability and quality of raw materials could cause delays and increase costs.
Fluctuations in the price, availability and quality of the raw materials used in our products could have a material adverse effect on our cost of sales or ability to meet our customers' demands. The price and availability of such raw materials may fluctuate significantly, depending on many factors, including natural resources, increased freight costs, increased labor costs, especially in China, and weather conditions. In the future, we may not be able to pass on all, or a portion of, such higher raw materials prices to our customers.
We rely on third-party assembly factories and manufacturers and problems with, or loss of, our assembly factories or manufacturing sources could harm our business and results of operations.
A substantial percentage of our watch and jewelry products are currently assembled or manufactured to our specifications by our majority-owned entities in China, with the remainder assembled or manufactured by independent entities. All of our handbags, small leather goods, belts and soft accessories are produced by independent manufacturers. We have no long-term contracts with these independent assembly factories or manufacturers and compete with other companies for production facilities. All transactions between us and our independent assembly factories or manufacturers are conducted on the basis of purchase orders. We face the risk that these independent assembly factories or manufacturers may not produce and deliver our products on a timely basis, or at all. As a result, we cannot be certain that these assembly factories or manufacturers will continue to assemble or manufacture products for us or that we will not experience operational difficulties with our manufacturers, such as reductions in the availability of production capacity, errors in complying with product specifications, insufficient quality control, shortages of raw materials, failures to meet production deadlines or increases in manufacturing costs. Our future success will depend upon our ability to maintain close relationships with, or ownership of, our current assembly factories and manufacturers and to develop long-term relationships with other manufacturers that satisfy our requirements for price, quality and production flexibility. Our ability to establish new manufacturing relationships involves numerous uncertainties, including those relating to payment terms, costs of manufacturing, adequacy of manufacturing capacity, quality control and timeliness of delivery. Any failure by us to maintain long-term relationships with, or ownership of, our current assembly factories and manufacturers or to develop relationships with other manufacturers could have a material adverse effect on our ability to manufacture and distribute our products.
If an independent manufacturer or license partner of ours fails to use acceptable labor practices or otherwise comply with laws, our business could suffer.
While we have a code of conduct for our manufacturing partners, we have no control over the ultimate actions or labor practices of our independent manufacturers. The violation of labor or other laws by one of our independent manufacturers, or by one of our license partners, or the divergence of an independent manufacturer's or license partner's labor practices from those generally accepted as ethical in the U.S. or other countries in which the violation or divergence occurred, could interrupt or otherwise disrupt the shipment of finished products to us or damage our reputation. Any of these, in turn, could have a material adverse effect on our financial condition and results of operations. As a result, should one of our independent manufacturers or licensors be found in violation of state or international laws, we could suffer financial or other unforeseen consequences.
We extend unsecured credit to our customers and are therefore vulnerable to any financial difficulties they may face.
We sell our merchandise primarily to department stores, specialty retail stores and distributors worldwide. We extend credit based on an evaluation of each customer's financial condition, usually without requiring collateral. Should any of our larger customers experience financial difficulties, we could curtail business with such customers or assume more credit risk relating to such customers' receivables. Our inability to collect on our trade accounts receivable relating to such customers could have a material adverse effect on our operating cash flows, financial condition and results of operations.
We do not maintain long-term contracts with our customers and are unable to control their purchasing decisions.
We do not maintain long-term purchasing contracts with our customers and therefore have no contractual leverage over their purchasing decisions. A decision by a major department store or other significant customer to decrease the amount of merchandise purchased from us or to cease carrying our products could have a material adverse effect on our net sales and operating strategy.
We face intense competition in the specialty retail and e-commerce industries and the size and resources of some of our competitors are substantially greater than ours, which may allow them to compete more effectively.
We face intense competition in the specialty retail and e-commerce industry where we compete primarily with specialty retailers, department stores and Internet businesses that engage in the retail sale of watches and accessories. We believe that the principal basis upon which we compete is the quality and design of merchandise and the quality of customer service. We also believe that price is an important factor in our customers' decision-making processes. Many of our competitors are, and many of our potential competitors may be, larger and have greater financial, marketing and other resources than we have and therefore may be able to adapt to changes in customer requirements more quickly, devote greater resources to the marketing and sale of their products and generate greater national brand recognition than we can, especially in the developing area of omni-channel retailing. Omni-channel retailing may include retail stores, e-commerce sites, mobile channels and other direct-to-consumer points of contact that enhance the consumer’s ability to interact with a retailer in the research, purchase, returning and serving of products. The intense competition and greater size and resources of some of our competitors could have a material adverse effect on the amount of net sales we generate and on our results of operations.
We could be negatively impacted if we fail to successfully integrate businesses we may acquire.
As part of our growth strategy, we have made, and may consider in the future, certain acquisitions, domestically and internationally, including acquisitions of certain watch brands and acquisitions of independent distributors of our products. The integration of future acquisitions may not be successful or generate sales increases. When we have acquired businesses, such as Misfit in December 2015, we have acquired businesses that we believe could enhance our business opportunities and our growth prospects. Acquisitions involve risks that could materially affect our business, financial condition and operating results. These risks include:
distraction of management from our business operations;
loss of key personnel and other employees;
costs, delays, and inefficiencies associated with integrating acquired operations and personnel;
the impairment of acquired assets and goodwill; and
acquiring the contingent and other liabilities of the businesses we acquire.
In addition, acquired businesses may not provide us with increased business opportunities or result in the growth that we anticipate. Furthermore, integrating acquired operations is a complex, time-consuming and expensive process. Combining acquired operations with our current operations may result in lower overall operating margins, greater stock price volatility and quarterly earnings fluctuations. Cultural incompatibilities, career uncertainties and other factors associated with such acquisitions may also result in the loss of employees. Failurecustomers and harm our operating performance. Alternatively, we may seek to acquireshift production outside of China or otherwise change our sourcing strategy for these products, resulting in significant costs and successfully integrate complementary practices,disruption to our operations. Even if the U.S. further modifies these tariffs, it is always possible that new products we introduce could be impacted by the changes, or failure to achieve thethat our business synergieswill be impacted by retaliatory trade measures taken by China or other anticipated benefits, could materially adversely affect our business, financial condition and results of operations.
We face competition from traditional competitors as well as new competitors in the wearable technology category.
There is intense competition in each of the businesses in which we compete. In all of our businesses, we compete with numerous manufacturers, importers and distributors who may have significantly greater financial, distribution, advertising and marketing resources than us. Our competitors include distributors that import watches and accessories from abroad, U.S. companies that have established foreign manufacturing relationships and companies that produce accessories domestically. In addition, we face growing competition from technology companies that have or are launching smart watch products and other wearable technology. These new competitors have not historically competed with us, and many have significantly greater financial, distribution, advertising and marketing resources than us. The impact of the introduction of wearable technology on sales of our traditional product lines, is uncertain, but could be materially adverse. Our results of operations and market position may be adversely affected by our competitors and their competitive pressures in the watch, wearable technology and fashion accessory industries.
Any material disruption of our information systems could disrupt our business and reduce our sales.
We are increasingly dependent on information systems to operate our websites, process transactions, manage inventory, monitor sales and purchase, sell and ship goods on a timely basis. We utilize SAP ERP in our U.S. operations and throughout most of our European operations to support our human resources, sales and distribution, inventory planning, retail merchandising and operational and financial reporting systems of our business, and Navision in our Asian operations to support many of the same functions on a local country level. We may experience operational problems with our information systems as a result of system failures, viruses, computer "hackers" or other causes. Any material disruption or slowdown of our systems could cause information, including data related to customer orders, to be lost or delayed which could result in delays in the delivery of merchandise to our stores and customers or lost sales, which could reduce demand for our merchandise and cause our sales to decline. Moreover, the failure to maintain, or a disruption in, financial and management control systems could have a material adverse effect on our ability to respond to trends in our target markets, market our products and meet our customers' requirements.
In addition, we have e-commerce and other websites in the U.S. and internationally. In addition to changing consumer preferences and buying trends relating to Internet usage, we are vulnerable to certain additional risks and uncertainties associated with the Internet, including changes in required technology interfaces, website downtime and other technical failures, security breaches, and consumer privacy concerns. Our failure to successfully respond to these risks and uncertainties could reduce Internet sales, increase costs and damage the reputation of our brands.
Changes in the mix of product sales demand could negatively impact our gross profit margins.
Our gross profit margins are impacted by our sales mix as follows:
Sales channel mix: sales from our direct retail and e-commerce channels typically provide gross margins in excess of our historical consolidated gross profit margins, while sales from our distributor, mass market and off-price channels typically provide gross margins below our historical consolidated gross profit margins.
Product mix: traditional watch and jewelry sales typically provide gross margins in excess of historical consolidated gross profit margins, while leather goods and private label products typically provide gross margins below our historical consolidated gross profit margins. In addition, sales of our wearable technology products have produced gross profit margins below our historical consolidated gross profit margins, which we anticipate continuing in fiscal 2018.
Geographic mix: international sales typically produce gross margins in excess of our historical consolidated gross profit margins, while domestic sales typically provide gross margins below our historical consolidated gross profit margins.
If future sales from our higher gross margin businesses do not increase at a faster rate than our lower gross margin businesses, our gross profit margins may grow at a slower pace, cease to grow, or decrease relative to our historical consolidated gross profit margin.
Our industry is subject to pricing pressures that may adversely impact our financial performance.
We assemble or source many of our products offshore because they generally cost less to make overseas, due primarily to lower labor costs. Many of our competitors also source their product requirements offshore to achieve lower costs, possibly in locations with lower costs than our offshore operations, and those competitors may use these cost savings to reduce prices. To remain competitive, we must adjust our prices from time to timecountries in response to these industry-wide pricing pressures. Our financial performance may be negatively affected by these pricing pressures if we are forcedexisting or future tariffs, causing us to reduceraise prices or make changes to our prices and we cannot reduceoperations, any of which could materially harm our production costsrevenue or our production costs increase and we cannot increase our prices.
operating results.
The loss of our intellectual property rights may harm our business.
Our trademarks, patents and other intellectual property rights are important to our success and competitive position. We are devoted to the establishment and protection of our trademarks, patents and other intellectual property rights in those countries where we believe it is important to our ability to sell our products. However, we cannot be certain that the actions we have taken will result in enforceable rights, will be adequate to protect our products in every country where we may want to sell our products, will be adequate to prevent imitation of our products by others or will be adequate to prevent others from seeking to prevent sales of our products as a violation of the trademarks, patents or other intellectual property rights of others. Additionally, we rely on the patent, trademark and other intellectual property laws of the U.S. and other countries to protect our proprietary rights. Even if we are successful in obtaining appropriate trademark, patent and other intellectual property rights, we may be unable to prevent third parties from using our intellectual property without our authorization, particularly in those
countries where the laws do not protect our proprietary rights as fully as in the U.S. Because we sell our products internationally and are dependent on foreign manufacturing in China, we are significantly dependent on foreign countries to protect our intellectual property rights. The use of our intellectual property or similar intellectual property by others could reduce or eliminate any competitive advantage we have developed, causing us to lose sales or otherwise harm our business. Further, if it became necessary for us to resort to litigation to protect our intellectual property rights, any proceedings could be burdensome and costly and we may not prevail. The failure to obtain or maintain trademark, patent or other intellectual property rights could materially harm our business.
Our products may infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling certain of our products.
We cannot be certain that our products do not and will not infringe upon the intellectual property rights of others. The wearable technology space is rapidly developing with new innovation, which will likely resultresulting in a significant number of domestic and international patent filings for new technology. As a result, wearable technology companies may be subject to an increasing number of claims that their products infringe the intellectual property rights of competitors or non-practicing entities. As we increase our wearable technology and other product offerings, weWe have been, are and may in the future be subject to legal proceedings includinginvolving claims of alleged infringement of the intellectual property rights of third parties by us and our customers in connection with theirthe marketing and sale of our products. Any such claims, whether or not meritorious, could result in costly litigation and divert the efforts of our personnel. Moreover, should we be found liable for infringement, we may be required to enter into agreements (if available on acceptable terms or at all) or to pay damages and cease making or selling certain products. Moreover, we may need to redesign or rename some of our products to avoid future infringement liability. Any of the foregoing could cause us to incur significant costs and prevent us from manufacturing or selling certain of our products.
AnIf an independent manufacturer or license partner of ours fails to use acceptable labor practices or otherwise comply with laws or suffers reputation harm, our business could suffer.
While we have a code of conduct for our manufacturing partners, we have no control over the ultimate actions or labor practices of our independent manufacturers. The violation of labor or other laws by one of our independent manufacturers, or by one of our license partners, or the divergence of an independent manufacturer’s or license partner’s labor practices from those generally accepted as ethical in the U.S. or other countries in which the violation or divergence occurred, could interrupt or otherwise disrupt the shipment of finished products to us or damage our reputation. In addition, certain of our license agreements are with named globally recognized fashion designers. Should one of these fashion designers, or any or our licensor companies, conduct themselves inappropriately or make controversial statements, the underlying brand, and consequently our business under that brand, could suffer. Any of these, in turn, could have a material adverse effect on our financial condition and results of operations. As a result, should one of our independent manufacturers or licensors be found in violation of state or international laws or receive negative publicity, we could suffer financial or other unforeseen consequences.
Risks Relating to our Common Stock
Our failure to meet the continued listing requirements of Nasdaq could result in a delisting of our securities.
If we fail to satisfy the continued listing requirements of Nasdaq, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq may take steps to delist our securities. Our Common Stock has recently closed below the $1.00 closing bid requirement for Nasdaq. Such a delisting would likely have a negative effect on the price of our securities and would impair stockholder’s ability to sell or purchase our securities. In the event of a delisting, we can provide no assurance that any action taken by us to restore compliance with listing requirements would allow our securities to become listed again, stabilize the market price or improve the liquidity of our securities, prevent our securities from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements. Additionally, if our securities are not listed on, or become delisted from, Nasdaq for any reason, and are quoted on the OTC Bulletin Board, an inter-dealer automated quotation system for equity securities that is not a national securities exchange, the liquidity and price of our securities may be more limited than if we were quoted or listed on Nasdaq or another national securities exchange. Holders of our stock may be unable to sell their securities unless a market can be established or sustained.
Our business could be negatively affected as a result of actions of activist stockholders, and such activism could impact the trading value of our securities.
Stockholders may, from time to time, engage in proxy solicitations or advance stockholder proposals, or otherwise attempt to effect changes and assert influence on our board of directors and management. For example, in February 2024, an activist stockholder nominated four directors for election at our 2024 annual meeting of stockholders. Activist campaigns that contest or conflict with our strategic direction or seek changes in the composition of our board of directors could have an adverse effect on our operating results and financial condition. A proxy contest would require us to incur significant legal and advisory fees, proxy solicitation expenses and administrative and associated costs and require significant time and attention by our board of directors and management, diverting their attention from the pursuit of our business strategy. Any perceived uncertainties as to our future direction and control, our ability to execute on our strategy, or changes to the composition of our board of directors or senior management team arising from a proxy contest could lead to the perception of a change in the direction of our business or instability which may result in the loss of potential business opportunities, make it more difficult to pursue our strategic initiatives, or limit our ability to attract and retain qualified personnel, any of which could adversely affect our business and operating results. If individuals are ultimately elected to our board of directors with a specific goal, it may adversely affect our ability to effectively implement our business strategy and create additional value for our stockholders. We may choose to initiate, or may become subject to, litigation as a result of a proxy contest or matters arising from the proxy contest, which would serve as a further distraction to our board of directors and management and would require us to incur significant additional costs. In addition, actions such as those described above could cause significant fluctuations in our stock price based upon temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
We may continue to incur rapid and substantial increases or decreases in our stock price in the foreseeable future that may not coincide in timing with the disclosure of news or developments by or affecting us. Accordingly, the market price of our common stock may fluctuate dramatically, and may decline rapidly, regardless of any developments in our business.
Overall, there are various factors, many of which are beyond our control, that could negatively affect the market price of our common stock or result in fluctuations in the price or trading volume of our common stock, including:
•the impact of any future pandemic;
•actual or anticipated variations in our annual or quarterly results of operations, including our earnings estimates and whether we meet market expectations with regard to our earnings and liquidity;
•our decision not to, or our current inability to, pay dividends or other distributions;
•publication of research reports by analysts or others about us or the specialty retail industry, which may be unfavorable, inaccurate, inconsistent or not disseminated on a regular basis;
•changes in market valuations of similar companies;
•market reaction to any additional equity, debt or other securities that we may issue in the future, and which may or may not dilute the holdings of our existing stockholders;
•additions or departures of key personnel;
•actions by activist and institutional or significant stockholders;
•short interest in our stock and the market response to such short interest;
•a dramatic increase in product returnsthe number of individual holders of our stock and their participation in social media platforms targeted at speculative investing;
•speculation in the press or investment community about our company or industry;
•financial results reported by certain of our significant public licensing partners;
•strategic actions by us or our competitors, such as acquisitions or other investments;
•legislative, administrative, regulatory or other actions affecting our business, our industry, including positions taken by the Internal Revenue Service ("IRS”);
•investigations, proceedings, or litigation that involve or affect us;
•general market and economic conditions;
•a downgrade in our debt ratings; and
•the other risks identified herein.
Our organizational documents contain anti-takeover provisions that could discourage a proposal for a takeover.
Our certificate of incorporation and bylaws, as well as the General Corporation Law of the State of Delaware, contain provisions that may have the effect of discouraging a proposal for a takeover. These include a provision in our certificate of incorporation authorizing the issuance of "blank check" preferred stock and provisions in our bylaws establishing advance notice procedures with respect to certain stockholder proposals. Our bylaws may be amended by a vote of 80% of the Board of Directors, subject to repeal by a vote of 80% of the stockholders. In addition, Delaware law limits the ability of a Delaware corporation to engage in certain business combinations with interested stockholders. Finally, Mr. Kartsotis has the ability, by virtue of his stock ownership, to influence a vote regarding a change in control.
Failure to meet our financial guidance or achieve other forward-looking statements we have provided to the public could result in a decline in our stock price.
From time to time, we provide public guidance on our expected financial results or disclose other forward-looking information for future periods. We manage our business to maximize our growth and profitability and not to achieve financial or operating targets for any particular reporting period. Although we believe that public guidance may provide investors with a better understanding of our expectations for the future and is useful to our existing and potential stockholders, such guidance is subject to risks, uncertainties and assumptions. Any such guidance or other forward-looking statements are predictions based on our then-existing expectations and projections about future events that we believe are reasonable. Actual events or results may differ materially from our expectations, and as such, our actual results may not be in line with guidance we have provided. We are under no duty to update any of our forward-looking statements to conform to actual results or to changes in our expectations, except as required by federal securities laws. If our financial results for a particular period do not meet our guidance or the expectations of investors, or if we reduce our guidance for future periods, the market price of our common stock may decline and stockholders could be adversely affected. Investors who rely on these predictions when making investment decisions with respect to our securities do so at their own risk. In addition, our stock price may also decline if we fail to meet securities research analysts' projections. Similarly, if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price could decline.
General Risks
Any deterioration in the global economic environment, and any resulting declines in consumer confidence and spending, could have an adverse effect on our operating results and financial condition.
Uncertainty in global markets, slowing economic growth, high levels of unemployment, a pandemic, inflation, rising interest rates and eroding consumer confidence can negatively impact our operating results.
We accept limited returns and will request that a customer return a product if we feel the customer has an excess of any style that we have identified as being a poor performer for that customer or geographic location. We continually monitor returns and maintain a provision for estimated returns based upon historical experience and any specific issues identified. However, as we continue to increase our wearable technology product offerings, we do not have the same level of historical experience estimating returnsconsumer spending for discretionary items. This can affect our business as we have withit is dependent on consumer demand for our other more mature products,products. Global economic conditions remain uncertain, and the possibility remains that domestic or global economies, or certain industry sectors of those economies that are key to our sales, may slow or deteriorate, which could result in us underestimating the levela corresponding decrease in demand for our products and negatively impact our results of returns.operations and financial condition.
The effects of economic cycles, terrorism, acts of war and retail industry conditions may adversely affect our business.
Our business is subject to economic cycles and retail industry conditions. Purchases of discretionary fashion accessories, such as our watches, jewelry, handbags, sunglasses and other products, tend to decline during recessionary periods when disposable income is low and consumers are hesitant to use available credit. In addition, acts of terrorism, acts of war and military action both in the U.S. and abroad can have a significant effect on economic conditions and may negatively affect our ability to procure our products from manufacturers for sale to our customers. Any significant declines in general economic conditions, public safety concerns or uncertainties regarding future economic prospects that affect consumer acceptancespending habits could have a material adverse effect on consumer purchases of wearable technology productsour products.
Risks associated with foreign government regulations and U.S. trade policy may affect our foreign operations and sourcing.
Our businesses are subject to risks generally associated with doing business abroad, such as foreign governmental regulation in the countries in which our manufacturing sources are located, primarily China. While we have not experienced any material issues with foreign governmental regulations that would impact our arrangements with our foreign manufacturing sources, we believe that this issue is of particular concern with regard to China due to the less mature nature of the Chinese
market economy, the historical involvement of the Chinese government in the industry and recent trade tensions between China and the inherent outdatingUnited States. If regulations or other factors were to render the conduct of technology over time may resultbusiness in an increasea particular country undesirable or impracticable, or if our current foreign manufacturing sources were for any other reason to cease doing business with us, such a development could have a material adverse effect on our product sales and on our supply, manufacturing and distribution channels.
Our business is also subject to risks associated with U.S. and foreign legislation and regulations relating to imports, including quotas, duties, tariffs or taxes, and other charges or restrictions on imports, which could adversely affect our operations and our ability to import products at current or increased levels. Substantially all of our import operations are subject to customs duties imposed by the governments where our production facilities are located on imported products, including raw materials. We cannot predict whether additional U.S. and foreign customs quotas, duties (including antidumping or countervailing duties), tariffs, taxes or other charges or restrictions, requirements as to whether raw materials must be purchased, additional workplace regulations or other restrictions on our imports will be imposed upon the importation of our products in the amountfuture or adversely modified, or what effect such actions would have on our costs of returns we accept fromoperations. For example, our customers. While returns have historically been within our expectations and the provisions established, future return rates may differ from those experiencedproducts imported for distribution in the past. In the event that our productsUnited States are performing poorlysubject to U.S. customs duties, and in the retailordinary course of our business, we may from time to time be subject to claims by U.S. Customs and Border Protection for duties and other charges. Factors that may influence the modification or imposition of these restrictions may include determinations by the Office of the U.S. Trade Representative that a country has denied adequate intellectual property rights or fair and equitable market and/access to U.S. firms, trade disputes between the United States and another country that leads to withdrawal of “most favored nation” status for that country and economic and political changes within a country that are viewed unfavorably by the U.S. government, resulting in trade policy changes towards that country. Future quotas, duties, or we experience product damagestariffs may have a material adverse effect on our business, financial condition and results of operations. Future trade agreements could also provide our competitors with an advantage over us, or defects at a rate significantly higher thanincrease our historical rate, the resulting credit returnscosts, either of which could have ana material adverse impacteffect on our operatingbusiness, financial condition and results for the period or periods in which such returns occur.of operations.
There are inherent limitations in all control systems, and misstatements due to error or fraud may occur and not be detected.
We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002. These provisions provide for the identification of material weaknesses in internal control over financial reporting, which is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Our management, including our Chief Executive OfficerCEO and Chief Financial Officer ("CFO"), does not expect that our internal controls and disclosure controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, in our companyCompany have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Further, controls can be circumvented by individual acts, of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may be inadequate because of changes in conditions, such as growth of the Company or increased transaction volume, or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
In addition, discovery and disclosure of a material weakness, by definition, could have a material adverse impact on our financial statements. Such an occurrence could discourage certain customers or suppliers from doing business with us, result in
higher borrowing costs and affect how our stock trades. This could in turn negatively affect our ability to access public debt or equity markets for capital.
Risk Factors Relating to Our International Operations
Factors affecting international commerce and our international operations may seriously harm our financial condition.
During fiscal year 2017, we generated 58.5% of our net sales from outside of the U.S., and we anticipate that revenue from our international operations could account for an increasingly larger portion of our net sales in the future. Our international operations are directly related to, and dependent on, the volume of international trade and foreign market conditions. International commerce and our international operations are subject to many risks, some of which are discussed in more detail below, including:
recessions in foreign economies;
the adoption and expansion of trade restrictions or the occurrence of trade wars;
limitations on repatriation of earnings;
difficulties in protecting our intellectual property or enforcing our intellectual property rights under the laws of other countries;
longer receivables collection periods and greater difficulty in collecting accounts receivable;
difficulties in managing foreign operations;
social, political and economic instability;
political tensions between the U.S. and foreign countries;
compliance with, changes in or adoption of current, new or expanded regulatory requirements, particularly in the wearable technology space;
our ability to finance foreign operations;
tariffs and other trade barriers; and
U.S. government licensing requirements for exports.
The occurrence or consequences of any of these risks may restrict our ability to operate in the affected regions and decrease the profitability of our international operations, which may seriously harm our financial condition.
Foreign currency fluctuations could adversely impact our financial condition.
We generally purchase our products in U.S. dollars. However, we source a significant amount of our products overseas and, as such, the cost of these products may be affected by changes in the value of the currencies of these countries, including the Australian dollar, British pound, Canadian dollar, Chilean peso, Chinese yuan, Danish krone, euro, Hong Kong dollar, Indian rupee, Japanese yen, South Korean won, Malaysian ringgit, Mexican peso, Norwegian kroner, Singapore dollar, Swedish krona, Swiss franc and Taiwanese dollar. Due to our dependence on manufacturing operations in China, changes in the value of the Chinese yuan may have a material impact on our supply channels and manufacturing costs, including component and assembly costs.
In addition, changes in currency exchange rates may also affect the prices at which we sell products in foreign markets. For fiscal years 2017, 2016 and 2015, 58.5%, 55.4% and 53.8% of our consolidated net sales were generated outside of the U.S. In general, our overall financial results are affected positively by a weaker U.S. dollar and are affected negatively by a stronger U.S. dollar as compared to the foreign currencies in which we conduct our business. For example, due to a generally weaker U.S. dollar in fiscal year 2017, the translation of foreign based net sales into U.S. dollars improved our reported net sales by approximately $23.3 million. If the value of the U.S. dollar remains at its current levels or strengthens further against foreign currencies, particularly against the euro, Canadian dollar, British pound, Japanese yen, Mexican peso, and Australian dollar, our financial condition and results of operations could be materially and adversely impacted. Although we utilize forward contracts to help mitigate foreign currency risks (mostly relating to the euro, Canadian dollar, British pound, Japanese yen, Mexican peso, Australian dollar and U.S. dollar), foreign currency fluctuations may have a material adverse impact on our financial condition and results of operations.
The European economic uncertainty and any further debt crisis could adversely impact our financial condition.
The European economic situation, particularly with the planned withdrawal by the United Kingdom from the European Union, has contributed to instability in certain international credit markets. During fiscal year 2017, we generated 34.9% of our consolidated net sales from our Europe segment. If global economic and market conditions, or economic conditions in Europe remain uncertain or deteriorate, the value of the euro could decline. Any additional financial instability in stressed European countries could have a contagion effect on the region and contribute to the general instability and uncertainty in the European Union. If this were to occur or if the value of the euro were to weaken against the U.S. dollar, our financial condition and results of operations could be materially and adversely impacted.
We depend on independent distributors to sell our products in certain international markets.
Our products are sold in certain international markets through independent distributors. If a distributor fails to meet annual sales goals or breaches the terms of our distribution agreement, it may be difficult and costly to locate an acceptable substitute distributor. If a change in our distributors becomes necessary, we may experience increased costs, as well as a substantial disruption in, and a resulting loss of, sales and profits.
Because we depend on foreign manufacturing, we are vulnerable to changes in economic and social conditions in Asia, particularly China, and disruptions in international travel and shipping.
Because a substantial portion of our watches and jewelry and certain of our handbags, sunglasses and other products are assembled or manufactured in China, our success will depend to a significant extent upon future economic and social conditions existing in China. If the factories in China were disrupted for any reason, we would need to arrange for the manufacture and shipment of products by alternative sources. Because the establishment of new manufacturing relationships involves numerous uncertainties, including those relating to payment terms, costs of manufacturing, adequacy of manufacturing capacity, quality control and timeliness of delivery, we are unable to predict whether such new relationships would be on terms that we regard as satisfactory. Any significant disruption in our relationships with our manufacturing sources located in China would have a material adverse effect on our ability to manufacture and distribute our products. In addition, restrictions on travel to and from this and other regions, and any delays or cancellations of customer orders or the manufacture or shipment of our products could have a material adverse effect on our ability to meet customer deadlines and timely distribute our products in order to match consumer tastes.
We face risks associated with increased political uncertainty.
In the U.S., the change in the U.S. government administration has resulted in uncertainty regarding potential changes in regulations, fiscal policy, social programs, domestic and foreign relations and international trade policies. Potential changes in relationships among the U.S., China, Russia and other countries could have significant impacts on global trade and regional economic conditions, among other things. In addition, changes in the relationships between the U.S. and its neighbors, such as Mexico, can have significant, potentially negative, impacts on commerce. Further, anti-American sentiment could harm the reputation and success of U.S. companies doing business abroad.
In Europe, the populist movement resulted in the Brexit vote, and other election results are signaling increasing populist demands and rises in nationalism, which could have a negative impact on economic policy and consequently pose a potential threat to the unity of the European Union.
Our business is dependent upon its international operations, particularly in Asia and Europe. During fiscal years 2017, 2016 and 2015, we generated 58.5%, 55.4% and 53.8%, respectively, of our net sales outside the U.S. In addition, we source the vast majority of our products from outside the U.S.
Our ability to respond to these developments or comply with any resulting new legal or regulatory requirements, including those involving economic and trade sanctions, could reduce our sales, increase our costs of doing business, reduce our financial flexibility and otherwise have a material adverse effect on our business, financial condition and results of our operations.
Risks associated with foreign government regulations and U.S. trade policy may affect our foreign operations and sourcing.
Our businesses are subject to risks generally associated with doing business abroad, such as foreign governmental regulation in the countries in which our manufacturing sources are located, primarily China. While we have not experienced any material issues with foreign governmental regulations that would impact our arrangements with our foreign manufacturing sources, we believe that this issue is of particular concern with regard to China due to the less mature nature of the Chinese market economy and the historical involvement of the Chinese government in industry. If regulations were to render the conduct of business in a particular country undesirable or impracticable, or if our current foreign manufacturing sources were for any other reason to cease doing business with us, such a development could have a material adverse effect on our product sales and on our supply, manufacturing and distribution channels.
Our business is also subject to risks associated with U.S. and foreign legislation and regulations relating to imports, including quotas, duties, tariffs or taxes, and other charges or restrictions on imports, which could adversely affect our operations and our ability to import products at current or increased levels. We cannot predict whether additional U.S. and foreign customs quotas, duties (including antidumping or countervailing duties), tariffs, taxes or other charges or restrictions, requirements as to where raw materials must be purchased, additional workplace regulations or other restrictions on our imports will be imposed upon the importation of our products in the future or adversely modified, or what effect such actions would have on our costs of operations. For example, our products imported to the U.S. are subject to U.S. customs duties and, in the ordinary course of our business, we may from time to time be subject to claims by the U.S. Customs Service for duties and other charges. Factors that may influence the modification or imposition of these restrictions include the determination by the U.S. Trade Representative that a country has denied adequate intellectual property rights or fair and equitable market access to U.S. firms that rely on intellectual property, trade disputes between the U.S. and a country that leads to withdrawal of "most favored nation" status for that country and economic and political changes within a country that are viewed unfavorably by the U.S. government. Future quotas, duties or tariffs may have a material adverse effect on our business, financial condition and results of operations. Future trade agreements could also provide our competitors with an advantage over us, or increase our costs, either of which could have a material adverse effect on our business, financial condition and results of operations and financial condition. Substantially all of our import operations are subject to customs duties imposed by the governments where our production facilities are located on imported products, including raw materials.
Risk Factors Relating to Our Common Stock
Many factors may cause our net sales, operating results and cash flows to fluctuate and possibly decline, which may result in declines in our stock price.
Our net sales, operating results and cash flows may fluctuate significantly because of a number of factors, many of which are outside of our control. These factors may include, but may not be limited to, the following:
fluctuations in market demand for our products;
increased competition and pricing pressures;
our ability to anticipate changing customer demands and preferences;
our ability to compete in the wearable technology space;
growth in our international operations;
our failure to efficiently manage our inventory levels;
our inability to manage and maintain our debt obligations;
seasonality in our business;
changes in our, and our competitors', business strategy or pricing;
implementation of our restructuring plan;
the successful management of our Company-owned retail store operations;
the timing of certain selling, general and administrative expenses;
completing acquisitions and the costs of integrating acquired operations;
international currency fluctuations, operating challenges and trade regulations;
acts of terrorism or acts of war; and
government regulation.
One or more of the foregoing factors may cause our operating expenses to be unexpectedly high or result in a decrease in our net sales during any given period. If these or any other variables or unknowns were to cause a shortfall in revenues or earnings, an increase in our operating costs or otherwise cause a failure to meet public market expectations, our stock price may decline and our business could be adversely affected.
Our CEO owns approximately 7.8% of our outstanding common stock.
Mr. Kosta Kartsotis owns approximately 7.8% of our common stock as of December 30, 2017. As a result, he is in a position to influence the outcome of elections of our directors, the adoption, amendment or repeal of our bylaws and any other actions requiring the vote or consent of our stockholders, and to otherwise influence our affairs.
Because the interests of Mr. Kartsotis may not coincide with the interests of other stockholders, Mr. Kartsotis may influence the Company to enter into transactions or agreements that other stockholders would not approve or make decisions with which other stockholders may disagree.
Our organizational documents contain anti-takeover provisions that could discourage a proposal for a takeover.
Our certificate of incorporation and bylaws, as well as the General Corporation Law of the State of Delaware, contain provisions that may have the effect of discouraging a proposal for a takeover. These include a provision in our certificate of incorporation authorizing the issuance of "blank check" preferred stock and provisions in our bylaws establishing advance notice procedures with respect to certain stockholder proposals. Our bylaws may be amended by a vote of 80% of the Board of Directors, subject to repeal by a vote of 80% of the stockholders. In addition, Delaware law limits the ability of a Delaware corporation to engage in certain business combinations with interested stockholders. Finally, Mr. Kartsotis has the ability, by virtue of his stock ownership, to influence a vote regarding a change in control.
Reports published by securities or industry analysts, including projections in those reports that exceed our actual results, could adversely affect our stock price and trading volume.
Research analysts publish their own quarterly projections regarding our operating results. These projections may vary widely from one another and may not accurately predict the results we actually achieve. Our stock price may decline if we fail to meet securities research analysts' projections. Similarly, if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, our stock price or trading volume could decline.
Future sales of our common stock in the public market could adversely affect our stock price.
The shares of our common stock beneficially owned by Mr. Kartsotis may be sold in the open market in the future, subject to any volume restrictions and other limitations under the Securities Act of 1933 and Rule 144 thereunder. We may also decide to file a registration statement enabling Mr. Kartsotis to sell additional shares. Any sales by Mr. Kartsotis of substantial amounts of our common stock in the open market, or the availability of his shares for sale, could adversely affect the price of our common stock. The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market, or the perception that those sales could occur. These sales or the possibility that they may occur also could make it more difficult for us to raise funds in any equity offering in the future at a time and price that we deem appropriate.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
Risk Management and Strategy
We have implemented and maintain various information security processes designed to identify, assess and manage material risks from cybersecurity threats to our critical computer networks, third party hosted services, communications systems, hardware and software, and our critical data, including intellectual property and data related to our customers, consumers and employees.Our cybersecurity risk management program leverages the National Institute of Standards and Technology Cyber Security Framework, which organizes cybersecurity risks into five categories: identify, protect, detect, respond and recover.Our cyber security team regularly reviews enterprise risk management-level cybersecurity risks, and key cybersecurity risks are incorporated into our Enterprise Risk Management program. In addition, we have a set of Company-wide policies and procedures concerning cybersecurity matters, which include cyber security guidelines as well as other policies that directly or indirectly relate to cybersecurity, such as policies related to encryption standards, antivirus protection, remote access, multi factor authentication, confidential information and the use of the Internet, social media, email and wireless devices.
Our Chief Information Security Officer ("CISO"), our information security team, and third-party service providers help identify, assess, and manage our cybersecurity threats and risks, including through the use of our cybersecurity risk assessment program. Our CISO along with this team, as applicable, identifies and assesses risks from cybersecurity threats by monitoring and evaluating our threat environment and our risk profile using various methods, including automated and manual tools, third-party threat feeds, internal audits, access control assessments, and evaluating threats reported to us by various third-party enterprise threat reporting services.
As part of our cybersecurity program, we regularly test our cyber defenses by performing simulations and drills at a technical level with third-party experts, internal user susceptibility testing and reviewing our operational policies and procedures. Our cyber security team monitors alerts and meets to discuss threat levels, risk ranking, trends and remediation. Further, we conduct regular external penetration tests, red team testing and maturity testing to assess our processes and procedures and the threat landscape. We conduct security assessments on additions and changes to our systems and applications including third-party service providers. In addition, our Audit Services group conducts periodic reviews of cyber security controls, procedures, and applications and monitors remediation activities. Our assessment of risks associated with use of third-party providers is part of our overall cybersecurity risk management framework.
We face a number of cybersecurity risks in connection with our business. Although such risks have not materially affected us, including our business strategy, results of operations or financial condition, to date, we have, from time to time, experienced threats to and breaches of our data and systems, including malware and computer virus attacks. For a description of the risks from cybersecurity threats that may materially affect us and how they may do so, see our risk factors under Part 1. Item 1A. Risk Factors in this Annual Report on Form 10-K, including "Any material disruption of our information systems could disrupt our business and reduce our sales" and “A data security or privacy breach could damage our reputation, harm our customer relationships, expose us to litigation or government actions, and result in a material adverse effect to our business, financial condition and results of operations.”
Governance
Our Board of Directors addresses our cybersecurity risk management as part of its general oversight function and has delegated to our Audit Committee responsibility for overseeing our cybersecurity risk management processes, including oversight and mitigation of risks from cybersecurity threats.
The CISO is responsible for developing and implementing our information security program and reporting on cybersecurity matters to the Audit Committee of the Board. Our CISO has two decades of experience leading cyber security oversight with ten years in a multinational company environment. Members of the security team have cybersecurity experience and certifications, such as the Certified Information Systems Security Professional certification. We regularly conduct training and/or simulations to ensure employees are aware of current cyber threats. Additionally, tabletop exercises at a management level incorporate external advisors. All employees are required to complete cybersecurity training annually. We also require employees in certain roles to complete additional role-based, specialized cybersecurity training.
Our cybersecurity incident response process is designed to escalate certain cybersecurity incidents to members of management depending on the circumstances including our CISO, our Chief Financial Officer and our General Counsel. In addition, our incident response process includes reporting to the Audit Committee for certain cybersecurity incidents.
The Audit Committee receives reports quarterly from our CISO concerning our significant cybersecurity threats and risk and the processes we have implemented to address them. Our Board of Directors also receives periodic reports from our CISO or Audit Committee regarding our overall cybersecurity program.
Item 2. Properties
Company facilities.Facilities
As of the end of fiscal year 2017,2023, we owned or leased the following material facilities in connection with our U.S. and international operations:
| | | | | | | | | | | | | | | | | | | | |
| Location | | Use | | Approximate
Square
Footage | | | | | |
Location | | Use | | Approximate
Square
Footage
| | Owned / Leased |
| Eggstätt, Germany | | Office, warehouse and distribution | | 383,000 | | 383,000 |
| Owned |
Grabenstätt, Germany | | Office | | 92,000 |
| | Owned (1)
|
| Richardson, Texas | | Corporate headquarters | | 383,000 | | 536,000 |
| Lease expiring in 20212036 |
| Dallas, Texas | | Office, warehouse and distribution | | 518,000 | | 518,000 |
| Lease expiring in 2026 |
| Hong Kong | | Warehouse and distribution | | 171,000 | | 205,000 |
| Lease expiring in 20232027 |
Garland, Texas | | Warehouse | | 154,000 |
| | Lease expiring in 2022 |
| Basel, Switzerland | | Europe headquarters | | 115,000 | | 140,000 |
| Lease expiring in 2036 |
Shenzhen, ChinaBangalore, India | | Office | | Manufacturing58,000 | | | 110,000
| | Lease expiring in 20182025 |
Hong KongNalagarh, India | | Factory | | Asia headquarters40,000 | | | 42,000
| | Lease expiring in 20192025 |
New York, New YorkHong Kong | | Asia headquarters | | General office and showroom40,000 | | | 27,000
| | Lease expiring in 20272026 |
(1) Facility is classified as held for sale as of the end of fiscal year 2017
We also lease certain other manufacturing and/or office, warehouse and/or distribution facilities in Burlingame, California; Chicago, Illinois; Los Angeles, California; Miami, Florida; Australia; Austria; Canada; China; Denmark; France; Germany; Hong Kong; India; Italy; Japan; Malaysia; Mexico; the Netherlands; New Zealand; Poland; Portugal; Singapore; South Africa; South Korea; Spain; Sweden; Switzerland; Taiwan, the United Kingdom and Vietnam.Retail Store Facilities
Retail store facilities.As of the end of fiscal year 2017,2023, we had 546299 lease agreements for retail space for the sale of our products. The leases, including renewal options, expire at various times from 2018 to 2029.through 2036. The leases provide for minimum annual rentals and, in certain cases, for the payment of additional rent when sales exceed specified net sales amounts. We are also generally required to pay our pro rata share of common area maintenance costs, real estate taxes, insurance, maintenance expenses and utilities.
We believe that our material existing facilities are well maintained, in good operating condition, and are adequate for our needs.
Item 3. Legal Proceedings
The CompanyInformation in response to this item is occasionally subject to litigation or other legal proceedingsprovided in the normal course“Part II - Item 8. Note 14, Commitments and Contingencies” and is incorporated by reference into Part I of its business. The Company does not believe that the outcome of any currently pending legal matters, individually or collectively, will have a material effect on the business or financial condition of the Company.this Annual Report.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
General.General
Our common stock is listed on the NASDAQNasdaq Global Select Market under the symbol "FOSL." The following table sets forth the range of quarterly high and low sales prices per share of our common stock on the NASDAQ Global Select Market for the fiscal years ended December 30, 2017 and December 31, 2016.
|
| | | | | | | |
| | High | | Low |
| Fiscal year ended December 30, 2017: | |
| | |
|
| First quarter | $ | 27.33 |
| | $ | 15.79 |
|
| Second quarter | $ | 18.44 |
| | $ | 8.98 |
|
| Third quarter | $ | 12.59 |
| | $ | 6.80 |
|
| Fourth quarter | $ | 9.60 |
| | $ | 5.50 |
|
| Fiscal year ended December 31, 2016: | |
| | |
|
| First quarter | $ | 51.93 |
| | $ | 28.26 |
|
| Second quarter | $ | 43.79 |
| | $ | 26.03 |
|
| Third quarter | $ | 33.05 |
| | $ | 26.30 |
|
| Fourth quarter | $ | 36.87 |
| | $ | 23.10 |
|
As of February 20, 2018,March 1, 2024, there were 7062 holders of record of our shares of common stock (including nominee holders such as banks and brokerage firms who hold shares for beneficial owners), although we believe that the number of beneficial owners is much higher.
Cash Dividend Policy.We didhave not declared or paid any dividends since our formation and currently do not intend to pay any cash dividends in fiscal years 2017, 2016 or 2015. We expect that for the foreseeable future. Our current business plan is to retain any future we will retain all available earnings generated by our operations forto finance the development and growth of our business. Any future determination as to a cash dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects, restrictive covenants and such other factors as our Board of Directors may deem relevant.
Common Stock Performance Graph
The following performance graph compares the cumulative return of our shares of common stock over the preceding five year periods with that of the broad market Standard & Poor's 500 Stock Index ("S&P 500 Index") and the NASDAQ Retail Trades Group. Each index assumes $100 invested at December 31, 2012 and is calculated assuming quarterly reinvestment of dividends and quarterly weighting by market capitalization.
2017 COMPARATIVE TOTAL RETURNS
Fossil Group, Inc.,
NASDAQ Retail Trades and S&P 500 Index
(Performance Results through 12/31/2017)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 12/31/2012 | | 12/31/2013 | | 12/31/2014 | | 12/31/2015 | | 12/31/2016 | | 12/31/2017 |
| Fossil Group, Inc. | $ | 100.00 |
| | $ | 128.83 |
| | $ | 118.95 |
| | $ | 39.27 |
| | $ | 27.78 |
| | $ | 8.35 |
|
| S&P 500 Index | $ | 100.00 |
| | $ | 129.60 |
| | $ | 144.36 |
| | $ | 143.31 |
| | $ | 156.98 |
| | $ | 187.47 |
|
| Nasdaq Retail Trades | $ | 100.00 |
| | $ | 137.79 |
| | $ | 158.97 |
| | $ | 177.68 |
| | $ | 181.93 |
| | $ | 226.83 |
|
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In August 2010, our Board of Directors approved a common stock repurchase program pursuant to which up to $30 million could be used to repurchase outstanding shares of our common stock. The $30 million repurchase program has no termination date, and as of December 30, 2017, no shares had been repurchased under it. On November 10, 2014, the Company’s Board of Directors authorized a $1.0 billion share repurchase program with an expiration date of December 31, 2018.date. As of December 30, 2017,2023, the Company had $824.2$20.0 million of repurchase authorizations remaining under its combined repurchase programs. However, under the Company's credit agreement, the Company is restricted from making open market repurchasesprogram.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publically Announced Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program |
| | | | | | | | |
| | | | | | | | |
| February 27, 2022 - April 2, 2022……… | | 989,186 | | | $ | 10.11 | | | 989,186 | | | $ | 19,999,982 | |
| Total……………………………….......... | | 989,186 | | | | | 989,186 | | | |
During fiscal 2022, 1.0 million shares of itsour common stock.
Common stock repurchases acquired from grantees in connection with income tax withholding obligations arising from vestingwere repurchased at a cost of restricted stock grants were 3,316 shares, 6,763 shares and 11,175 shares for fiscal years 2017, 2016 and 2015, respectively.
$10.0 million. There were no sharesrepurchases of common stock repurchased during the fourth quarter of fiscal year 2017.years 2023 and 2021.
Item 6. Selected Financial Data
The following information should be read in conjunction with our consolidated financial statements and notes thereto contained in Item 8. Consolidated Financial Statements and Supplementary Data of this Annual Report on Form 10-K (in thousands, except for per share data).[Reserved]
|
| | | | | | | | | | | | | | | | | | | |
| Fiscal Year | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Net sales | $ | 2,788,163 |
| | $ | 3,042,371 |
| | $ | 3,228,836 |
| | $ | 3,509,691 |
| | $ | 3,259,971 |
|
| Gross profit | 1,358,839 |
| | 1,578,186 |
| | 1,753,467 |
| | 2,001,172 |
| | 1,861,686 |
|
| Operating income (loss) | (424,276 | ) | | 127,146 |
| | 291,234 |
| | 566,536 |
| | 561,596 |
|
| Net income (loss) | (473,559 | ) | | 85,603 |
| | 229,902 |
| | 386,611 |
| | 388,048 |
|
| Net income (loss) attributable to Fossil Group, Inc. | (478,172 | ) | | 78,868 |
| | 220,637 |
| | 376,707 |
| | 378,152 |
|
| Earnings (loss) per share: | |
| | |
| | |
| | |
| | |
|
| Basic | (9.87 | ) | | 1.64 |
| | 4.52 |
| | 7.12 |
| | 6.59 |
|
| Diluted | (9.87 | ) | | 1.63 |
| | 4.51 |
| | 7.10 |
| | 6.56 |
|
| Weighted average common shares and common equivalent shares outstanding: | |
| | |
| | |
| | |
| | |
|
| Basic | 48,468 |
| | 48,136 |
| | 48,800 |
| | 52,882 |
| | 57,401 |
|
| Diluted | 48,468 |
| | 48,323 |
| | 48,924 |
| | 53,080 |
| | 57,676 |
|
| Working capital | $ | 781,900 |
| | $ | 932,705 |
| | $ | 953,141 |
| | $ | 1,008,264 |
| | $ | 939,573 |
|
| Total assets | 1,658,372 |
| | 2,186,897 |
| | 2,355,661 |
| | 2,177,460 |
| | 2,186,251 |
|
| Total long-term liabilities | 568,337 |
| | 756,874 |
| | 933,589 |
| | 747,351 |
| | 618,978 |
|
| Stockholders' equity attributable to Fossil Group, Inc. | 576,133 |
| | 1,006,236 |
| | 921,388 |
| | 977,860 |
| | 1,068,677 |
|
Return on average stockholders' equity attributable to Fossil Group, Inc.(1) | (62.3 | )% | | 8.2 | % | | 24.7 | % | | 37.5 | % | | 33.1 | % |
| |
| Calculated by dividing net income (loss) attributable to Fossil Group, Inc. by five quarter average stockholders' equity attributable to Fossil Group, Inc. |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Summary
The following discussion should be read in conjunction with Item 1. Business, Item 1A. Risk Factors and our consolidated financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K. Our actual results of operations may differ materially from those discussed in forward-looking statements as a result of various factors, including but not limited to those included in Item 1A. Risk Factors and other portions of this Annual Report on Form 10-K.
Overview
We are a global design, marketing and distribution company that specializes in consumer fashion accessories. Our principal offerings include an extensive line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts, and sunglasses. In the watch and jewelry product categories, we have a diverse portfolio of globally recognized owned and licensed brand names under which our products are marketed.
Our products are distributed globally through various distribution channels including wholesale in countries where we have a physical presence, direct to the consumer through our retail stores and commercial websites and through third-party distributors in countries where we do not maintain a physical presence. Our products are offered at varying price points to meet the needs of our customers, whether they are value-conscious or luxury oriented. Based on our extensive range of accessory products, brands, distribution channels and price points, we are able to target style-conscious consumers across a wide age spectrum on a global basis.
Domestically,Known or Anticipated Trends
Based on our recent operating results and current perspectives on our operating environment, we sellanticipate the following trends will continue to impact our products through a diversified distribution network that includes department stores, specialty retail locations, specialty watchoperating results:
Economic Environment Impacting Consumer Spending Ability and jewelry stores, Company-owned retailPreferences: Macroeconomic factors, including inflation and outlet stores, mass market stores and through our FOSSIL website. Our wholesaleincreased interest rates, impacted customer base includes, among others, Amazon, Best Buy, Dillard's, JCPenney, Kohl's, Macy's, Neiman Marcus, Nordstrom, Saks Fifth Avenue, Target and Wal-Mart. In the U.S., our network of Company-owned stores included 80 retail stores locatedbehavior in premier retail sites and 123 outlet stores located in major outlet malls as of December 30, 2017.fiscal year 2023. In addition, our wholesale customers have shown caution in placing advance orders for merchandise. We expect interest rates to remain close to recent highs, along with continued economic uncertainty. While the impact of these macroeconomic factors are difficult to quantify, we offer an extensive collectionexpect continued negative impacts on consumer confidence and consumer demand in fiscal year 2024 in many of our FOSSIL brand products onmajor markets.
Inventory Levels: In fiscal year 2023, a slowing of consumer demand in our website, www.fossil.com,core categories, in part due to macro-economic factors such as well as proprietary and licensed watch and jewelry brands through other managed and affiliated websites.
Internationally, our products are sold to department stores, specialty retail stores and specialty watch and jewelry storeshigher inflation, resulted in approximately 150 countries worldwide through 23 Company-owned foreign sales subsidiaries and through a network of approximately 80 independent distributors. Internationally, our network of Company-owned stores included 208 retail stores and 133 outlet stores as of December 30, 2017. Our products are also sold through licensed and franchised FOSSIL retail stores, retail concessions operated by us and kiosks in certain international markets. In addition, we offer an extensive collectionexcess inventory with many of our FOSSIL brand productswholesale customers. With higher marketplace inventories and a worsening economic environment, retailers placed increased emphasis on rationalizing their inventory needs. With the challenging global macro environment, we expect many customers to continue to manage to leaner inventory levels than the prior year across our websiteskey categories. We will also continue to proactively manage our inventory purchases to mitigate our cash flow and inventory risks.
World Conflicts: We continuously monitor the direct and indirect impacts from the military conflicts between Russia and Ukraine and in certain countries.
the Middle East. Our consolidated gross profit margin is impacted by our diversified business model that includes, but is not limited to: (i) a significant numberoperations in Russia and Israel consist of product categories we distribute, (ii) the multiple brands we offer within several product categories, (iii) the geographical presence of our businessessales through third-party distributors, and (iv) the different distribution channels we sellsales to or through. The components of this diversified business model produce varying ranges of gross profit margin. Generally,these distributors are currently on a historical basis, our fashion branded watch and jewelry offerings produce higher gross profit margins than our leather goods offerings. In addition, in most product categories that we offer, brands with higher retail price points generally produce higher gross profit margins compared to those of lower retail priced brands and connected products carry relatively lower margins than traditional products. Gross profit margins related tohold. Our sales in our EuropeRussia and Asia businessesIsrael are historically higher than our Americas business, primarily due to the following factors: (i) premiums charged in comparison to retail prices on products sold in the U.S.; (ii) the product sales mix in our international businesses, in comparisonnot material to our Americas business, is comprised more predominantlyfinancial results. We have no other operations, including supply chain, in Israel, Palestine, Russia or Ukraine. However, the continuation of watchesthe current military conflicts and/or an escalation of the conflicts beyond their current scope may continue to weaken the global economy and jewelry that generally produce higher gross profit margins than leather goods;could result in additional inflationary pressures and (iii) the watch sales mix in our Europe and Asia businesses, in comparison to our Americas business, are comprised more predominantly of higher priced licensed brands.supply chain constraints.
Supply Chain:Our business is subject to the risks inherent in global sourcing supply. We rely on domestic and foreign suppliers to provide us with merchandise in a timely manner and at favorable prices. Certain key components in our products come from limited sources of supply, which exposes us to potential supply shortages that could disrupt the manufacture and sale of our products. Any interruption or delay in the supply of key components could significantly harm our ability to meet scheduled product deliveries to our customers and cause us to lose sales. Interruptions or delays in supply may be caused by
Among our foreign suppliers, China is the source of a number of factors that are outsidesubstantial majority of our imports. A material increase in the cost of our products or transportation without any offsetting price increases or a disruption in the flow of finished goods from China may significantly increase our costs.
Data: We depend on information technology systems, the Internet and computer networks for a substantial portion of our contractor manufacturers' control.retail and e-commerce businesses, including credit card transaction authorization and processing. We also receive and store personal information about our customers and employees, the protection of which is critical to us. In the normal course of our business, we collect, retain, and transmit certain sensitive and confidential customer information, including credit card information, over public networks. Despite the security measures we currently have in place, our facilities and systems and
those of our third party service providers have been, and will continue to be, vulnerable to theft of physical information, security breaches, hacking attempts, computer viruses and malware, ransomware, phishing, lost data and programming and/or human errors. To date, none of these risks, intrusions, attacks or human error have resulted in any material liability to us. While we carry insurance policies that would provide liability coverage for certain of these matters, if we experience a significant security incident, we could be subject to liability or other damages that exceed our insurance coverage. In addition, we cannot be certain that such insurance policies will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim.
Business Strategies and Outlook: Our goal is to drive shareholder value and make a positive impact on our people, planet and communities. We continue to operate in a very challenging business environment for our product offerings. In early 2023, we initiated Our Transform and Grow plan (“TAG”), which was designed to reduce operating expenses, improve operating margins and advance our path to profitable growth. This discussion shouldinitial phase of TAG was designed to deliver $100 million in annualized cost savings by the end of fiscal year 2024.
In August 2023, as a result of a more comprehensive review of our business operations, we expanded the scope of TAG. Our goal in expanding TAG is to put additional emphasis on a broader set of initiatives aimed at restructuring or optimizing our operations, exit or minimize certain product offerings, brands and distribution, strengthen gross margins and improve our working capital efficiency.
Under the expanded plan, the Company increased the estimated economic benefits from the original $100 million in annualized cost savings target to be readachieved by the end of fiscal 2024 to $300 million in conjunctionannualized operating income benefits to be achieved by the end of fiscal 2025. Under the expanded program, we accelerated organizational restructuring, began exiting the smartwatch category, and reduced sku complexity in 2023. In 2024, we will continue to execute on all facets of TAG, including capturing benefits in our sourcing and operating costs. In connection with TAG, the Company expects to incur charges of approximately $100 million to $120 million over the duration of TAG and estimates approximately $35 million of charges in fiscal year 2024.
The Company has announced a strategic review of its current business model and capital structure. This includes efforts to optimize its business model with additional changes to its operations as well as further structural cost reductions under consideration. The Company expects this effort will further expand on TAG and could include additional debt and equity financing options, including monetization of various assets.
As we execute against the entire scope of TAG, we have an opportunity to improve our operating fundamentals, right size our cost structure, and return to sales growth. Aided by these measures, our long-term goal is to achieve adjusted gross margins above 50% and adjusted operating margins of approximately 10%.
Operating Segments
We operate our business in three segments which are divided into geographies. Net sales for each geographic segment are based on the location of the selling entity and each reportable segment provides similar products and services.
Americas: The Americas segment is comprised of sales from our operations in the United States, Canada and Latin America. Sales are generated through diversified distribution channels that include wholesalers, distributors, and direct to consumer. Within each channel, we sell our products through a variety of physical point of sale, distributors and e-commerce channels. In the direct to consumer channel, we had 143 Company-owned stores as of the end of fiscal 2023 and an extensive collection of products available through our owned websites. As of the end of fiscal 2023, net sales in the Americas segment accounted for 45.4% of our consolidated financial statementsrevenue.
Europe: The Europe segment is comprised of sales to customers based in European countries, the Middle East and Africa. Sales are generated through diversified distribution channels that include wholesalers, distributors and direct to consumer. Within each channel, we sell our products through a variety of physical points of sale, distributors, and e-commerce channels. In the related notes included therewith.direct to consumer channel, we had 86 Company-owned stores as of the end of fiscal 2023 and an extensive collection of products available through our owned websites. As of the end of fiscal 2023, net sales in the Europe segment accounted for 31.0% of our consolidated revenue.
Asia: The Asia segment is comprised of sales to customers based in Australia, China (including Hong Kong, Macau, and Taiwan), India, Indonesia, Japan, Malaysia, New Zealand, Singapore, South Korea and Thailand. Sales are generated through diversified distribution channels that include wholesalers, distributors and direct to consumer. Within each channel, we sell our products through a variety of physical points of sale, distributors, and e-commerce channels. In the direct to consumer channel,
we had 73 Company-owned stores as of the end of fiscal 2023 and an extensive collection of products available through our owned websites. As of the end of fiscal 2023, net sales in the Asia segment accounted for 23.2% of our consolidated revenue.
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including those related to product returns, bad debt, inventories, long-lived asset impairment, impairment of goodwill and trade names, income taxes, warranty costs hedge accounting,and litigation liabilities and stock-based compensation.liabilities. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Our estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policiessubjects require the most significant estimates and judgments.
Product Returns. We accept limited returns and may request that amonitor customer return a product if we feel the customer has an excess of any style that we have identified as being a poor performer for that customer or geographic location. We monitor returns and maintain a provision for estimated returns based upon historical experience, current information and any specific issues identified. While returns have historically been within our expectations and the provisions established, future return rates may differ from those experienced in the past. In the event that our products are performing poorly in the retail market and/or we experience product damages or defects at a rate significantly higher than our historical rate, the resulting returns could have an adverse impact on the operating results for the period or periods in which such returns occur. If our allowance for product returns were to change by 10%, the result,impact, excluding taxes, would have been an approximate $3.5$1.6 million change to net income (loss).
Inventories. Inventories are stated at the lower of cost and net realizable value, including any applicable duty and freight charges.Inventory. We account for estimated obsolescence or unmarketable inventory equal to the difference between the average cost of inventory and the estimated net realizable value based upon assumptions about futureforecasted sales demand, market conditions and available liquidation channels. Valuation of existing smartwatch inventory can be negatively impacted by the emergence of newer generation product. If actual future demand or market conditions are less favorable than those projected by management, or if liquidation channels are not readily available, additional inventory valuation reductions may be required. We assess our off-price sales on an ongoing basis and update our estimates accordingly. Revenue from salesFor every 1% of our products that are subject toadditional inventory consignment agreements is recognized when title and risk of loss transfers, delivery has occurred, the price to the buyer is determinable and collectability is reasonably assured.
Impairment of Goodwill and Trade Names. We evaluate goodwill for impairment annuallyvaluation reductions as of the end of the fiscal year by comparing the fair value of the reporting unit to its recorded value. Additionally, if events or conditions were to indicate the carrying value of a reporting unit may not be recoverable, we would evaluate goodwill for impairment at that time. We have three reporting units for which we evaluated goodwill for impairment: Americas, Europe and Asia. The fair value of each reporting unit was estimated using market comparable information and discounted cash flows. In fiscal year 2017, we determined goodwill was fully impaired and recognized a pre-tax impairment charge in operations of $202.3 million, $114.3 million and $42.9 million in the Americas, Europe and Asia segments, respectively.
We evaluate indefinite-lived trade names by comparing the fair value of the asset to its recorded value annually as of the end of the fiscal year and whenever events or conditions indicate that the carrying value of the trade name may not be recoverable. The fair value of the asset is estimated using discounted cash flow methodologies. The MICHELE trade name represented approximately 29% of our total trade name balances at the end of fiscal year 2017, 21% at the end 2023, we would have recorded an additional cost of fiscal year 2016sales of approximately $0.2 million.
Property, Plant and 19% at the end of fiscal year 2015. The SKAGEN trade name represented approximately 71% of our total trade name balance at the end of fiscal year 2017, 63% at the end of fiscal year 2016Equipment and 65% at the end of fiscal year 2015. In fiscal year 2017, as a result of interim impairment testing, we recorded impairment charges of $28.3 million and $7.6 million related to the SKAGEN and MICHELE trade names, respectively. In fiscal year 2016, no impairment charges were recorded related to the SKAGEN or the MICHELE trade names. In fiscal year 2015, $9.1 million in impairment charges were recorded related to the SKAGEN trade name, and no impairment charges were recorded to the MICHELE trade name. As of December 30, 2017, the fair value of the MICHELE trade name exceeded its carrying value by approximately 12%, and the fair value of the SKAGEN trade name exceeded its carrying value by approximately 13%.
The MISFIT trade name represented approximately 15% of our total trade name balance at the end of fiscal year 2016 and 17% at the end of fiscal year 2015. The MISFIT trade name was being amortized over its estimated useful life, however during fiscal year 2017, the trade name was deemed not recoverable, resulting in an impairment charge of $11.8 million.
Due to the inherent uncertainties involved in making the estimates and assumptions used in the fair value analysis, actual results may differ, which could alter the fair value of the trade names and possibly cause impairment charges to occur in future periods.
Judgments and assumptions are inherent in our estimate of future cash flows used to determine the estimate of the reporting unit's fair value. The most significant assumptions associated with the fair value calculations include net sales growth rates and discount rates. If the actual future sales results do not meet the assumed growth rates, future impairments of goodwill and trade names may be incurred.
Other AssetLease Impairment. We test for asset impairment of property, plant and equipment and other long-livedlease assets whenever events or conditions indicate that the carrying value of an asset might not be recoverable based on expected undiscounted cash flows related to the asset. In evaluating long-lived assets for recoverability, we calculate fair value using our best estimate of future cash flows expected to result from the use of the asset and its eventual disposition. When undiscounted cash flows estimated to be generated through the operations of our Company-owned retail stores are less than the carrying value of the underlying assets, the assets are impaired. If it is determined that assets are impaired, an impairment loss is recognized for the amount that the asset's book value exceeds its fair value. Should actual results or market conditions differ from those anticipated, additional losses may be recorded. We recorded impairment losses in restructuring chargeslong-lived asset impairments of approximately $8.3$1.7 million, $13.5$2.1 million and $3.4$7.5 million in fiscal years 2017, 20162023, 2022 and 2015, respectively.2021, respectively, related to lease assets. We recorded impairment losses in selling, general, and administrative expenseslong-lived asset impairments of approximately $1.6$0.4 million, $2.8$0.2 million and $7.7$1.7 million in fiscal years 2017, 20162023, 2022 and 2015, respectively.2021, respectively, related to property, plant and equipment. We recorded impairment losses in restructuring charges of $0.7 million in fiscal year 2021 related to lease assets. We recorded impairment losses in restructuring charges of $0.1 million and $0.2 million in fiscal years 2022 and 2021, respectively, related to property, plant and equipment. In fiscal year 2017,2023, an increase of 100 basis points to the discount rate used in our impairment testing would not have resulted in additionalan increase to property, plant and equipment and lease impairment expense. A 10% decrease in future expected cash flows would have increased impairment expense by $0.3$1.1 million. We recorded non-impairment restructuring charges related to the write off of property, plant and equipment of approximately $0.4 million and $1.5 million in fiscal years 2017 and 2016, respectively.
We record impairment charges on long-lived assets held for sale when the carrying amount of those assets exceeds their fair value. We recorded impairment charges on long-lived assets held for sale of approximately $0.7 million in fiscal year 2017 based on a preliminary sales contract.
Income Taxes. We record valuation allowances against our deferred tax assets, when necessary, in accordance with ASC 740, Income Taxes ("ASC 740"). Realization of deferred tax assets is dependent on future taxable earnings and is therefore uncertain. At least quarterly, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance against our deferred tax asset, increasing our income tax expense in the period such determination is made. The valuation allowance for fiscal years 2017, 20162023, 2022 and 20152021 was $78.3$192.6 million, $19.4$143.3 million and $10.8$123.0 million, respectively. In addition, in fiscal year 2017, we recorded a state deferred tax liability of $1.0 million on foreign earnings not considered to be indefinitely reinvested outside of the U.S. Due to the imposition of the one-time repatriation tax, we reversed the prior year federal deferred tax liability of $53.7 million.
Our continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. We accrue an amount for our estimate of additional income tax liability which we believe we are more likely than not to incur as a result of the ultimate resolution of tax audits ("uncertain tax positions"). We review and update the estimates used in the accrual
for uncertain tax positions as more definitive information becomes available from taxing authorities upon completion of tax audits, upon expiration of statutes of limitation, or upon occurrence of other events. The results of operations and financial position for future periods could be impacted by changes in assumptions or resolutions of tax audits.
The new Global Intangible Low-Taxed Income (“GILTI”)GILTI provisions of the Tax Cuts and Jobs Act of 2017 (the "TCJ Act”) requiring the inclusion of certain foreign earnings in U.S. taxable income will increasecontinue to have an adverse impact on our effective tax rate in future years. Due to the complexity of these new tax rules, we are continuing to evaluate these provisions of the Tax Act. We are not yet able to reasonably estimate the effect of therate. The GILTI provision of the Tax Act and have not made any adjustments related to potential GILTI tax in our financial statements. If applicable, GILTI tax would first apply to our fiscal year 2018, andimpact will be accounted for as incurred under the period cost method.
Accounting for the income tax effects of the Tax Act requires significant judgments and estimates in the interpretation and calculations of the provisions of the Tax Act. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we have made reasonable estimates of the effects and recorded provisional amounts in our financial statements for fiscal year 2017 as permitted under Staff Accounting Bulletin No. 118, (“SAB 118”) Income Tax Accounting Implications of the Tax Cuts and Jobs Act, which provides guidance on accounting for the Tax Act’s impact. As we collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department or the Internal Revenue Service, we may make adjustments to the provisional amounts. In addition, our valuation allowance analysis is affected by various aspects of the TaxTCJ Act, including the new limitation on the deductibility of interest expense and the impact of the GILTI. Those adjustments may materially impact
The Organization for Economic Cooperation and Development ("OECD") and over 140 countries have agreed to enact a two-pillar solution to reform the provision for income taxesinternational tax rules to address the challenges arising from the globalization and digitalization of the economy."The Pillar Two Global Anti-Base Erosion (GloBE) Rules" provide a coordinated system to ensure that multinational enterprises with revenues above 750 million euro pay a minimum effective tax rate of 15% tax on the income arising in each of the periodjurisdictions in which the adjustments are made.they operate. The accounting for the tax effectstechnical aspects of the enactment of the Tax Act will be completed in fiscal year 2018.
Warranty Costs. Our watch productscalculation are covered by limited warranties against defects in materials or workmanship. Historically, our FOSSIL and RELIC watch products sold in the U.S. have been covered for warranty periods of 11 years and 12 years, respectively, and our SKAGEN branded watches have been covered by a lifetime warranty. Beginning in 2017, these brands are covered by a two year warranty. Generally, all other products, including leathers and jewelry, sold in the U.S. and internationally are covered by a comparable one to two year warranty. We determine our warranty liability using historical warranty repair experience. As changes occur in sales volumes and warranty costs, the warranty accrual is adjusted as necessary. Due to the nature of connected products, their warranty costs are usually more than traditional products. A shift in product mix from traditional to connected products generally results in an increase in warranty liabilities. The year-end warranty liability for fiscal years 2017, 2016 and 2015 was $19.4 million, $15.4 million and $13.7 million, respectively.
Hedge Accounting. The Company is exposed to certain market risks relating to foreign exchange rates and interest rates. The Company actively monitors and attempts to manage these exposures using derivative instruments including foreign exchange forward contracts ("forward contracts") and interest rate swaps. The Company’s main objective is to hedge the variability in forecasted cash flows due to the foreign currency risks primarily associated with certain anticipated inventory purchases. Changes in the fair value of forward contracts designated as cash flow hedges are recorded in the cumulative translation adjustment component of accumulated other comprehensive income (loss) within stockholders' equity, and are recognized in other income (expense) - net in the period which the intercompany cash payment for inventory is made. Additionally, to the extent that anystill being developed. Implementation of these contracts are not considered to be effective in offsetting the change in the value of the cash flows being hedged, any changes in fair value relating to the ineffective portion of these contracts would be recognized in other income (expense) - net on the Company's consolidated statements of income (loss) and comprehensive income (loss). Also, the Company has entered into interest rate swap agreements to effectively convert portions of its variable rate debt obligations to fixed rates. Changes in the fair value of the interest rate swaps that are designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity, and are recognized in interest expense in the period inrules is scheduled for 2024, at which the payment is settled. Changes in the fair value of the interest rate swaps that are not designated as cash flow hedges are recorded in other income (expense) - net as they occur. To reduce exposure to changes in currency exchange rates adversely affecting the Company’s investment in foreign currency-denominated subsidiaries, the Company periodically enters into forward contracts designated as net investment hedges. Both realized and unrealized gains and losses from net investment hedges are recognized in the cumulative translation adjustment component of other comprehensive income (loss), and will be reclassified into earnings in the event the Company's underlying investments are liquidated or disposed. The Company does not enter into derivative financial instruments for trading or speculative purposes. The Company has elected to apply the hedge accounting rules as required by ASC 815, Derivatives and Hedging, for designated cash flow hedging instruments.
Stock-Based Compensation. We utilize the Black-Scholes model topoint we can determine the fair value of stock options and stock appreciation rights on the date of grant. The model requires us to make assumptions concerning (i) the length of time employees will retain their vested stock options and stock appreciation rights before exercising them ("expected term"), (ii) the volatility of our common stock price over the expected term and (iii) the number of stock options and stock appreciation rights that will be forfeited. Changes in these assumptions can materially affect the estimate of fair value of stock-based compensation and, consequently, the related expense amounts recognizedimpact on our consolidated statementsincome tax expense and effective tax rate.
Key Measures of income (loss)Financial Performance and comprehensive income (loss). If the fair value of our stock-based compensation were to change by 10%, excluding taxes, the result would have been a $3.2 million change to net income (loss) in fiscal 2017.Key Non-GAAP Financial Measures
Results of Operations
Executive Summary
During fiscal year 2017, net sales decreased 8% (9% in constant currency) as compared to the prior fiscal year, as the retail environment remains challenging. During fiscal 2017, net sales declined in all three reporting segments. However, sales trends improved in the second half of the fiscal year across all regions mainly driven by the wearables category. In constant currency, sales in watches declined in all segments, with increases in connected watches more than offset by declines in traditional watches. We remain confident wearables can be one of the key catalysts that could eventually offset the sales declines we have seen in our traditional watch business in recent years. Wearables products accounted for approximately 11% of our net sales in fiscal year 2017 with wearable sales nearly doubling as compared to fiscal year 2016. Leather and jewelry categories declined in all segments. While both our wholesale and retail businesses declined during fiscal 2017, our retail business was stronger than wholesale in all regions, and the U.S. department store business continued to be the most challenging. Our retail sales were negatively impacted by store closures globally, as well as continued traffic declines. During the 2017 fiscal year, we made significant progress in our strategic objectives, advancing our wearables business, leveraging scale in our supply chain, becoming more digitally enabled and continuing our transformation under our New World Fossil ("NWF") initiative.
During fiscal year 2017, FOSSIL branded products decreased 5% (7% in constant currency), driven by weakness in our leathers and jewelry categories, which were partially offset by modest growth in watches. In addition, our SKAGEN branded products decreased 8% (9% in constant currency), with decreases in watches and leathers. Our FOSSIL and SKAGEN watch performance was favorably impacted by wearables. While display watches continue to represent the largest percentage of wearables for the FOSSIL brand, we have had some success in hybrids as well, led by our marketing efforts, store experience and celebrity influencer campaigns. FOSSIL watch sales increased in Europe and Asia partially offset by a decrease in the Americas in fiscal 2017 as compared to the prior fiscal year. SKAGEN watch sales decreased in the Americas and Europe and were flat in Asia over the same period.
The following table presents as reported and constant currency net sales percentage change information by brand for fiscal year 2017 as compared to fiscal year 2016:
|
| | | | | | |
| | | Growth Percentage |
| |
| | Brand | As Reported | | Constant Currency |
| | FOSSIL | (5.4 | )% | | (6.5 | )% |
| | SKAGEN | (8.2 | ) | | (9.0 | ) |
Our multi-brand global watch portfolio decreased 6% (same in constant currency) during fiscal year 2017. Growth in EMPORIO ARMANI, ARMANI EXCHANGE and FOSSIL branded watches, driven by wearables, was more than offset by declines in most other brands. We launched ARMANI EXCHANGE hybrid watches at the beginning of fiscal year 2017, and launched EMPORIO ARMANI display and hybrid connected watches late in the third quarter of fiscal year 2017. Our FOSSIL connected watches are now on their third generation. In fiscal 2017, our most significant declines were in MICHAEL KORS and MARC JACOBS watches. Although we have seen some stabilization in the trajectory of MICHAEL KORS, the growth in connected watches was not able to compensate for the declines in traditional watches. Sales of watches declined in the wholesale channel in all three regions and in the Americas retail channel, which were partially offset by strong growth in e-commerce in all regions and to a lesser extent retail store growth in Asia and Europe.
During fiscal 2017, global comparable retail sales (including e-commerce) declined 6% year-over-year, with increases in watches in Asia and Europe more than offset by declines in watches in the Americas and declines in leathers and jewelry in all regions. While comparable retail sales were negative for fiscal year 2017, we did see stronger performance in the fourth quarter with positive comparable retail sales (including e-commerce) of 2%.
During fiscal year 2016, we began working on a multi-year restructuring plan, focused on our growth opportunities, including connected accessories, and improving overall profitability. Our goal continues to be to build a leaner and more nimble operating platform that can support improved profitability in the future, all while better serving our customers and competing in the new retail environment. This transformation will take time, but we are making significant progress to evolve our key categories and streamline our business to position us for profitable growth over the long term. During fiscal year 2017, through a combination of category management programs, direct and indirect sourcing efforts and organizational efficiency initiatives, approximately $80 million in benefits were reflected in operating income. We expect NWF benefits to expand to $200 million when completed in 2019.
During fiscal year 2017, gross profit decreased as compared to fiscal year 2016 primarily resulting from decreased sales and a lower gross margin rate. The decrease in gross margin rate was driven by the impact of connected products due to both the increase in sales mix of connected products which carry relatively lower margins than traditional products, as well as additional product valuation charges. Our strategy in fiscal 2017 was to invest in margin to drive significant volume in wearables and leverage that volume to drive future cost efficiencies. Although we nearly doubled our connected sales volumes in fiscal 2017 compared to fiscal 2016, and have exceeded expectations for unit cost savings, we came up short of our aggressive connected sales plan. Consequently, having higher levels of connected inventory than plan and deferring some receipts to fiscal year 2018, resulted in additional valuation charges of approximately $40 million to support our efforts to clear this inventory. The shift in sales mix towards connected product and the related valuation charges reduced our gross margin rate by 280 basis points. The gross margin rate was also negatively impacted by increased promotional activity in our outlets and e-commerce channels. Product cost benefits generated from our NWF supply chain initiatives partially offset these headwinds.
During the second quarter of fiscal year 2017, due to the sustained declines in our market capitalization and sales trends, we recorded $359 million of goodwill impairment and $48 million of impairment related to writing down our SKAGEN, MISFIT and MICHELE trade names. As a result, operating expenses for fiscal year 2017 increased to $1,783 million including the $407 million of non-cash intangible asset impairment charges and $48 million of restructuring costs associated with our NWF initiative. During fiscal year 2017, SG&A expenses decreased, primarily due to corporate overhead reductions and cost reductions in our regional organizations across the globe, as well as a lower store base and reduced marketing expenses. During fiscal year 2017, interest expense increased $16.3 million to $43.2 million and other income decreased $0.3 million to $13.7 million. Income tax expenses were $19.8 million for fiscal year 2017 and included impacts from the Tax Cuts and Jobs Act (the "Tax Act") that was signed into law in December 2017 and valuation allowances. During fiscal year 2017, our financial performance resulted in a loss of $9.87 per diluted share, including non-cash intangible asset impairment charges of $7.07 per diluted share, tax charges resulting from the Tax Act and valuation allowances of $2.20 per diluted share and restructuring charges of $0.65 per diluted share.
Constant Currency Financial Information
Information: As a multinational enterprise, we are exposed to changes in foreign currency exchange rates. The translation of the operations of our foreign-based entities from their local currencies into U.S. dollars is sensitive to changes in foreign currency exchange rates and can have a significant impact on our reported financial results. In general, our overall financial results are affected positively by a weaker U.S. dollar and are affected negatively by a stronger U.S. dollar as compared to the foreign currencies in which we conduct our business.
As a result, in addition to presenting financial measures in accordance with accounting principles generally accepted in the United States of America (“GAAP”), our discussion contains references to constant currency financial information, which is a non-GAAP financial measure. To calculate net sales on a constant currency basis, net sales for the current fiscal year for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average rates during the comparable period of the prior fiscal year. We present constant currency information to provide investors with a basis to evaluate how our underlying business performed excluding the effects of foreign currency exchange rate fluctuations. The constant currency financial information presented herein should not be considered a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP. Reconciliations between constant currency financial information and the most directly comparable GAAP measure are included where applicable.
Fiscal Year 2017 ComparedAdjusted EBITDA, Adjusted Operating Income (Loss), Adjusted Net Income (Loss) and Adjusted Earnings per Share: Adjusted EBITDA, Adjusted operating income (loss), Adjusted net income (loss) and Adjusted earnings (loss) per share are non-GAAP financial measures. We define Adjusted EBITDA as our income (loss) before income taxes, plus interest expense, amortization and depreciation, impairment expense, other non-cash charges, stock-based compensation expense, restructuring cost of sales and expense and unamortized debt issuance costs included in loss on extinguishment of debt minus interest income. We define Adjusted operating income (loss) as operating income (loss) before impairment expense and restructuring cost of sales and expense. We define Adjusted net income (loss) and Adjusted earnings (loss) per share as net income attributable to Fiscal Year 2016
Consolidated Net Sales. NetFossil Group, Inc. and diluted earnings per share, respectively, before impairment expense, restructuring cost of sales decreased $254.2 million or 8.4% (9.1%and expense and unamortized debt issuance costs included in constant currency)loss on extinguishment of debt. We have included Adjusted EBITDA, Adjusted operating income (loss), Adjusted net income (loss) and Adjusted earnings (loss) per share herein because they are widely used by investors for fiscal year 2017, as compared to fiscal year 2016. Global watch sales decreased $131.3 million or 5.6% (6.4% in constant currency), with increases in EMPORIO ARMANI, ARMANI EXCHANGEvaluation and FOSSIL more than offset by declines in most other brands infor comparing our portfolio. Our leathers business decreased $68.3 million or 17.3% (18.0% in constant currency). Our jewelry category decreased $39.7 million or 15.8% (16.7% in constant currency), mostly as a result of a decrease in sales of MICHAEL KORS, FOSSIL and MISFIT branded products during fiscal year 2017 as compared to fiscal year 2016.
Net sales information by product category is summarized on a reported and constant currency basis as follows (dollars in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year | | | | | | |
| | 2017 | | 2016 | | Growth (Decline) |
| | | | Percentage of Total | | | | Percentage of Total | | | | Percentage as Reported | | Percentage Constant Currency |
| | Amounts | | | Amounts | | | Dollars | | |
| Watches | $ | 2,199.0 |
| | 78.9 | % | | $ | 2,330.3 |
| | 76.6 | % | | $ | (131.3 | ) | | (5.6 | )% | | (6.4 | )% |
| Leathers | 325.5 |
| | 11.7 |
| | 393.8 |
| | 12.9 |
| | (68.3 | ) | | (17.3 | ) | | (18.0 | ) |
| Jewelry | 211.7 |
| | 7.6 |
| | 251.4 |
| | 8.3 |
| | (39.7 | ) | | (15.8 | ) | | (16.7 | ) |
| Other | 52.0 |
| | 1.8 |
| | 66.9 |
| | 2.2 |
| | (14.9 | ) | | (22.3 | ) | | (22.6 | ) |
| Total net sales | $ | 2,788.2 |
| | 100.0 | % | | $ | 3,042.4 |
| | 100.0 | % | | $ | (254.2 | ) | | (8.4 | )% | | (9.1 | )% |
The following table sets forth consolidated net sales by segment on a reported and constant currency basis (dollars in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year | | | | | | |
| | 2017 | | 2016 | | Growth (Decline) |
| | | | Percentage of Total | | | | Percentage of Total | | | | Percentage as Reported | | Percentage Constant Currency |
| | Amounts | | | Amounts | | | Dollars | | |
| Americas | $ | 1,316.2 |
| | 47.2 | % | | $ | 1,524.9 |
| | 50.1 | % | | $ | (208.7 | ) | | (13.7 | )% | | (13.8 | )% |
| Europe | 974.2 |
| | 34.9 |
| | 1,002.1 |
| | 32.9 |
| | (27.9 | ) | | (2.8 | ) | | (4.7 | ) |
| Asia | 497.8 |
| | 17.9 |
| | 515.4 |
| | 17.0 |
| | (17.6 | ) | | (3.4 | ) | | (3.9 | ) |
| Total net sales | $ | 2,788.2 |
| | 100.0 | % | | $ | 3,042.4 |
| | 100.0 | % | | $ | (254.2 | ) | | (8.4 | )% | | (9.1 | )% |
Americas Net Sales. During fiscal year 2017, the Americas segment remained our most challenging. Americas net sales decreased $208.7 million or 13.7% (13.8% in constant currency), largely driven by watches. During fiscal year 2017, our multi-brand watch portfolio decreased $132.2 million or 11.4% (11.5% in constant currency), with declines across all brands. Continued softness in traditional watches was partially offset by increases in connected watches,financial performance with the strongest performances coming from FOSSILperformance of our competitors. We also use these non-GAAP financial measures to monitor and MICHAEL KORS connected watches.compare the financial performance of our operations. Our leathers category decreased $49.5 million or 20.0% (20.2%presentation of Adjusted EBITDA, Adjusted operating income (loss), Adjusted net income (loss) and Adjusted earnings (loss) per share may not be comparable to similarly titled measures other companies report. Adjusted EBITDA, Adjusted operating income (loss), Adjusted net income (loss) and Adjusted earnings (loss) per share are not intended to be used as alternatives to any measure of our performance in constant currency), largely driven by FOSSIL branded product and our jewelry business decreased $21.1 million or 23.0% (23.3% in constant currency), largely due to MISFIT branded product. Within the region, sales declined in the U.S. and Canada, while sales in Mexico were flat. accordance with GAAP.
Comparable retail sales (including e-commerce) decreased moderately in the region, as negative comparable sales in our stores were partially offset by positive comparable sales in our e-commerce business.
The following table sets forth product net sales for the Americas segment on a reported and constant currency basis by fiscal year (dollars in millions):
|
| | | | | | | | | | | | | | | | | |
| | Net Sales | | | | | | |
| | Fiscal Year | | Growth (Decline) |
| | | | | | | | Percentage as Reported | | Percentage Constant Currency |
| | 2017 | | 2016 | | Dollars | | |
| Watches | $ | 1,030.1 |
| | $ | 1,162.3 |
| | $ | (132.2 | ) | | (11.4 | )% | | (11.5 | )% |
| Leathers | 198.2 |
| | 247.7 |
| | (49.5 | ) | | (20.0 | ) | | (20.2 | ) |
| Jewelry | 70.6 |
| | 91.7 |
| | (21.1 | ) | | (23.0 | ) | | (23.3 | ) |
| Other | 17.3 |
| | 23.2 |
| | (5.9 | ) | | (25.4 | ) | | (25.0 | ) |
| Total | $ | 1,316.2 |
| | $ | 1,524.9 |
| | $ | (208.7 | ) | | (13.7 | )% | | (13.8 | )% |
Europe Net Sales. During fiscal year 2017, Europe net sales decreased $27.9 million or 2.8% (4.7% in constant currency). Across the Eurozone, sales were down modestly while distributor markets in Eastern Europe and the Middle East declined significantly. Our multi-brand watch portfolio increased $2.3 million or 0.3% (decreased 1.7% in constant currency), with growth in connected watches largely offsetting declines in traditional watches on a constant currency basis. Within our watch portfolio, ARMANI EXCHANGE, ARMANI and FOSSIL increased, while all other brands declined. Our jewelry category decreased $12.9 million or 8.8% (10.3% in constant currency), and our leathers business decreased $9.0 million or 10.7% (12.4% in constant currency) in fiscal year 2017, as compared to fiscal year 2016. Comparable retail sales in the Europe
segment (including e-commerce) decreased modestly, with increases in the watch category more than offset by decreases in our other product categories. Strong e-commerce increases were more than offset by declines in our owned retail stores driven by both store closures and negative comparable retail sales.
The following table sets forth product net sales for the Europe segment on a reported and constant currency basis by fiscal year (dollars in millions):
|
| | | | | | | | | | | | | | | | | |
| | Net Sales | | | | | | |
| | Fiscal Year | | Growth (Decline) |
| | | | | | | | Percentage as Reported | | Percentage Constant Currency |
| | 2017 | | 2016 | | Dollars | | |
| Watches | $ | 742.2 |
| | $ | 739.9 |
| | $ | 2.3 |
| | 0.3 | % | | (1.7 | )% |
| Leathers | 75.4 |
| | 84.4 |
| | (9.0 | ) | | (10.7 | ) | | (12.4 | ) |
| Jewelry | 134.2 |
| | 147.1 |
| | (12.9 | ) | | (8.8 | ) | | (10.3 | ) |
| Other | 22.4 |
| | 30.7 |
| | (8.3 | ) | | (27.0 | ) | | (27.4 | ) |
| Total | $ | 974.2 |
| | $ | 1,002.1 |
| | $ | (27.9 | ) | | (2.8 | )% | | (4.7 | )% |
Asia Net Sales. In fiscal year 2017, Asia net sales decreased $17.6 million or 3.4% (3.9% in constant currency). On a constant currency basis, sales growth in India and China was more than offset by decreases in most other markets, with the sharpest declines in Japan and South Korea. Our watch category decreased $1.3 million or 0.3% (0.8% in constant currency), with increases in EMPORIO ARMANI, driven by both traditional and connected watches, and FOSSIL watches more than offset by decreases in most other brands. Our leathers products decreased $9.7 million or 15.7% (16.5% in constant currency), and our jewelry business decreased $5.8 million or 46.0% (45.2% in constant currency). Comparable retail sales (including e-commerce) in the Asia region decreased moderately, with declines in leathers and jewelry partially offset by increases in watches.
The following table sets forth product net sales for the Asia segment on a reported and constant currency basis by fiscal year (dollars in millions):
|
| | | | | | | | | | | | | | | | | |
| | Net Sales | | | | | | |
| | Fiscal Year | | Growth (Decline) |
| | | | | | | | Percentage as Reported | | Percentage Constant Currency |
| | 2017 | | 2016 | | Dollars | | |
| Watches | $ | 426.8 |
| | $ | 428.1 |
| | $ | (1.3 | ) | | (0.3 | )% | | (0.8 | )% |
| Leathers | 52.0 |
| | 61.7 |
| | (9.7 | ) | | (15.7 | ) | | (16.5 | ) |
| Jewelry | 6.8 |
| | 12.6 |
| | (5.8 | ) | | (46.0 | ) | | (45.2 | ) |
| Other | 12.2 |
| | 13.0 |
| | (0.8 | ) | | (6.2 | ) | | (5.4 | ) |
| Total | $ | 497.8 |
| | $ | 515.4 |
| | $ | (17.6 | ) | | (3.4 | )% | | (3.9 | )% |
Stores. The following table sets forth the number of stores by concept for the fiscal years ended below:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 30, 2017 | | December 31, 2016 |
| | Americas | | Europe | | Asia | | Total | | Americas | | Europe | | Asia | | Total |
| Accessory stores | 108 |
| | 106 |
| | 59 |
| | 273 |
| | 122 |
| | 119 |
| | 63 |
| | 304 |
|
| Outlets | 136 |
| | 74 |
| | 46 |
| | 256 |
| | 143 |
| | 73 |
| | 45 |
| | 261 |
|
| Full priced multi-brand | — |
| | 8 |
| | 7 |
| | 15 |
| | — |
| | 8 |
| | 12 |
| | 20 |
|
| Total stores | 244 |
| | 188 |
| | 112 |
| | 544 |
| | 265 |
| | 200 |
| | 120 |
| | 585 |
|
During fiscal year 2017, we opened 8 new stores and closed 49 stores. During fiscal year 2018, we anticipate opening approximately five additional retail stores and closing approximately 60 stores globally, depending on lease negotiations.
Retail Sales:Both stores and e-commerce sites are included in comparable retail sales in the thirteenth month of operation. Stores that experience a gross square footage increase of 10% or more due to an expansion and/or relocation are removed from the comparable store sales base, but are included in total sales. These stores are returned to the comparable store sales base in the thirteenth month following the expansion and/or relocation. Comparable retail sales also exclude the effects of foreign currency fluctuations.
Store Counts: While macro-economic factors have shifted sales away from traditional brick and mortar stores towards digital channels, store counts continue to provide a key metric for management. Both the size and quality of our store fleet have
a direct impact on our sales and profitability. Over time, we have made progress right-sizing our fleet of stores by focusing on closing our least profitable stores.
Total Liquidity: We define total liquidity as cash and cash equivalents plus available borrowings on our revolving credit facility. We monitor and forecast total liquidity to ensure we can meet our financial obligations.
Components of Results of Operations
Revenues from sales of our products, including those that are subject to inventory consignment arrangements, are recognized when control of the product is transferred to the customer and in an amount that reflects the consideration we expect to be entitled in exchange for the product. We accept limited returns from customers. We continually monitor returns and maintain a provision for estimated returns based upon historical experience and any specific issues identified. Our product returns provision is accounted for as a reduction to revenue and cost of sales and an increase to customer liabilities and other current assets to the extent the returned product is resalable.
Cost of Sales includes raw material costs, assembly labor, assembly overhead including depreciation expense, assembly warehousing costs and shipping and handling costs related to the movement of finished goods from assembly locations to sales distribution centers and from sales distribution centers to customer locations. Additionally, cost of sales includes customs duties, product packaging cost, royalty cost associated with sales of licensed products, the cost of molding and tooling, inventory shrinkage and damages and restructuring charges.
Gross Profit. Profit and gross profit margin are influenced by our diversified business model that includes, but is not limited to: (i) product categories that we distribute; (ii) the multiple brands, including both owned and licensed, we offer within several product categories; (iii) the geographical presence of our businesses; and (iv) the different distribution channels we sell to or through.
The attributes of this diversified business model produce varying ranges of gross profit margin. Generally, on a historical basis, our fashion branded traditional watch and jewelry offerings produce higher gross profit margins than our smartwatches and leather goods offerings. In addition, in most product categories that we offer, brands with higher retail price points generally produce higher gross profit margins compared to those of lower retail priced brands. However, smartwatches carry relatively lower margins than our other major product categories. Gross profit margins related to sales in our Europe and Asia businesses are historically higher than our Americas business, primarily due to the following factors: (i) premiums charged in comparison to retail prices on products sold in the U.S.; (ii) the product sales mix in our international businesses, in comparison to our Americas business, is comprised more predominantly of $1.4 billionwatches and jewelry that generally produce higher gross profit margins than leather goods; and (iii) the watch sales mix in our Europe and Asia businesses, in comparison to our Americas business, are comprised more predominantly of higher priced licensed brands.
Operating Expenses include selling, general and administrative ("SG&A"), long-lived asset impairments and restructuring charges. SG&A expenses include selling and distribution expenses primarily consisting of sales and distribution labor costs, sales distribution center and warehouse facility costs, depreciation expense related to sales distribution and warehouse facilities, the four-wall operating costs of our retail stores, point-of-sale expenses, advertising expenses and art, design and product development labor costs. SG&A also includes general and administrative expenses primarily consisting of administrative support labor and support costs such as treasury, legal, information services, accounting, internal audit, human resources, executive management costs and costs associated with stock-based compensation. Restructuring charges include costs to reorganize, refine and optimize our Company’s infrastructure and store closures under our TAG and New World Fossil initiatives.
Results of Operations
Fiscal Year 2023 Compared to Fiscal Year 2022
Consolidated Net Sales. Net sales decreased $270.0 million or 16.0% (15.9% in constant currency) for fiscal year 2017 decreased 13.9% compared to $1.6 billion in fiscal year 2016, mainly as a result of decreased sales and a lower gross margin rate. Gross profit margin decreased 320 basis points to 48.7% in fiscal year 2017 compared to 51.9% in the prior fiscal year. The decrease in gross margin rate2023, as compared to fiscal year 20162022. Sales declined in all three regions. Corporate revenue decreased due to sales declines in revenue recognized over time, based on the timing of progress in completing performance obligations under a licensing agreement. The sales decrease was primarilylargely driven by the impact of connected productsdeclines in our wholesale channel, and to a lesser extent, declines in smartwatch sales and our store rationalization initiatives. Wholesale sales declined 21.2% (21.4% in constant currency), reflecting lower purchases by wholesale accounts due to bothtighter management of inventories and lower end-consumer demand. Direct to consumer sales decreased 7.5% (6.9% in constant currency), mainly due to a smaller store base. We have reduced our store footprint by 40 stores (12%), since the increase in sales mix of connected products which carry relatively lower margins than traditional products, as well as additional product valuation charges. Our strategy in fiscal 2017 was to invest in margin to drive significant volume in wearables and leverage that volume to drive future cost efficiencies. During fiscal 2017, we nearly doubled our connected sales volumes and finished aheadend of the initial cost goals that we set for ourselves in fiscal year 2017. However, we did not achieve the aggressive2022. Comparable retail sales goals that we set for ourselves in this new category, resulting in carrying greater levels of connected product inventory. Consequently, having higher levels of connected inventory than planned and even deferring some receiptsdecreased 2% during fiscal year 2023, compared to fiscal year 2018, resulted2022 with growth in additional valuation chargese-commerce more than offset by declines in stores. From a category perspective, traditional watch sales decreased 12.4% (12.2% in constant currency). Sales of approximately $40 million to supportsmartwatches declined 46.6% (46.5% in constant currency) as we have shifted our efforts to clear this inventory. focus away from the category as part of our product rationalization initiatives. Leathers declined 11.3% (10.7% in constant currency) and jewelry declined 14.7% (15.4% in constant currency). From a brand perspective, sales decreased throughout most of our brand portfolio, with the most predominant declines in MICHAEL KORS, FOSSIL and EMPORIO ARMANI.
The shift infollowing table sets forth consolidated net sales mix towards connected productby segment and the related valuation charges reduced our gross margin ratechanges in net sales by 280segment on both a reported and constant currency basis points. from period to period (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year | | | | | | |
| 2023 | | 2022 | | Growth (Decline) |
| | | Percentage
of Total | | | | Percentage
of Total | | | | Percentage as Reported | | Percentage Constant Currency |
| Amounts | | | Amounts | | | Dollars | | |
| Americas | $ | 640.8 | | | 45.4 | % | | $ | 744.0 | | | 44.2 | % | | $ | (103.2) | | | (13.9) | % | | (14.2) | % |
| Europe | 437.4 | | | 31.0 | | | 541.3 | | | 32.2 | | | (103.9) | | | (19.2) | | | (20.8) | |
| Asia | 328.2 | | | 23.2 | | | 377.6 | | | 22.4 | | | (49.4) | | | (13.1) | | | (9.6) | |
| Corporate | 6.0 | | | 0.4 | | | 19.5 | | | 1.2 | | | (13.5) | | | (69.2) | | | (69.2) | |
| Total net sales | $ | 1,412.4 | | | 100.0 | % | | $ | 1,682.4 | | | 100.0 | % | | $ | (270.0) | | | (16.0) | % | | (15.9) | % |
The gross margin rate was also negatively impacted by increased promotional activityfollowing table sets forth product net sales and the changes in product net sales on both a reported and constant currency basis from period to period (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year | | | | | | |
| 2023 | | 2022 | | Growth (Decline) |
| | | Percentage
of Total | | | | Percentage
of Total | | | | Percentage as Reported | | Percentage Constant Currency |
| Amounts | | | Amounts | | | Dollars | | |
| Watches: | | | | | | | | | | | | | |
| Traditional watches | $ | 1,015.1 | | | 71.9 | % | | $ | 1,158.9 | | | 68.9 | % | | $ | (143.8) | | | (12.4) | % | | (12.2) | % |
| Smartwatches | 80.9 | | | 5.7 | | | 151.6 | | | 9.0 | | | (70.7) | | | (46.6) | | | (46.5) | |
| Total watches | $ | 1,096.0 | | | 77.6 | % | | $ | 1,310.5 | | | 77.9 | % | | $ | (214.5) | | | (16.4) | % | | (16.2) | % |
| Leathers | 158.4 | | | 11.2 | | | 178.5 | | | 10.6 | | | (20.1) | | | (11.3) | | | (10.7) | |
| Jewelry | 131.4 | | | 9.3 | | | 154.1 | | | 9.2 | | | (22.7) | | | (14.7) | | | (15.4) | |
| Other | 26.6 | | | 1.9 | | | 39.3 | | | 2.3 | | | (12.7) | | | (32.3) | | | (32.6) | |
| Total net sales | $ | 1,412.4 | | | 100.0 | % | | $ | 1,682.4 | | | 100.0 | % | | $ | (270.0) | | | (16.0) | % | | (15.9) | % |
The following table sets forth the number of stores on the dates indicated below:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | Opened | | Closed | | December 30, 2023 |
| Americas | 151 | | 2 | | 10 | | 143 |
| Europe | 111 | | 2 | | 27 | | 86 |
| Asia | 80 | | 1 | | 8 | | 73 |
| Total stores | 342 | | 5 | | 45 | | 302 |
Americas Net Sales. Americas net sales decreased $103.2 million or 13.9% (14.2% in constant currency) for fiscal year 2023 as compared to fiscal year 2022. Sales decreased in almost all brands with the biggest decreases in MICHAEL KORS and FOSSIL. Sales decreases in our outletswholesale and e-commerce channels. Product cost benefits generated from our NWF supply chain initiativesstores channel were partially offset these headwinds,by growth in our owned e-commerce sales. Comparable retail sales declined slightly during fiscal year 2023, with growth in e-commerce more than offset by declines in stores.
The following table sets forth product net sales and the changes in product net sales on both a reported and constant currency impactbasis from period to period for the year remained neutral.Americas segment (dollars in millions):
Operating Expenses. For fiscal year 2017, total operating expenses increased by $332.1 million and, as a percentage of net sales, increased to 64.0%, compared to 47.7% in fiscal year 2016, primarily due to intangible impairment charges recorded in the second quarter of fiscal 2017. During the second quarter of fiscal year 2017, interim impairment tests were performed on goodwill and trade names due to the sustained declines in our market capitalization and sales trends, resulting in impairment expenses of $359.5 million for goodwill and $47.6 million for trade names. For additional information, please refer to "Note 1 - Significant Accounting Policies" in the consolidated financial statements. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Sales | | | | | | | | | | |
| Fiscal Year | | Growth (Decline) | | | | |
| | | | | | | Percentage as Reported | | Percentage Constant Currency | | | | |
| 2023 | | 2022 | | Dollars | | | | | | |
| Watches: | | | | | | | | | | | | | |
| Traditional watches | $ | 456.7 | | | $ | 519.0 | | | $(62.3) | | (12.0) | % | | (12.5) | % | | | | |
| Smartwatches | 37.7 | | | 65.6 | | | (27.9) | | (42.5) | | | (42.8) | | | | | |
| Total watches | $ | 494.4 | | | $ | 584.6 | | | $(90.2) | | (15.4) | % | | (15.9) | % | | | | |
| Leathers | 104.8 | | | 115.3 | | | (10.5) | | (9.1) | | | (8.7) | | | | | |
| Jewelry | 33.4 | | | 35.7 | | | (2.3) | | (6.4) | | | (6.2) | | | | | |
| Other | 8.2 | | | 8.4 | | | (0.2) | | (2.4) | | | (1.2) | | | | | |
| Total | $ | 640.8 | | | $ | 744.0 | | | $(103.2) | | (13.9) | % | | (14.2) | % | | | | |
Europe Net Sales. During fiscal year 2017, we incurred restructuring charges2023, Europe net sales decreased $103.9 million or 19.2% (20.8% in constant currency) in comparison to fiscal year 2022. The greatest sales decreases were in the MICHAEL KORS and FOSSIL brands. Sales declined in our wholesale and stores channels, while owned e-commerce sales increased. Comparable retail sales increased slightly during fiscal year 2023, with growth in store and owned e-commerce sales.
The following table sets forth product net sales and the changes in product net sales on both a reported and constant currency basis from period to period for the Europe segment (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Sales | | | | | | | | |
| Fiscal Year | | Growth (Decline) | | |
| | | | | | | Percentage as Reported | | Percentage Constant Currency | | |
| 2023 | | 2022 | | Dollars | | | | |
| Watches: | | | | | | | | | | | |
| Traditional watches | $ | 296.1 | | | $ | 354.8 | | | $ | (58.7) | | | (16.5) | % | | (18.0) | % | | |
| Smartwatches | 26.3 | | | 53.2 | | | (26.9) | | | (50.6) | | | (51.9) | | | |
| Total watches | $ | 322.4 | | | $ | 408.0 | | | $ | (85.6) | | | (21.0) | % | | (22.5) | % | | |
| Leathers | 25.9 | | | 29.4 | | | (3.5) | | | (11.9) | | | (13.6) | | | |
| Jewelry | 78.9 | | | 93.6 | | | (14.7) | | | (15.7) | | | (17.8) | | | |
| Other | 10.2 | | | 10.3 | | | (0.1) | | | (1.0) | | | (2.9) | | | |
| Total | $ | 437.4 | | | $ | 541.3 | | | $ | (103.9) | | | (19.2) | % | | (20.8) | % | | |
Asia Net Sales. In fiscal year 2023, Asia net sales decreased $49.4 million under our NWF initiative comparedor 13.1% (9.6% in constant currency) in comparison to restructuring chargesfiscal 2022. Sales decreased across the majority of $27.8regions, most notably in greater China, while sales in India increased in constant currency. Sales declines were primarily in the EMPORIO ARMANI and FOSSIL brands. Comparable retail sales decreased moderately during fiscal year 2023.
The following table sets forth product net sales and the changes in product net sales on both a reported and constant currency basis from period to period for the Asia segment (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Sales | | | | | | | | |
| Fiscal Year | | Growth (Decline) | | |
| | | | | | | Percentage as Reported | | Percentage Constant Currency | | |
| 2023 | | 2022 | | Dollars | | | | |
| Watches: | | | | | | | | | | | |
| Traditional watches | $ | 260.3 | | | $ | 281.6 | | | $ | (21.3) | | | (7.6) | % | | (4.0) | % | | |
| Smartwatches | 17.0 | | | 32.7 | | | (15.7) | | | (48.0) | | | (45.0) | | | |
| Total watches | $ | 277.3 | | | $ | 314.3 | | | $ | (37.0) | | | (11.8) | % | | (8.2) | % | | |
| Leathers | 27.8 | | | 33.8 | | | (6.0) | | | (17.8) | | | (15.4) | | | |
| Jewelry | 19.1 | | | 24.8 | | | (5.7) | | | (23.0) | | | (19.0) | | | |
| Other | 4.0 | | | 4.7 | | | (0.7) | | | (14.9) | | | (10.6) | | | |
| Total | $ | 328.2 | | | $ | 377.6 | | | $ | (49.4) | | | (13.1) | % | | (9.6) | % | | |
Gross Profit. Gross profit of $679.6 million in fiscal year 2016. During2023 decreased $151.1 million, or 18.2%, in comparison to $830.7 million in fiscal year 2017,2022, driven mainly by the decrease in sales. The gross profit margin rate decreased to 48.1% in fiscal year 2023 compared to 49.4% in fiscal year 2022, largely due to increased promotions and licensor minimum royalty costs and unfavorable currency and product mix impacts, driven by connected products. These costs were partially offset by reduced freight costs.
Operating Expenses. For fiscal year 2023, total operating expenses decreased to $822.6 million or 58.2% of net sales, compared to $832.2 million or 49.5% of net sales in fiscal year 2022. SG&A expenses decreased, primarily due to corporate overhead reductions and cost reductionswere $777.2 million in our regional organizations across the globe, as well as a lower store base and reduced marketing expenses. The translation of foreign-denominated expenses during fiscal year 2017 increased operating expenses by approximately $8.12023 compared to $823.7 million as a result of the weaker U.S. dollar.in fiscal year 2022. As a percentage of net sales, SG&A expenses increased to 47.6%55.0% in fiscal 2017,year 2023 as compared to 46.8%49.0% in fiscal 2016.year 2022, mainly driven by decreased sales. During fiscal year 2023, we incurred $43.3 million in restructuring charges as compared to $6.1 million in fiscal year 2022.
Consolidated Operating Income (Loss). Operating income (loss) decreasedwas a loss of $143.0 million in fiscal year 2023, as compared to a loss of $424.2 million in fiscal year 2017, as compared to income of $127.1$1.5 million in the prior fiscal year. The operating loss in fiscal year 2023 was primarily driven by non-cash intangible impairment chargesdue to deleveraging of $407.1 million and also by decreased sales and gross margin rate.expenses with the decline in net sales. As a percentage of net sales, operating margin decreased to (15.2)was (10.1)% in fiscal year 20172023 as compared to 4.2%(0.1)% in fiscal year 2016. For fiscal year 2017, the positive currency impact on gross margin was offset by the negative currency impact on expenses, resulting in a neutral impact to operating income (loss). In fiscal year 2017, we continued to face retail pressure, most significantly in our traditional watch business in all segments. Additionally, the gross margin rate2022 and was negatively impacted by connected products,70 basis points due to both lower connected margins as well as additional product valuation charges, and lower retail margins due to increased promotional activitychanges in outlets and the e-commerce channel in all segments. Operating expenses increased significantly, primarily due to non-cash impairment charges on our goodwillforeign currencies.
Operating income (loss) by operating segment is summarized as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year | | Growth (Decline) | | Operating Margin % |
| 2023 | | 2022 | | Dollars | | Percentage | | 2023 | | 2022 |
| Americas | $ | 82.7 | | | $ | 116.4 | | | $ | (33.7) | | | (29.0) | % | | 12.9 | % | | 15.6 | % |
| Europe | 41.0 | | | 91.1 | | | (50.1) | | | (55.0) | | | 9.4 | | | 16.8 | |
| Asia | 38.2 | | | 52.1 | | | (13.9) | | | (26.7) | | | 11.6 | | | 13.8 | |
| Corporate | (304.9) | | | (261.1) | | | (43.8) | | | (16.8) | | | | | |
| Total operating income (loss) | $ | (143.0) | | | $ | (1.5) | | | $ | (141.5) | | | (9,433.3) | % | | (10.1) | % | | (0.1) | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year | | Growth (Decline) | | Operating Margin % |
| | 2017 | | 2016 | | Dollars | | Percentage | | 2017 | | 2016 |
| Americas | $ | (46.0 | ) | | $ | 241.1 |
| | $ | (287.1 | ) | | (119.1 | )% | | (3.5 | )% | | 15.8 | % |
| Europe | 33.8 |
| | 174.2 |
| | (140.4 | ) | | (80.6 | ) | | 3.5 |
| | 17.4 |
|
| Asia | (10.9 | ) | | 77.6 |
| | (88.5 | ) | | (114.0 | ) | | (2.2 | ) | | 15.1 |
|
| Corporate | (401.1 | ) | | (365.8 | ) | | (35.3 | ) | | 9.7 |
| | | | |
| Total operating income (loss) | $ | (424.2 | ) | | $ | 127.1 |
| | $ | (551.3 | ) | | (433.8 | )% | | (15.2 | )% | | 4.2 | % |
Interest Expense. Interest expense increased by $16.3$2.6 million in fiscal year 2017,2023, primarily as a result ofdriven by increased interest rates in comparisoncompared to the prior fiscal year.year 2022.
Other Income (Expense)—Net. During fiscal year 2017,2023, other income (expense) - net decreased by approximately $0.3was income of $8.7 million driven by fewercompared to expense of $1.4 million in the prior fiscal year. The change in other income (expense)-net was largely reflective of net currency gains on the liquidation of non-operating assets, losses on the extinguishment of our term loan in fiscal year 2017 and decreased net foreign currency gains resulting from cash flow hedging and other transactional activities2023 as
compared to net currency losses in fiscal year 2016. These headwinds were mostly offset by2022 and increased interest income and decreased losses on our equity method investment.in fiscal year 2023.
Provision for Income Taxes. IncomeDuring fiscal year 2023, there was an income tax expense for fiscal year 2017 was $19.8of $0.5 million, resulting in an effective tax rate of (4.4)(0.3)%, compared to 25.1%(96.7)% in fiscal year 2016.2022. The 20172023 effective rate was negativelyfavorably impacted by reduced foreign income taxes, release of reserves for uncertain tax positions and the accrual of interest income on tax receivables, whereas the 2022 effective rate was unfavorably impacted by the accruallow level of apre-tax earnings and valuation allowanceallowances on U.S. net deferred tax assets as well as some foreign deferred tax assets, the non-deductibility of intangible asset impairments, and the imposition of a one-time repatriation tax on deferred foreign earnings under the Tax Act. The impacts from the tax reform and the U.S. valuation allowances resulted in combined charges of $106.7 million or $2.20 per diluted share. For additional information, please refer to "Note 12 - Taxes" in the consolidated financial statements.assets.
Net Income (Loss) Attributable to Fossil Group, Inc. Fiscal year 20172023, net income (loss) attributable to Fossil Group, Inc. was a net loss of $9.87$157.1 million, or $3.00 per diluted share, in comparison to a net incomeloss of $1.63$44.2 million, or $0.85 per diluted share, in the prior fiscal year. Diluted earnings (loss) per share included non-cash intangible asset impairment charges of $7.07 per diluted share, tax charges resulting from the Tax Act and valuation allowances established on deferred tax assets of $2.20 per diluted share and restructuring charges of $0.65 per diluted share. FiscalDuring fiscal year 2016,2023, currency fluctuations unfavorably impacted diluted earnings (loss) per share included restructuring chargesby $0.10.
Adjusted EBITDA. The following table reconciles Adjusted EBITDA to the most directly comparable GAAP financial measure, which is income (loss) before income taxes. Certain line items presented in the table below, when aggregated, may not foot due to rounding (dollars in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year | | |
| | | 2023 | | 2022 | | |
| | | Dollars | | % of Net Sales | | Dollars | | % of Net Sales | | |
| Income (loss) before income taxes | | | $ | (156.1) | | | (11.1) | % | | $ | (22.1) | | | (1.3) | % | | |
| Plus: | | | | | | | | | | | |
| Interest expense | | | 21.8 | | | | | 19.2 | | | | | |
| Amortization and depreciation | | | 19.1 | | | | | 23.3 | | | | | |
| Impairment expense | | | 2.2 | | | | | 2.4 | | | | | |
| Other non-cash charges | | | (0.9) | | | | | (1.1) | | | | | |
| Stock-based compensation | | | 5.7 | | | | | 8.0 | | | | | |
| Restructuring expense | | | 43.3 | | | | | 6.1 | | | | | |
| Restructuring cost of sales | | | 5.5 | | | | | — | | | | | |
| Unamortized debt issuance costs included in loss on extinguishment of debt | | | — | | | | | 1.1 | | | | | |
| Less: | | | | | | | | | | | |
| Interest income | | | 3.2 | | | | | 0.8 | | | | | |
| Adjusted EBITDA | | | $ | (62.6) | | | (4.4) | % | | $ | 36.1 | | | 2.1 | % | | |
Adjusted Operating Income (Loss), Adjusted Net Income (Loss) and Adjusted Earnings (Loss) per diluted share. Fiscal year 2017Share. The following tables reconcile Adjusted operating income (loss), Adjusted net income (loss) and Adjusted earnings (loss) per share to the most directly comparable GAAP financial measures, which are operating income (loss), net income (loss) attributable to Fossil Group, Inc. was also negatively impacted by lower sales and gross margin rate. Currencies, including both the translation impact on operating earnings and the impact of foreign currency hedging contracts, unfavorably affected the year-over-year diluted earnings (loss) per share, comparison by $(0.01).respectively. Certain line items presented in the table below, when aggregated, may not foot due to rounding.
| | | | | | | | | | | | | | | | | | | |
| Fiscal Year 2023 |
| ($ in millions, except per share data): | As Reported | Restructuring Cost of Sales | Long-lived Asset Impairment | | Restructuring Expenses | | As Adjusted |
| Operating income (loss) | $ | (143.0) | | $ | 5.5 | | $ | 2.2 | | | $ | 43.3 | | | $ | (92.0) | |
| Operating margin (% of net sales) | (10.1) | % | | | | | | (6.5) | % |
| Interest expense | 21.8 | | — | | — | | | — | | | 21.8 | |
| Other income (expense) - net | 8.7 | | — | | — | | | — | | | 8.7 | |
| Income (loss) before income taxes | (156.1) | | 5.5 | | 2.2 | | | 43.3 | | | (105.1) | |
| Provision for income taxes | 0.5 | | 1.2 | | 0.5 | | | 9.1 | | | 11.3 | |
| Less: net income attributable to noncontrolling interest | 0.4 | | — | | — | | | — | | | 0.4 | |
| Net income (loss) attributable to Fossil Group, Inc. | $ | (157.1) | | $ | 4.3 | | $ | 1.7 | | | $ | 34.2 | | | $ | (116.9) | |
| Diluted earnings (loss) per share | $ | (3.00) | | $ | 0.08 | | $ | 0.03 | | | $ | 0.65 | | | $ | (2.24) | |
| | | | | | | | | | | | | | | | | | |
| Fiscal Year 2022 |
| ($ in millions, except per share data): | As Reported | Long-lived Asset Impairment | | Restructuring Expenses | Unamortized Debt Issuance Costs Included in Loss on Extinguishment of Debt | As Adjusted |
| Operating income (loss) | $ | (1.5) | | $ | 2.4 | | | $ | 6.1 | | $ | — | | $ | 7.0 | |
| Operating margin (% of net sales) | (0.1) | % | | | | | 0.4 | % |
| Interest expense | 19.2 | | — | | | — | | — | | 19.2 | |
| Other income (expense) - net | (1.4) | | — | | | — | | 1.1 | | (0.3) | |
| Income (loss) before income taxes | (22.1) | | 2.4 | | | 6.1 | | 1.1 | | (12.5) | |
| Provision for income taxes | 21.4 | | 0.5 | | | 1.3 | | 0.2 | | 23.4 | |
| Less: net income attributable to noncontrolling interest | 0.6 | | — | | | — | | — | | 0.6 | |
| Net income (loss) attributable to Fossil Group, Inc. | $ | (44.2) | | $ | 1.9 | | | $ | 4.8 | | $ | 0.9 | | $ | (36.6) | |
| Diluted earnings (loss) per share | $ | (0.85) | | $ | 0.04 | | | $ | 0.09 | | $ | 0.01 | | $ | (0.71) | |
Fiscal Year 20162022 Compared to Fiscal Year 20152021
Consolidated Net Sales. Net sales decreased $186.4 million or 5.8%, (4.4%For a discussion of our results of operations in constant currency ) for fiscal year 2016 as2022 compared to fiscal year 2015. Global watch sales decreased $145.5 million or 5.9% (4.5% in constant currency) as a result2021, please see Item 7 of increases in our owned brands FOSSIL and SKAGEN and licensed brands KATE SPADE NEW YORK and TORY BURCH, being more than offset by declines in most other brands in our portfolio. Our leathers business decreased $15.6 million or 3.8% (2.5% in constant currency). Our jewelry category decreased $20.7 million or 7.6% (5.9% in constant currency), mostly as a result of a decrease in sales of MICHAEL KORS and FOSSIL branded products during fiscal year 2016 as compared to fiscal year 2015.
Net sales information by product category is summarizedAnnual Report on a reported and constant currency basis as follows (dollars in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year | | |
| | 2016 | | 2015 | | Growth (Decline) |
| | | | Percentage of Total | | | | Percentage of Total | | | | Percentage as Reported | | Percentage Constant Currency |
| | | | | | | | | | |
| | Amounts | | | Amounts | | | Dollars | | |
| Watches | $ | 2,330.3 |
| | 76.6 | % | | $ | 2,475.8 |
| | 76.7 | % | | $ | (145.5 | ) | | (5.9 | )% | | (4.5 | )% |
| Leathers | 393.8 |
| | 12.9 |
| | 409.4 |
| | 12.7 |
| | (15.6 | ) | | (3.8 | ) | | (2.5 | ) |
| Jewelry | 251.4 |
| | 8.3 |
| | 272.1 |
| | 8.4 |
| | (20.7 | ) | | (7.6 | ) | | (5.9 | ) |
| Other | 66.9 |
| | 2.2 |
| | 71.5 |
| | 2.2 |
| | (4.6 | ) | | (6.4 | ) | | (5.6 | ) |
| Total net sales | $ | 3,042.4 |
| | 100.0 | % | | $ | 3,228.8 |
| | 100.0 | % | | $ | (186.4 | ) | | (5.8 | )% | | (4.4 | )% |
The following table sets forth consolidated net sales by segment on a reported and constant currency basis (dollars in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year | | |
| | 2016 | | 2015 | | Growth (Decline) |
| | | | | | | | | | | | Percentage as Reported | | Percentage Constant Currency |
| | | | Percentage of Total | | | | Percentage of Total | | | | |
| | Amounts | | | Amounts | | | Dollars | | |
| Americas | $ | 1,524.9 |
| | 50.1 | % | | $ | 1,661.9 |
| | 51.5 | % | | $ | (137.0 | ) | | (8.2 | )% | | (7.5 | )% |
| Europe | 1,002.1 |
| | 32.9 |
| | 1,069.8 |
| | 33.1 |
| | (67.7 | ) | | (6.3 | ) | | (3.5 | ) |
| Asia | 515.4 |
| | 17.0 |
| | 497.1 |
| | 15.4 |
| | 18.3 |
| | 3.7 |
| | 4.0 |
|
| Total net sales | $ | 3,042.4 |
| | 100.0 | % | | $ | 3,228.8 |
| | 100.0 | % | | $ | (186.4 | ) | | (5.8 | )% | | (4.4 | )% |
Americas Net Sales. During fiscal year 2016, we experienced the most significant retail headwinds in the Americas segment. Americas net sales decreased $137.0 million or 8.2% (7.5% in constant currency), driven by watches but with jewelry
and leathers contributing to the declines as well. During fiscal year 2016, our multi-brand watch portfolio decreased $100.6 million or 8.0% (7.1% in constant currency) and our leathers category decreased $21.9 million or 8.1% (7.7% in constant currency). Our Americas watch sales decline during fiscal year 2016 was primarily driven by MICHAEL KORS and partially offset by increases in KATE SPADE NEW YORK and TORY BURCH. Our jewelry business decreased $8.1 million or 8.1% (7.7% in constant currency) in fiscal year 2016 as compared toForm 10-K for the fiscal year 2015 primarily driven by declines in MICHAEL KORS jewelry partially offset by increases from the MISFIT brand. Within the region, sales declined in the U.S. and were slightly offset by growth in Mexico and Canada on a constant currency basis. Comparable retail store sales decreased modestly in our owned retail stores, most notably in our outlets.
The following table sets forth product net sales for the Americas segment on a reported and constant currency basis by fiscal year (dollars in millions):
|
| | | | | | | | | | | | | | | | | |
| | Net Sales | | | | | | |
| | Fiscal Year | | Growth (Decline) |
| | | | | | | | Percentage as Reported | | Percentage Constant Currency |
| | | | | | | | |
| | 2016 | | 2015 | | Dollars | | |
| Watches | $ | 1,162.3 |
| | $ | 1,262.9 |
| | $ | (100.6 | ) | | (8.0 | )% | | (7.1 | )% |
| Leathers | 247.7 |
| | 269.6 |
| | (21.9 | ) | | (8.1 | ) | | (7.7 | ) |
| Jewelry | 91.7 |
| | 99.8 |
| | (8.1 | ) | | (8.1 | ) | | (7.7 | ) |
| Other | 23.2 |
| | 29.6 |
| | (6.4 | ) | | (21.6 | ) | | (20.9 | ) |
| Total | $ | 1,524.9 |
| | $ | 1,661.9 |
| | $ | (137.0 | ) | | (8.2 | )% | | (7.5 | )% |
Europe Net Sales. During fiscal year 2016, Europe net sales decreased $67.7 million or 6.3% (3.5% in constant currency). We experienced declines in most countries,ended December 31, 2022 filed with the most significant sales declines in the United Kingdom and our distributor markets. Our multi-brand watch portfolio decreased $49.8 million or 6.3% (3.4% in constant currency) while our jewelry category decreased $18.0 million or 10.9% (8.5% in constant currency) and our leathers business remained flat (increased 3.7% in constant currency) in fiscal year 2016 as compared to fiscal year 2015. Comparable retail store sales in our owned retail stores in the European region remained flat, with increases in our outlets and watch categories offsetSEC, which is incorporated herein by decreases in our full-priced stores and other product categories.reference.
The following table sets forth product net sales for the Europe segment on a reported and constant currency basis by fiscal year (dollars in millions):
|
| | | | | | | | | | | | | | | | | |
| | Net Sales | | | | | | |
| | Fiscal Year | | Growth (Decline) |
| | | | | | | | Percentage as Reported | | Percentage Constant Currency |
| | | | | | | | |
| | 2016 | | 2015 | | Dollars | | |
| Watches | $ | 739.9 |
| | $ | 789.7 |
| | $ | (49.8 | ) | | (6.3 | )% | | (3.4 | )% |
| Leathers | 84.4 |
| | 84.4 |
| | — |
| | — |
| | 3.7 |
|
| Jewelry | 147.1 |
| | 165.1 |
| | (18.0 | ) | | (10.9 | ) | | (8.5 | ) |
| Other | 30.7 |
| | 30.6 |
| | 0.1 |
| | 0.3 |
| | 2.9 |
|
| Total | $ | 1,002.1 |
| | $ | 1,069.8 |
| | $ | (67.7 | ) | | (6.3 | )% | | (3.5 | )% |
Asia Net Sales. In fiscal year 2016, Asia net sales increased $18.3 million or 3.7% (4.0% in constant currency). Sales growth was led by India, our distributor markets, South Korea, Australia and China and was partially offset by decreases in Hong Kong, Taiwan and Macau on a constant currency basis. Our watch category increased $4.9 million or 1.2% (1.4% in constant currency), while our leathers products increased $6.4 million or 11.6% (13.2% in constant currency). Our jewelry business increased $5.4 million or 75.0% (76.4% in constant currency). Comparable retail store sales in our owned retail stores in the Asia region increased slightly with modest comparable store sale increases in our full-priced and outlet FOSSIL branded stores partially offset by declines in our other store concepts.
The following table sets forth product net sales for the Asia segment on a reported and constant currency basis by fiscal year (dollars in millions):
|
| | | | | | | | | | | | | | | | | |
| | Net Sales | | | | | | |
| | Fiscal Year | | Growth (Decline) |
| | | | | | | | Percentage as Reported | | Percentage Constant Currency |
| | | | | | | | |
| | 2016 | | 2015 | | Dollars | | |
| Watches | $ | 428.1 |
| | $ | 423.2 |
| | $ | 4.9 |
| | 1.2 | % | | 1.4 | % |
| Leathers | 61.7 |
| | 55.3 |
| | 6.4 |
| | 11.6 |
| | 13.2 |
|
| Jewelry | 12.6 |
| | 7.2 |
| | 5.4 |
| | 75.0 |
| | 76.4 |
|
| Other | 13.0 |
| | 11.4 |
| | 1.6 |
| | 14.0 |
| | 10.5 |
|
| Total | $ | 515.4 |
| | $ | 497.1 |
| | $ | 18.3 |
| | 3.7 | % | | 4.0 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 | | January 2, 2016 |
| | Americas | | Europe | | Asia | | Total | | Americas | | Europe | | Asia | | Total |
| Full price | 122 |
| | 119 |
| | 63 |
| | 304 |
| | 128 |
| | 126 |
| | 68 |
| | 322 |
|
| Outlets | 143 |
| | 73 |
| | 45 |
| | 261 |
| | 153 |
| | 71 |
| | 46 |
| | 270 |
|
| Full priced multi-brand | — |
| | 8 |
| | 12 |
| | 20 |
| | — |
| | 7 |
| | 20 |
| | 27 |
|
| Total stores | 265 |
| | 200 |
| | 120 |
| | 585 |
| | 281 |
| | 204 |
| | 134 |
| | 619 |
|
During fiscal year 2016, we opened 18 new stores and closed 52 stores.
Gross Profit. Gross profit of $1.6 billion in fiscal year 2016 decreased 10.0% in comparison to $1.8 billion in fiscal year 2015 mainly as a result of decreased sales. Gross profit margin decreased 240 basis points to 51.9% in fiscal year 2016 compared to 54.3% in fiscal year 2015. The gross margin rate decreased as compared to fiscal year 2015 primarily due to increased promotional activity in our outlet stores and an increased mix of connected product sales. Additionally, our wholesale channel was burdened by an increased mix of off-price sales at lower margin rates and the impacts of currency decreased our gross profit margin rate by 70 basis points. Partially offsetting these headwinds were the favorable impacts of our margin improvement initiatives.
Operating Expenses. For fiscal year 2016, total operating expenses decreased by $11.2 million and, as a percentage of net sales, increased to 47.7%, compared to 45.3% in fiscal year 2015. Operating expenses decreased due to lower store and core infrastructure costs, a $14.9 million favorable impact from changes in foreign currency, the non-recurrence of both the SKAGEN trade name impairment and Misfit acquisition-related professional services recorded in fiscal year 2015, partially offset by an increase in expenses associated with wearables infrastructure and Misfit intangible amortization.
Consolidated Operating Income. Operating income decreased by $164.1 million, or 56.4%, in fiscal year 2016 as compared to fiscal year 2015 mainly driven by decreased sales and gross margin rate and included a $31.7 million unfavorable impact from changes in foreign currencies. As a percentage of net sales, operating income decreased to 4.2% in fiscal year 2016 as compared to 9.0% in fiscal year 2015 and was negatively impacted by approximately 90 basis points due to changes in foreign currencies.
Sales and gross profit margins were negatively impacted by currencies in all regional segments in fiscal year 2016 as compared to fiscal year 2015, although not as extensively as in fiscal year 2015 compared to fiscal year 2014. On a constant currency basis, sales and gross profit margins decreased in the Americas and Europe and increased in Asia while the gross profit margin rate decreased across all segments. The gross margin rate declined primarily as a result of promotional activity in our outlet stores and an increased mix of connected product sales in all geographies. Additionally, the Americas gross profit margin rate was unfavorably impacted by an increased mix of sales in the wholesale off-price channel to manage inventory levels. These unfavorable impacts to the gross profit margin rate were partially offset by a favorable impact from our margin improvement initiatives in all segments. In fiscal year 2016, total operating expenses decreased compared to fiscal year 2015 as reduced store expenses and lower core infrastructure costs were partially offset by corporate cost increases in wearables infrastructure and Misfit purchase accounting related costs. Our operating expenses in fiscal year 2016 also benefited from real estate sales in the Americas and Europe. During fiscal year 2016 as compared to fiscal 2015, operating expense leverage was
relatively flat in Europe and improved in Asia while weakening in the Americas largely due to fixed expenses on lower sales and increased restructuring costs related to store closures.
Operating income by operating segment is summarized as follows (dollars in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year | | Growth (Decline) | | Operating Margin % |
| | 2016 | | 2015 | | Dollars | | Percentage | | 2016 | | 2015 |
| Americas | $ | 241.1 |
| | $ | 354.3 |
| | $ | (113.2 | ) | | (32.0 | )% | | 15.8 | % | | 21.3 | % |
| Europe | 174.2 |
| | 210.5 |
| | (36.3 | ) | | (17.2 | ) | | 17.4 |
| | 19.7 |
|
| Asia | 77.6 |
| | 71.7 |
| | 5.9 |
| | 8.2 |
| | 15.1 |
| | 14.4 |
|
| Corporate | (365.8 | ) | | (345.3 | ) | | (20.5 | ) | | 5.9 |
| | | | |
| Total operating income | $ | 127.1 |
| | $ | 291.2 |
| | $ | (164.1 | ) | | (56.4 | )% | | 4.2 | % | | 9.0 | % |
Interest Expense. Interest expense increased by $6.9 million in fiscal year 2016 as a result of increased interest rates in comparison to the fiscal year 2015.
Other Income (Expense)—Net. During fiscal year 2016, other income (expense) - net decreased by approximately $26.4 million, largely driven by decreased net foreign currency gains resulting from cash flow hedging and other transactional activities as compared to fiscal year 2015. Additionally, the fiscal year 2015 other income (expense) - net amount included a $5.2 million gain related to an interest rate hedge settlement related to a potential debt issuance which did not occur. Fiscal year 2016 includes a gain of $3.5 million for the liquidation of some non-operating Misfit assets, which partially offset our unfavorable other income (expense) - net change.
Provision for Income Taxes. Income tax expense for fiscal year 2016 was $28.7 million, resulting in an effective tax rate of 25.1%, compared to 26.2% in fiscal year 2015. The lower effective tax rate for fiscal year 2016 as compared to fiscal year 2015 was mostly attributable to lower U.S. taxable income taxed at higher effective tax rates.
Net Income Attributable to Fossil Group, Inc. Fiscal year 2016 net income attributable to Fossil Group, Inc. was $1.63 per diluted share in comparison to $4.51 per diluted share in fiscal year 2015, mainly driven by the sales decline and reduced margin rate. Diluted earnings per share decreased $0.87 due to the translation impact of a stronger U.S. dollar and less net foreign currency gains resulting from cash flow hedging and other transactional activities. Diluted earnings per share was also unfavorably impacted by a $0.37 per diluted share decrease due to the amortization of acquired Misfit intangible assets and of related contingent equity grants. An increase in interest expense negatively impacted our diluted earnings per share by $0.11 due to increased interest rates. Partially offsetting these decreases was a $0.16 favorable impact to diluted earnings per share due to the sale of real estate.
Liquidity and Capital Resources
Historically, our business operations have not required substantialOur cash duringand cash equivalents balance at the first several monthsend of our fiscal year.year 2023 was $117.2 million, including $104.4 million held by foreign subsidiaries outside the U.S., in comparison to $198.7 million at the end of fiscal year 2022, including $195.8 million held by foreign subsidiaries outside the U.S. Generally, starting in the third quarter, our cash needs begin to increase, typically reaching a peak in the September-November time frame as we increase inventory levels in advance of the holiday season. Our quarterly cash requirements are also impacted by the number of new stores we open, otherdebt repayments, restructuring charges and capital expenditures and strategic investments such as acquisitions. Our cash and cash equivalents balance atexpenditures.
At the end of fiscal year 2017 was $231.2 million, including $186.4 million held by foreign subsidiaries outside the U.S., in comparison to $297.3 million at the end of fiscal year 2016.
For fiscal year 2017,2023, we generated operating cash flow of $179.5 million. This operating cash flow combined with cash on hand was utilized to fund $190.1 million in net repayments on our credit facilities and $25.5 million in capital expenditures. Net losses of $473.6 million were offset by net non-cash items of $498.0 million and a net decrease inhad working capital items of $155.1 million. Non-cash items primarily consisted of goodwill and trade name impairment charges of $407.1$368.2 million depreciation, amortization and accretion charges of $81.0 million, stock-based compensation of $30.4 million, partially offset by deferred income taxes and other of $43.5 million.
Accounts receivable decreased by 2.3% to $367.0 million at the end of fiscal year 2017 compared to $375.5working capital of $519.4 million at the end of the prior fiscal year. Average days sales outstanding for our wholesale business forAt the end of fiscal year 2017 was 55 days2023, we had $0.5 million of outstanding short-term borrowings and $207.0 million in long-term debt including unamortized issuance costs compared to 50 days$0.3 million of short-term borrowings and $216.1 million in the prior fiscal year due to shifts in customer mix and the elimination of an early pay discount customer program in parts of Europe.
Inventorylong-term debt including unamortized issuance costs at the end of fiscal year 2017 was $573.82022.
Operating Activities. Cash used in operating activities is net income (loss) adjusted for certain non-cash items and changes in assets and liabilities. Cash used in operating activities of $59.5 million representing an increasein fiscal year 2023 decreased from cash used of 5.8%$110.9 million in fiscal year 2022, primarily due to proactively managing our inventory levels down in fiscal year 2023, and partially offset by decreased earnings in fiscal year 2023 as compared to fiscal year 2022.
Investing Activities. Investing cash flows primarily consist of capital expenditures and are offset by proceeds from the priorsale of property, plant and equipment.
Financing Activities. Financing cash flows primarily consist of borrowings and repayments of debt. The decrease in financing cash flows in fiscal year inventory balance2023 compared to fiscal year 2022 was reflective of $542.5 million driven by our connected business. net debt payments in fiscal year 2023 as compared to net debt borrowings in fiscal year 2022.
Material Cash Requirements. We have significantly reduced our inventories of traditional watches, and we are working to clear the previous generation connected products over the next few quarters.
The following table reflects our common stock repurchase activity under our repurchase programs for the periods indicated (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | For the 2017 Fiscal Year | | For the 2016 Fiscal Year |
Fiscal Year Authorized | Dollar Value Authorized | | Termination Date | | Number of Shares Repurchased | | Dollar Value Repurchased | | Number of Shares Repurchased | | Dollar Value Repurchased |
| 2014 | $ | 1,000.0 |
| | December 2018 | | — |
| | $ | — |
| | 0.1 |
| | $ | 5.2 |
|
| 2010 | $ | 30.0 |
| | None | | — |
| | $ | — |
| | — |
| | $ | — |
|
We did not repurchase any shares of common stock under our repurchase programs during fiscal year 2017. During fiscal year 2016, we effectively retired approximately 0.1 million shares of common stock repurchased under our repurchase programs. The effective retirement of common stock repurchased during the 2016 fiscal year decreased common stock by $1,100, additional paid-in capital by $0.2 million, retained earnings by $5.0 million and treasury stock by $5.2 million. At December 31, 2016 and December 30, 2017, all treasury stock had been effectively retired. We are currently prohibited by the termsvarious payment obligations as part of our revolving credit facility from repurchasing additional sharesordinary course of common stock under our repurchase programs.
Atbusiness. Our material cash requirements include: (1) operating lease obligations (see Note 13 Leases within the endConsolidated Financial Statements); (2) debt repayments (see Note 10 Debt within the Consolidated Financial Statements); (3) non-cancellable purchase obligations (see Note 14 Commitments and Contingencies within the Consolidated Financial Statements), (4) minimum royalty payments (see Note 14 Commitments and Contingencies within the Consolidated Financial Statements); and (5) employee wages, benefits, and incentives. The expected timing of fiscal year 2017, we had working capital of $781.9 million compared to working capital of $932.7 million at the end of the prior fiscal year. Additionally, at the end of fiscal year 2017, we had approximately $2.1 million of outstanding short-term borrowings and $443.9 million in long-term debt.
As of December 30, 2017, we do not consider $650.3 million of undistributed earningspayments of our foreign subsidiaries toobligations is estimated based on current information. Timing of payments and actual amounts paid may be indefinitely reinvested. Tax legislation enacted in 2017 allows a federal tax exemption on foreign dividends, and foreign withholding tax is not applicable. As such, we have only accrued state income taxes on these amounts. We have not provided taxesdifferent, depending on the remaining $378.0 milliontiming of undistributed earningsreceipt of goods or services, or changes to agreed-upon amounts for some obligations. In addition, some of our foreign subsidiaries becausepurchasing requirements are not current obligations and are therefore not included above. For example, some of these requirements are not handled through binding contracts or are fulfilled by vendors on a purchase order basis within short time horizons. Moreover, we consider such earningsmay be subject to be indefinitely reinvested outsideadditional material cash requirements that are contingent upon the U.Soccurrence of certain events, e.g., legal contingencies, uncertain tax positions (see Note 12 Taxes within the Consolidated Financial Statements), pensions (see Note 16 Employee Benefit Plans within the Consolidate Financial Statements) and our current plans do not indicate a need to repatriate them to fund our U.S. operations.other matters.
For the fiscal year ending December 29, 2018,28, 2024, we expect total capital expenditures to be approximately $25$10 million. Of this amount, we expect approximately 40% will be for technology and facilities maintenance, approximately 35% will be for strategic growth, including investments in omni-channel, global concessions and technology and approximately 25% will be for retail store expansion and renovation. Our capital expenditure budget is an estimate and allocation of it to the foregoing investments are estimates and areis subject to change.
Sources of Liquidity. We believe that cash flows from operations, combined with existing cash on hand and amounts available under our credit facilities will be sufficient to fund our working capitalcash needs and planned capital expenditures for at least the next twelve months. Although we believe we have adequate sources of liquidity, the success of our operations, in light of the market volatility and uncertainty, among other factors, could impact our business and liquidity.
Debt FacilitiesThe following table shows our sources of liquidity (in millions):
| | | | | | | | | | | | | | | | |
| | Fiscal Year End | | |
| | 2023 | | 2022 | | |
| Cash and cash equivalents | | $ | 117.2 | | | $ | 198.7 | | | |
| Revolver availability | | 64.0 | | | 141.2 | | |
| Total liquidity | | $ | 181.2 | | | $ | 339.9 | | | |
We are assessing potential sources of supplemental liquidity in light of our operating performance, the timing of the expected benefits of our TAG plan and other relevant considerations. In the event our liquidity becomes insufficient, we may be required to limit our spending or sell assets. In addition, we may seek additional deleveraging or refinancing transactions, including entering into transactions to exchange debt for other debt securities (including additional secured debt), issuance of equity (including preferred stock and convertible securities), repurchase or redemption of outstanding indebtedness, or may
otherwise seek transactions to reduce interest expense, extend debt maturities and improve our capital structure. Any of these transactions could impact our financial results, including additional expenses, charges and cancellation of indebtedness income. We cannot assure you whether any of such transactions will be consummated, whether we will achieve the benefits of any such transaction, or whether our cost of capital will increase, any of which could have an impact on our future liquidity. Additionally, we currently have a $56.5 million (including interest) U.S. tax refund that is expected to be received in fiscal year 2024, however the timing of the refund is uncertain.
Notes: In November 2021, we sold $150.0 million aggregate principal amount of our 7.00% senior notes due 2026 (the "Notes"), generating net proceeds of approximately $141.7 million.
The Notes are our general unsecured obligations. The Notes bear interest at the rate of 7.00% per annum. Interest on the Notes is payable quarterly in arrears on February 28, May 31, August 31 and November 30 of each year. The Notes mature on November 30, 2026. We may redeem the Notes for cash in whole or in part at any time at our option at the following prices: (i) after November 30, 2023 and prior to November 30, 2024, at a price equal to $25.50 per $25.00 principal amount of Notes, (ii) on or after November 30, 2024 and prior to November 30, 2025, at a price equal to $25.25 per $25.00 principal amount of Notes and (iii) on or after November 30, 2025, at a price equal to $25.00 per $25.00 principal amount of Notes, plus (in each case noted above) accrued and unpaid interest, if any, to, but excluding, the date of redemption.
Revolving Facility: On March 9, 2015,September 26, 2019, we and Fossil Partners L.P., as the U.S. borrowers, and Fossil Group Europe GmbH, Fossil Asia Pacific Limited, Fossil (Europe) GmbH, Fossil (UK) Limited and Fossil Canada Inc., as the non-U.S. borrowers, certain other of our subsidiaries from time to time party thereto designated as borrowers, and certain of our subsidiaries from time to time party thereto as guarantors, entered into a secured asset-based revolving credit agreement (as amended from time to time, the "Revolving Facility") with JPMorgan Chase Bank, N.A. as administrative agent (the "ABL Agent"), J.P. Morgan AG, as French collateral agent, JPMorgan Chase Bank, N.A., Citizens Bank, N.A. and Wells Fargo Bank, National Association as joint bookrunners and joint lead arrangers, and Citizens Bank, N.A. and Wells Fargo Bank, National Association, as co-syndication agents and each of the lenders from time to time party thereto (the "ABL Lenders"). On November 8, 2022 we entered into Amendment No. 4 (the "Amendment”) to the Revolving Facility. The Amendment, among other things, (i) extends the maturity date of the credit facility to November 8, 2027 (provided, that if we have any indebtedness in an Amendedamount in excess of $35 million that matures prior to November 8, 2027, the maturity date of the credit facility shall be the 91st day prior to the maturity date of such other indebtedness) and Restated Credit Agreement (as amended,(ii) changes the “Credit Agreement”). calculation methodology of the borrowing base to include the value of certain of our intellectual property in such methodology and to provide for seasonal increases to certain advance rates.
The Credit Agreement provided for (i)Revolving Facility provides that the ABL Lenders may extend revolving credit loans in an aggregate principal amount not to exceed $225.0 million at any time outstanding (the “Revolving Credit Facility”Commitment”), withof which up to $125.0 million is available under a U.S. facility, an aggregate of $80.0 million is available under a European facility, $10.0 million is available under a Hong Kong facility, $5.0 million is available under a French facility, and $5.0 million is available under a Canadian facility, in each case, subject to the borrowing base availability limitations described below. The Revolving Facility also includes an up to $20.0$45.0 million subfacility for the issuance of letters of credit (the “Letters of Credit”). The French facility includes a $1.0 million subfacility for swingline loans, (the “Swingline Loan”), and an up to $10.0the European facility includes a $7.0 million subfacility for lettersswingline loans. The Revolving Facility is subject to a line cap equal to the lesser of the total Revolving Credit Commitment and the aggregate borrowing bases under the U.S. facility, the European facility, the Hong Kong facility, the French facility and the Canadian facility. Loans under the Revolving Facility may be made in U.S. dollars, Canadian dollars, euros, Hong Kong dollars or pounds sterling.
The Revolving Facility is an asset-based facility, in which borrowing availability is subject to a borrowing base equal to: (a) with respect to us, the sum of (i) the lesser of (x) 90% of the appraised net orderly liquidation value of eligible U.S. finished goods inventory and (y) 65% of the lower of cost or market value of eligible U.S. finished goods inventory, plus (ii) 85% of the eligible U.S. accounts receivable, plus (iii) 90% of eligible U.S. credit card accounts receivable, plus (iv) the lesser of (x) 40% of the appraised net orderly liquidation value of eligible U.S. intellectual property and (ii) a term loan in(y) $20.0 million, minus (y) the aggregate amount of $231.3 million (the “Term Loan”). The Credit Agreement amended and restated that certain credit agreement, dated asreserves, if any, established by the ABL Agent; (b) with respect to each non-U.S. borrower (except for the French Borrower), the sum of May 17, 2013, as amended (the “Prior Agreement”).
On March 10, 2017, we entered into(i) the Second Amendment to the Amended and Restated Credit Agreement (the “Second Amendment”). The Second Amendment reduced the Revolving Credit Facility under the Credit Agreement from $1.05 billion to $850.0 million. The Second Amendment also removed the incremental term loan that was available under the Credit Agreement, extended the maturity datelesser of (x) 90% of the Credit Agreement to May 17, 2019appraised net orderly liquidation value of eligible foreign finished goods inventory of such non-U.S. borrower and removed our ability to make offers to the lenders to extend the maturity date(y) 65% of the Term Loanlower of cost or the Revolving Credit Facility. The Second Amendment also amended the repayment schedule for the Term Loan and required us to make monthly payments on the last business daymarket value of each month beginning April 30, 2018. The Second Amendment also amended the mandatory prepayment provisions under the Credit Agreement and provided that to the extent there were excess proceeds remaining from the issuanceeligible foreign finished goods inventory of debt following the repayment in fullsuch non-U.S. borrower, plus (ii) 85% of the Term Loan, we were required to repayeligible foreign accounts receivable of such non-U.S. borrower, minus (iii) the Revolving Credit Facility in theaggregate amount of such excess proceeds, with a corresponding permanent reduction inreserves, if any, established by the Revolving Credit Facility in the amount of up to $50.0 million.
The Second Amendment amended the applicable margin used to calculate the interest rate that was applicable to base rate loansABL Agent; and London Interbank Offer Rate ("LIBOR") rate loans and provided that the interest rate margin for base rate loans was 2.50% per annum and the interest rate margin for LIBOR rate loans was 3.50% per annum. On October 1, 2017, the applicable margin on the Term Loan automatically increased to 2.75% per annum for base rate loans and 3.75% per annum for LIBOR rate loans. The Second Amendment also changed the commitment fee payable(c) with respect to the Revolving Credit Facility to 0.50% per annum. Furthermore,French Borrower, (i) 85% of eligible French accounts receivable minus (ii) the Second Amendment changedaggregate amount of reserves, if any, established by the consolidated total leverage ratio that we were required to comply with from 3.25 to 1.00 toABL Agent. Not more than 60% of the ratios as set forth below:
|
| | |
Period | | Maximum Ratio |
October 1, 2017 through and including March 31, 2018 | | 3.25 to 1.00 |
April 1, 2018 through and including September 29, 2018 | | 3.50 to 1.00 |
September 30, 2018 and thereafter | | 3.25 to 1.00 |
As of December 30, 2017, amounts outstandingaggregate borrowing base under the Revolving Credit Facility may consist of the non-U.S. borrowing bases.
The above advance rates (other than the advance rate with respect to intellectual property) are seasonally increased by 5%
(e.g. from 90% to 95%) during the period commencing on the date of delivery of the borrowing base certificate with respect to the second fiscal month of the Company and ending on the Term Loan underlast day of the Credit Agreement bore interest, at our option, at (i)period covered by the borrowing base rate plus 2.75% or (ii)certificate delivered with respect to the LIBOR rate (defined asfifth fiscal month of the quotient obtained by dividing (a) LIBOR by (b) 1.00 minus the Eurodollar reserve percentage) plus 3.75%.Company.
During fiscal year 2017, we made principalFiscal Year 2023 Activity: We had payments net of $193.8 million under the Term Loan, which repaid the outstanding balance. During fiscal year 2017, we had average outstanding borrowings of $618.7$10.9 million under the Revolving Credit Facility during fiscal year 2023 at an average interest rate of 4.45%6.5%. As of December 30, 2017,2023, we had $445.0$150.0 million outstanding under the Notes and $62.1 million outstanding under the Revolving Credit Facility. As of December 30, 2017,2023, we also had unamortized debt issuance costs of $4.7$5.1 million which reduce the correspondingrecorded in long-term debt liability.and $2.5 million recorded in intangible and other assets-net on our consolidated balance sheets. In addition, we had $0.8$4.5 million of outstanding standby letters of credit at December 30, 2017.2023. Amounts available under the Revolving Credit Facility are reduced by any amounts outstanding under standby letters of credit. As of December 30, 2017,2023, we had $199.8$64.0 million available for borrowing under the Revolving Credit Facility, which was favorably impacted by a $149.6 million international cash balance.Facility. At December 30, 2017,2023, we were in compliance with all debt covenants related to all our credit facilities.debt agreement.
On January 29, 2018, we and certain of our foreign subsidiaries entered into a Second Amended and Restated Credit Agreement (the "Second A&R Credit Agreement"). The Second A&R CreditAgreement provides for (i) revolving credit loans in the amount of $325 million, subject to a borrowing base (as described below) (the "Second A&R Revolving Credit Facility"), with an up to $45.0 million subfacility for letters of credit, and (ii) a term loan in the amount of $425 million (the "Term Loan Facility"). The Second A&R Credit Agreement expires and is due and payable on December 31, 2020. Borrowings under the Second A&R Credit Agreement were used to pay the outstanding balance under the Revolving Credit Facility.
Availability under the Second A&R Revolving Credit Facility and any letters of credit are subject to a borrowing base equal to, (a) with respect to Fossil Group, Inc., the sum of (i) 85% of eligible U.S. accounts receivable and 90% of net U.S.
credit card receivables (less any dilution reserve), (ii) the lesser of (A) 65% of the lower of cost or market value of eligible U.S. finished good inventory and (B) 85% of the appraised net orderly liquidation value of eligible U.S. finished goods inventory, and (iii) until the earlier of (x) March 31, 2018 and (y) the date on which certain of our foreign subsidiaries join the Second A&R Credit Agreement as non-U.S. borrowers, (A) 35% of eligible foreign accounts receivable of certain pledged foreign subsidiaries, plus (B) the least of (x) 35% of the lower of cost or market value of eligible foreign finished good inventory of such pledged foreign subsidiaries, (y) 35% of the appraised net orderly liquidation value of eligible foreign finished good inventory of such pledged foreign subsidiaries, and (z) $100,000,000, minus (C) all indebtedness for borrowed money of such pledged foreign subsidiaries (subject to exceptions) minus (iv) the aggregate amount of reserves, if any, established by the Administrative Agent in good faith and in the exercise of reasonable business judgment from the perspective of a secured asset-based lender; and (b) with respect to each non-U.S. borrower, the sum of (i) 85% of eligible accounts receivable of the non-U.S. borrowers (less any dilution reserve) and (ii) the least of (A) 65% of the lower of cost or market value of eligible foreign finished goods inventory of the non-U.S. borrowers, (B) 85% of the appraised net orderly liquidation value of eligible foreign finished goods inventory of the non-U.S. borrowers, and (C) $185,000,000 minus (iii) the aggregate amount of reserves, if any, established by the Administrative Agent in good faith and in the exercise of reasonable business judgment from the perspective of a secured asset-based lender.
In connection with the Second A&R Credit Agreement, we and all of our domestic subsidiaries entered into a Collateral Agreement in favor of the Administrative Agent, pursuant to which we and our subsidiaries granted liens on all or substantially all of our assets in order to secure our obligations under the Second A&R Credit Agreement and the other loan documents (the “Obligations”). Additionally, all of our domestic subsidiaries entered into a Guaranty Agreement in favor of the Administrative Agent, pursuant to which such subsidiaries guarantee the payment and performance of the Obligations. Additionally, Fossil Group Europe and the other non-U.S. borrowers from time to time party to the Second A&R Credit Agreement are required to enter into security instruments with respect to all or substantially all of their assets that can be pledged under applicable local law.
As of January 29, 2018, amounts outstanding under the Second A&R Revolving Credit Facility bear interest at (a) the LIBOR rate plus the applicable interest margin, (b) the daily LIBOR rate plus the applicable interest margin or (c) the base rate plus the applicable interest margin. The applicable interest margin varies from 4.00% to 5.00% for LIBOR rate loans and daily LIBOR rate loans and 1.50% to 3.00% for base rate loans and is based on our average daily excess availability under the revolving credit loans under the Second A&R Credit Agreement for the most recently ended calendar quarter, which is an amount equal to (a) the lesser of (i) $325 million and (ii) the aggregate borrowing base minus (b) the amount of all outstanding borrowings and letter of credit obligations under the revolving credit facility under the Second A&R Credit Agreement, for each day during the applicable period divided by the number of days in such period.
Amounts outstanding under the Term Loan Facility bear interest at a rate per annum equal to (a) the LIBOR rate plus 7%, increasing to the LIBOR rate plus 8% on the first anniversary of the closing of the Second A&R Credit Agreement and the LIBOR rate plus 9% on the second anniversary of the closing of the Second A&R Credit Agreement and thereafter or (b) the base rate plus 5.5%, increasing to the base rate plus 6.5% on the first anniversary of the closing of the Second A&R Credit Agreement and to the base rate plus 7.5% on the second anniversary of the closing of the Second A&R Credit Agreement and thereafter.
We are required to repay the outstanding principal balance of the Term Loan Facility in the amount of $25 million on March 31, 2018, $125 million on March 31, 2019, $75 million on March 31, 2020 and the outstanding balance on December 31, 2020. Additionally, loans under the Second A&R Credit Agreement may be prepaid, in whole or in part, at our option, in minimum principal amounts of (a) $1.0 million or increments of $1.0 million in excess thereof, with respect to a base rate loan under the Second A&R Revolving Credit Facility, (b) $5.0 million or increments of $1.0 million in excess thereof, with respect to a LIBOR rate loan or a daily LIBOR rate loan under the Second A&R Revolving Credit Facility, and (c) $5.0 million or increments of $1.0 million in excess thereof, with respect to the Term Loan Facility. Loans under the Second A&R Credit Agreement must be repaid with the net cash proceeds of certain asset sales, insurance and condemnation events, certain debt and equity issuances and certain cash dividends received from our subsidiaries. We may permanently reduce the revolving credit commitment at any time, in whole or in part, without premium or penalty, in a minimum aggregate principal amount of not less than $3.0 million or increments of $1.0 million in excess thereof.
We are required to pay a commitment fee on the unused amounts of the commitments under the Second A&R Revolving Credit Facility, payable quarterly in arrears, of 0.5% on the average daily unused portion of the overall commitment under the Second A&R Revolving Credit Facility.
The repayment obligation under the Second A&R Credit Agreement can be accelerated upon the occurrence of an event of default, including the failure to pay principal or interest, a material inaccuracy of a representation or warranty, violation of
covenants, cross-default, change in control, bankruptcy events, failure of a loan document provision, certain ERISA events and material judgments.
Financial covenants governing the Second A&R Credit Agreement require us to maintain (a) a minimum fixed charge coverage ratio measured quarterly on a rolling twelve-month basis of 1.15 to 1.00 if our quarter-end balances of cash and cash equivalents plus the excess availability under the Second A&R Revolving Credit Facility is less than $200 million; (b) a maximum leverage ratio measured as of the last day of each fiscal quarter for the period of four fiscal quarters ending on such date of (i) 4.5 to 1.0 for the period ending March 31, 2018, (ii) 4.75 to 1.0 for the period ending June 30, 2018, (iii) 5.0 to 1.0 for the period ending September 29, 2018, (iv) 4.25 to 1.0 for the period ending December 29, 2018, (v) 3.75 to 1.0 for each fiscal quarter ending during the period from December 30, 2018 through September 28, 2019, and (vi) 3.5 to 1.0 thereafter; (c) a minimum trailing twelve-month EBITDA tested quarterly of $110 million (beginning with the fiscal quarter ending December 29, 2018); (d) a minimum liquidity covenant of unrestricted cash and cash equivalents plus available and unused capacity under the Second A&R Revolving Credit Facility equal to $160 million; and (e) maximum capital expenditures of $35 million per year.
On June 23, 2016, Fossil Accessories South Africa Pty Ltd, entered into a 20 million South African rand short-term note with First National Bank (the "Fossil South Africa Note") that is used for working capital purposes. The Fossil South Africa Note bears interest at the bank's prime rate, 10.25% as of year end 2017. The Fossil South Africa Note is reviewed annually for renewal. South African rand-based borrowings, in U.S. dollars, under the Fossil South Africa Note were approximately $0.9 million at the end of fiscal year 2017.
Contractual Obligations
The following table identifies our contractual obligations as of December 30, 2017 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Total | | Less than
1 Year | | 1 - 3 Years | | 3 - 5 Years | | More than 5 Years |
Debt obligations (1) | $ | 445,906 |
| | $ | 906 |
| | $ | 445,000 |
| | $ | — |
| | $ | — |
|
Interest payments on debt (2) | 32,370 |
| | 23,565 |
| | 8,805 |
| | — |
| | — |
|
Minimum royalty payments (3) | 164,701 |
| | 154,115 |
| | 10,586 |
| | — |
| | — |
|
Capital lease obligations (4) | 4,960 |
| | 1,285 |
| | 2,108 |
| | 1,567 |
| | — |
|
| Operating lease obligations | 712,955 |
| | 144,108 |
| | 227,245 |
| | 155,167 |
| | 186,435 |
|
Purchase obligations (5) | 357,253 |
| | 317,326 |
| | 38,269 |
| | 1,524 |
| | 134 |
|
Uncertain tax positions (6) | 5,360 |
| | 5,360 |
| | — |
| | — |
| | — |
|
Total contractual obligations (7) (8) | $ | 1,723,505 |
| | $ | 646,665 |
| | $ | 732,013 |
| | $ | 158,258 |
| | $ | 186,569 |
|
| |
(1) | Consists of borrowings, excluding contractual interest payments and unamortized debt issuance costs of $4.7 million. |
| |
(2) | Consists of estimated interest payments under the Revolving Credit Facility. |
| |
(3) | Consists primarily of minimum royalty commitments under exclusive licenses to manufacture watches and jewelry under trademarks not owned by us. However these minimum royalty commitments do not include amounts owed pursuant to various license and design service agreements under which we are obligated to pay the licensors a percentage of our net sales of these licensed products. |
| |
(4) | Payments shown include interest. |
| |
(5) | Consists primarily of open non-cancelable purchase orders. |
| |
(6) | Management has only included its current ASC 740 liability in the table above. Long-term amounts of $30.0 million have been excluded because the payment timing cannot be reasonably estimated. |
| |
(7) | Pension obligations of $13.8 million and deferred compensation liabilities of $5.2 million have been excluded because the payment timing cannot be reasonably estimated. |
| |
(8) | The contingent consideration liability of $6.5 million related to Fossil Accessories South Africa Pty. Ltd. has been excluded because the payment timing cannot be reasonably estimated. |
Off Balance Sheet Arrangements
We are the guarantor for a 5.0 million Swiss franc credit facility agreement entered into by Swiss Technology Components Ltd. ("STC"), our equity method investee. We are obligated to pay up to 5.5 million Swiss francs in the event of default by STC.
There are no other off balance sheet arrangements other than those disclosed in Note 13—Commitments and Contingencies to our consolidated financial statements set forth in Part II, Item 8 of this Annual Report on Form 10-K.
Selected Quarterly Consolidated Financial Data
The table below sets forth selected quarterly consolidated financial information. The information is derived from our unaudited consolidated financial statements and includes all normal and recurring adjustments that management considers necessary for a fair statement of results for such periods. The operating results for any quarter are not necessarily indicative of results for any future period. Certain line items presented in the tables below, when aggregated, may not agree with the corresponding line items on our consolidated statements of income (loss) and comprehensive income (loss) for fiscal years 2017 and 2016 due to rounding (in thousands, except percentage and per share data).
|
| | | | | | | | | | | | | | | |
| Fiscal Year 2017 | 1st Qtr | | 2nd Qtr | | 3rd Qtr | | 4th Qtr |
| Net sales | $ | 581,790 |
| | $ | 596,846 |
| | $ | 688,722 |
| | $ | 920,805 |
|
| Gross profit | 289,519 |
| | 301,347 |
| | 319,893 |
| | 448,080 |
|
| Net income (loss) | (46,789 | ) | | (343,099 | ) | | (5,479 | ) | | (78,192 | ) |
| Net income (loss) attributable to noncontrolling interest | 1,397 |
| | 1,613 |
| | (80 | ) | | 1,683 |
|
| Net income (loss) attributable to Fossil Group, Inc. | $ | (48,186 | ) | | $ | (344,712 | ) | | $ | (5,399 | ) | | $ | (79,875 | ) |
| Earnings (loss) per share: | |
| | |
| | |
| | |
|
| Basic | $ | (1.00 | ) | | $ | (7.11 | ) | | $ | (0.11 | ) | | $ | (1.65 | ) |
| Diluted | $ | (1.00 | ) | | $ | (7.11 | ) | | $ | (0.11 | ) | | $ | (1.65 | ) |
| Gross profit as a percentage of net sales | 49.8 | % | | 50.5 | % | | 46.4 | % | | 48.7 | % |
|
| | | | | | | | | | | | | | | |
| Fiscal Year 2016 | 1st Qtr | | 2nd Qtr | | 3rd Qtr | | 4th Qtr |
| Net sales | $ | 659,847 |
| | $ | 685,368 |
| | $ | 737,990 |
| | $ | 959,166 |
|
| Gross profit | 348,337 |
| | 355,750 |
| | 385,080 |
| | 489,019 |
|
| Net income | 7,396 |
| | 8,072 |
| | 19,348 |
| | 50,786 |
|
| Net income attributable to noncontrolling interest | 1,603 |
| | 2,051 |
| | 1,992 |
| | 1,088 |
|
| Net income attributable to Fossil Group, Inc. | $ | 5,793 |
| | $ | 6,021 |
| | $ | 17,356 |
| | $ | 49,698 |
|
| Earnings per share: | |
| | |
| | |
| | |
|
| Basic | $ | 0.12 |
| | $ | 0.13 |
| | $ | 0.36 |
| | $ | 1.03 |
|
| Diluted | $ | 0.12 |
| | $ | 0.12 |
| | $ | 0.36 |
| | $ | 1.03 |
|
| Gross profit as a percentage of net sales | 52.8 | % | | 51.9 | % | | 52.2 | % | | 51.0 | % |
While the majority of our products are not seasonal in nature, a significant portion of our net sales and operating income is generally derived in the second half of the fiscal year. Our third and fourth quarters, which include the "back to school" and Christmas seasons, have historically generated a significant portion of our annual operating income. Connected products appear to be more seasonal than traditional products which may further impact our operational performance in the third and fourth quarters as compared to the first half of the year. The amount of net sales and operating income generated during the first quarter is affected by the levels of inventory held by retailers at the end of the Christmas season, as well as general economic conditions and other factors beyond our control. In general, lower levels of inventory held by retailers at the end of the Christmas season may have a positive impact on our net sales and operating income in the first quarter of the following fiscal year as a result of higher levels of restocking orders placed by retailers.
As we expand our e-commerce business and improve productivity in our retail store base, sales from the direct to consumer distribution channel may increase as a percentage of the total sales mix. Based upon the historical seasonality of
direct to consumer sales, we believe this expansion could result in higher levels of profitability in the fourth quarter and lower levels of profitability in the first and second quarters when, due to seasonality, it is more difficult to leverage retail store four wall operating costs and back office expenses against a lower level of sales productivity. In addition, new product launches would generally augment the sales and operating expense levels in the quarter the product launch takes place. The results of operations for a particular quarter may also vary due to a number of factors, including retail, economic and monetary conditions, timing of orders or holidays, the timing of investments and the mix of products sold by us.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Rate Risk
As a multinational enterprise, we are exposed to changes in foreign currency exchange rates. Our most significant foreign currency risk relates to the euro and, to a lesser extent, the Canadian dollar, British pound, Japanese yen, Mexican peso and Australian dollar as compared to the U.S. dollar. Due to our vertical nature whereby a significant portion of goods are sourced from our owned entities, the foreign currency risks relate primarily to the necessary current settlement of intercompany inventory transactions. We employ a variety of operating practices to manage these market risks relative to foreign currency exchange rate changes and, where deemed appropriate, utilize forward contracts. These operating practices include, among others, our ability to convert foreign currency into U.S. dollars at spot rates and to maintain U.S. dollar pricing relative to sales of our products to certain distributors located outside the U.S. The use of forward contracts allows us to offset exposure to rate fluctuations because the gains or losses incurred on the derivative instruments will offset, in whole or in part, losses or gains on the underlying foreign currency exposure. We use derivative instruments only for risk management purposes and do not use them for speculation or for trading. There were no significant changes in how we managed foreign currency transactional exposure in fiscal year 2017 and management does not anticipate any significant changes in such exposures or in the strategies we employ to manage such exposure in the near future.
The following table shows our outstanding forward contracts designated as cash flow hedges for intercompany inventory transactions (in millions) at December 30, 2017 and their expiration dates.Not applicable.
|
| | | | | | | | |
| Functional Currency | | Contract Currency | | |
| Type | Amount | | Type | Amount | | Expiring Through |
| Euro | 245.2 |
| | U.S. dollar | 286.6 |
| | November 2019 |
| Canadian dollar | 88.4 |
| | U.S. dollar | 68.7 |
| | December 2019 |
| British pound | 41.1 |
| | U.S. dollar | 54.8 |
| | December 2019 |
| Japanese yen | 4,105.7 |
| | U.S. dollar | 37.9 |
| | December 2019 |
| Mexican peso | 388.5 |
| | U.S. dollar | 20.2 |
| | September 2018 |
| Australian dollar | 8.6 |
| | U.S. dollar | 6.7 |
| | June 2018 |
| U.S. Dollar | 33.5 |
| | Japanese Yen | 3,670.0 |
| | November 2018 |
If we were to settle our euro, Canadian dollar, British pound, Japanese yen, Mexican peso, Australian dollar and U.S. dollar based forward contracts hedging intercompany inventory transactions asInterest Rate Risk
We are subject to interest rate volatility with regard to debt borrowings. Based on our variable-rate debt outstanding as of December 30, 2017, a 100 basis point increase in interest rates would increase annual interest expense by approximately $4.5 million.
Item 8. Consolidated Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Fossil Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Fossil Group, Inc. and subsidiaries (the "Company") as of December 30, 20172023 and December 31, 2016,2022, and the related consolidated statements of income (loss) and comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended December 30, 2017,2023, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 20172023 and December 31, 2016,2022, and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2017,2023, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 30, 2017,2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 2, 2018,13, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Inventories – Valuation —Refer to Notes 1 and 3 of the financial statements
Critical Audit Matter Description
Inventories are stated at the lower of cost and net realizable value, including any applicable duty and freight charges. The Company accounts for estimated obsolescence or unmarketable inventory equal to the difference between the average cost of inventory and the estimated net realizable value based upon assumptions about future demand, market conditions and available liquidation channels through the establishment of an inventory excess and obsolescence valuation adjustment. Changes in these assumptions could have a significant impact on the inventory excess and obsolescence valuation adjustment.
We identified inventory valuation for smartwatch products as a critical audit matter because of the significant judgments made by management to estimate future demand, market conditions, and available liquidation channels which are used to arrive at the net realizable value. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions within the inventory excess and obsolescence allowance.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the inventory excess and obsolescence allowance for smartwatch products included the following, among others:
•We tested the effectiveness of controls over the inventory excess and obsolescence valuation adjustment, specifically the control over the estimation of the net realizable value of inventory.
•We evaluated management’s ability to estimate net realizable value by comparing management’s estimates to subsequent transactions, taking into account changes in market conditions subsequent to December 30, 2023.
•We evaluated the method and assumptions used by management to estimate net realizable value by:
–Testing the underlying data that served as the basis for the assumptions.
–Evaluating the appropriateness of the inputs to the estimate, including future demand, market conditions, and available liquidation channels.
–Comparing management’s prior-year estimate of demand to actual results for the year.
–Comparing management’s estimate of future demand to historical results and forecasted information included in the Company’s press releases, as well as industry reports.
–Comparing actual sales values realized subsequent to the balance sheet date to the recorded amounts, net of the inventory excess and obsolescence allowance.
•Tested the completeness of the inventory valuation adjustment by:
–Identifying slow-moving inventory with a turnover of less than one and comparing to management’s analysis and investigating the rationale for no adjustment if required.
–Inquiring of brand management and performing corroborative inquiry about returns, inventory that is under-performing, and anticipated trends based on market reaction and comparing to management’s analysis.
–Comparing inventory sold at a loss or to liquidators to management’s analysis.
–Testing a sample of inventory items to determine if the inventory excess and obsolescence allowance is reasonable through evaluations of historical margin data, obtaining evidence of past or future product orders, and other qualitative factors for each selection.
•Tested the mathematical accuracy of the inventory excess and obsolescence allowance by recalculating the net realizable value and comparing our recalculation to the recorded balance.
•Compared management’s prior-year estimate of the inventory excess and obsolescence allowance for a sample of inventory items to the recorded sales price to identify potential bias for determination of the inventory excess and obsolescence allowance.
/s/ Deloitte & Touche LLP
Dallas, Texas
March 2, 201813, 2024
We have served as the Company's auditor since 1988.
FOSSIL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS
| | | | December 30,
2017 | | December 31,
2016 |
| December 30,
2023 | | | December 30,
2023 | | December 31,
2022 |
| Assets | | | |
| Current assets: | | | |
| Current assets: | |
| Current assets: | |
| Cash and cash equivalents | |
| Cash and cash equivalents | |
| Cash and cash equivalents | $ | 231,244 |
| | $ | 297,330 |
|
| Accounts receivable-net | 367,013 |
| | 375,520 |
|
| Inventories | 573,788 |
| | 542,487 |
|
| Prepaid expenses and other current assets | 118,943 |
| | 131,953 |
|
| Total current assets | 1,290,988 |
| | 1,347,290 |
|
| Property, plant and equipment-net | 219,742 |
| | 273,851 |
|
| Goodwill | — |
| | 355,263 |
|
| | Operating lease right-of-use assets | |
| Operating lease right-of-use assets | |
| Operating lease right-of-use assets | |
| Intangible and other assets-net | 147,642 |
| | 210,493 |
|
| Total long-term assets | 367,384 |
| | 839,607 |
|
| Total assets | $ | 1,658,372 |
| | $ | 2,186,897 |
|
| Liabilities and Stockholders' Equity | | | |
| Current liabilities: | | | |
| Current liabilities: | |
| Current liabilities: | |
| Accounts payable | $ | 204,981 |
| | $ | 163,644 |
|
| Short-term and current portion of long-term debt | 2,144 |
| | 26,368 |
|
| Accounts payable | |
| Accounts payable | |
| Short-term debt | |
| Accrued expenses: | | | |
| Current operating lease liabilities | |
| Current operating lease liabilities | |
| Current operating lease liabilities | |
| Compensation | 70,725 |
| | 52,993 |
|
| Royalties | 39,874 |
| | 30,062 |
|
| Co-op advertising | 27,946 |
| | 29,111 |
|
| Customer liabilities | |
| Transaction taxes | 36,547 |
| | 26,743 |
|
| Other | 109,211 |
| | 69,565 |
|
| Income taxes payable | 17,660 |
| | 16,099 |
|
| Total current liabilities | 509,088 |
| | 414,585 |
|
| Long-term income taxes payable | 47,093 |
| | 18,584 |
|
| Deferred income tax liabilities | 1,096 |
| | 55,877 |
|
| Long-term debt | 443,942 |
| | 609,961 |
|
| Long-term operating lease liabilities | |
| Other long-term liabilities | 76,206 |
| | 72,452 |
|
| Total long-term liabilities | 568,337 |
| | 756,874 |
|
| Commitments and contingencies (Note 13) |
|
| |
|
|
| Commitments and contingencies (Note 14) | | Commitments and contingencies (Note 14) | | | |
| Stockholders' equity: | | | |
| Common stock, 48,643 and 48,269 shares issued and outstanding at December 30, 2017 and December 31, 2016, respectively | 486 |
| | 483 |
|
| Common stock, 52,487 and 51,836 shares issued and outstanding at December 30, 2023 and December 31, 2022, respectively | |
| Common stock, 52,487 and 51,836 shares issued and outstanding at December 30, 2023 and December 31, 2022, respectively | |
| Common stock, 52,487 and 51,836 shares issued and outstanding at December 30, 2023 and December 31, 2022, respectively | |
| Additional paid-in capital | 242,263 |
| | 213,352 |
|
| Retained earnings | 409,653 |
| | 887,825 |
|
| Accumulated other comprehensive income (loss) | (76,269 | ) | | (95,424 | ) |
| Total Fossil Group, Inc. stockholders' equity | 576,133 |
| | 1,006,236 |
|
| Noncontrolling interest | 4,814 |
| | 9,202 |
|
| Total stockholders' equity | 580,947 |
| | 1,015,438 |
|
| Total liabilities and stockholders' equity | $ | 1,658,372 |
| | $ | 2,186,897 |
|
See notes to the consolidated financial statements.
FOSSIL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
IN THOUSANDS, EXCEPT PER SHARE DATA
| | | Fiscal Year | 2017 | | 2016 | | 2015 | Fiscal Year | 2023 | | 2022 | | 2021 |
| Net sales | $ | 2,788,163 |
| | $ | 3,042,371 |
| | $ | 3,228,836 |
|
| Cost of sales | 1,429,324 |
| | 1,464,185 |
| | 1,475,369 |
|
| Gross profit | 1,358,839 |
| | 1,578,186 |
| | 1,753,467 |
|
| Operating expenses: | | | | | |
| Selling, general and administrative expenses | 1,327,816 |
| | 1,423,262 |
| | 1,428,717 |
|
| Goodwill and trade name impairments | 407,128 |
| | — |
| | 9,116 |
|
| Restructuring charges | 48,171 |
| | 27,778 |
| | 24,400 |
|
| Selling, general and administrative expenses | |
| Selling, general and administrative expenses | |
| | Long-lived asset impairments | |
| Long-lived asset impairments | |
| Long-lived asset impairments | |
| Restructuring expenses | |
| Total operating expenses | 1,783,115 |
| | 1,451,040 |
| | 1,462,233 |
|
| Operating income (loss) | (424,276 | ) | | 127,146 |
| | 291,234 |
|
| Interest expense | 43,214 |
| | 26,894 |
| | 20,018 |
|
| Other income (expense) - net | 13,736 |
| | 14,056 |
| | 40,443 |
|
| Income (loss) before income taxes | (453,754 | ) | | 114,308 |
| | 311,659 |
|
| Provision for income taxes | 19,805 |
| | 28,705 |
| | 81,757 |
|
| Net income (loss) | (473,559 | ) | | 85,603 |
| | 229,902 |
|
| Less: Net income attributable to noncontrolling interest | 4,613 |
| | 6,735 |
| | 9,265 |
|
| Net income (loss) attributable to Fossil Group, Inc. | $ | (478,172 | ) | | $ | 78,868 |
| | $ | 220,637 |
|
| Other comprehensive income (loss), net of taxes: | |
| | |
| | |
| Other comprehensive income (loss), net of taxes: | | | |
| Currency translation adjustment | $ | 37,368 |
| | $ | (20,160 | ) | | $ | (54,466 | ) |
| Cash flow hedges - net change | (20,448 | ) | | 2,929 |
| | (7,057 | ) |
| Pension plan activity | 2,235 |
| | 2,313 |
| | (2,573 | ) |
| Total other comprehensive income (loss) | 19,155 |
| | (14,918 | ) | | (64,096 | ) |
| Total comprehensive income (loss) | (454,404 | ) | | 70,685 |
| | 165,806 |
|
| Less: Comprehensive income attributable to noncontrolling interest | 4,613 |
| | 6,735 |
| | 9,265 |
|
| Comprehensive income (loss) attributable to Fossil Group, Inc. | $ | (459,017 | ) | | $ | 63,950 |
| | $ | 156,541 |
|
| Earnings (loss) per share: | |
| | |
| | |
| Earnings (loss) per share: | | | |
| Basic | $ | (9.87 | ) | | $ | 1.64 |
| | $ | 4.52 |
|
| Diluted | $ | (9.87 | ) | | $ | 1.63 |
| | $ | 4.51 |
|
| Weighted average common shares outstanding: | |
| | |
| | |
| Weighted average common shares outstanding: | | | |
| Basic | 48,468 |
| | 48,136 |
| | 48,800 |
|
| Diluted | 48,468 |
| | 48,323 |
| | 48,924 |
|
See notes to the consolidated financial statements.
FOSSIL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AMOUNTS IN THOUSANDS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional
Paid-in
Capital | | Treasury
Stock | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income
(Loss) | | Stockholders'
Equity
Attributable
to Fossil
Group, Inc. | | Noncontrolling Interest | | Total Stockholders' Equity |
| Shares | | Par
Value |
| Balance, January 2, 2021 | 51,474 | | | $ | 515 | | | $ | 293,777 | | | $ | — | | | $ | 203,698 | | | $ | (58,900) | | | $ | 439,090 | | | $ | 942 | | | $ | 440,032 | |
| Common stock issued upon exercise of stock options and stock appreciation rights and restricted stock units | 861 | | | 8 | | | (8) | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| Acquisition of common stock | — | | | — | | | — | | | (2,420) | | | — | | | — | | | (2,420) | | | — | | | (2,420) | |
| Retirement of common stock | (189) | | | (2) | | | (2,418) | | | 2,420 | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Stock-based compensation | — | | | — | | | 9,497 | | | — | | | — | | | — | | | 9,497 | | | — | | | 9,497 | |
| Net income (loss) | — | | | — | | | — | | | — | | | 25,434 | | | — | | | 25,434 | | | 1,190 | | | 26,624 | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | (8,375) | | | (8,375) | | | — | | | (8,375) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance, January 1, 2022 | 52,146 | | | $ | 521 | | | $ | 300,848 | | | $ | — | | | $ | 229,132 | | | $ | (67,275) | | | $ | 463,226 | | | $ | 2,132 | | | $ | 465,358 | |
| Common stock issued upon exercise of stock options and stock appreciation rights and restricted stock units | 906 | | | 9 | | | (9) | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| Acquisition of common stock | — | | | — | | | — | | | (12,447) | | | — | | | — | | | (12,447) | | | — | | | (12,447) | |
| Retirement of common stock | (1,216) | | | (12) | | | (2,951) | | | 12,447 | | | (9,484) | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Stock-based compensation | — | | | — | | | 8,353 | | | — | | | — | | | — | | | 8,353 | | | — | | | 8,353 | |
| Net income (loss) | — | | | — | | | — | | | — | | | (44,157) | | | — | | | (44,157) | | | 631 | | | (43,526) | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | (9,043) | | | (9,043) | | | — | | | (9,043) | |
| | | | | | | | | | | | | | | | | |
| Distribution of noncontrolling interest earnings and other | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (5,686) | | | (5,686) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance, December 31, 2022 | 51,836 | | | $ | 518 | | | $ | 306,241 | | | $ | — | | | $ | 175,491 | | | $ | (76,318) | | | $ | 405,932 | | | $ | (2,923) | | | $ | 403,009 | |
| Common stock issued upon exercise of stock options and stock appreciation rights and restricted stock units | 816 | | | 8 | | | (8) | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| Acquisition of common stock | — | | | — | | | — | | | (530) | | | — | | | — | | | (530) | | | — | | | (530) | |
| Retirement of common stock | (165) | | | (1) | | | (529) | | | 530 | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Stock-based compensation | — | | | — | | | 6,005 | | | — | | | — | | | — | | | 6,005 | | | — | | | 6,005 | |
| Net income (loss) | — | | | — | | | — | | | — | | | (157,088) | | | — | | | (157,088) | | | 429 | | | (156,659) | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | (87) | | | (87) | | | — | | | (87) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance, December 30, 2023 | 52,487 | | | $ | 525 | | | $ | 311,709 | | | $ | — | | | $ | 18,403 | | | $ | (76,405) | | | $ | 254,232 | | | $ | (2,494) | | | $ | 251,738 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common stock | | Additional paid-in capital | | Treasury stock | | Retained earnings | | Accumulated other comprehensive income (loss) | | Stockholders' equity attributable to Fossil Group, Inc. | | Noncontrolling interest | | Total stockholders' equity |
| Shares | | Par value |
| Balance, January 4, 2015 | 50,771 |
| | $ | 508 |
| | $ | 171,669 |
| | $ | — |
| | $ | 822,093 |
| | $ | (16,410 | ) | | $ | 977,860 |
| | $ | 5,941 |
| | $ | 983,801 |
|
| Common stock issued upon exercise of stock options and stock appreciation rights | 113 |
| | 1 |
| | 769 |
| | — |
| | — |
| | — |
| | 770 |
| | — |
| | 770 |
|
| Tax benefit derived from stock-based compensation | — |
| | — |
| | (1,128 | ) | | — |
| | — |
| | — |
| | (1,128 | ) | | — |
| | (1,128 | ) |
| Acquisition of common stock | — |
| | — |
| | 887 |
| | (232,169 | ) | | — |
| | — |
| | (231,282 | ) | | — |
| | (231,282 | ) |
| Retirement of common stock | (2,759 | ) | | (28 | ) | | (3,368 | ) | | 232,169 |
| | (228,773 | ) | | — |
| | — |
| | — |
| | — |
|
| Stock-based compensation | — |
| | — |
| | 18,627 |
| | — |
| | — |
| | — |
| | 18,627 |
| | — |
| | 18,627 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 220,637 |
| | — |
| | 220,637 |
| | 9,265 |
| | 229,902 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (64,096 | ) | | (64,096 | ) | | — |
| | (64,096 | ) |
| Distribution of noncontrolling interest earnings and other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (9,883 | ) | | (9,883 | ) |
| Purchase of noncontrolling interest shares | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,832 |
| | 5,832 |
|
| Balance, January 2, 2016 | 48,125 |
| | $ | 481 |
| | $ | 187,456 |
| | $ | — |
| | $ | 813,957 |
| | $ | (80,506 | ) | | $ | 921,388 |
| | $ | 11,155 |
| | $ | 932,543 |
|
| Common stock issued upon exercise of stock options and stock appreciation rights | 310 |
| | 3 |
| | 93 |
| | — |
| | — |
| | — |
| | 96 |
| | — |
| | 96 |
|
| Tax expense derived from stock-based compensation | — |
| | — |
| | (2,995 | ) | | — |
| | — |
| | — |
| | (2,995 | ) | | — |
| | (2,995 | ) |
| Acquisition of common stock | — |
| | — |
| | 247 |
| | (7,484 | ) | | — |
| | — |
| | (7,237 | ) | | — |
| | (7,237 | ) |
| Retirement of common stock | (166 | ) | | (1 | ) | | (2,483 | ) | | 7,484 |
| | (5,000 | ) | | — |
| | — |
| | — |
| | — |
|
| Stock-based compensation | — |
| | — |
| | 31,034 |
| | — |
| | — |
| | — |
| | 31,034 |
| | — |
| | 31,034 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 78,868 |
| | — |
| | 78,868 |
| | 6,735 |
| | 85,603 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (14,918 | ) | | (14,918 | ) | | — |
| | (14,918 | ) |
| Distribution of noncontrolling interest earnings and other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8,688 | ) | | (8,688 | ) |
| Balance, December 31, 2016 | 48,269 |
| | $ | 483 |
| | $ | 213,352 |
| | $ | — |
| | $ | 887,825 |
| | $ | (95,424 | ) | | $ | 1,006,236 |
| | $ | 9,202 |
| | $ | 1,015,438 |
|
| Common stock issued upon exercise of stock options, stock appreciation rights and restricted stock units | 467 |
| | 4 |
| | (4 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Acquisition of common stock | — |
| | — |
| | 126 |
| | (1,344 | ) | | — |
| | — |
| | (1,218 | ) | | — |
| | (1,218 | ) |
| Retirement of common stock | (93 | ) | | (1 | ) | | (1,343 | ) | | 1,344 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Stock-based compensation | — |
| | — |
| | 31,604 |
| | — |
| | — |
| | — |
| | 31,604 |
| | — |
| | 31,604 |
|
| Net income (loss) | — |
| | — |
| | — |
| | — |
| | (478,172 | ) | | — |
| | (478,172 | ) | | 4,613 |
| | (473,559 | ) |
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | 19,155 |
| | 19,155 |
| | — |
| | 19,155 |
|
| Distribution of noncontrolling interest earnings and other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,022 | ) | | (4,022 | ) |
| Purchase of noncontrolling interest shares | — |
| | — |
| | (1,472 | ) | | — |
| | — |
| | — |
| | (1,472 | ) | | (4,979 | ) | | (6,451 | ) |
| Balance, December 30, 2017 | 48,643 |
| | $ | 486 |
| | $ | 242,263 |
| | $ | — |
| | $ | 409,653 |
| | $ | (76,269 | ) | | $ | 576,133 |
| | $ | 4,814 |
| | $ | 580,947 |
|
See notes to consolidated financial statements.
FOSSIL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| Fiscal Year | 2017 | | 2016 | | 2015 |
| Operating Activities: | |
| | |
| | |
|
| Net income (loss) | $ | (473,559 | ) | | $ | 85,603 |
| | $ | 229,902 |
|
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| | |
| | |
|
| Depreciation, amortization and accretion | 80,973 |
| | 94,592 |
| | 87,662 |
|
| Stock-based compensation | 30,400 |
| | 31,034 |
| | 18,627 |
|
| Decrease in allowance for returns-net of inventory in transit | (336 | ) | | (3,600 | ) | | (1,282 | ) |
| Loss (gain) on disposal of assets | 2,510 |
| | (9,851 | ) | | 1,913 |
|
| Fixed asset and other long-lived asset impairment losses | 3,213 |
| | 2,828 |
| | 7,688 |
|
| Goodwill and tradename impairment losses | 407,128 |
| | — |
| | 9,116 |
|
| Non-cash restructuring charges | 10,684 |
| | 15,745 |
| | 3,962 |
|
| Equity method investment losses | 460 |
| | 1,321 |
| | — |
|
| Increase (decrease) in allowance for doubtful accounts | 7,140 |
| | (2,819 | ) | | 2,384 |
|
| Excess tax benefits from stock-based compensation | — |
| | (5 | ) | | (177 | ) |
| Loss on extinguishment of debt | 1,029 |
| | — |
| | — |
|
| Deferred income taxes and other | (43,491 | ) | | (18,561 | ) | | 929 |
|
| Gain on business divestiture | (1,750 | ) | | (3,500 | ) | | — |
|
| Changes in operating assets and liabilities, net of effect of acquisitions: | |
| | |
| | |
|
| Accounts receivable | 14,367 |
| | (12,900 | ) | | 42,912 |
|
| Inventories | 6,829 |
| | 64,827 |
| | (43,082 | ) |
| Prepaid expenses and other current assets | 13,509 |
| | 26,098 |
| | (36,902 | ) |
| Accounts payable | 34,864 |
| | (43,020 | ) | | 41,843 |
|
| Accrued expenses | 52,761 |
| | (20,116 | ) | | 12,545 |
|
| Income taxes payable | 32,811 |
| | 2,451 |
| | (17,269 | ) |
| Net cash provided by operating activities | 179,542 |
| | 210,127 |
| | 360,771 |
|
| Investing Activities: | |
| | |
| | |
|
| Additions to property, plant and equipment | (25,520 | ) | | (65,674 | ) | | (79,767 | ) |
| (Increase) decrease in intangible and other assets | (1,499 | ) | | 771 |
| | (3,730 | ) |
| Skagen Designs arbitration settlement | — |
| | — |
| | 5,968 |
|
| Proceeds from the sale of property, plant, equipment and other | 548 |
| | 44,908 |
| | 179 |
|
| Misfit escrow receipts | — |
| | 3,341 |
| | — |
|
| Business acquisitions-net of cash acquired | — |
| | — |
| | (220,189 | ) |
| Net investment hedge settlement | — |
| | 752 |
| | 3,709 |
|
| Business divestiture | 1,750 |
| | 3,500 |
| | — |
|
| Net cash used in investing activities | (24,721 | ) | | (12,402 | ) | | (293,830 | ) |
| Financing Activities: | |
| | |
| | |
|
| Acquisition of common stock | (1,218 | ) | | (7,237 | ) | | (231,282 | ) |
| Distribution of noncontrolling interest earnings and other | (4,022 | ) | | (8,688 | ) | | (9,883 | ) |
| Debt borrowings | 2,128,181 |
| | 1,035,838 |
| | 2,548,650 |
|
| Debt payments | (2,318,246 | ) | | (1,207,205 | ) | | (2,368,408 | ) |
| Payment for shares of Fossil, S.L. | — |
| | (8,657 | ) | | — |
|
| Other financing activities | (6,405 | ) | | (2,545 | ) | | (3,104 | ) |
| Net cash used in financing activities | (201,710 | ) | | (198,494 | ) | | (64,027 | ) |
| Effect of exchange rate changes on cash and cash equivalents | (19,197 | ) | | 8,824 |
| | 10,100 |
|
| Net (decrease) increase in cash and cash equivalents | (66,086 | ) | | 8,055 |
| | 13,014 |
|
| Cash and cash equivalents: | |
| | |
| | |
|
| Beginning of year | 297,330 |
| | 289,275 |
| | 276,261 |
|
| End of year | $ | 231,244 |
| | $ | 297,330 |
| | $ | 289,275 |
|
| | | | | | | | | | | | | | | | | |
| Fiscal Year | 2023 | | 2022 | | 2021 |
| Operating Activities: | | | | | |
| Net income (loss) | $ | (156,659) | | | $ | (43,526) | | | $ | 26,624 | |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | |
| Depreciation, amortization and accretion | 19,099 | | | 23,333 | | | 29,606 | |
| Non-cash lease expense | 74,813 | | | 79,274 | | | 90,250 | |
| Stock-based compensation | 5,686 | | | 8,060 | | | 9,497 | |
| Decrease in allowance for returns and markdowns | (2,604) | | | (6,729) | | | (6,420) | |
| Gain on disposal of assets | (6,398) | | | (460) | | | (5,218) | |
| | | | | |
| Property, plant and equipment and other long-lived asset impairment losses | 2,159 | | | 2,642 | | | 9,223 | |
| | | | | |
| Non-cash restructuring charges | 7,563 | | | 779 | | | 655 | |
| Bad debt expense | 3,535 | | | 6,305 | | | 3,070 | |
| Other non cash items | (7,080) | | | 12,456 | | | 17,861 | |
| | | | | |
| Loss on extinguishment of debt | — | | | 1,060 | | | 13,005 | |
| | | | | |
| Contingent consideration remeasurement | (348) | | | 2,363 | | | 347 | |
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable | 19,945 | | | 41,621 | | | (35,453) | |
| Inventories | 125,766 | | | (46,031) | | | (62,261) | |
| Prepaid expenses and other current assets | 18,758 | | | (3,954) | | | 20,920 | |
| Accounts payable | (42,889) | | | (35,422) | | | 53,934 | |
| Accrued expenses | (24,473) | | | (55,055) | | | (12,927) | |
| Income taxes | (9,858) | | | (4,496) | | | 3,085 | |
| Operating lease liabilities | (86,474) | | | (93,076) | | | (105,769) | |
| Net cash (used in) provided by operating activities | (59,459) | | | (110,856) | | | 50,029 | |
| Investing Activities: | | | | | |
| Additions to property, plant and equipment and other | (8,528) | | | (13,262) | | | (10,293) | |
| (Increase) decrease in intangible and other assets | (1,365) | | | 1,719 | | | 6,031 | |
| Proceeds from the sale of property, plant and equipment | 23 | | | 2,990 | | | 11,369 | |
| | | | | |
| | | | | |
| | | | | |
| Net cash (used in) provided by investing activities | (9,870) | | | (8,553) | | | 7,107 | |
| Financing Activities: | | | | | |
| Acquisition of common stock | (530) | | | (12,447) | | | (2,420) | |
| Distribution of noncontrolling interest earnings | — | | | (5,686) | | | — | |
| | | | | |
| Debt borrowings | 172,827 | | | 386,067 | | | 254,717 | |
| Debt payments | (183,607) | | | (314,200) | | | (354,389) | |
| | | | | |
| | | | | |
| Payment for shares of Fossil Accessories South Africa Pty. Ltd. | (2,316) | | | — | | | — | |
| Debt issuance costs and other | — | | | (744) | | | (10,479) | |
| Net cash (used in) provided by financing activities | (13,626) | | | 52,990 | | | (112,571) | |
| Effect of exchange rate changes on cash and cash equivalents, and restricted cash | 463 | | | 5,922 | | | (4,239) | |
| Net decrease in cash and cash equivalents, and restricted cash | (82,492) | | | (60,497) | | | (59,674) | |
| Cash and cash equivalents, and restricted cash: | | | | | |
| Beginning of year | 204,075 | | | 264,572 | | | 324,246 | |
| End of year | $ | 121,583 | | | $ | 204,075 | | | $ | 264,572 | |
See notes to the consolidated financial statements.
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Consolidated Financial Statements include the accounts of Fossil Group, Inc., a Delaware corporation, and its subsidiaries (the "Company"). The Company is a leader in the design, development, marketing and distribution of contemporary, high quality fashion accessories on a global basis. The Company's products are sold primarily through department stores, specialty retailers, Company-owned retail stores and commercial websites worldwide. The Company reports on a fiscal year reflecting the retail-based calendar (containing 4-4-5 week calendar quarters). References to fiscal years 2017, 20162023, 2022 and 20152021 are for the fiscal years ended December 30, 2017,2023, December 31, 20162022 and January 2, 2016,1, 2022, respectively. All intercompany balances and transactions are eliminated in consolidation.
Use of Estimates is required in the preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Management makes estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to product returns, bad debt, inventories, long-lived assets, goodwill andasset impairment, impairment of trade names, income taxes, warranty costs hedge accounting and stock-based compensation.litigation liabilities. Management bases its estimates and judgments on historical experiencethe information available at the time and on various other factors that it believes areassumptions believed to be reasonable under the circumstances. Management estimates form the basis for making judgments about the carrying value of the assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions.estimates.
Concentration of Risk involves financial instruments that potentially expose the Company to concentration of credit risk and consist primarily of cash investments and accounts receivable. The Company places its cash investments with high-credit quality financial institutions and currently invests primarily in corporate debt securities and money market funds with major banks and financial institutions. Accounts receivable are generally diversified due to the number of entities comprising the Company's customer base and their dispersion across many geographic regions. The Company believes no significant concentration of credit risk exists with respect to these cash investments and accounts receivable.
A significant portion of sales of the Company's products are supplied by manufacturers located outside of the U.S., primarily in Asia. While the Company is not dependent on any single manufacturer outside the U.S., the Company could be adversely affected by political, economic or economicother disruptions affecting the business or operations of third-party manufacturers located outside of the U.S. In fiscal year 2017, two of the Company's majority-owned assembly factories accounted for approximately 55% of the Company's non-Swiss watch assembly, and one of the Company's majority-owned assembly factories accounted for approximately 63% of the Company's jewelry production.
The Company has entered into multi-year, worldwide exclusive license agreements for the manufacture, distribution and sale of products bearing the brand names of certain globally recognized fashion companies. Sales of the Company's licensed products amounted to 47.0%44.7%, 46.5% and 50.5% of the consolidated net sales for fiscal year 2017,years 2023, 2022 and 2021, respectively, of which MICHAEL KORS® product sales accounted for 22.6%17.6%, 19.2% and 20.9% of the consolidated net sales for fiscal year 2017.years 2023, 2022 and 2021, respectively, and EMPORIO ARMANI® product sales accounted for 14.0%, 14.6% and 18.4% of the consolidated net sales for fiscal years 2023, 2022 and 2021, respectively.
Cash Equivalents are considered all highly liquid investments with original maturities of three months or less.
Restricted Cash was comprised primarily of pledged collateral to secure bank guarantees for the purpose of obtaining retail space. The following table provides a reconciliation of the cash, cash equivalents, and restricted cash balances as of December 30, 2023, December 31, 2022 and January 1, 2022 that are presented in the consolidated statement of cash flows (in thousands):
| | | | | | | | | | | | | | | | | |
| December 30, 2023 | | December 31, 2022 | | January 1, 2022 |
| Cash and cash equivalents | $ | 117,197 | | | $ | 198,726 | | | $ | 250,844 | |
| Restricted cash included in prepaid expenses and other current assets | 77 | | | 106 | | | 117 | |
| Restricted cash included in intangible and other assets-net | 4,309 | | | 5,243 | | | 13,611 | |
| Cash, cash equivalents and restricted cash | $ | 121,583 | | | $ | 204,075 | | | $ | 264,572 | |
Accounts Receivable at the end of fiscal years 20172023 and 20162022 are stated net of allowances of approximately $75.2 million and $66.9 million for estimated customer returns, respectively, and net of doubtful accounts of approximately $12.9$12.6 million and $12.8$14.6 million, respectively. The Company's policy is to maintain allowances for bankruptcies until the bankruptcies are actually settled. The total amount charged to expenses during fiscal year 2017 relating to the Company's doubtful accounts receivable was $7.1 million.
Inventories are stated at the lower of cost and net realizable value, including any applicable duty and freight charges. Inventory held at consignment locations is included in the Company's finished goods inventory, and at the end of fiscal years 20172023 and 2016,2022, was $54.5$19.8 million and $51.1$25.3 million, respectively.
InvestmentsLease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using the Company's incremental borrowing rate, adjusted for the lease term and lease country, unless the implicit rate is readily determinable. Lease assets also include any upfront lease payments made and are reduced by lease incentives. Some lease terms include options to extend or terminate the lease and they are included in whichthe measurement of the lease assets and lease liabilities if the Company has significant influence overis reasonably certain that those options will be exercised. Variable lease payments are expensed as incurred and include certain index-based changes in rent and certain non-lease components such as maintenance and other services provided by the investeelessor to the extent the charges are accounted for utilizing the equity method.variable. The Company hadevaluates contractual arrangements at inception to determine if individual agreements are a lease or contain an equity method investmentidentifiable lease component as defined by Accounting Standards Codification ("ASC") 842, Leases ("ASC 842"). When evaluating contracts to determine appropriate classification and recognition under ASC 842, judgment may be necessary to determine, among other criteria, if an embedded leasing arrangement exists, the length of $1.8the term, classification as either an operating or financing lease and whether renewal or termination options are reasonably certain to be exercised. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease agreements with lease and non-lease components are combined as a single lease component for all classes of underlying assets. The depreciable life of lease assets and leasehold improvements is limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Lease assets are evaluated for impairment whenever events or conditions indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows related to the asset. Lease impairment losses of $1.7 million, $2.1 million and $1.3$7.5 million at the end ofwere recorded in long-lived asset impairments in fiscal years 20172023, 2022 and 2016, respectively,2021, respectively. No lease impairment losses were recorded in other long-term liabilities due to the Company's practicerestructuring charges in fiscal year 2023 and 2022, and lease impairment losses of continuing to loan funds to the investee to cover the investee's accumulated losses. If the Company does not have significant influence over the investee, the$0.7 million were recorded in restructuring charges in fiscal year 2021.
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
cost method is utilized. The Company's cost method investments at the end of fiscal years 2017 and 2016 were $0.5 million and $2.0 million, respectively.
Property, Plant and Equipmentand Otheris stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets of 30 years for buildings, generally five years for machinery and equipment and furniture and fixtures and two to seven years for computer equipment and software. Leasehold improvements are amortized over the shorter of the lease term or the asset's estimated useful life.
Property, plant and equipment and other long-lived assets areis evaluated for impairment whenever events or conditions indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows related to the asset. Property, plant and equipment and other long-lived assetsimpairment losses of underperforming Company-owned retail stores of approximately $8.3$0.4 million, $13.5$0.2 million and $3.4$1.7 million were recorded in long-lived asset impairments. No impairment losses were recorded in restructuring charges in fiscal year 2023, and impairment losses of $0.1 million and $0.2 million were recorded in restructuring charges in fiscal years 2017, 20162022 and 2015, respectively, and losses of approximately $1.6 million, $2.8 million and $7.7 million were recorded in selling, general, and administrative ("SG&A") in fiscal years 2017, 2016 and 2015,2021, respectively. Additionally, in fiscal years 2017 and 2016, the Company recorded non-impairment losses related to the disposal of property, plant and equipment of $0.4 million and $1.5 million, respectively, included in restructuring charges in the Company’s consolidated statements of income (loss) and comprehensive income (loss).
Property Held for Sale is recorded at the lower of cost or estimated fair value, less estimated costs to sell once the property meets certain criteria. Depreciation on property held for sale is discontinued. At the end of fiscal year 2017, the Company had property held for sale of $12.3 million recorded in prepaid expenses and other current assets primarily related to an office building in Germany that the Company plans to sell and leaseback in fiscal year 2018. A loss of $0.7 million was recorded in restructuring charges in the Company's consolidated statements of income (loss) and comprehensive income (loss) for the amount the carrying value of the office exceeded the fair value.
Goodwill and Other Intangible Assets include the acquisition cost in excess of net assets acquired (goodwill), trademarks, trade names, developed technology, customer lists and patents. Trademarks, trade names with finite lives, developed technology, customer lists and patents are amortized using the straight-line method over their estimated useful lives, which are generally three to 20 years. Goodwill and other indefinite-lived intangible assets, such as indefinite-livedIndefinite-lived trade names are evaluated for impairment annually as of the end of the fiscal year. Additionally, if events or conditions were to indicate the carrying value of a reporting unit or an indefinite-lived intangible asset may not be recoverable, the Company would evaluate the asset for impairment at that time. Impairment testing compares the carrying amount of the reporting unit or otheran intangible assetsasset with its fair value. When the carrying amount of the reporting unit or otheran intangible assetsasset exceeds its fair value, an impairment charge is recorded.
The Company has three reporting units for which it evaluated goodwill for impairment. These reporting units are (i) Americas, (ii) Europe and (iii) Asia. At the end of fiscal year 2016, the Company's market capitalization exceeded the carrying amount of its net assets by 23%. At the end of the first quarter of fiscal 2017, the Company experienced a decline in market capitalization and, as a result of the decline, the Company's market capitalization was 14% below the carrying amount of its net assets as of April 1, 2017. During the second quarter of fiscal 2017, the Company's market capitalization continued to decline, at which point the Company determined the decrease in stock price to be sustained and thus a strong indicator of impairment. Due to a change in key assumptions used in interim testing, a decline in sales projections, the Company believed that impairment of goodwill and trade names was more likely than not as of June 15, 2017, and therefore performed interim tests for each reporting unit and trade name. Using a combination of discounted cash flow and guideline public company methodologies, the Company compared the fair value of each of its three reporting units with their carrying value and concluded that goodwill was fully impaired. Accordingly, in the second quarter of fiscal 2017, the Company recognized pre-tax impairment charges in operations of $202.3 million, $114.3 million and $42.9 million in the Americas, Europe and Asia segments, respectively.
During the second quarter of fiscal 2017, the SKAGENCompany's MICHELE® trade name with a carrying amount of $55.6 million was written down to its implied fair value of $27.3 million, resulting in a pre-tax impairment charge of $28.3 million; the MISFIT® trade name with a carrying amount of $11.8 million was deemed not recoverable, resulting in a pre-tax impairment charge of $11.8 million and the MICHELE® trade name with a carrying amount of $18.5 million was written down to its implied fair value of $10.9 million, resulting in a pre-tax impairment charge of $7.6 million. The fair values of the Company's indefinite-lived SKAGEN and MICHELE trade names were estimated using the relief from royalty method. The fair value of the Company's definite-lived MISFIT trade name was estimated using a discounted cash flow methodology. A reduction in expected future cash flows negatively affected the valuation compared to previous valuation assumptions. Due to the inherent uncertainties
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
involved in making the estimates and assumptions used in the fair value analysis, actual results may differ, which could alter the fair value of the trade names and possibly result in impairment charges in future periods. No impairment charges were recorded into the MICHELE trade name during fiscal year 2016. In fiscal year 2015,years 2023, 2022 or 2021. The SKAGEN® trade name is being fully amortized on a straight-line basis over its estimated remaining useful life of two years as of December 30, 2023. No impairment charges of $9.1 million were recorded related to the SKAGEN trade name.name during fiscal years 2023, 2022 or 2021.
Accrued Expenses Otherincludes liabilities relating to employee compensation, operating lease liabilities, royalties, warranties, duty, deferred compensation, gift cards, foreign exchange forward contracts ("forward contracts"), deferred rent, and other accrued liabilities which are current in nature.
Other Long-Term Liabilities includes obligations relating to asset retirements, deferred rent, forward contracts and defined benefits relating to certain international employees and other liabilities that are not current in nature.
Cumulative Translation Adjustment is included as a component of accumulated other comprehensive income (loss) and reflects the adjustments resulting from translating the financial statements of foreign subsidiaries into U.S. dollars. The functional currency of the Company's foreign subsidiaries is the currency of the primary economic environment in which the entity operates, which is generally the local currency of the country. Accordingly, assets and liabilities of the foreign subsidiaries are translated to U.S. dollars at fiscal year-end exchange rates. Income and expense items are translated at average monthly exchange rates. Cumulative translation adjustments remain in accumulated other comprehensive income (loss) and are reclassified into earnings in the event the related foreign subsidiary is sold or liquidated.
Foreign Transaction Gains and Losses are those changes in exchange rates of currencies not considered the functional currency that affectaffects cash flows and the related receivables or payables. The Company incurred a net foreign currency transaction gains, including gains and losses associated with the settlement of forward contracts,gain of approximately $7.8$3.0 million $8.7for fiscal year 2023 and net foreign currency transaction losses of $0.2 million and $32.6$4.0 million for fiscal years 2017, 20162022 and 2015,2021, respectively. These net gains and losses have been included in other income (expense)—net in the Company's consolidated statements of income (loss) and comprehensive income (loss).
Hedging Instruments The Company is exposed to certain market risks relating to foreign exchange rates and interest rates. The Company actively monitors and attempts to mitigate, but does not eliminate, these exposures using derivative instruments, including forward contracts and interest rate swaps. The Company’s foreign subsidiaries periodically enter into forward contracts to hedge the future payment of intercompany inventory transactions denominated in U.S. dollars. Additionally, during the first quarter of fiscal year 2016, the Company entered into forward contracts to manage fluctuations in Japanese yen exchange rates that will be used to settle future third-party inventory component purchases by a U.S. dollar functional currency subsidiary. If the Company was to settle its euro, Canadian dollar, British pound, Japanese yen, Mexican peso, Australian dollar and U.S. dollar forward contracts as of December 30, 2017, the result would have been a net loss of approximately $11.0 million, net of taxes. This unrealized loss is recognized in other comprehensive income (loss), net of taxes on the Company's consolidated statements of income (loss) and comprehensive income (loss). Additionally, to the extent that any of these contracts are not considered to be effective in offsetting the change in the value of the cash flows being hedged, any changes in fair value relating to the ineffective portion of these contracts would be recognized in other income (expense)-net on the Company's consolidated statements of income (loss) and comprehensive income (loss). Also, the Company entered into an interest rate swap agreement in order to manage its variable rate debt obligations. The underlying debt related to the interest rate swap was extinguished during the fourth quarter of fiscal year 2017, at which point the interest rate swap was considered a non-designated hedge. Prior to the debt extinguishment, changes in the fair value of the interest rate swap were recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity, and recognized in interest expense in the period in which the payment was settled. When the interest rate swap was converted to a non-designated hedge, the amount in accumulated other comprehensive income (loss) was reclassified into other income (expense) on the Company's consolidated statements of income (loss) and comprehensive income (loss). Any future changes in fair value of the interest rate swap will be recognized in other income (expense) when the changes occur. To reduce exposure to changes in currency exchange rates adversely affecting the Company’s investment in foreign currency-denominated subsidiaries, the Company periodically enters into forward contracts designated as net investment hedges. Both realized and unrealized gains and losses from net investment hedges are recognized in the cumulative translation adjustment component of other comprehensive income (loss), and will be reclassified into earnings in the event the Company's underlying investments are liquidated or disposed. The Company does not enter into derivative financial instruments for trading or speculative purposes. See Note 8—Derivatives and Risk Management for additional disclosures about the Company's use of derivatives.
Litigation Liabilities are estimated amounts for claims that are probable and can be reasonably estimated and are recorded as liabilities in the Company's consolidated balance sheets. The likelihood of a material change in these estimated liabilities would be dependent on new claims that may arise, changes in the circumstances used to estimate amounts for prior period claims and favorable or unfavorable final settlements of prior period claims. As additional information becomes
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
available, the Company assesses the potential liability related to new claims and existing claims and revises estimates as appropriate. As new claims arise or circumstances change relative to prior claim assessments, revisions in estimates of the potential liability could materially impact the Company's consolidated results of operations and financial position.
Stock-Based Compensation is recognized as expense related to the fair value of employee stock-based awards. The Company utilizes the Black-Scholes model to determine the fair value of stock options and stock appreciation rights on the date of grant. The model requires the Company to make assumptions concerning (i) the length of time employees will retain their vested stock options and stock appreciation rights before exercising them ("expected term"), (ii) the volatility of the Company's common stock price over the expected term and (iii) the number of stock options and stock appreciation rights that will be forfeited. Changes in these assumptions can materially affect the estimate of fair value of stock-based compensation and, consequently, the related expense amounts recognized on the Company's consolidated statements of income (loss) and comprehensive income (loss).
Revenues from sales of the Company's products including those that are subject to inventory consignment agreements are recognized when title and riskcontrol of loss transfers, delivery has occurred, the priceproduct is transferred to the buyer is determinablecustomer and collectability is reasonably assured.in an amount that reflects the consideration the Company expects to be entitled in exchange for the product. The Company accepts limited returns and may request that a customer return a product if the customer has an excess of any style that the Company has identified as being a poor performer for that customer or geographic location.from customers. The Company continually monitors returns and maintains a provision for estimated returns based upon historical experience and any specific issues identified. Product returns are accounted for as reductions to revenue and cost of sales accounts receivable and an increase in inventoryincreases to customer liabilities and other current assets to the extent the returned product is resalable. WhileThe Company recorded an estimated returns have historically been within management's expectationsprovision of $33.4 million and $35.8 million in accrued expenses as of the provisions established, future return rates may differ from those experienced in the past. In the event that the Company's products are performing poorly in the retail market and/or it experiences product damages or defects at a rate significantly higher than the historical rate, the resulting returns could have an adverse impact on the operating results for the period or periods in which such returns occur.end of fiscal years 2023 and 2022, respectively. Taxes imposed by governmental authorities on the Company's revenue-producing activities with customers, such as sales taxes and value added taxes, are excluded from net sales. See Note 2—Revenue, for more information regarding the Company's revenue recognition policy.
Cost of Sales includes raw material costs, assembly labor, assembly overhead including depreciation expense, assembly warehousing costs, and shipping and handling costs related to the movement of finished goods from assembly locations to sales distribution centers and from sales distribution centers to customer locations.locations and restructuring charges. Additionally, cost of sales includes customs duties, product packaging cost, royalty cost associated with sales of licensed products, the cost of molding and tooling and inventory shrinkage and damages.
Operating Expenses include SG&A, goodwillselling, general and trade nameadministrative ("SG&A"), long-lived asset impairments and restructuring charges. SG&A expenses include selling and distribution expenses primarily consisting of sales and distribution labor costs, sales distribution center and warehouse facility costs, depreciation expense related to sales distribution and warehouse facilities, the four-wall operating costs of the Company's retail stores, point-of-sale expenses, advertising expenses and art, design and product development labor costs. SG&A also includes general and administrative expenses primarily consisting of administrative support labor and "back office" or support costs such as treasury, legal, information services, accounting, internal audit, human resources, executive management costs and costs associated with stock-based compensation. Restructuring charges include costs to reorganize, refinereduce and optimize the Company’s infrastructure and store closures. See Note 19—20—Restructuring for additional information on the Company’s restructuring plan. The Company recorded $3.6 million, $4.0 million and $16.1 million, during fiscal years 2023, 2022 and 2021, respectively, related to government assistance and subsidies. These amounts mostly relate to payroll expense and were recorded as a reduction of selling, general and administrative expenses.
Advertising Costs for in-storedigital marketing and mediain-store advertising as well as co-op advertising, catalog costs, product displays, show/exhibit costs, advertising royalties related to the sales of licensed brands, internet costs associated with affiliation fees printing,and sample costs and promotional allowances are expensed as incurred within SG&A. Advertising costs were approximately $207.1$157.3 million, $238.4$154.6 million and $241.3$168.4 million for fiscal years 2017, 20162023, 2022 and 2015,2021, respectively.
Warranty Costs are included in SG&A. The Company records an estimate for future warranty costs based on historical repair costs and adjusts the liability as required. Warranty costs have historically been within the Company's expectations and the provisions established. If such costs were to substantially exceed estimates, this could have an adverse effect on the Company's operating results. See Note 4—Warranty Liabilities, for more information regarding warranties.
Research and Development Costs are incurred primarily through the Company's in-house engineering team and also through some outsideas well as third party consulting and labor and consist primarily of personnel-related expenses, tooling and prototype materials and overhead costs. The Company’s research and development ("R&D") expenses are related to designing and developing new products
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and features and improving existing products. The Company's research and developmentR&D expenses are recorded in SG&A and consisted of $42.8were $19.4 million, $38.6$29.1 million and $5.2$27.2 million in fiscal years 2017, 20162023, 2022 and 2015,2021, respectively.
Noncontrolling Interest is recognized as equity in the Company's consolidated balance sheets, is reflected in net income attributable to noncontrolling interest in the consolidated statements of income (loss) and comprehensive income (loss) and is captured within the summary of changes in equity attributable to controlling and noncontrolling interests. Noncontrolling interests represent ownership interests in the Company's subsidiaries held by third parties.
Other Comprehensive Income (Loss) which is reported in the consolidated statements of income (loss) and comprehensive income (loss) and consolidated statements of stockholders' equity, consists of net income and other gains and losses affecting equity that are excluded from net income. The components of other comprehensive income (loss) primarily consist of foreign currency translation gains and losses and net realized and unrealized gains and losses on the following: (i) derivatives designated as cash flow hedges;hedges and (ii) the Company's defined benefit plans.
Earnings (Loss) Per Share ("EPS") is based on the weighted average number of common shares outstanding during each period. Diluted EPS adjusts basic EPS for the effects of dilutive common stock equivalents outstanding during each period using the treasury stock method.
The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS (in thousands except per share data):
| | | Fiscal Year | 2017 | | 2016 | | 2015 | Fiscal Year | 2023 | | 2022 | | 2021 |
| Numerator: | | | | | |
| Net income (loss) attributable to Fossil Group, Inc. | $ | (478,172 | ) | | $ | 78,868 |
| | $ | 220,637 |
|
| Net income (loss) attributable to Fossil Group, Inc. | |
| Net income (loss) attributable to Fossil Group, Inc. | |
| Denominator: | | | | | |
| Basic EPS computation: | | | | | |
| Basic EPS computation: | |
| Basic EPS computation: | |
| Basic weighted average common shares outstanding | |
| Basic weighted average common shares outstanding | |
| Basic weighted average common shares outstanding | 48,468 |
| | 48,136 |
| | 48,800 |
|
| Basic EPS | $ | (9.87 | ) | | $ | 1.64 |
| | $ | 4.52 |
|
| Diluted EPS computation: | | | | | |
| Basic weighted average common shares outstanding | 48,468 |
| | 48,136 |
| | 48,800 |
|
| Stock options, stock appreciation rights and restricted stock units | — |
| | 187 |
| | 124 |
|
| Basic weighted average common shares outstanding | |
| Basic weighted average common shares outstanding | |
| | Diluted weighted average common shares outstanding | |
| Diluted weighted average common shares outstanding | |
| Diluted weighted average common shares outstanding | 48,468 |
| | 48,323 |
| | 48,924 |
|
| Diluted EPS | $ | (9.87 | ) | | $ | 1.63 |
| | $ | 4.51 |
|
Approximately 4.62.1 million, weighted average shares issuable under stock-based awards were not included in the diluted EPS calculation in fiscal year 2017 because they were antidilutive, including approximately 1.2 million weighted performance-based shares.
Approximately 2.32.1 million and 0.60.3 million weighted average shares issuable under stock-based awards were not included in the diluted EPS calculation in fiscal years 20162023, 2022 and 2015,2021, respectively, because they were antidilutive. In fiscal year 2016,anti-dilutive, including approximately 0.3 million, 0.3 million and 13,000 weighted average performance-based shares were not included in the diluted EPS calculation as the performance targets were not met. Performance shares were not issued prior to fiscal year 2015.years 2023, 2022 and 2021, respectively.
Income Taxes are provided for under the asset and liability method for temporary differences in the recognition of assets and liabilities recognized for income tax and financial reporting purposes. Deferred tax assets are periodically assessed for the likelihood of whether they are more likely than not to be realized. In fiscal year 2017, tax expense of $56.5 million was accrued for valuation allowances against U.S. and foreign income tax deferred tax assets. Tax benefits associated with uncertain tax positions are recognized in the period in which one of the following conditions is satisfied: (i) the more likely than not recognition threshold is satisfied; (ii) the position is ultimately settled through negotiation or litigation; or (iii) the statute of limitations for the taxing authority to examine and challenge the position has expired. Tax benefits associated with an uncertain tax position are derecognized in the period in which the more likely than not recognition threshold is no longer satisfied.
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The new Global Intangible Low-Taxed Income (“GILTI”) provisions of the Tax Cuts and Jobs Act (the "Tax Act") requiring the inclusion of certain foreign earnings in U.S. taxable income will increase our effective tax ratefirst applied in future years. Due to the complexity of these new tax rules, we are continuing to evaluate these provisions of the Tax Act. We are not yet able to reasonably estimate the effect of the GILTI provision of the Tax Act and have not made any adjustments related to potentialfiscal year 2018. The GILTI tax in our financial statements. If applicable, GILTI tax would first apply to our fiscal year 2018 and will bewas accounted for as incurred under the period cost method.
Accounting for the income tax effects of the Tax Act requires significant judgments and estimates in the interpretation and calculations of the provisions of the Tax Act. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company has made reasonable estimates of the effects and recorded provisional amounts in its financial statements for fiscal year 2017 as permitted under Staff Accounting Bulletin No. 118, (“SAB 118”) Income Tax Accounting Implications of the Tax Cuts and Jobs Act, which provides guidance on accounting for the Tax Act’s impact. As the Company collects and prepares necessary data, and interprets any additional guidance issued by the U.S. Treasury Department or the Internal Revenue Service, the Company may make adjustments to the provisional amounts. In addition, the The Company's valuation allowance analysis is affected by various aspects of the
Tax Act, including the new limitation on the deductibility of interest expense and the impact of GILTI. Those adjustments may materially impact the provision for income taxes and the effective tax rate in the period in which the adjustments are made. The accounting for the tax effects of the enactment of the Tax Act will be completed in fiscal year 2018.
Recently Issued Accounting Standards
In August 2017,December 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-12, Derivatives and Hedging, 2023-09, Income Taxes (Topic 815)740): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"). ASU 2017-12 amendsIncome Tax Disclosures, to enhance the transparency and simplifies hedge accounting guidance in orderdecision usefulness of income tax disclosures through changes to enable entities to better portray the economics of their risk management activities. Therate reconciliation and income taxes paid information. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those periods. Early2024, with early adoption is permitted. The Company is currently evaluating the impact of the standardadopting this guidance on its consolidated financial statements and relatedstatement disclosures.
In May 2017,November 2023, the FASB issued ASU 2017-09, Compensation-Stock Compensation2023-07, Improvements to Reportable Segment Disclosures (Topic 718): Scope of Modification Accounting ("ASU 2017-09"). ASU 2017-09 clarifies when280), to account for a changeimprove reportable segment disclosures, primarily through enhanced disclosures about significant segment expenses. The amendments in this update will require public entities to disclose significant segment expenses that are regularly provided to the terms or conditionsCompany's chief operating decision maker and included within segment profit and loss, an amount and description of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the modification. Theits composition for other segment items, and expanded interim disclosures. This guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("ASU 2017-01"). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18"). ASU 2016-18 requires that a statement of cash flows explain the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for annual periods, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). ASU 2016-16 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2017. Early adoption is permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows(Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides guidance on how certain cash receipts and cash payments should be presented and classified in the statement of cash flows with the objective of reducing existing diversity in practice with respect to these items. ASU 2016-15 is effective for annual periods,2023 and interim periods within thosefiscal years beginning after December 15, 2017. Early2024, with early adoption permitted. The Company is permitted. This standard will not have a materialevaluating the impact of adopting this guidance on the Company’s consolidated results of operations orits financial position.statement disclosures.
In March 2016,October 2023, the FASB issued ASU 2016-04, Liabilities—Extinguishments of Liabilities (Subtopic 405-20)2023-06, Disclosure Improvements - Recognition of Breakage for Certain Prepaid Stored-Value Products (“ASU 2016-04”). ASU 2016-04 entitles a company to derecognize amounts related to expected breakageCodification Amendments in Response to the extent that it is probableSEC's Disclosure Update and Simplification Initiative ("ASU 2023-06"). The amendments in ASU 2023-06 modify the disclosure or presentation requirements of a significant reversalvariety of the recognized breakage amount will not subsequently occur. ASU 2016-04 is effective for annual periods, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842): Amendments totopics in the FASB Accounting Standards Codification® (“ASU 2016-02”Codification (the "Codification"), which supersedeswith the existing guidanceintention of clarifying or improving them and to align the requirements in the Codification with the regulations of the U.S. Securities and Exchange Commission (the "SEC”). The effective date for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases2023-06 varies and is determined for each individual disclosure based on their balance sheets, and modifies accounting, presentation and disclosure for both lessors and lessees. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the effective date of initial application, with an option to elect to use certain transition relief. ASU 2016-02 is effective for annual periods, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. Manythe SEC's removal of the Company’s leases are considered operating leases and arerelated disclosure. ASU 2023-06 will not capitalized under ASC 840. Under ASC 842 the majority of these leases will qualify for capitalization and will result in the recognition of lease assets and lease liabilities once the new standard is adopted. The Company is in the process of reviewing lease contracts to determine the impact of adopting ASU 2016-02, but expects the standard to have a materialan impact on the Company's financial position.position or results of operation.
The Organization for Economic Cooperation and Development ("OECD") and over 140 countries have agreed to enact a two-pillar solution to reform the international tax rules to address the challenges arising from the globalization and digitalization of the economy."The Pillar Two Global Anti-Base Erosion (GloBE) Rules" provide a coordinated system to ensure that multinational enterprises with revenues above 750 million euro pay a minimum effective tax rate of 15% tax on the income arising in each of the jurisdictions in which they operate. The technical aspects of the calculation are still being developed. Implementation of these rules is scheduled for 2024, at which point the Company can determine the impact on its income tax expense and effective tax rate.
Recently Adopted Accounting Standards
In May 2014,October 2021, the FASB issued ASU 2014-09, Revenue2021-08, Business Combinations – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principleguidance requires an acquirer to recognize and measure contract assets and liabilities acquired in a business combination as if they had originated the contracts, as opposed to at fair value on the acquisition date. The standard is effective for business combinations after January 1, 2023. The adoption of this standard did not have an impact on the guidance is that an entity should recognizeCompany's consolidated financial statements or related disclosures.
2. Revenue
The Company’s revenue to depict the transferconsists of promised goods or servicessales of finished products to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB later amended ASU-2014-09 with the following:
ASU 2015-14, through wholesale and retail channels. Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842)
ASU 2017-14, Income Statement—Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606)
The Company has performed a review of its revenue streams including reviewing contracts and comparing current accounting policies and practices to the new standard to identify differences from the application of ASU 2014-09. The Company's performance obligations underlying its core revenue streams (i.e., its retail and standard wholesale businesses) will remain substantially unchanged. Revenues for these businesses are generated through the sale of finished products, and will continueincluding those that are subject to be generallyinventory consignment agreements, is recognized atwhen control of the point in time when merchandiseproduct is transferred to the customer and in an amount that considersreflects the impacts of estimated allowances.consideration the Company expects to be entitled in exchange for the product. The Company does anticipate some timing changes, including accelerated recognitiongenerally considers control to transfer either when products ship or when products are delivered depending on the shipping terms in the agreement or purchase order. The Company considers control to have transferred upon shipment or delivery because the Company has a present right to payment, the customer has legal title to the product, the Company has transferred physical possession of markdowns which upon adoption will reducethe product, and the customer has the significant risks and rewards of the product. Taxes imposed by governmental authorities on the Company's retained earnings by less than $40 millionrevenue-producing activities with customers, such as sales taxes and value added taxes, are excluded from net sales.
Markdowns. The Company provides markdowns to record additional markdown allowancescertain customers in order to facilitate sales of select styles. Markdowns are estimated at the time of sale using historical data and are recorded as a reduction to accounts receivable.revenue. The Company will also have a change in classification of certain considerations paidCompany's policy is to customers from SG&A to a reduction of net sales, which the Company does not believe will be
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
material. Upon adoption of ASU 2014-09, the Company's returnrecord its markdown allowance will be reported as a current liability instead of as a reduction of accounts receivable.
Returns. The standard will also require additional disclosures aboutCompany accepts limited returns from customers. The Company continually monitors returns and maintains a provision for estimated returns based upon historical experience, any specific issues identified and current information. Product returns are accounted for as reductions to revenue, cost of sales and customer liabilities and an increase to other current assets to the natureextent the returned product is resalable.
Cooperative Advertising. The Company participates in cooperative advertising programs with its major retail customers, whereby the Company shares the cost of certain of their advertising and promotional expenses. Certain advertising expenses which are not considered separate performance obligations are recorded as sales discounts. All other cooperative advertising expenses are recorded in SG&A.
Multiple Performance Obligations. The Company enters into contracts with customers for its wearable technology that include multiple performance obligations. Each distinct performance obligation was determined by whether the customer could benefit from the good or service on its own or together with readily available resources. The Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company's process for determining standalone selling price considers multiple factors including the Company's internal pricing model and market trends that may vary depending upon the facts and circumstances related to each performance obligation. Revenue allocated to the hardware and software essential to the functionality of the product represents the majority of the arrangement consideration and is recognized at the time of product delivery, provided the other conditions for revenue recognition have been met. Revenue allocated to free software services provided through the Company's online dashboard and mobile apps as well as revenue allocated to the judgment involvedright to receive future unspecified software updates is deferred and recognized on a straight-line basis over the product's estimated usage period of two years.
Licensing Income. The Company previously had agreements with certain customers to provide smartwatch technology, design, support and procurement, which expired in thefiscal year 2023.
Disaggregation of Revenue. The Company's revenue disaggregated by major product category and timing of revenue recognition. The Company adopted ASU 2014-09 on the first day of fiscal 2018 and used the modified retrospective approach.
Recently Adopted Accounting Standards
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Under ASU 2017-04, goodwill impairment testing is done by comparing the fair value of the reporting unit to its carrying value. If the carrying amount exceeds the fair value, the Company would recognize an impairment charge for the amount that the reporting unit's carrying value exceeds the fair value, not to exceed the total amount of goodwill allocated to that reporting unit. The Company concluded that ASU 2017-04 is preferable to the current guidance due to efficiency, since ASU 2017-04 eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. The Company early adopted ASU 2017-04 effective June 15, 2017 in conjunction with the interim impairment test of goodwill for all reporting units and goodwill impairmentrecognition was recorded according to the new standard. The Company believes the adoption of ASU 2017-04 did not change the amount of impairment charges recorded in the second quarter of fiscal 2017. See “Note 2—Goodwill and Intangibles Impairment Charges” for additional information on our interim goodwill impairment test performed.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplified several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 was effective for the Company beginning fiscal year 2017 and did not have a material impact on the Company’s consolidated results of operations or financial position. As a result of adoption, the Company now recognizes excess tax benefits or deficiencies associated with share-based compensation activity as an income tax expense or benefit in the period the awards vest or are settled. In addition, the Company now presents excess tax benefits from share-based compensation activity with other income tax cash flows as an operating activity on the statement of cash flows, which differs from the Company’s historical classification of excess tax benefits as a financing activity. The Company has elected to apply this change in cash flow presentation on a prospective basis. The standard also permits the Company to make a policy election for how it accounts for forfeitures, and the Company has elected to continue estimating forfeitures.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 requires that inventory be measured at the lower of cost and net realizable value. The standard was effective for the Company beginning fiscal year 2017 and did not have a material impact on the Company’s consolidated results of operations or financial position.
2. Acquisitions, Divestiture and Goodwill
Fossil Spain Acquisition. On August 10, 2012, the Company’s joint venture company, Fossil, S.L. (“Fossil Spain”), entered into a Framework Agreement (the “Framework Agreement”) with several related and unrelated parties, including General De Relojeria, S.A. (“General De Relojeria”), the Company’s joint venture partner. Pursuant to the Framework Agreement, Fossil Spain was granted the right to acquire the outstanding 50% of its shares owned by General De Relojeria upon the expiration of the joint venture agreement on December 31, 2015. As of January 1, 2013, pursuant to the Framework Agreement, the Company assumed control over the board of directors and the day-to-day management of Fossil Spain, and began consolidating Fossil Spain, instead of treating it as an equity method investment. The Company completed the acquisition of these shares in the second quarter of fiscal year 2016, at which time Fossil Spain became a wholly-owned subsidiary of the Company. During the second quarter of fiscal year 2016, the fixed and previously remaining variable components of the purchase price were settled in the amounts of 4.3 million euros (approximately $4.8 million as of the settlement date) and 3.5 million euros (approximately $3.9 million as of the settlement date), respectively.
Misfit, Inc. Acquisition. On December 22, 2015, the Company acquired Misfit, Inc. ("Misfit"), an innovator and distributor of wearable technology and stylish connected devices. Misfit was a U.S.-based, privately held company. The primary purpose of the acquisition was to acquire a scalable technology platform that could be integrated across the Company's multi-brand portfolio, a native wearable technology brand and a pipeline of innovative products. Misfit’s position in the
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
wearable technology space combined with their software and hardware engineering teams enabled the Company to expand its addressable market with new distribution channels, products, brands and enterprise partnerships.
The purchase price was $215.4 million in cash, net of cash acquired and subject to working capital adjustments, and $1.7 million in replacement awards attributable to precombination service. At closing, $12.5 million of the cash payment was placed into an escrow fund for the Company for working capital adjustments and indemnification obligations of the seller incurred within 12 months from the closing date. During fiscal year 2016, the Company received $3.3 million from the escrow for claims incurred and as a working capital settlement and recorded a receivable for additional claims incurred. To fund the cash purchase price, the Company utilized cash on hand and approximately $60 million of availability under its revolving line of credit. The results of Misfit's operations have been included in the Company’s consolidated financial statements since December 22, 2015.
Assets acquired and liabilities assumed in the transaction were recorded at their acquisition date fair values, while transaction costs of $8.4 million associated with the acquisition were expensed as incurred during the fourth quarter of fiscal year 2015.
Divestiture. On December 30, 2016, the Company completed the sale of its machine vision operations, a part of Misfit. In connection with the transaction, the Company received a cash payment of $3.5 million and recognized a corresponding pre-tax gain in other income (expense) - net, in the consolidated statements of income (loss) and comprehensive income (loss). At the time of sale, another $3.5 million was placed into escrow. The Company received $1.8 million from the escrow during fiscal year 2017, and the remainder, less any amounts due by the Company under the sales agreement that may be paid by the Company from the escrow balance, will be released to the Company upon the two year anniversary of the closing date, if certain conditions are met.
Goodwill. The changes in the carrying amount of goodwill were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year 2023 |
| Americas | | Europe | | Asia | | Corporate | | Total |
| Product Type | | | | | | | | | |
| Watches: | | | | | | | | | |
| Traditional watches | $ | 456,745 | | | $ | 296,133 | | | $ | 260,244 | | | $ | 1,955 | | | $ | 1,015,077 | |
| Smartwatches | 37,660 | | | 26,251 | | | 17,038 | | | — | | | 80,949 | |
| Total watches | $ | 494,405 | | | $ | 322,384 | | | $ | 277,282 | | | $ | 1,955 | | | $ | 1,096,026 | |
| Leathers | 104,760 | | | 25,877 | | | 27,790 | | | — | | | 158,427 | |
| Jewelry | 33,367 | | | 78,946 | | | 19,097 | | | — | | | 131,410 | |
| Other | 8,247 | | | 10,151 | | | 4,029 | | | 4,094 | | | 26,521 | |
| Consolidated | $ | 640,779 | | | $ | 437,358 | | | $ | 328,198 | | | $ | 6,049 | | | $ | 1,412,384 | |
| | | | | | | | | |
| Timing of Revenue Recognition | | | | | | | | | |
| Revenue recognized at a point in time | $ | 640,191 | | | $ | 436,610 | | | $ | 327,747 | | | $ | 4,677 | | | $ | 1,409,225 | |
| Revenue recognized over time | 588 | | | 748 | | | 451 | | | 1,372 | | | 3,159 | |
| Consolidated | $ | 640,779 | | | $ | 437,358 | | | $ | 328,198 | | | $ | 6,049 | | | $ | 1,412,384 | |
|
| | | | | | | | | | | | | | | |
| | Americas | | Europe | | Asia | | Total |
| Balance at January 3, 2016 | $ | 283,598 |
| | $ | 63,981 |
| | $ | 11,815 |
| | $ | 359,394 |
|
Segment allocation and acquisition adjustments (1) | (81,166 | ) | | 48,046 |
| | 30,949 |
| | (2,171 | ) |
| Foreign currency changes | (245 | ) | | (1,736 | ) | | 21 |
| | (1,960 | ) |
| Balance at December 31, 2016 | $ | 202,187 |
| | $ | 110,291 |
| | $ | 42,785 |
| | $ | 355,263 |
|
| Foreign currency changes | 162 |
| | 3,983 |
| | 85 |
| | 4,230 |
|
Impairment charges (2) | (202,349 | ) | | (114,274 | ) | | (42,870 | ) | | (359,493 | ) |
| Balance at December 30, 2017 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year 2022 |
| Americas | | Europe | | Asia | | Corporate | | Total |
| Product Type | | | | | | | | | |
| Watches: | | | | | | | | | |
| Traditional watches | $ | 518,995 | | | $ | 354,799 | | | $ | 281,550 | | | $ | 3,545 | | | $ | 1,158,889 | |
| Smartwatches | 65,649 | | | 53,239 | | | 32,712 | | | 2 | | | 151,602 | |
| Total watches | $ | 584,644 | | | $ | 408,038 | | | $ | 314,262 | | | $ | 3,547 | | | $ | 1,310,491 | |
| Leathers | 115,300 | | | 29,414 | | | 33,828 | | | — | | | 178,542 | |
| Jewelry | 35,695 | | | 93,614 | | | 24,796 | | | — | | | 154,105 | |
| Other | 8,388 | | | 10,277 | | | 4,714 | | | 15,922 | | | 39,301 | |
| Consolidated | $ | 744,027 | | | $ | 541,343 | | | $ | 377,600 | | | $ | 19,469 | | | $ | 1,682,439 | |
| | | | | | | | | |
| Timing of Revenue Recognition | | | | | | | | | |
| Revenue recognized at a point in time | $ | 742,436 | | | $ | 540,465 | | | $ | 377,107 | | | $ | 7,350 | | | $ | 1,667,358 | |
| Revenue recognized over time | 1,591 | | | 878 | | | 493 | | | 12,119 | | | 15,081 | |
| Consolidated | $ | 744,027 | | | $ | 541,343 | | | $ | 377,600 | | | $ | 19,469 | | | $ | 1,682,439 | |
(1) All goodwill resulting from | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year 2021 |
| Americas | | Europe | | Asia | | Corporate | | Total |
| Product Type | | | | | | | | | |
| Watches: | | | | | | | | | |
| Traditional watches | $ | 531,392 | | | $ | 396,787 | | | $ | 359,266 | | | $ | 1,054 | | | $ | 1,288,499 | |
| Smartwatches | 110,726 | | | 74,888 | | | 38,261 | | | 24 | | | 223,899 | |
| Total watches | $ | 642,118 | | | $ | 471,675 | | | $ | 397,527 | | | $ | 1,078 | | | $ | 1,512,398 | |
| Leathers | 95,197 | | | 31,809 | | | 30,636 | | | — | | | 157,642 | |
| Jewelry | 41,350 | | | 95,995 | | | 21,500 | | | — | | | 158,845 | |
| Other | 7,258 | | | 10,738 | | | 5,494 | | | 17,661 | | | 41,151 | |
| Consolidated | $ | 785,923 | | | $ | 610,217 | | | $ | 455,157 | | | $ | 18,739 | | | $ | 1,870,036 | |
| | | | | | | | | |
| Timing of Revenue Recognition | | | | | | | | | |
| Revenue recognized at a point in time | $ | 784,287 | | | $ | 608,946 | | | $ | 454,558 | | | $ | 8,328 | | | $ | 1,856,119 | |
| Revenue recognized over time | 1,636 | | | 1,271 | | | 599 | | | 10,411 | | | 13,917 | |
| Consolidated | $ | 785,923 | | | $ | 610,217 | | | $ | 455,157 | | | $ | 18,739 | | | $ | 1,870,036 | |
Contract Balances. As of December 30, 2023, the Misfit acquisition was recorded inCompany had no material contract assets on the Americas segmentconsolidated balance sheets and no deferred contract costs. The Company had contract liabilities of (i) $0.0 million and $0.8 million as of January 2, 2016,December 30, 2023 and December 31, 2022, respectively, related to remaining performance obligations on a preliminary basis. This line item includes an allocationlicensing income, (ii) $1.7 million and $3.7 million as of December 30, 2023 and December 31, 2022, respectively, primarily related to remaining performance obligations on wearable technology products and (iii) $2.7 million and $3.1 million as of December 30, 2023 and December 31, 2022, respectively, related to gift cards issued.
Shipping and Handling Fees. The Company accounts for shipping and handling activities that occur after control of the goodwill across reporting segments and also purchase accounting adjustments made during fiscal year 2016.related good transfers as fulfillment activities instead of assessing such activities as performance obligations.
(2) See Note 1—Significant Accounting Policies for additional disclosures about impairment charges.
3. Inventories
Inventories consisted of the following (in thousands):
| | | | | | | | | | | |
| At Fiscal Year End | 2023 | | 2022 |
| Components and parts | $ | 18,931 | | | $ | 20,998 | |
| | | |
| Finished goods | 233,903 | | | 355,030 | |
| Inventories | $ | 252,834 | | | $ | 376,028 | |
|
| | | | | | | |
| At Fiscal Year End | 2017 | | 2016 |
| Components and parts | $ | 52,837 |
| | $ | 49,438 |
|
| Work-in-process | 15,983 |
| | 12,345 |
|
| Finished goods | 504,968 |
| | 480,704 |
|
| Inventories | $ | 573,788 |
| | $ | 542,487 |
|
4. Warranty Liabilities
The Company's warranty liabilities are primarily related to watch products and are included in accrued expenses—other in the consolidated balance sheets. The Company's watch products are covered by limited warranties of various lengths against defects in materials or workmanship. Historically, the Company's FOSSIL® and RELIC® watch products sold in the U.S. have been covered for warranty periods of 11 years and 12 years, respectively, and SKAGEN brand watches have been covered by a lifetime warranty. Beginning in 2017, these brands are covered by a two year warranty. Generally, all other products sold in the U.S. and internationally are covered by a comparable one to two year warranty. The Company's warranty liability is estimated using historical warranty repair expense. As changes occur in sales volumes and warranty costs, the warranty accrual is adjusted as necessary. Due to the nature of connectedsmartwatch products, their warranty costs are usually more than traditional products. A shift in product mix from traditionalsmartwatch to connectedtraditional products generally results in an increasea decrease in the Company's warranty liabilities. Warranty liability activity consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Fiscal Year | 2023 | | 2022 | | 2021 |
| Beginning balance | $ | 13,623 | | | $ | 19,159 | | | $ | 21,916 | |
| Settlements in cash or kind | (6,956) | | | (8,630) | | | (10,263) | |
Warranties issued and adjustments to preexisting warranties(1) | 3,455 | | | 3,094 | | | 7,506 | |
| | | | | |
| Ending balance | $ | 10,122 | | | $ | 13,623 | | | $ | 19,159 | |
(1)Changes in cost estimates related to preexisting warranties are aggregated with accruals for new standard warranties issued and foreign currency changes.
|
| | | | | | | | | | | |
| Fiscal Year | 2017 | | 2016 | | 2015 |
| Beginning balance | $ | 15,421 |
| | $ | 13,669 |
| | $ | 13,500 |
|
| Settlements in cash or kind | (15,177 | ) | | (9,616 | ) | | (9,310 | ) |
Warranties issued and adjustments to preexisting warranties(1) | 19,161 |
| | 11,368 |
| | 9,435 |
|
| Liabilities assumed in acquisition | — |
| | — |
| | 44 |
|
| Ending balance | $ | 19,405 |
| | $ | 15,421 |
| | $ | 13,669 |
|
| |
| Changes in cost estimates related to preexisting warranties are aggregated with accruals for new standard warranties issued and foreign currency changes. |
5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
| | | | | | | | | | | |
| At Fiscal Year End | 2023 | | 2022 |
| Prepaid royalties | $ | 17,143 | | | $ | 34,114 | |
| Prepaid taxes | 34,917 | | | 36,081 | |
| Current income tax receivable | 56,491 | | | 52,618 | |
| Other receivables | 824 | | | 1,488 | |
| Forward contracts | 339 | | | 2,783 | |
| Inventory returns | 9,757 | | | 10,833 | |
| | | |
| Property held for sale | 9,394 | | | — | |
| | | |
| Short term deposits | 568 | | | 1,786 | |
| Other | 23,284 | | | 24,710 | |
| Prepaid expenses and other current assets | $ | 152,717 | | | $ | 164,413 | |
|
| | | | | | | |
| At Fiscal Year End | 2017 | | 2016 |
| Prepaid royalties | $ | 19,353 |
| | $ | 26,298 |
|
| Prepaid taxes and tax receivables | 41,811 |
| | 43,102 |
|
| Other receivables | 12,659 |
| | 12,396 |
|
| Forward contracts | 2,291 |
| | 23,288 |
|
| Prepaid rent | 7,763 |
| | 9,875 |
|
| Property held for sale | 12,273 |
| | — |
|
| Short term deposits | 1,679 |
| | 2,363 |
|
| Other | 21,114 |
| | 14,631 |
|
| Prepaid expenses and other current assets | $ | 118,943 |
| | $ | 131,953 |
|
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Property, Plant and Equipment
Property, plant and equipment—net consisted of the following (in thousands):
| | | | | | | | | | | |
| At Fiscal Year End | 2023 | | 2022 |
| Land | $ | 1,004 | | | $ | 4,180 | |
| Buildings | 7,589 | | | 23,404 | |
| Machinery and equipment | 36,046 | | | 36,654 | |
| Furniture and fixtures | 68,467 | | | 73,721 | |
| Computer equipment and software | 193,604 | | | 198,206 | |
| Leasehold improvements | 131,502 | | | 153,161 | |
| Construction in progress | 3,720 | | | 5,728 | |
| 441,932 | | | 495,054 | |
| Less accumulated depreciation and amortization | 384,688 | | | 415,172 | |
| Property, plant and equipment-net | $ | 57,244 | | | $ | 79,882 | |
|
| | | | | | | |
| At Fiscal Year End | 2017 | | 2016 |
| Land | $ | 5,725 |
| | $ | 7,795 |
|
| Buildings | 30,887 |
| | 39,031 |
|
| Machinery and equipment | 41,221 |
| | 38,756 |
|
| Furniture and fixtures | 111,641 |
| | 112,145 |
|
| Computer equipment and software | 243,199 |
| | 241,160 |
|
| Leasehold improvements | 214,485 |
| | 233,566 |
|
| Construction in progress | 4,498 |
| | 16,159 |
|
| | 651,656 |
| | 688,612 |
|
| Less accumulated depreciation and amortization | 431,914 |
| | 414,761 |
|
| Property, plant and equipment-net | $ | 219,742 |
| | $ | 273,851 |
|
7. Intangible and Other Assets
Intangible and other assets-net consisted of the following (in thousands):
|
| | | | | | | | | | | | | | | | | |
| | | | 2017 | | 2016 |
| At Fiscal Year End | Useful Lives | | Gross Amount | | Accumulated Amortization | | Gross Amount | | Accumulated Amortization |
| Intangibles-subject to amortization: | | | | | | | | | |
| Trademarks | 10 yrs. | | $ | 4,310 |
| | $ | 3,676 |
| | $ | 4,310 |
| | $ | 3,443 |
|
| Customer lists | 5 - 10 yrs. | | 55,164 |
| | 34,023 |
| | 53,625 |
| | 26,986 |
|
| Patents | 3 - 20 yrs. | | 2,325 |
| | 2,132 |
| | 2,325 |
| | 2,099 |
|
| Noncompete agreement | 3 - 6 yrs. | | 2,553 |
| | 2,243 |
| | 2,505 |
| | 1,662 |
|
| Developed technology | 7 yrs. | | 36,100 |
| | 10,314 |
| | 36,100 |
| | 5,157 |
|
| Trade name | 6 yrs. | | — |
| | — |
| | 15,700 |
| | 2,617 |
|
| Other | 7 - 20 yrs. | | 266 |
| | 241 |
| | 253 |
| | 215 |
|
| Total intangibles-subject to amortization | | | 100,718 |
| | 52,629 |
| | 114,818 |
| | 42,179 |
|
| Intangibles-not subject to amortization: | | | | | | | | | |
| Trade names | | | 38,643 |
| | | | 74,485 |
| | |
| Other assets: | | | | | | | | | |
| Key money deposits | | | 27,196 |
| | 23,845 |
| | 26,948 |
| | 22,038 |
|
| Other deposits | | | 19,269 |
| | | | 19,344 |
| | |
| Deferred compensation plan assets | | | 4,806 |
| | | | 2,385 |
| | |
| Deferred tax asset-net | | | 27,112 |
| | | | 23,061 |
| | |
| Restricted cash | | | 377 |
| | | | 500 |
| | |
| Shop-in-shop | | | 8,864 |
| | 8,606 |
| | 8,807 |
| | 8,019 |
|
| Tax receivable | | | 478 |
| | | | — |
| | |
| Forward contracts | | | 147 |
| | | | 5,648 |
| | |
| Investments | | | 500 |
| | | | 2,078 |
| | |
| Other | | | 4,612 |
| | | | 4,655 |
| | |
| Total other assets | | | 93,361 |
| | 32,451 |
| | 93,426 |
| | 30,057 |
|
| Total intangible and other assets | | | $ | 232,722 |
| | $ | 85,080 |
| | $ | 282,729 |
| | $ | 72,236 |
|
| Total intangible and other assets-net | | | | | $ | 147,642 |
| | |
| | $ | 210,493 |
|
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Key money is the amount of funds paid to a landlord or tenant to acquire the rights of tenancy under a commercial property lease for a certain property. Key money represents the "right to lease" with an automatic right of renewal. This right can be subsequently sold by the Company or can be recovered should the landlord refuse to allow the automatic right of renewal to be exercised. Key money is amortized over the initial lease term, which ranges from approximately four to 18 years. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2023 | | 2022 |
| At Fiscal Year End | Useful
Lives | | Gross
Amount | | Accumulated
Amortization | | Gross
Amount | | Accumulated
Amortization |
| Intangibles-subject to amortization: | | | | | | | | | |
| Trademarks | 10 yrs. | | $ | 3,978 | | | $ | 3,256 | | | $ | 3,728 | | | $ | 3,243 | |
| Customer lists | 5 - 10 yrs. | | — | | | — | | | 279 | | | 266 | |
| Patents | 3 - 20 yrs. | | 850 | | | 546 | | | 867 | | | 537 | |
| | | | | | | | | |
| | | | | | | | | |
| Trade name | 6 yrs. | | 4,502 | | | 3,189 | | | 4,502 | | | 2,439 | |
| Other | 7 - 20 yrs. | | 341 | | | 236 | | | 342 | | | 195 | |
| Total intangibles-subject to amortization | | | 9,671 | | | 7,227 | | | 9,718 | | | 6,680 | |
| Intangibles-not subject to amortization: | | | | | | | | | |
| Trade names | | | 8,919 | | | | | 8,876 | | | |
| Other assets: | | | | | | | | | |
| | | | | | | | | |
| Other deposits | | | 16,168 | | | | | 16,487 | | | |
| | | | | | | | | |
| Deferred tax asset-net | | | 21,426 | | | | | 17,262 | | | |
| Restricted cash | | | 4,309 | | | | | 5,243 | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Debt issuance costs | | | 2,490 | | | | | 3,124 | | | |
| Other | | | 3,340 | | | | | 1,969 | | | |
| Total other assets | | | 47,733 | | | | | 44,085 | | | |
| Total intangible and other assets | | | $ | 66,323 | | | $ | 7,227 | | | $ | 62,679 | | | $ | 6,680 | |
| Total intangible and other assets-net | | | | | $ | 59,096 | | | | | $ | 55,999 | |
Amortization expense for intangible assets was approximately $13.5$0.9 million, $15.0$2.5 million, and $4.9$3.4 million for fiscal years 2017, 20162023, 2022 and 2015, respectively.2021. Estimated aggregate future amortization expense by fiscal year for intangible assets is as follows (in thousands):
| | | | | |
| Fiscal Year | Amortization
Expense |
| 2024 | $ | 924 | |
| 2025 | 733 | |
| 2026 | 142 | |
| 2027 | 124 | |
| 2028 | 118 | |
| Thereafter | 403 | |
|
| | | |
| Fiscal Year | Amortization Expense |
| 2018 | $ | 11,905 |
|
| 2019 | 11,575 |
|
| 2020 | 11,028 |
|
| 2021 | 7,190 |
|
| 2022 | 6,273 |
|
8. Derivatives and Risk Management
Cash Flow Hedges. The primary risks managed by using derivative instruments are the fluctuations in global currencies that will ultimately be used by non-U.S. dollar functional currency subsidiaries to settle future payments of intercompany inventory transactions denominated in U.S. dollars. Specifically, the Company projects future intercompany purchases by its non-U.S. dollar functional currency subsidiaries generally over a period of up to 24 months. The Company entersmay enter into forward contracts generally for up to 85% of its forecasted purchases to manage fluctuations in global currencies that will ultimately be used to settle such U.S. dollar denominated inventory purchases. Additionally, during the first quarter of fiscal year 2016, the Company enteredmay enter into forward contracts to manage fluctuations in Japanese yen exchange rates that will be used to settle future third-party inventory component purchases by a U.S. dollar functional currency subsidiary. Forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon settlement date and exchange rate. These forward contracts are designated as single cash flow hedges. Fluctuations in exchange rates will either increase or decrease the Company'sCompany’s U.S. dollar equivalent cash flows from these inventory transactions, which will affect the Company'sCompany’s U.S. dollar earnings. Gains or losses on the forward contracts are expected to offset these fluctuations to the extent the cash flows are hedged by the forward contracts.
These forward contracts meet the criteria for hedge accounting, which requires that they represent foreign-currency-denominated forecasted transactions in which (i) the operating unit that has the foreign currency exposure is a party to the hedging instrument and (ii) the hedged transaction is denominated in a currency other than the hedging unit's functional currency.
At the inception of each forward contract designated as a cash flow hedge, the hedging relationship is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk. The Company assesses hedge effectiveness under the critical terms matched method at inception and at least quarterly throughout the life of the hedging relationship. If the critical terms (i.e., amounts, currencies and settlement dates) of the forward contract match the terms of the forecasted transaction, the Company concludes that the hedge is effective. Hedge accounting is discontinued if it is determined that the derivative is not highly effective.
For a derivative instrument that is designated and qualifies as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss), net of taxes and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, the Company's hedges resulted in no ineffectiveness in its consolidated statements of income (loss) and comprehensive income (loss), and there were no components excluded from the assessment of hedge effectiveness for fiscal years 2017, 2016 and 2015.
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All derivative instruments are recognized as either assets or liabilities at fair value in the consolidated balance sheets. The Company records all forward contract hedge assets and liabilities on a gross basis as they do not meet the balance sheet netting criteria because the Company does not have master netting agreements established with the derivative counterparties that would allow for net settlement. Derivatives designated as cash flow hedges are recorded at fair value at each balance sheet date and the change in fair value is recorded to accumulated other comprehensive income (loss) within the equity section of the Company's consolidated balance sheets until such derivative's gains or losses become realized or the cash flow hedge relationship is terminated.
If the cash flow hedge relationship is terminated, the derivative's gains or losses that are recorded in accumulated other comprehensive income (loss) will be immediately recognized in earnings. During fiscal year 2017, the Company paid off its U.S.-based term loan (as amended and restated, the "Term Loan") which discontinued the interest rate swap cash flow hedge treatment resulting in a gain of $0.2 million being reclassified into other income (expense). There were no gains or losses reclassified into earnings as a result of the discontinuance of cash flow hedges for fiscal years 2016 and 2015.
As of December 30, 2017,2023, the Company had the following outstanding forward contracts designated as cash flow hedges that were entered into to hedge the future payments of intercompany inventory transactions (in millions):
| | | | | | | | | | | | | | | | | | | | |
| Functional Currency | | Contract Currency |
| Type | | Amount | | Type | | Amount |
| Euro | | 50.9 | | | U.S. dollar | | 56.3 | |
| Canadian dollar | | 25.3 | | | U.S. dollar | | 19.0 | |
| Mexican peso | | 121.1 | | | U.S. dollar | | 6.8 | |
| British pound | | 4.5 | | | U.S. dollar | | 5.7 | |
| Japanese yen | | 395.5 | | | U.S. dollar | | 3.0 | |
| Australian dollar | | 3.8 | | | U.S. dollar | | 2.5 | |
| U.S. dollar | | 3.5 | | | Japanese Yen | | 480.0 | |
|
| | | | | | | | |
| Functional Currency | | Contract Currency |
| Type | | Amount | | Type | | Amount |
| Euro | | 245.2 |
| | U.S. dollar | | 286.6 |
|
| Canadian dollar | | 88.4 |
| | U.S. dollar | | 68.7 |
|
| British pound | | 41.1 |
| | U.S. dollar | | 54.8 |
|
| Japanese yen | | 4,105.7 |
| | U.S. dollar | | 37.9 |
|
| Mexican peso | | 388.5 |
| | U.S. dollar | | 20.2 |
|
| Australian dollar | | 8.6 |
| | U.S. dollar | | 6.7 |
|
| U.S. dollar | | 33.5 |
| | Japanese Yen | | 3,670.0 |
|
Net Investment Hedges. The Company is also exposed to risk that adverse changes in foreign currency exchange rates could impact its net investment in foreign operations. During the first quarter of fiscal year 2016, the Company entered into a forward contract designated as a net investment hedge to reduce exposure to changes in currency exchange rates on 45.0 million euros of its total investment in a wholly-owned, euro-denominated foreign subsidiary. The hedge was settled during the second quarter of fiscal year 2016 resulting in a net gain of $0.5 million net of taxes that was recognized in the currency translation component of accumulated other comprehensive income (loss).
Non-designated Hedges. The Company also periodically enters into forward contracts to manage exchange rate risks associated with certain intercompany transactions and for which the Company does not elect hedge accounting treatment. As of December 30, 2017,2023, the Company had non-designated forward contracts of approximately $2.9$1.5 million on 39.827.1 million rand associated with a South African rand-denominated foreign subsidiary. As of December 31, 2022, the Company had non-designated forward contracts of $0.7 million on 12.1 million rand associated with a South African rand-denominated foreign subsidiary. Changes in the fair value of derivatives not designated as hedging instruments are recognized in earnings when they occur.
On July 26, 2013, the Company entered into an approximately five year interest rate swap agreement in order to manage the interest rate risk related to its Term Loan. Under the terms of the swap, the Company pays a fixed interest rate of 1.288% per annum to the swap counterparty plus the London Interbank Offer Rate ("LIBOR") rate applicable margin of 3.50%. The Company receives interest from the swap counterparty at a variable rate based on 1-month LIBOR. As mentioned above, during the fourth quarter of fiscal year 2017, the Company paid off the Term Loan and, as a result, the interest rate swap cash flow hedge relationship was terminated. When the interest rate swap was designated as a cash flow hedge, the change in fair value was recorded to accumulated other comprehensive income (loss) until such gains or losses became realized and were reclassified into interest expense. At the time the cash flow hedge relationship was terminated, the existing gains and losses were reclassified from accumulated other comprehensive income (loss) into other income (expense). Future changes in the fair value of the interest rate swap will be recognized in earnings when they occur.
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The effective portion of gains and losses on cash flow hedges that were recognized in other comprehensive income (loss), net of taxes during fiscal years 2017, 20162023, 2022 and 20152021 are set forth below (in thousands): | | | Fiscal Year | 2017 | | 2016 | | 2015 | Fiscal Year | 2023 | | 2022 | | 2021 |
| Cash flow hedges: | | | | | |
| Forward contracts | $ | (25,088 | ) | | $ | 13,565 |
| | $ | 22,763 |
|
| Interest rate swaps | 278 |
| | (730 | ) | | 1,544 |
|
| Forward contracts | |
| Forward contracts | |
| | Total gain (loss) recognized in other comprehensive income (loss), net of taxes | $ | (24,810 | ) | | $ | 12,835 |
| | $ | 24,307 |
|
| Total gain (loss) recognized in other comprehensive income (loss), net of taxes | |
| Total gain (loss) recognized in other comprehensive income (loss), net of taxes | |
The following table illustrates the effective portion of gains and losses on derivative instruments recorded in other comprehensive income (loss), net of taxes during the term of the hedging relationship and reclassified into earnings, and gains and losses on derivatives not designated as hedging instruments recorded directly to earnings during fiscal years 2017, 20162023, 2022 and 20152021 (in thousands): |
| | | | | | | | | | | | | | | | |
| Derivative Instruments | | Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) Location | | Effect of Derivative Instruments | | Fiscal Year 2017 | | Fiscal Year 2016 | | Fiscal Year 2015 |
| Forward contracts designated as cash flow hedging instruments | | Other income (expense)-net | | Total gain (loss) reclassified from accumulated other comprehensive income (loss) | | $ | (4,297 | ) | | $ | 10,986 |
| | $ | 29,629 |
|
| Forward contracts not designated as hedging instruments | | Other income (expense)-net | | Total gain (loss) recognized in income | | $ | (652 | ) | | $ | (82 | ) | | $ | (210 | ) |
| Interest rate swap designated as a cash flow hedging instrument | | Interest expense | | Total gain (loss) reclassified from accumulated other comprehensive income (loss) | | $ | (260 | ) | | $ | (1,080 | ) | | $ | (1,596 | ) |
| Interest rate swap not designated as a cash flow hedging instrument | | Other income (expense)-net | | Total gain (loss) reclassified from accumulated other comprehensive income (loss) | | $ | 195 |
| | $ | — |
| | $ | — |
|
| Interest rate swap designated as a cash flow hedging instrument | | Other income (expense)-net | | Total gain (loss) reclassified from accumulated other comprehensive income (loss) | | $ | — |
| | $ | — |
| | $ | 3,331 |
|
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative Instruments | | Consolidated
Statements of Income (Loss)
and Comprehensive
Income (Loss) Location | | Effect of Derivative
Instruments | | Fiscal Year 2023 | | Fiscal Year 2022 | | Fiscal Year 2021 |
| Forward contracts designated as cash flow hedging instruments | | Cost of sales | | Total gain (loss) reclassified from accumulated other comprehensive income (loss) | | $ | (1,001) | | | $ | 10,789 | | | $ | 2,429 | |
| Forward contracts designated as cash flow hedging instruments | | Other income (expense)-net | | Total gain (loss) reclassified from accumulated other comprehensive income (loss) | | $ | 1,002 | | | $ | 3,334 | | | $ | (55) | |
| Forward contracts not designated as hedging instruments | | Other income (expense)-net | | Total gain (loss) recognized in income | | $ | 83 | | | $ | 128 | | | $ | 37 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The following table discloses the fair value amounts for the Company's derivative instruments as separate asset and liability values, presents the fair value of derivative instruments on a gross basis, and identifies the line items in the consolidated balance sheets in which the fair value amounts for these categories of derivative instruments are included (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives |
| December 30, 2023 | | December 31, 2022 | | December 30, 2023 | | December 31, 2022 |
| Consolidated
Balance Sheets
Location | | Fair Value | | Consolidated
Balance Sheets
Location | | Fair Value | | Consolidated
Balance Sheets
Location | | Fair Value | | Consolidated
Balance Sheets
Location | | Fair Value |
| Forward contracts designated as cash flow hedging instruments | Prepaid expenses and other current assets | | $ | 339 | | | Prepaid expenses and other current assets | | $ | 2,783 | | | Accrued expenses-other | | $ | 1,044 | | | Accrued expenses-other | | $ | 2,659 | |
| Forward contracts not designated as cash flow hedging instruments | Prepaid expenses and other current assets | | — | | | Prepaid expenses and other current assets | | — | | | Accrued expenses-other | | 7 | | | Accrued expenses-other | | 16 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Forward contracts designated as cash flow hedging instruments | Intangible and other assets-net | | 20 | | | Intangible and other assets-net | | 112 | | | Other long-term liabilities | | 28 | | | Other long-term liabilities | | 318 | |
| | | | | | | | | | | | | | | |
| Total | | | $ | 359 | | | | | $ | 2,895 | | | | | $ | 1,079 | | | | | $ | 2,993 | |
The following table summarizes the effects of the Company's derivative instruments on earnings (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Effect of Derivative Instruments |
| | Fiscal Year 2023 | | Fiscal Year 2022 |
| | Cost of Sales | | Other Income (Expense)-net | | Cost of Sales | | Other Income (Expense)-net |
| Total amounts of income and expense line items presented in the consolidated statements of income (loss) and comprehensive income (loss) in which the effects of cash flow hedges are recorded | | $ | 732,803 | | | $ | 8,665 | | | $ | 851,760 | | | $ | (1,416) | |
| Gain (loss) on cash flow hedging relationships: | | | | | | | | |
| Forward contracts designated as cash flow hedging instruments: | | | | | | | | |
| Total gain (loss) reclassified from other comprehensive income (loss) | | (1,001) | | | 1,002 | | | 10,789 | | | 3,334 | |
| Forward contracts not designated as cash flow hedging instruments: | | | | | | | | |
| Total gain (loss) recognized in income | | — | | | 83 | | | — | | | 128 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Asset Derivatives | | Liability Derivatives |
| | December 30, 2017 | | December 31, 2016 | | December 30, 2017 | | December 31, 2016 |
| | Consolidated Balance Sheets Location | | Fair Value | | Consolidated Balance Sheets Location | | Fair Value | | Consolidated Balance Sheets Location | | Fair Value | | Consolidated Balance Sheets Location | | Fair Value |
| Forward contracts designated as cash flow hedging instruments | Prepaid expenses and other current assets | | $ | 2,291 |
| | Prepaid expenses and other current assets | | $ | 23,288 |
| | Accrued expenses-other | | $ | 14,798 |
| | Accrued expenses-other | | $ | 4,696 |
|
| Forward contracts not designated as cash flow hedging instruments | Prepaid expenses and other current assets | | — |
| | Prepaid expenses and other current assets | | — |
| | Accrued expenses-other | | 362 |
| | Accrued expenses-other | | 2 |
|
| Interest rate swap designated as a cash flow hedging instrument | Prepaid expenses and other current assets | | — |
| | Prepaid expenses and other current assets | | — |
| | Accrued expenses-other | | — |
| | Accrued expenses-other | | 613 |
|
| Interest rate swap not designated as a cash flow hedging instrument | Prepaid expenses and other current assets | | 195 |
| | Prepaid expenses and other current assets | | — |
| | Accrued expenses-other | | — |
| | Accrued expenses-other | | — |
|
| Forward contracts designated as cash flow hedging instruments | Intangible and other assets-net | | 147 |
| | Intangible and other assets-net | | 5,648 |
| | Other long-term liabilities | | 2,725 |
| | Other long-term liabilities | | 268 |
|
| Interest rate swap designated as a cash flow hedging instrument | Intangible and other assets-net | | — |
| | Intangible and other assets-net | | 73 |
| | Other long-term liabilities | | — |
| | Other long-term liabilities | | — |
|
| Total | | | $ | 2,633 |
| | | | $ | 29,009 |
| | | | $ | 17,885 |
| | | | $ | 5,579 |
|
At the end of fiscal year 2017,2023, the Company had forward contracts designated as cash flow hedges with maturities extending through December 2019.March 2025. As of December 30, 2017,2023, an estimated net loss of $8.9$0.6 million is expected to be reclassified into earnings within the next twelve months at prevailing foreign currency exchange rates. See Note 1—Significant Accounting Policies for additional disclosures on foreign currency hedging instruments.
9. Fair Value Measurements
The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
ASC 820, Fair Value Measurement and Disclosures ("ASC 820"), establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
•Level 1—Quoted prices in active markets for identical assets or liabilities.
•Level 2—Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
•Level 3—Unobservable inputs based on the Company's assumptions.
ASC 820 requires the use of observable market data if such data is available without undue cost and effort.
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 30, 20172023 (in thousands):
| | Fair Value at December 30, 2023 | | | Fair Value at December 30, 2023 |
| Level 1 | | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | |
| Forward contracts | |
| Forward contracts | |
| Forward contracts | |
| | | | Fair Value at December 30, 2017 |
| Total | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
| Forward contracts | $ | — |
| | $ | 2,438 |
| | $ | — |
| | $ | 2,438 |
|
| Deferred compensation plan assets: | | | | | | | |
| Investment in publicly traded mutual funds | 4,806 |
| | — |
| | — |
| | 4,806 |
|
| Interest rate swap | — |
| | 195 |
| | — |
| | 195 |
|
| | Total | |
| | Total | $ | 4,806 |
| | $ | 2,633 |
| | $ | — |
| | $ | 7,439 |
|
| Liabilities: | | | | | | | |
| Contingent consideration | $ | — |
| | $ | — |
| | $ | 6,452 |
| | $ | 6,452 |
|
| Contingent consideration | |
| Contingent consideration | |
| Forward contracts | — |
| | 17,885 |
| | — |
| | 17,885 |
|
| | Total | $ | — |
| | $ | 17,885 |
| | $ | 6,452 |
| | $ | 24,337 |
|
| Total | |
| Total | |
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 20162022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
| Forward contracts | $ | — | | | $ | 2,895 | | | $ | — | | | $ | 2,895 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total | $ | — | | | $ | 2,895 | | | $ | — | | | $ | 2,895 | |
| Liabilities: | | | | | | | |
| Contingent consideration | $ | — | | | $ | — | | | $ | 3,630 | | | $ | 3,630 | |
| Forward contracts | — | | | 2,993 | | | — | | | 2,993 | |
| | | | | | | |
| Total | $ | — | | | $ | 2,993 | | | $ | 3,630 | | | $ | 6,623 | |
|
| | | | | | | | | | | | | | | |
| | Fair Value at December 31, 2016 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
| Forward contracts | $ | — |
| | $ | 28,936 |
| | $ | — |
| | $ | 28,936 |
|
| Deferred compensation plan assets: | | | | | | | |
| Investment in publicly traded mutual funds | 2,385 |
| | — |
| | — |
| | 2,385 |
|
| Interest rate swaps | — |
| | 73 |
| | — |
| | 73 |
|
| Total | $ | 2,385 |
| | $ | 29,009 |
| | $ | — |
| | $ | 31,394 |
|
| Liabilities: | | | | | | | |
| Forward contracts | $ | — |
| | $ | 4,966 |
| | $ | — |
| | $ | 4,966 |
|
| Interest rate swap | — |
| | 613 |
| | — |
| | 613 |
|
| Total | $ | — |
| | $ | 5,579 |
| | $ | — |
| | $ | 5,579 |
|
The fair values of the Company's deferred compensation plan assets are based on quoted prices. The deferred compensation plan assets are recorded in intangible and other assets—net in the Company's consolidated balance sheets. The fair values of the Company's forward contracts are based on published quotations of spot currency rates and forward points, which are converted into implied forward currency rates.
As of December 30, 2017, debt,2023, the Company's senior notes (as defined in Note 4— Debt), excluding unamortized debt issuance costs, and capital leases, was recorded at cost and had a carrying value of $445.9$150.0 million and had a fair value of approximately $439.2$92.5 million. The fair value of the Company's debt approximated itssenior notes was based on Level 1 inputs. The Company's revolving credit agreement (as defined in Note 4—Debt) was recorded at cost and had a carrying amount asvalue of December 31, 2016.$62.1 million and had a fair value of approximately $49.6 million. The fair value of debtthe Company's revolving credit agreement was obtained from a third-party based on observable marketLevel 2 inputs.
The fair values of the interest rate swap asset and liability are determined using valuation models based on market observable inputs, including forward curves, mid-market price, foreign exchange spot or forward rates and volatility levels. See Note 8—Derivatives and Risk Management for additional disclosures about the interest rate swap.
Property, plant and equipment—net67
Operating lease right-of-use assets with a carrying amount of $9.2$4.3 million related to retail store leasehold improvements and fixturing and related key money in the amount of $0.7 million was deemed not recoverable, resulting in total impairment charges of $9.9 million for fiscal year 2017.
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair values of assets related to Company-owned retail stores were determined using Level 3 inputs. Of the $9.9 million impairment expense, $5.6 million, $1.9 million and $0.8 million were recorded in restructuring charges in the Americas, Europe and Asia segments, respectively, and $0.9 million, $0.4 million and $0.3 million were recorded in SG&A in the Europe, Americas and Asia segments, respectively.
In fiscal year 2016, property, plant and equipment—net with a carrying amount of $15.0$1.1 million related to retail store leasehold improvements and fixturing waswere written down to a fair value of $0.7$2.7 million and related key money in the amount of $2.0$0.5 million, was deemed not recoverable,respectively, resulting in total pre-tax impairment charges of $16.3$2.2 million for fiscal year 2016.2023.
The fair values of operating lease right-of-use ("ROU") assets and fixed assets related to retail stores were determined using Level 3 inputs, including forecasted cash flows and discount rates. Of the $2.2 million impairment expense, $1.5 million and $0.7 million were recorded in long-lived asset impairments in the Europe and Americas segments, respectively.
In fiscal year 2022, operating lease right-of-use assets with a carrying amount of $5.7 million and property, plant and equipment—net with a carrying amount of $0.8 million related to retail store leasehold improvements, fixturing and shop-in-shops were written down to a fair value of $3.6 million and $0.4 million, respectively, resulting in total pre-tax impairment charges of $2.5 million. Of the $2.5 million impairment expense, $1.3 million, $0.7 million and $0.4 million were recorded in long-lived asset impairments in the Europe, Americas and Asia segments, respectively, and $0.1 million was recorded in restructuring charges in the Europe segment.
The fair value of goodwill and trade names are measured on a non-recurring basis using Level 3 inputs, including forecasted cash flows, discounts rates and implied royalty rates.
In No trade name impairment was recorded during fiscal year 2017, the Company fully impaired its goodwill balance and recorded pre-tax impairment charges of $202.3 million, $114.3 million and $42.9 million in the Americas, Europe and Asia segments, respectively.
In2023 or fiscal year 2017, the SKAGEN trade name with a carrying amount of $55.6 million was written down to its implied fair value of $27.3 million, resulting in a pre-tax impairment charge of $28.3 million; the MISFIT trade name with a carrying amount of $11.8 million was deemed not recoverable, resulting in a pre-tax impairment charge of $11.8 million and the MICHELE trade name with a carrying amount of $18.5 million was written down to its implied fair value of $10.9 million, resulting in a pre-tax impairment charge of $7.6 million. Trade name impairment charges were recorded in the Corporate cost area. See Note 1—Significant Accounting Policies for additional disclosures about goodwill and trade name impairment.2022.
The fair value of the contingent consideration liability related to Fossil Accessories South Africa Pty. Ltd. (‘‘Fossil South Africa’’) was determined using Level 3 inputs. See Note 14—Stockholders' Equity for additional disclosures about the equity transaction. The contingent consideration is based on Fossil South Africa's projected earnings and dividends through fiscal year 2020 with the final payments expected the following year. A discount rate of 14% was used to calculate the present value of the contingent consideration. The present value of the contingent consideration liability was valued at $6.5 million as of December 30, 2017.
In fiscal year 2017, the Company recorded a pre-tax impairment charge of $1.6 million related to a cost method investment and recorded a pre-tax impairment charge of $0.7 million related to property held for sale.
10. Debt
The Company's debt consisted of the following, excluding capitalfinance lease obligations, (in millions):
| | December 30, 2023 | | | December 30, 2023 | | December 31, 2022 |
| Revolving facility | |
Notes(1) | |
| | | Other international | |
| | December 30, 2017 | | December 31, 2016 |
U.S. revolving line of credit (1) | $ | 440.3 |
| | $ | 441.0 |
|
| U.S. term loan | — |
| | 189.9 |
|
| Other international | |
| | Other international | 0.9 |
| | — |
|
| Total debt | $ | 441.2 |
| | $ | 630.9 |
|
| Less current portion | 0.9 |
| | 25.0 |
|
| Long-term debt | $ | 440.3 |
| | $ | 605.9 |
|
| |
(1)
| Net of debt issuance costs of $4.7 million and $3.8 million at December 30, 2017 and December 31, 2016, respectively. |
(1)Excludes debt issuance costs of $5.1 million and $6.9 million at December 30, 2023 and December 31, 2022, respectively.
U.S.-Based.On March 9, 2015,September 26, 2019, the Company and Fossil Partners L.P., as the U.S. borrowers, and Fossil Group Europe GmbH, Fossil Asia Pacific Limited, Fossil (Europe) GmbH, Fossil (UK) Limited and Fossil Canada Inc., as the non-U.S. borrowers, certain other subsidiaries of the Company from time to time party thereto designated as borrowers, and certain subsidiaries of the Company from time to time party thereto as guarantors, entered into a $275.0 million secured asset-based revolving credit agreement (the "Revolving Facility") with JPMorgan Chase Bank, N.A. as administrative agent (the "ABL Agent"), J.P. Morgan AG, as French collateral agent, JPMorgan Chase Bank, N.A., Citizens Bank, N.A. and Wells Fargo Bank, National Association as joint bookrunners and joint lead arrangers, and Citizens Bank, N.A. and Wells Fargo Bank, National Association, as co-syndication agents and each of the lenders from time to time party thereto (the "ABL Lenders"). On November 8, 2022 the Company entered into an Amended and Restated Credit AgreementAmendment No. 4 (the “Credit Agreement”"Amendment”). On March 10, 2017, the Company entered into the Second Amendment to the Credit Agreement (the “Second Amendment”).Revolving Facility. The Second Amendment, reduced the Company's revolving credit facility (the "Revolving Credit Facility") andamong other things, (i) provided for revolving credit loans in the amount of $850.00 million, with an up to $20.0 million subfacility for swingline loans (the “Swingline Loan”), and an up to $10.0 million subfacility for letters of credit, and (ii) continued the Company's Term Loan in the amount of $231.3 million. The Second Amendment extended the maturity date of the Credit Agreementcredit facility to May 17, 2019 and removedNovember 8, 2027 (provided, that if the Company’s abilityCompany has any indebtedness in an amount in excess of $35 million that matures prior to make offers to the lenders to extendNovember 8, 2027, the maturity date of the Term Loan orcredit facility shall be the 91st day prior to the maturity date of such other indebtedness) and (ii) changed the calculation methodology of the borrowing base to include the value of certain of the Company’s intellectual property in such methodology and to provide for seasonal increases to certain advance rates.
In November 2021, the Company sold $150.0 million aggregate principal amount of 7.00% senior notes due 2026 (the "Notes"), generating net proceeds of approximately $141.7 million. The Notes were issued pursuant to an indenture (the "Base Indenture") and a first supplemental indenture (the "First Supplemental Indenture" and, together with the Base Indenture, the "Indenture") with The Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee").
The Notes are general unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured and unsubordinated indebtedness, and will rank senior in right of payment to the Company’s future subordinated indebtedness, if any. The Notes are effectively subordinated to all of the Company’s
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revolving Credit Facility. The Second Amendment also amended the mandatory prepayment provisions under the credit agreementexisting and provided thatfuture secured indebtedness, to the extent there were excess proceeds remaining from the issuance of debt by the Company following the repayment in full of the Term Loan,value of the Company would be requiredassets securing such indebtedness, and the Notes are structurally subordinated to repayall existing and future indebtedness and other liabilities (including trade payables) of the Revolving Credit Facility in the amount ofCompany’s subsidiaries (excluding any amounts owed by such excess proceeds, with a corresponding permanent reduction in the Revolving Credit Facility in the amount of up to $50.0 million. In accordance with the Second Amendment, dividends paid from foreign subsidiaries to U.S. subsidiaries or Fossil Group, Inc., were required to be used to repay the Term Loan and then up to $50.0 million of the Revolving Credit Facility.
Company). The Second Amendment amended the applicable margin used to calculate the interest rate that was applicable to base rate loans and LIBOR rate loans under the Credit Agreement. As of December 30, 2017, the interest rate margin for base rate loans was 2.75% per annum and the interest rate margin for LIBOR rate loans was 3.75% per annum.
As of December 30, 2017, amounts outstanding under the Revolving Credit Facility and the Term Loan under the Credit Agreement boreNotes bear interest at the Company's option, at (i)rate of 7.00% per annum. Interest on the base rate (defined as the highest of (a) the prime rate publicly announced by Wells Fargo (4.5% at fiscal year end 2017), (b) the federal funds rate plus 0.5% and (c) the London Interbank Offer Rate ("LIBOR") (1.49% at fiscal year end 2017) for an interest period of one month plus 1.0%) plus the base rate applicable margin (2.75% at fiscal year end 2017) or (ii) the LIBOR rate (defined as the quotient obtained by dividing (a) LIBOR by (b) 1.00 minus the Eurodollar reserve percentage) plus the LIBOR rate applicable margin (3.75% at fiscal year end 2017). Amounts outstanding under the Swingline Loan under the Credit Agreement or upon any drawing under a letter of credit bore interest at the base rate plus the applicable margin. Interest based upon the base rateNotes is payable quarterly in arrears. Interest based uponarrears on February 28, May 31, August 31 and November 30 of each year. The Notes mature on November 30, 2026.
The Company may redeem the LIBOR rateNotes for cash in whole or in part at any time at its option. On and after November 30, 2023, the Company may redeem the Notes at the following prices: (i) after November 30, 2023 and prior to November 30, 2024, at a price equal to $25.50 per $25.00 principal amount of Notes, (ii) on or after November 30, 2024 and prior to November 30, 2025, at a price equal to $25.25 per $25.00 principal amount of Notes and (iii) on or after November 30, 2025, at a price equal to $25.00 per $25.00 principal amount of Notes, plus (in each case noted above) accrued and unpaid interest, if any, to, but excluding, the date of redemption.
The Indenture contains customary events of default and cure provisions. If an event of default (other than an event of default of the type described in the following sentence) occurs and is continuing with respect to the Notes, the Trustee may, and at the direction of the registered holders of at least 25% in aggregate principal amount of the outstanding debt securities of the Notes shall, declare the principal amount plus accrued and unpaid interest, premium and additional amounts, if any, on the Notes to be due and payable immediately. If an event of default relating to certain events of bankruptcy, insolvency or reorganization of the Company occurs, the principal amount plus accrued and unpaid interest, and premium, if any, on the Notes will become immediately due and payable without any action on the part of the Trustee or any holder of the Notes.
The Revolving Facility provides that the ABL Lenders may extend revolving loans in an aggregate principal amount not to exceed $225.0 million at any time outstanding (the “Revolving Credit Commitment”), of which up to $125.0 million is available under a U.S. facility, an aggregate of $80.0 million is available under a European facility, $10.0 million is available under a Hong Kong facility, $5.0 million is available under a French facility, and $5.0 million is available under a Canadian facility, in each case, subject to the borrowing base availability limitations described below. The Revolving Facility also includes an up to $45.0 million subfacility for the issuance of letters of credit (the “Letters of Credit”). The French facility includes a $1.0 million subfacility for swingline loans, and the European facility includes a $7.0 million subfacility for swingline loans. The Revolving Facility is subject to a line cap equal to the lesser of the total Revolving Credit Commitment and the aggregate borrowing bases under the U.S. facility, the European facility, the Hong Kong facility, the French facility and the Canadian facility. Loans under the Revolving Facility may be made in U.S. dollars, Canadian dollars, euros, Hong Kong dollars or pounds sterling.
The Revolving Facility is an asset-based facility, in which borrowing availability is subject to a borrowing base equal to: (a) with respect to the Company, the sum of (i) the lesser of (x) 90% of the appraised net orderly liquidation value of eligible U.S. finished goods inventory and (y) 65% of the lower of cost or market value of eligible U.S. finished goods inventory, plus (ii) 85% of the eligible U.S. accounts receivable, plus (iii) 90% of eligible U.S. credit card accounts receivable, plus (iv) the lesser of (x) 40% of the appraised net orderly liquidation value of eligible U.S. intellectual property and (y) $20.0 million, minus (iv) the aggregate amount of reserves, if any, established by the ABL Agent; (b) with respect to each non-U.S. borrower (except for the French Borrower), the sum of (i) the lesser of (x) 90% of the appraised net orderly liquidation value of eligible foreign finished goods inventory of such non-U.S. borrower and (y) 65% of the lower of cost or market value of eligible foreign finished goods inventory of such non-U.S. borrower, plus (ii) 85% of the eligible foreign accounts receivable of such non-U.S. borrower, minus (iii) the aggregate amount of reserves, if any, established by the ABL Agent; and (c) with respect to the French Borrower, (i) 85% of eligible French accounts receivable minus (ii) the aggregate amount of reserves, if any, established by the ABL Agent. Not more than 60% of the aggregate borrowing base under the Revolving Facility may consist of the non-U.S. borrowing bases. The above advance rates (other than the advance rates with respect to intellectual property) are seasonally increased by 5% (e.g. from 90% to 95%) during the period commencing on the date of delivery of the borrowing base certificate with respect to the second fiscal month of the Company and ending on the last day of the applicable interest period. The Second Amendment changedperiod covered by the consolidated total leverage ratio that the Company was required to complyborrowing base certificate delivered with from 3.25 to 1.00respect to the ratios as set forth below:
|
| |
Period | Maximum Ratio |
October 1, 2017 through and including March 31, 2018 | 3.25 to 1.00 |
April 1, 2018 through and including September 29, 2018 | 3.50 to 1.00 |
September 30, 2018 and thereafter | 3.25 to 1.00 |
fifth fiscal month of the Company.The Second AmendmentRevolving Facility also changed theincludes a commitment fee, payable quarterly in arrears, of 0.250% or 0.375% determined by reference to the Companyaverage daily unused portion of the overall commitment under the Revolving Facility. The ABL Borrowers will pay the ABL Agent, on the account of the issuing ABL Lenders, an issuance fee of 0.125% for unused amountsany issued Letters of Credit.
The ABL Borrowers have the right to request an increase to the commitments under the Revolving Credit Facility or any subfacility in an aggregate principal amount not to 0.50% per annum, payable quarterlyexceed $75.0 million in arrears. In connection with any letter of credit,increments no less than $10.0 million, subject to certain terms and conditions as defined in the Revolving Facility.
The Revolving Facility is secured by guarantees by the Company wasand certain of its domestic subsidiaries. Additionally, the Company and such subsidiaries have granted liens on all or substantially all of their assets in order to secure the obligations under the Revolving Facility. In addition, the Swiss Borrower, the Hong Kong Borrower, the French Borrower, the German Borrower and the Canadian Borrower, and the other non-U.S. borrowers from time to time party to the Revolving Facility are required to pay (i) a letter of credit commission, payable quarterly in arrears, in an amount equal to the daily amount available to be drawn under such letter of credit multiplied by the applicable marginenter into security instruments with respect to all or substantially all of their assets that can be pledged under applicable local law, and certain of their respective subsidiaries may guarantee the respective non-U.S. obligations under the Revolving Facility.
The Revolving Facility contains customary affirmative and negative covenants and events of default, such as compliance with annual audited and quarterly unaudited financial statements disclosures. Upon an event of default, the ABL Agent will have the right to declare the revolving credit loans that were LIBOR rate loans, (ii) a fronting fee,and other obligations outstanding immediately due and payable quarterly in arrears, asand all commitments immediately terminated or reduced, subject to cure periods and grace periods set forth in the applicable letter of credit application or as otherwise separately agreed by the Company and the issuing lender and (iii) normal and customary costs and expenses incurred or charged by the issuing lender in issuing, effecting payment under, amending or otherwise administering the letter of credit. Revolving Facility.
Loans under the Credit Agreement could be prepaid, in whole or in part, at the option of the Company, in minimum principal amounts of (i) $2.0 million or increments of $1.0 million in excess thereof, with respect to a base rate loan under the Revolving Credit Facility, (ii) $5.0 million or increments of $1.0 million in excess thereof, with respect to a LIBOR rate loan under the Revolving Credit Facility, (iii) $5.0 million or increments of $1.0 million in excess thereof, with respect to the Term Loan and (iv) $0.1 million or increments of $0.1 million in excess thereof, with respect to a Swingline Loan. Loans under the Credit Agreement were required to be repaid with the net cash proceeds of certain asset sales or insurance and condemnation events. The Company could permanently reduce the revolving credit commitment at any time, in whole or in part, without premium or penalty, in a minimum aggregate principal amount of not less than $3.0 million or increments of $1.0 million in excess thereof.
The repayment obligation under the Credit Agreement could be accelerated upon the occurrence of an event of default, including the failure to pay principal or interest, a material inaccuracy of a representation or warranty, violation of covenants, cross-default, change in control, bankruptcy events, failure of a loan document provision, certain ERISA events and material judgments.
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During fiscal year 2017, the Company made principal payments of $193.8 million under the Term Loan, which repaid the outstanding balance. The Company had payments net of borrowings of $4.0$10.9 million under the Revolving Credit Facility during fiscal year 2017. Amounts available under the Revolving Credit Facility were reduced by any amounts outstanding under standby letters of credit.2023. As of December 30, 2017,2023, the Company had available borrowing capacity of approximately $199.8$64.0 million under the Revolving CreditFacility. As of December 30, 2023, the Company had unamortized debt issuance costs of $5.1 million recorded in long-term debt and $2.5 million recorded in intangible and other assets-net on the Company's consolidated balance sheets. The Company incurred $10.5 million and $5.6 million of interest expense related to the Notes and Revolving Facility, which was favorably impacted by a $149.6 million international cash balance.respectively, during fiscal year 2023. The Company incurred approximately $8.5 million of interest expense under the Term Loan during fiscal year 2017, including the impact of the related interest rate swap. The Company incurred approximately $27.4 million of interest expense under the Revolving Credit Facility during fiscal year 2017. The Company incurred approximately $3.7$2.4 million of interest expense related to the amortization of debt issuance costs during fiscal year 2017. Additionally,2023. At December 30, 2023, the Company recorded a loss of $1.0 millionwas in other income (expense) - net forcompliance with all debt issuance costs associated with the Term Loan that was paid off during fiscal year 2017. See Note 20—Subsequent Event for more information about the Company's amendedcovenants related to its credit facilities.
Foreign-Based. On June 23, 2016, Fossil Accessories South Africa Pty Ltd, entered into a 20 million South African rand short-term note with First National Bank (the "Fossil South Africa Note") that is used for working capital purposes. The Fossil South Africa Note bears interest at the bank's prime rate, 10.25%which was 10.5% as of year end 2017. 2023, plus 0.5%. The Fossil South Africa note is reviewed annually for renewal. South African rand-based borrowings, in U.S. dollars, under the Fossil South Africa Note were approximately $0.9$0.5 million as of December 30, 20172023.
The Company's debt as of December 30, 2017,2023, excluding capitalfinance lease obligations, matures as follows (in millions):
| | | | | |
| Less than 1 Year | $ | 0.5 | |
| Year 2 | — | |
| Year 3 | 212.1 | |
| Year 4 | — | |
| Year 5 | — | |
| Principal amounts repayable | 212.6 | |
| Debt issuance costs | (5.1) | |
| |
| Total debt outstanding | $ | 207.5 | |
|
| | | |
| Less than 1 Year | $ | 0.9 |
|
| Year 2 | 445.0 |
|
| Principal amounts repayable | 445.9 |
|
| Debt issuance costs | (4.7 | ) |
| Total debt outstanding | $ | 441.2 |
|
Letters of Credit. At the end of fiscal year 2016, the Company had $54.3 million of outstanding commercial letters of credit under the Company's Letter of Credit Facility (the "LC Facility"). During fiscal year 2017, the LC facility was canceled and all outstanding letters of credit were paid.
Capital Lease Obligations. At the end of fiscal years 2017 and 2016, the Company had current capital lease obligations of $1.2 million and $1.4 million, respectively, and long-term capital lease obligations of $3.6 million and $4.0 million, respectively.
11. Other Income (Expense)—Net
Other income (expense)—net consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Fiscal Year | 2023 | | 2022 | | 2021 |
| Interest income | $ | 3,184 | | | $ | 772 | | | $ | 407 | |
| Contingent consideration remeasurement | 348 | | | (2,363) | | | (347) | |
| | | | | |
| | | | | |
| Equity in losses of unconsolidated investment | (11) | | | (132) | | | (349) | |
| Extinguishment of debt | — | | | (1,060) | | | (13,005) | |
| | | | | |
| Net currency (losses) gains | 3,023 | | | (218) | | | (4,016) | |
| Other net gains | 2,121 | | | 1,585 | | | 2,810 | |
| Other income (expense) - net | $ | 8,665 | | | $ | (1,416) | | | $ | (14,500) | |
|
| | | | | | | | | | | |
| Fiscal Year | 2017 | | 2016 | | 2015 |
| Interest income | $ | 4,729 |
| | $ | 2,156 |
| | $ | 1,026 |
|
| Gain on interest rate swap | 195 |
| | — |
| | 5,241 |
|
| Equity in losses of unconsolidated investment | (460 | ) | | (1,321 | ) | | — |
|
| Extinguishment of debt | (1,029 | ) | | — |
| | — |
|
| Gain on machine vision divestiture | 1,750 |
| | 3,500 |
| | — |
|
| Net currency gains | 7,849 |
| | 8,729 |
| | 32,611 |
|
| Other net gains | 702 |
| | 992 |
| | 1,565 |
|
| Other income (expense) - net | $ | 13,736 |
| | $ | 14,056 |
| | $ | 40,443 |
|
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Taxes
Income Taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the consolidated deferred tax assets and liabilities were (in thousands):
| | | | | | | | | | | |
| Fiscal Year | 2023 | | 2022 |
| Deferred income tax assets: | | | |
| | | |
| | | |
| Inventory | $ | 1,940 | | | $ | 2,985 | |
| | | |
| | | |
| Compensation | 6,368 | | | 7,936 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Property, plant and equipment | 4,611 | | | 2,120 | |
| Trade names and customer lists | 2,489 | | | 3,819 | |
| Goodwill | 6,712 | | | 8,867 | |
| | | |
| | | |
| Foreign accruals | 6,785 | | | 4,538 | |
| Loss carryforwards | 128,055 | | | 79,130 | |
| Tax credit carryforwards | 11,134 | | | 5,717 | |
| | | |
| Capitalized research and development | 6,882 | | | 6,066 | |
| Interest disallowance | 15,143 | | | 12,701 | |
| | | |
| | | |
| Lease liabilities | 40,633 | | | 47,354 | |
| Other | 15,207 | | | 15,862 | |
| Deferred income tax assets total | $ | 245,959 | | | $ | 197,095 | |
| | | |
| Deferred income tax liabilities: | | | |
| | | |
| | | |
| | | |
| | | |
| Right-of-use assets | (32,531) | | | (36,821) | |
| Other | (97) | | | (281) | |
| Deferred income tax liabilities total | $ | (32,628) | | | $ | (37,102) | |
| | | |
| Valuation allowance | (192,603) | | | (143,347) | |
| | | |
| Net deferred income tax assets | $ | 20,728 | | | $ | 16,646 | |
| | | |
| Deferred income tax assets - net | $ | 21,426 | | | $ | 17,262 | |
| Deferred income tax liabilities - net | (698) | | | (616) | |
| Net deferred income tax assets | $ | 20,728 | | | $ | 16,646 | |
|
| | | | | | | |
| Fiscal Year | 2017 | | 2016 |
| Deferred income tax assets (liabilities): | | | |
| Bad debt allowance | $ | 2,920 |
| | $ | 3,936 |
|
| Returns allowance | 3,662 |
| | 5,464 |
|
| Inventory | 13,409 |
| | 15,243 |
|
| Warranty liabilities | 2,656 |
| | 3,244 |
|
| Compensation | 19,005 |
| | 19,286 |
|
| Accrued liabilities | 9,881 |
| | 7,276 |
|
| Deferred rent | 12,403 |
| | 17,518 |
|
| Unrealized exchange gains (losses) | 5,553 |
| | (6,498 | ) |
| State income tax and interest on tax contingencies | 1,410 |
| | 2,808 |
|
| Fixed assets | (13,442 | ) | | (20,872 | ) |
| Trade names and customer lists | (2,607 | ) | | (26,166 | ) |
| Goodwill | 19,982 |
| | (16,758 | ) |
| Other intangibles | (5,985 | ) | | (11,414 | ) |
| Undistributed earnings of certain foreign subsidiaries | (1,018 | ) | | (53,761 | ) |
| Foreign accruals | 8,501 |
| | 8,503 |
|
| Loss carryforwards | 27,868 |
| | 20,898 |
|
| Tax credit carryforwards | — |
| | 17,363 |
|
| Valuation allowance | (78,314 | ) | | (19,415 | ) |
| Other | 132 |
| | 529 |
|
| Net deferred income tax assets (liabilities) | $ | 26,016 |
| | $ | (32,816 | ) |
| Total deferred income tax assets | $ | 27,112 |
| | $ | 23,061 |
|
| Total deferred income tax liabilities | (1,096 | ) | | (55,877 | ) |
| Net deferred income tax assets (liabilities) | $ | 26,016 |
| | $ | (32,816 | ) |
Operating Loss Carryforwards. The At December 30, 2023, the consolidated balance sheet includes $27.9sheets included $74.1 million of deferred tax assets for net operating losses of foreign subsidiaries. Valuation allowances have been recorded to reflect the estimated amount of deferred tax assets that may not be realized on these losses. The amounts and the fiscal year of expiration of the loss carryforwards are (in thousands):
| | | | | |
| Expires 2024 through 2028 | $ | 29,334 | |
| Expires 2029 through 2033 | 86,962 | |
| Expires 2034 through 2038 | 37,126 | |
| Expires 2039 through 2043 | 102,217 | |
| Indefinite | 64,770 | |
| Total loss carryforwards | $ | 320,409 | |
|
| | | |
| Expires 2018 through 2022 | $ | 37,291 |
|
| Expires 2023 through 2027 | 26,082 |
|
| Expires 2028 through 2032 | 5,979 |
|
| Expires 2033 through 2037 | 32,439 |
|
| Indefinite | 19,176 |
|
| Total loss carryforwards | $ | 120,967 |
|
| | | | | |
| Expires 2024 through 2028 | $ | 7,975 | |
| Expires 2029 through 2033 | 26,267 | |
| Expires 2034 through 2038 | 49,802 | |
| Expires 2039 through 2043 | 124,558 | |
| Indefinite | 64,326 | |
| Total loss carryforwards | $ | 272,928 | |
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
deferred tax assets for federal income tax net operating losses. In the U.S., federal income tax net operating losses can be carried forward indefinitely, but are limited to 80% of taxable income.
The following table identifies income (loss) before income taxes for the Company's U.S. and non-U.S. based operations for the fiscal years indicated (in thousands):
| | | Fiscal Year | 2017 | | 2016 | | 2015 | Fiscal Year | 2023 | | 2022 | | 2021 |
| U.S | $ | (517,227 | ) | | $ | (72,249 | ) | | $ | 24,864 |
|
| Non-U.S | 63,473 |
| | 186,557 |
| | 286,795 |
|
| U.S. | |
| Non-U.S. | |
| Total | $ | (453,754 | ) | | $ | 114,308 |
| | $ | 311,659 |
|
The Company's provision for income taxes consisted of the following for the fiscal years indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Fiscal Year | 2023 | | 2022 | | 2021 |
| Current provision: | | | | | |
| U.S. federal | $ | (3,798) | | | $ | 5,901 | | | $ | 1,714 | |
| Non-U.S | 8,315 | | | 9,944 | | | 17,027 | |
| State and local | (120) | | | (98) | | | (274) | |
| Total current | 4,397 | | | 15,747 | | | 18,467 | |
| Deferred provision (benefit): | | | | | |
| | | | | |
| Non-U.S | (3,875) | | | 5,653 | | | 7,960 | |
| | | | | |
| Total deferred | (3,875) | | | 5,653 | | | 7,960 | |
| Provision for income taxes | $ | 522 | | | $ | 21,400 | | | $ | 26,427 | |
|
| | | | | | | | | | | |
| Fiscal Year | 2017 | | 2016 | | 2015 |
| Current provision: | | | | | |
| U.S. federal | $ | 30,817 |
| | $ | 2,111 |
| | $ | 10,666 |
|
| Non-U.S | 40,423 |
| | 53,880 |
| | 72,336 |
|
| State and local | (2,055 | ) | | (1,482 | ) | | 1,180 |
|
| Total current | 69,185 |
| | 54,509 |
| | 84,182 |
|
| Deferred provision (benefit): | | | | | |
| U.S. federal | (45,990 | ) | | (20,216 | ) | | 1,798 |
|
| Non-U.S | (3,770 | ) | | (5,584 | ) | | (4,511 | ) |
| State and local | 380 |
| | (4 | ) | | 288 |
|
| Total deferred | (49,380 | ) | | (25,804 | ) | | (2,425 | ) |
| Provision for income taxes | $ | 19,805 |
| | $ | 28,705 |
| | $ | 81,757 |
|
The expected cash payments for current U.S. income tax expense for fiscal years 2017, 2016 and 2015 were reduced by approximately $1.6 million, $3.3 million and $2.4 million, respectively, as a result of tax deductions related to the exercise of non-qualified stock options and stock appreciation rights and the vesting of restricted stock and restricted stock units. The expected cash payments for current foreign tax expense for fiscal years 2017, 2016 and 2015 were reduced by $0.1 million, $0.2 million and $0.3 million, respectively, as a result of tax deductions related to the exercise of stock options and the vesting of restricted stock granted to foreign employees. The income tax benefits resulting from these stock-based compensation plans have been recorded to additional paid-in capital in the Company's consolidated balance sheets. Total deferred income tax expense of $49.4 million, $25.8 million and $2.4 million for fiscal years 2017, 2016 and 2015, respectively, are included in deferred income taxes on the Company's consolidated statements of cash flows.
A reconciliation of the U.S. federal statutory income tax rate of 35.0%rates to the Company's effective tax rate is as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Year | 2023 | | 2022 | | 2021 |
| Tax at statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| | | | | |
| Permanent differences | 0.1 | | | (4.9) | | | (2.5) | |
| State, net of federal tax benefit | 2.3 | | | 8.6 | | | (2.0) | |
| Foreign rate differential | 1.8 | | | 21.5 | | | (3.8) | |
| Withholding taxes | (2.0) | | | (19.3) | | | 7.5 | |
| GILTI tax-net of foreign tax credits | — | | | — | | | 5.7 | |
| U.S. tax on foreign income-net of foreign tax credits | 0.3 | | | — | | | — | |
| Income tax contingencies | 0.4 | | | (4.8) | | | 3.9 | |
| Federal Interest on IRS Refund | 2.5 | | | — | | | — | |
| Valuation allowances | (32.5) | | | (110.6) | | | 31.9 | |
| R&D/Foreign Tax Credits | 3.5 | | | — | | | (5.6) | |
| Deficiencies (Benefits) on employee stock awards | (0.6) | | | (2.7) | | | (0.3) | |
| | | | | |
| APB23 Assertion | (0.1) | | | 0.6 | | | (6.9) | |
| Return to provision true-up | 2.7 | | | 4.8 | | | — | |
| | | | | |
| Non deductible foreign equity awards | (0.2) | | | (2.0) | | | 0.8 | |
| Non deductible officer compensation | (0.1) | | | (3.4) | | | 1.0 | |
| | | | | |
| | | | | |
| | | | | |
| Foreign currency hedges | — | | | 1.2 | | | 0.7 | |
| Adjustments related to intercompany | — | | | (5.9) | | | 0.4 | |
| Other | 0.6 | | | (0.8) | | | (2.0) | |
| Provision for income taxes | (0.3) | % | | (96.7) | % | | 49.8 | % |
|
| | | | | | | | |
| Fiscal Year | 2017 | | 2016 | | 2015 |
| Tax at statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
| Non-deductible expenses | (0.6 | ) | | 5.3 |
| | 0.7 |
|
| State, net of federal tax benefit | 1.0 |
| | 0.6 |
| | 0.5 |
|
| Foreign rate differential | 3.7 |
| | (30.9 | ) | | (15.6 | ) |
| U.S. tax on foreign income | (1.7 | ) | | 5.0 |
| | 4.3 |
|
| Valuation allowances | (12.5 | ) | | 8.1 |
| | 1.4 |
|
| Repatriation tax - net impact | (7.4 | ) | | — |
| | — |
|
| Non-deductible goodwill impairment | (15.2 | ) | | — |
| | — |
|
| Tax Reform rate reduction impact on deferred tax assets | (6.2 | ) | | — |
| | — |
|
| Other | (0.5 | ) | | 2.0 |
| | (0.1 | ) |
| Provision for income taxes | (4.4 | )% | | 25.1 | % | | 26.2 | % |
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On December 22, 2017, the U.S. government enacted comprehensive tax legislation that significantly revised the Internal Revenue Code of 1986, including a corporate income tax rate reduction from 35% to 21%, under the Tax Cuts and Jobs Act (the “Tax Act”). The newly enacted federal income tax law contains significant changes in the taxation of foreign income earned by U.S. shareholders, specifically adding new rules related to low-taxed foreign earnings and allowing an exemption on foreign dividends paid after 2017. In anticipation of the tax exemption on foreign dividends, the law imposes a one-time repatriation tax on historical earnings generated offshore that have not been previously taxed in the U.S. Foreign earnings held in cash or liquid assets are taxed at 15.5%, and the remaining earnings are taxed at 8%. The Company accrued $86.4 million for the repatriation tax and released $52.8 million in deferred tax liabilities for foreign earnings not indefinitely reinvested, resulting in a net charge of $33.6 million. After applying foreign tax credit carry forwards and the current year net operating loss, the actual cash repatriation tax liability is expected to be $15.7 million, payable in installments over eight years.
Accounting for the income tax effects of the Tax Act requires significant judgments and estimates in the interpretation and calculations of the provisions of the Tax Act. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company has made reasonable estimates of the effects and recorded provisional amounts in its financial statements for fiscal year 2017 as permitted under SAB 118. As the Company collects and prepares necessary data, and interprets any additional guidance issued by the U.S. Treasury Department or the Internal Revenue Service, the Company may make adjustments to the provisional amounts. In addition, the Company's valuation allowance analysis is affected by various aspects of the Tax Act, including the new limitation on the deductibility of interest expense and the impact of the GILTI. Those adjustments may materially impact the provision for income taxes and the effective tax rate in the period in which the adjustments are made. The accounting for the tax effects of the enactment of the Tax Act will be completed in fiscal year 2018.
The Company recognized expense of $28.2 million on the reduction in U.S. deferred tax assets as a result of the corporate income tax reduction from 35% to 21%. The Company also accrued valuation allowances of $44.7 million on net U.S deferred tax assets and $11.8 million on net foreign deferred tax assets. The2023 effective tax rate was alsounfavorably impacted by non-deductible intangible asset impairment charges recognized during fiscal year 2017.foreign withholding tax and valuation allowances on deferred tax assets, partially offset by favorable benefit from the accrual of interest on tax receivables.
The Company records a valuation allowance against its deferred tax assets when recovery of those amounts on a jurisdictional basis is not more likely than not. The Company's U.S. valuation allowance analysis was increased by $35.7 million and the foreign valuation allowance on NOL's and deferred tax assets was increased by $13.5 million as compared to December 31, 2022. The total valuation allowance of $192.6 million at December 30, 2023 was comprised of $111.3 million and $81.3 million attributable to the U.S. and foreign operations, respectively.
The Company will not indefinitely reinvest $650.3$160.3 million of previously taxed and undistributed earnings and profits of its foreign subsidiaries.subsidiaries as of December 30, 2023. Since under the Tax Act there will be no additional federal income tax when these amounts are repatriated, and the foreign jurisdiction does not impose a withholding tax on dividends, the Company has only accrued state income taxestax on these earnings.foreign exchange gains with an offsetting valuation allowance. Deferred U.S. federal and state income taxes and foreign withholding taxes are not recorded on the remaining $378.0$501.3 million of undistributed earnings and profits of foreign subsidiaries where management plans to continue reinvesting these earnings outside the U.S. Determining tax amounts that would be payable ifAs the majority of these earnings werehave previously been taxed in the U.S., the distribution of the earnings considered indefinitely reinvested would generally be subject only to local country withholding and U.S. state income taxes when distributed, to the U.S. parent companyamount of which is not practicable.material.
The total amount of unrecognized tax benefits, excluding interest and penalties that would favorably impact the effective tax rate in future periods if recognized, was $33.0$23.6 million, $20.6$24.0 million and $20.0$24.8 million for fiscal years 2017, 20162023, 2022 and 2015,2021, respectively. The U.S. Internal Revenue Service has completed examinations of the Company's federalCompany filed amended income tax returns through 2013.for 2014-2017 under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) which included a provision for the carryback of U.S. NOLs. The IRS is reviewing the Company’s 2019 and 2020 U.S. tax returns and resulting net operating losses as well as the tax returns for 2014-2017 which are the carryback years. The Company has received the income tax refund for the 2019 U.S. tax NOL carryback and expects to receive a tax refund of $56.5 million (including interest) for the 2020 U.S. tax NOL carryback in 2024. Fiscal years 2014-2017 2014-2022
remain open for federal income tax examination. The Company is also subject to examinations in various state and foreign jurisdictions for its 2011-20162013-2022 tax years, none of which the Company believes are significant, individually or in the aggregate. Tax audit outcomes and timing of tax audit settlements are subject to significant uncertainty.
The Company has classified uncertain tax positions as long-term income taxes payable unless such amounts are expected to be paid within twelve months from December 30, 2017.2023. As of December 30, 2017,2023, the Company had recorded $5.4$9.6 million of unrecognized tax benefits, excluding interest and penalties, for positions that could be settled or not assessed within the next twelve months. Consistent with its past practice, the Company recognizes interest and/or penalties related to income tax overpayments and income tax underpayments in income tax expense and income taxes receivable/payable, respectively. The total amount of accrued income tax-related interest in the Company's consolidated balance sheets was $2.8$5.1 million, of which $8.9 million is accrued interest expense and $2.3$3.8 million is accrued interest income at December 30, 2017 and2023; compared to $9.1 million of interest expense at December 31, 2016, respectively.2022. The total amount ofCompany accrued no income tax-related penalties in the Company's consolidated balance sheets was $1.3 million and $1.4 million at December 30, 2017 and December 31, 2016, respectively.2023. The Company accrued income tax-related interest expenseexpense/(income) of $0.5$(4.0) million, $0.1$0.9 million and $0.3$1.5 million in fiscal years 2017, 20162023, 2022 and 2015,2021, respectively.
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for the fiscal years indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Fiscal Year | 2023 | | 2022 | | 2021 |
| Balance at beginning of year | $ | 23,998 | | | $ | 29,833 | | | $ | 31,540 | |
| Gross increases—tax positions in prior years | 214 | | | 1,069 | | | 2,266 | |
| Gross decreases—tax positions in prior years | — | | | (1,395) | | | (3,016) | |
| Gross increases—tax positions in current year | 1,006 | | | 1,275 | | | 1,120 | |
| Settlements | (1,583) | | | (5,350) | | | (630) | |
| Lapse in statute of limitations | (173) | | | (171) | | | (1,188) | |
| Change due to currency revaluation | 177 | | | (1,263) | | | (259) | |
| Balance at end of year | $ | 23,639 | | | $ | 23,998 | | | $ | 29,833 | |
13. Leases
The Company's leases consist primarily of retail space, offices, warehouses, distribution centers, equipment and vehicles. The Company determines if an agreement contains a lease at inception based on the Company's right to the economic benefits of the leased asset and its right to direct the use of the leased asset. ROU assets represent the Company's right to use an underlying asset, and ROU liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term. As the Company's leases do not provide an implicit rate, the Company uses its estimated collateralized incremental borrowing rate, which is based on the yield curve for the respective lease terms and adjusted for each lease country to determine the present value of the lease payments.
Some leases include one or more options to renew at the Company's discretion, with renewal terms that can extend the lease from one to ten additional years. The renewal options are not included in the measurement of ROU assets and ROU liabilities unless the Company is reasonably certain to exercise the optional renewal periods. Short-term leases are leases having a term of twelve months or less at inception. The Company does not record a related lease asset or liability for short-term leases. The Company has certain leases containing lease and non-lease components which are accounted for as a single lease component. The Company has certain lease agreements where lease payments are based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. The variable portion of these lease payments is not included in the Company's lease liabilities. The Company's lease agreements do not contain any significant restrictions or covenants other than those that are customary in such arrangements.
|
| | | | | | | | | | | |
| Fiscal Year | 2017 | | 2016 | | 2015 |
| Balance at beginning of year | $ | 23,399 |
| | $ | 23,022 |
| | $ | 20,086 |
|
| Gross increases tax positions in prior years | 2,104 |
| | 918 |
| | 1,800 |
|
| Gross decreases tax positions in prior years | (845 | ) | | (183 | ) | | (9,282 | ) |
| Gross increases—tax positions in current year | 13,444 |
| | 974 |
| | 11,909 |
|
| Settlements | (81 | ) | | (181 | ) | | (583 | ) |
| Lapse in statute of limitations | (2,706 | ) | | (1,106 | ) | | (758 | ) |
| Change due to currency revaluation | 40 |
| | (45 | ) | | (150 | ) |
| Balance at end of year | $ | 35,355 |
| | $ | 23,399 |
| | $ | 23,022 |
|
| | | | | | | | | | | | | | | | | | | | | | |
| Lease Cost | | Consolidated
Statements of Income (Loss)
and Comprehensive
Income (Loss) Location | | Fiscal Year 2023 | | Fiscal Year 2022 | | |
Operating lease cost(1) | | SG&A | | $ | 72,296 | | | $ | 76,528 | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Short-term lease cost | | SG&A | | $ | 1,145 | | | $ | 802 | | | |
| Variable lease cost | | SG&A | | $ | 23,181 | | | $ | 27,606 | | | |
(1) Includes sublease income, which was immaterial. 13.
The following table discloses supplemental balance sheet information for the Company’s leases (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Leases | | Consolidated Balance Sheets Location | | December 30, 2023 | | December 31, 2022 |
| Assets | | | | | | |
| Operating | | Operating lease ROU assets | | $ | 151,000 | | | $ | 156,947 | |
| | | | | | |
| | | | | | |
| Liabilities | | | | | | |
| Current: | | | | | | |
| Operating | | Current operating lease liabilities | | $ | 43,565 | | | $ | 49,702 | |
| | | | | | |
| Noncurrent: | | | | | | |
| Operating | | Long-term operating lease liabilities | | $ | 137,644 | | | $ | 150,188 | |
| | | | | | |
The following table discloses the weighted-average remaining lease term and weighted-average discount rate for the Company's leases:
| | | | | | | | | | | | | | |
| Lease Term and Discount Rate | | December 30, 2023 | | December 31, 2022 |
| Weighted-average remaining lease term: | | | | |
| Operating leases | | 6.4 years | | 5.6 years |
| | | | |
| Weighted-average discount rate: | | | | |
| Operating leases | | 14.9 | % | | 14.1 | % |
| | | | |
Future minimum lease payments by year as of December 30, 2023 were as follows (in thousands):
| | | | | | | | | | |
| Fiscal Year | | Operating Leases | | |
| 2024 | | $ | 70,125 | | | |
| 2025 | | 50,188 | | | |
| 2026 | | 38,594 | | | |
| 2027 | | 27,775 | | | |
| 2028 | | 17,693 | | | |
| Thereafter | | 87,328 | | | |
| Total lease payments | | $ | 291,703 | | | |
| Less: Interest | | 110,494 | | | |
| Total lease obligations | | $ | 181,209 | | | |
Supplemental cash flow information related to leases was as follows (in thousands):
| | | | | | | | | | | |
| Fiscal Year 2023 | | Fiscal Year 2022 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows from operating leases | $ | 86,474 | | | $ | 93,245 | |
| | | |
| | | |
| | | |
| Leased assets obtained in exchange for new operating lease liabilities | 41,430 | | | 34,248 | |
As of December 30, 2023, the Company did not have any material operating or finance leases that have been signed but not commenced.
14. Commitments and Contingencies
License Agreements. The Company has various license agreements to market watches and jewelry bearing certain trademarks or patentsincorporating certain technology owned by various third parties. In accordance with these agreements, the Company incurred royalty expense of approximately $190.0$129.5 million, $206.1$140.5 million and $243.5$157.8 million in fiscal years 2017, 20162023, 2022 and 2015,2021, respectively. These amounts are included in the Company's cost of sales or, if advertising related,advertising-related, in SG&A. These license agreements have expiration dates between fiscal years 20182024 and 20252028 and require the Company to pay royalties ranging from 5% to 15%22% of defined net sales. The Company has future minimum royalty commitments through fiscal year 20202028 under these license agreements as follows by fiscal year (in thousands):
|
| | | |
| Fiscal Year | Minimum Royalty Commitments |
| 2018 | $ | 154,115 |
|
| 2019 | 8,086 |
|
| 2020 | 2,500 |
|
| Total | $ | 164,701 |
|
| | | | | |
| Fiscal Year | Minimum Royalty
Commitments |
| 2024 | $ | 111,604 | |
| 2025 | 16,205 | |
| 2026 | 14,348 | |
| 2027 | 14,348 | |
| 2028 | 1,448 | |
| |
| Total | $ | 157,953 | |
These minimum royalty commitments do not include amounts owed under these license agreements for obligations of the Company to pay the licensors a percentage of net sales of these licensed products.
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Leases. The Company leases its retail and outlet store facilities as well as certain of its office and warehouse facilities and equipment under non-cancelable operating leases and capital leases. Most of the retail and outlet store leases provide for contingent rental payments based on operating results and require the payment of taxes, insurance and other costs applicable to the property. Generally, these leases include renewal options for various periods at stipulated rates. Total rent expense under these agreements was approximately $171.6 million, $188.7 million and $186.1 million for fiscal years 2017, 2016 and 2015, respectively. The Company's total rent expense included contingent rent expense of approximately $8.2 million, $10.5 million and $13.3 million for fiscal years 2017, 2016 and 2015, respectively. The Company includes capital leases as a component of short-term and current portion of long-term debt and long-term debt in the consolidated balance sheets. Future minimum rental commitments under non-cancelable leases, by fiscal year, are as follows (in thousands):
|
| | | | | | | |
| Fiscal Year | Operating Leases | | Capital Leases |
| 2018 | $ | 144,108 |
| | $ | 1,285 |
|
| 2019 | 124,176 |
| | 1,056 |
|
| 2020 | 103,069 |
| | 1,052 |
|
| 2021 | 85,064 |
| | 1,045 |
|
| 2022 | 70,103 |
| | 522 |
|
| Thereafter | 186,435 |
| | — |
|
| | $ | 712,955 |
| | $ | 4,960 |
|
| Less amounts representing interest at 2.2% to 10.8% | | | 117 |
|
| Capital lease obligations | | | $ | 4,843 |
|
Purchase Obligations. As of December 30, 2017,2023, the Company had purchase obligations totaling $357.3$192.1 million that consisted primarily of open non-cancelable purchase orders.
Asset Retirement Obligations. ASC 410, Asset Retirement and Environmental Obligations requires (i) that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made and (ii) that the associated asset retirement costs be capitalized as part of the carrying amount of the long-lived asset. The Company's asset retirement obligations relate to costs associated with the retirement of leasehold improvements under office leases and retail store leases within the Americas, Europe and Asia segments.
The following table summarizes the changes in the Company's asset retirement obligations (in thousands):
| | | | | | | | | | | |
| Fiscal Year | 2023 | | 2022 |
| Beginning asset retirement obligation | $ | 11,547 | | | $ | 13,161 | |
| Additions and changes in estimate | 1,356 | | | 412 | |
| Liabilities settled during the period | (1,636) | | | (1,608) | |
| Accretion expense | 296 | | | 308 | |
| Currency translation | 195 | | | (726) | |
| Ending asset retirement obligations | $ | 11,758 | | | $ | 11,547 | |
|
| | | | | | | |
| Fiscal Year | 2017 | | 2016 |
| Beginning asset retirement obligation | $ | 12,678 |
| | $ | 8,894 |
|
| Liabilities incurred during the period | 549 |
| | 4,331 |
|
| Liabilities settled during the period | (1,472 | ) | | (684 | ) |
| Accretion expense | 363 |
| | 401 |
|
| Currency translation | 968 |
| | (264 | ) |
| Ending asset retirement obligations | $ | 13,086 |
| | $ | 12,678 |
|
Litigation. The Company is occasionally subject to litigation or other legal proceedings in the normal course of its business. In addition, from time to time, the Company receives communications from government or regulatory agencies concerning investigations or allegations of noncompliance with laws or regulations in jurisdictions in which the Company operates. The Company does not believe that the outcome of any currently pending legal matters, individually or collectively, will have a material effect on the business or financial condition of the Company.
14.
15. Stockholders' Equity
Common and Preferred Stock. The Company has 100,000,000 shares of common stock, par value $0.01 per share, authorized, with 48,642,70352,487,020 and 48,268,59951,836,456 shares issued and outstanding at fiscal year-end 2017year end 2023 and 2016,2022, respectively. The Company has 1,000,000 shares of preferred stock, par value $0.01 per share, authorized, with none issued or outstanding at fiscal year-end 20172023 and 2016.2022. Rights, preferences and other terms of preferred stock will be determined by the Board of Directors at the time of issuance.
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Common Stock Repurchase Programs. Purchases of the Company's common stock have been made from time to time pursuant to its repurchase programs, subject to market conditions and at prevailing market prices, through the open market. Repurchased shares of common stock are recorded at cost and become authorized but unissued shares which may be issued in the future for general corporate or other purposes. In the event the repurchased shares are canceled, the Company accounts for retirements by allocating the repurchase price to common stock, additional paid‑in capital and retained earnings. The repurchase price allocation is based upon the equity contribution associated with historical issuances. The repurchase programs have been conducted pursuant to Rule 10b‑18 of the Securities Exchange Act of 1934.
DuringIn August 2010, the period from the announcementBoard of the Company's buyback authorizations in December 2012 and December 2014 for $1.0 billion each, until the end of the fiscal year 2017, the Company has repurchased approximately $1.2 billion of itsDirectors approved a common stock representing approximately 11.8repurchase program pursuant to which up to $30 million shares.could be used to repurchase outstanding shares of our common stock. The Company has not repurchased any shares under the $30 million repurchase plan authorized in 2010.
program has no termination date. During fiscal year 2022, the Company effectively retired 1.0 million shares of common stock repurchased under its repurchase programs. The effective retirement of repurchased common stock decreased common stock by $10,000, additional paid-in capital by $0.5 million, retained earnings by $9.5 million and treasury stock by $10.0 million. At December 30, 20172023 and December 31, 2016,2022, all treasury stock had been effectively retired. As of December 30, 2017,2023, the Company had $824.2$20.0 million of repurchase authorizations remaining under the combinedits repurchase plans. However, under the Company's credit agreement, the Company is restricted from making open market repurchases of its common stock. See Note 10—Debt for additional disclosures about the Second Amendment and Note 20—Subsequent Event for more information about the Company's amended credit facilities.plan.
The following table shows the Company's common stock repurchase activity for the periods indicated (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | For the 2017 Fiscal Year | | For the 2016 Fiscal Year |
| Fiscal Year Authorized | | Dollar Value Authorized | | Termination Date | | Number of Shares Repurchased | | Dollar Value Repurchased | | Number of Shares Repurchased | | Dollar Value Repurchased |
| 2014 | | $ | 1,000.0 |
| | December 2018 | | — |
| | $ | — |
| | 0.1 |
| | $ | 5.2 |
|
| 2010 | | $ | 30.0 |
| | None | | — |
| | $ | — |
| | — |
| | $ | — |
|
Noncontrolling Interest. The Company has entered into an agreement to purchase the outstanding minority interest shares in Fossil South Africa, representing the entire noncontrolling interest in the subsidiary. The purchase price is based on variable payments through fiscal year 2020, the present value of which the Company has measured at $6.5 million as of December 30, 2017. The transaction was accounted for as an equity transaction, and the Company’s ownership interest in Fossil South Africa increased to 100%. The Company recorded $2.0 million of the variable consideration in accrued expenses-other and $4.5 million in other long-term liabilities in the consolidated balance sheets at December 30, 2017.
15.16. Employee Benefit Plans
Deferred Compensation and Savings Plans. The Company has a defined contribution savings plan (the "401(k) Plan") for substantially all U.S.-based full-time employees of the Company, which includes a Roth 401(k) option. The Company's common stock is one of several investment alternatives available under the 401(k) Plan. The Company has a discretionary match for the 401(k) Plan. After 90 days of service (minimum of 250 hours worked), the Company matches 50% of employee contributions up to 6% of their compensation. Matching contributions made by the Company to the 401(k) Plan totaled approximately $2.9$2.5 million, for both fiscal years 2017$2.6 million and 2016 and $2.8$2.3 million for fiscal year 2015.years 2023, 2022 and 2021, respectively. The Company also has the right to make additional matching contributions not to exceed 15% of employee compensation. The Company did not make any additional matching contributions during fiscal years 2017, 20162023, 2022 and 2015.2021.
Under the Fossil Group, Inc. and Affiliates Deferred Compensation Plan (the "Deferred Plan") eligible participants may elect to defer up to 50% of their salary or up to 100% of any bonuses paid pursuant to the terms and conditions of the Deferred Plan. In addition, the Company may make employer contributions to participants under the Deferred Plan from time to time. The Company made no contributions to the Deferred Plan during fiscal years 2017, 2016 and 2015. In prior periods, the Company made payments pursuant to the Deferred Plan into a Rabbi Trust. The funds held in the Rabbi Trust are directed to certain investments available through life insurance products. The Company had an asset of $4.8 million and $2.4 million related to the Company's invested balances recorded in intangible and other assets—net and a liability of $5.2 million and $3.9
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
million related to the participants' invested balances recorded in accrued expenses—other, each on the Company's consolidated balance sheets at the end of fiscal years 2017 and 2016, respectively.
Stock-Based Compensation Plans. The Company’s grants under its current stock-based compensation plans generally include: (i) stock options, restricted stock units, and performance restricted stock units for its international employees, (ii) restricted stock units for its nonemployee directors, and (iii) stock appreciation rights, performance stock appreciation rights, restricted stock, restricted stock units, and performance restricted stock units for its U.S.-based employees. As of
December 30, 2017,2023, the Company had approximately $43.7$5.6 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company's stock basedstock-based compensation plans. This cost is expected to be recognized over a weighted-average period of approximately 1.4 years. All time-based or performance-based stock appreciation rights and restricted stock units are settled in shares of the Company's common stock with the exception of two employees' grants that were converted to cash settled awards.stock.
Long-Term Incentive Plans. An aggregate of 3,000,000 shares of the Company's common stock were reserved for issuance pursuant to the Company's 2016 Long-Term Incentive Plan ("2016 LTIP"Plan"), adopted in March 2016. Pursuant to the First Amendment to the Company’s 2016 Long-Term Incentive Plan, which was approved by our stockholders on May 23, 2018, the number of shares of the Company’s common stock authorized for issuance under the Company’s 2016 Plan was increased from 3,000,000 to 10,288,468, such additional shares consisting of (i) 5,000,000 additional shares of common stock and (ii) up to 2,288,468 shares of common stock subject to awards under the Company’s 2008 Long-Term Incentive Plan (the “2008 Plan”) that were outstanding on March 31, 2018 and, on or after March 31, 2018, are forfeited, expire or are canceled.
Under the 2016 LTIP,Plan, designated employees of the Company, including officers, certain contractors, and outsidenon-employee directors of the Company, are eligible to receive (i) stock options, (ii) stock appreciation rights, (iii) restricted or non-restricted stock awards, (iv) restricted stock units, (v) performance awards, (vi) cash awards, or (vii) any combination of the foregoing. The 2016 LTIPPlan is administered by theThe Compensation and Talent Management Committee of the Company's Board of Directors (the "Compensation Committee"). Each award issued under the 2016 LTIPPlan terminates at the time designated by the Compensation Committee, not to exceed ten years. The current outstanding stock options, stock appreciation rights, performance stock appreciation rights, restricted stock, restricted stock units and performance restricted stock units issued under the 2016 LTIPPlan predominantly have original vesting periods of three years. Time-based or performance-based stock appreciation rights and restricted stock units are predominately settled in shares of the Company's common stock. Each nonemployeeOn the date of the Company’s annual stockholders meeting, each non-employee director automatically receives restricted stock units valued at $130,000 on the date of the Company's annual stockholders' meeting. These grantswhich vest 100% on the earlier of one year from the date of grant or the date of the Company's next annual stockholders' meeting.stockholders meeting, provided such director is providing services to the Company or a subsidiary of the Company on that date. Beginning with the grant in fiscal year 2021, non-employee directors may elect to defer receipt of all or a portion of the restricted stock units settled in common stock of the Company upon the vesting date. In addition, beginning in fiscal year 2021, non-employee directors may defer the cash portion of their annual fees. Each participant may also elect to have the cash portion of his or her annual fees for each calendar year treated as if invested in units of common stock of the Company.
Stock Options, Stock Appreciation Rights and Performance Stock Appreciation Rights. The fair value of stock options, stock appreciation rights and performance stock appreciation rights granted under the Company's stock-based compensation plans were estimated on the date of grant using the Black-Scholes option pricing model. The table below outlines the weighted-average assumptions for these award grants:
|
| | | | | | | |
| Fiscal Year | 2016 | | 2015 |
| Risk-free interest rate | 1.1 | % | | 1.3 | % |
| Expected term (in years) | 3.0 |
| | 3.2 |
|
| Expected volatility | 38.8 | % | | 42.3 | % |
| Expected dividend yield | — | % | | — | % |
| Estimated fair value per stock option/stock appreciation right granted | $ | 11.25 |
| | $ | 12.74 |
|
The expected term of the stock options represents the estimated period of time until exercise and is based on historical experience of similar awards. Expected stock price volatility is based on the historical volatility of the Company'sCompany’s common stock. The risk-freerisk‑free interest rate is based on the implied yield available on U.S. Treasury securities with an equivalent remaining term.
The Company did not issue stock options, stock appreciation rights and performance stock appreciation rights in fiscal year 2017.
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
years 2023, 2022 and 2021.
The following table summarizes stock option, stock appreciation rights and performance stock appreciation rights activity:
| | Stock Appreciation Rights | | Stock Appreciation Rights | Shares | | Weighted-Average
Exercise Price | | Weighted-Average
Remaining
Contractual
Term (Years) | | Aggregate
Intrinsic
Value |
| | | | | | | | | | in thousands | | | | | | in thousands |
| Stock Options and Stock Appreciation Rights | Shares | | Weighted-Average
Exercise Price | | Weighted-Average
Remaining
Contractual
Term (Years) | | Aggregate
Intrinsic
Value |
| | in thousands | | | | in thousands |
| Outstanding at January 3, 2015 | 663 |
| | $ | 85.08 |
| | 5.6 | | $ | 20,751 |
|
| Outstanding at January 2, 2021 | |
| Granted | 1,496 |
| | 41.16 |
| | |
| Exercised | (36 | ) | | 31.04 |
| | 1,544 |
|
| Exercised | |
| Exercised | |
| Forfeited or expired | (95 | ) | | 102.86 |
| | |
| Outstanding at January 2, 2016 | 2,028 |
| | 52.80 |
| | 8.7 | | 2,095 |
|
| Outstanding at January 1, 2022 | |
| Outstanding at January 1, 2022 | |
| Outstanding at January 1, 2022 | |
| Granted | 326 |
| | 41.53 |
| | |
| Exercised | (10 | ) | | 26.93 |
| | 186 |
|
| Exercised | |
| Exercised | |
| Forfeited or expired | (57 | ) | | 81.93 |
| | |
| Outstanding at December 31, 2016 | 2,287 |
| | 50.58 |
| | 6.2 | | 627 |
|
| Outstanding at December 31, 2022 | |
| Outstanding at December 31, 2022 | |
| Outstanding at December 31, 2022 | |
| Granted | — |
| | — |
| | |
| Exercised | (13 | ) | | 13.65 |
| | 35 |
|
| Exercised | |
| Exercised | |
| Forfeited or expired | (97 | ) | | 67.99 |
| | |
| Outstanding at December 30, 2017 | 2,177 |
| | 50.01 |
| | 5.3 | | — |
|
| Exercisable at December 30, 2017 | 1,058 |
| | $ | 62.01 |
| | 4.6 | | $ | — |
|
| Outstanding at December 30, 2023 | |
| Outstanding at December 30, 2023 | |
| Outstanding at December 30, 2023 | |
| Exercisable at December 30, 2023 | |
The aggregate intrinsic value in the table above is before income taxes and is based on the exercise price for outstanding and exercisable options/rights at December 30, 20172023 and based on the fair market value of the Company's common stock on the exercise date for options/rights that were exercised during the fiscal year.
Stock Options, Stock Appreciation Rights and Performance Stock Appreciation Rights Outstanding and Exercisable. The following tables summarizetable summarizes information with respect to stock options, stock appreciation rights and performance stock appreciation rights outstanding and exercisable at December 30, 2017:2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock Appreciation Rights Outstanding | | Stock Appreciation
Rights Exercisable |
| Range of Exercise Prices | Number of
Shares | | Weighted-Average
Exercise Price | | Weighted-Average
Remaining
Contractual
Term (Years) | | Number of
Shares | | Weighted-
Average
Exercise
Price |
| in thousands | | | | | | in thousands | | |
| | | | | | | | | |
| $47.99 - $71.98 | 39 | | | $ | 47.99 | | | 0.2 | | 39 | | | $ | 47.99 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total | 39 | | | $ | 47.99 | | | 0.2 | | 39 | | | $ | 47.99 | |
|
| | | | | | | | | | | | | | | |
| Stock Options Outstanding | | Stock Options Exercisable |
| Range of Exercise Prices | Number of Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (Years) | | Number of Shares | | Weighted- Average Exercise Price |
| | in thousands | | | | | | in thousands | | |
| $13.65 - $29.49 | 35 |
| | $ | 14.12 |
| | 1.2 | | 35 |
| | $ | 14.12 |
|
| $29.78 - $47.99 | 74 |
| | 36.53 |
| | 1.3 | | 74 |
| | 36.53 |
|
| $55.04 - $83.83 | 87 |
| | 81.35 |
| | 3.1 | | 87 |
| | 81.35 |
|
| $95.91 - $131.46 | 124 |
| | 127.98 |
| | 4.1 | | 124 |
| | 127.98 |
|
| Total | 320 |
| | $ | 81.71 |
| | 2.9 | | 320 |
| | $ | 81.71 |
|
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | | | | | |
| Stock Appreciation Rights Outstanding | | Stock Appreciation Rights Exercisable |
| Range of Exercise Prices | Number of Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (Years) | | Number of Shares | | Weighted- Average Exercise Price |
| | in thousands | | | | | | in thousands | | |
| $13.65 - $29.49 | 101 |
| | $ | 29.49 |
| | 6.6 | | 34 |
| | $ | 29.49 |
|
| $29.78 - $47.99 | 1,467 |
| | 38.05 |
| | 6.0 | | 490 |
| | 38.11 |
|
| $55.04 - $83.83 | 125 |
| | 79.16 |
| | 4.6 | | 91 |
| | 79.43 |
|
| $95.91 - $131.46 | 103 |
| | 114.46 |
| | 2.8 | | 103 |
| | 114.46 |
|
| Total | 1,796 |
| | $ | 44.82 |
| | 5.7 | | 718 |
| | $ | 53.95 |
|
|
| | | | | | | | | | | | | | | |
| Cash Stock Appreciation Rights Outstanding | | Cash Stock Appreciation Rights Exercisable |
| Range of Exercise Prices | Number of Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (Years) | | Number of Shares | | Weighted- Average Exercise Price |
| | in thousands | | | | | | in thousands | | |
| $29.78 - $47.99 | 61 |
| | $ | 36.73 |
| | 6.0 | | 20 |
| | $ | 36.73 |
|
| Total | 61 |
| | $ | 36.73 |
| | 6.0 | | 20 |
| | $ | 36.73 |
|
Restricted Stock, Restricted Stock Units and Performance Restricted Stock Units. The following table summarizes restricted stock, restricted stock unit and performance restricted stock unit activity:
| | Restricted Stock Units and Performance Restricted Stock Units | | Restricted Stock Units and Performance Restricted Stock Units | Number of
Shares | | Weighted-Average
Grant Date Fair
Value Per Share |
| | Restricted Stock, Restricted Stock Units and Performance Restricted Stock Units | Number of Shares | | Weighted-Average Grant Date Fair Value Per Share |
| | in thousands | | |
| Nonvested at January 3, 2015 | 255 |
| | $ | 110.17 |
|
| Nonvested at January 2, 2021 | |
| Nonvested at January 2, 2021 | |
| Nonvested at January 2, 2021 | |
| Granted | 1,131 |
| | 49.16 |
|
| Vested | (115 | ) | | 109.97 |
|
| Forfeited | (63 | ) | | 94.54 |
|
| Nonvested at January 2, 2016 | 1,208 |
| | $ | 53.87 |
|
| Nonvested at January 1, 2022 | |
| Granted | 588 |
| | 27.94 |
|
| Vested | (327 | ) | | 64.51 |
|
| Forfeited | (64 | ) | | 56.29 |
|
| Nonvested at December 31, 2016 | 1,405 |
| | $ | 40.41 |
|
| Nonvested at December 31, 2022 | |
| Granted | 2,381 |
| | 14.81 |
|
| Vested | (479 | ) | | 44.79 |
|
| Forfeited | (326 | ) | | 25.62 |
|
| Nonvested at December 30, 2017 | 2,981 |
| | $ | 20.84 |
|
| Nonvested at December 30, 2023 | |
The total fair value of shares/units vested during fiscal years 2017, 20162023, 2022 and 20152021 was $6.3$2.6 million, $12.3$9.4 million and $9.0$10.4 million, respectively.
Other Retirement Plans. The Company maintains a defined benefit plan for its employees located in Switzerland. The plan is funded through payments to an insurance company. The payments are determined by periodic actuarial calculations. During fiscal years 2017, 20162023, 2022 and 2015,2021, the Company recorded pension expensesgains (expenses) of $1.8$5.5 million, $2.2$0.2 million and $1.5
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($0.6) million, respectively, related to this plan. The liability for the Company's defined benefit plan was $12.5$4.8 million and $11.3$4.0 million at the end of fiscal years 20172023 and 2016,2022, respectively. This liability is recorded in other long-term liabilities on the Company's consolidated balance sheets.
Under French law, the Company is required to maintain a defined benefit plan for its employees located in France, which is referred to as a "retirement indemnity." The amount of the retirement indemnity is based on the employee's last salary and duration of employment with the Company. The employee's right to receive the retirement indemnity is subject to the employee remaining with the Company until retirement. During fiscal years 2017, 20162023, 2022 and 2015,2021, the Company recorded pension gains (expenses) of $0.7$0.1 million, $(0.2) million($46,000), and $(0.1)$0.1 million, respectively, for its retirement indemnity obligations. The liability for the Company's retirement indemnity was $1.3$0.9 million and $1.7$1.0 million at the end of fiscal years 20172023 and 2016,2022, respectively. This liability is recorded in other long-term liabilities on the Company's consolidated balance sheets.
16.17. Supplemental Cash Flow Information
The following table summarizes supplemental cash flow information (in thousands):
| | | | | | | | | | | | | | | | | |
| Fiscal Year | 2023 | | 2022 | | 2021 |
| Cash paid during the year for: | | | | | |
| Interest | $ | 27,297 | | | $ | 17,501 | | | $ | 16,078 | |
| Income taxes, net of refunds | $ | 20,162 | | | $ | 5,836 | | | $ | (16,695) | |
| Supplemental disclosures of non-cash investing and financing activities: | | | | | |
| Additions to property, plant and equipment included in accounts payable | $ | 943 | | | $ | 1,039 | | | $ | 581 | |
| Additions to property, plant and equipment acquired under finance leases | $ | — | | | $ | — | | | $ | 9 | |
| | | | | |
|
| | | | | | | | | | | |
| Fiscal Year | 2017 | | 2016 | | 2015 |
| Cash paid during the year for: | |
| | |
| | |
|
| Interest | $ | 43,245 |
| | $ | 26,867 |
| | $ | 20,042 |
|
| Income taxes, net of refunds | $ | 36,571 |
| | $ | 14,163 |
| | $ | 131,838 |
|
| Supplemental disclosures of non-cash investing and financing activities: | |
| | |
| | |
|
| Additions to property, plant and equipment included in accounts payable | $ | 2,300 |
| | $ | 4,762 |
| | $ | 7,966 |
|
| Additions to property, plant and equipment acquired under capital leases | $ | — |
| | $ | 432 |
| | $ | 1,462 |
|
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 17.18. Supplemental Disclosure for Accumulated Other Comprehensive Income (Loss)
The following table illustrates changes in the balances of each component of accumulated other comprehensive income (loss), net of taxes (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 30, 2023 |
| | | | Cash Flow Hedges | | | | |
| | Currency
Translation
Adjustments | | Forward
Contracts | | | | Pension
Plan | | Total |
| Beginning balance | $ | (90,681) | | | $ | 2,397 | | | | | $ | 11,966 | | | $ | (76,318) | |
| Other comprehensive income (loss) before reclassifications | 6,775 | | | (1,461) | | | | | (6,209) | | | (895) | |
| Tax (expense) benefit | — | | | 753 | | | | | 56 | | | 809 | |
| Amounts reclassed from accumulated other comprehensive income (loss) | — | | | (788) | | | | | — | | | (788) | |
| Tax (expense) benefit | — | | | 789 | | | | | — | | | 789 | |
| Total other comprehensive income (loss) | 6,775 | | | (709) | | | | | (6,153) | | | (87) | |
| Ending balance | $ | (83,906) | | | $ | 1,688 | | | | | $ | 5,813 | | | $ | (76,405) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| | | Cash Flow Hedges | | | | | | |
| Currency
Translation
Adjustments | | Forward
Contracts | | | | Pension
Plan | | Total |
| Beginning balance | $ | (75,601) | | | $ | 4,344 | | | | | $ | 3,982 | | | $ | (67,275) | |
| Other comprehensive income (loss) before reclassifications | (15,080) | | | 11,097 | | | | | 8,050 | | | 4,067 | |
| Tax (expense) benefit | — | | | 1,079 | | | | | (66) | | | 1,013 | |
| Amounts reclassed from accumulated other comprehensive income (loss) | — | | | 13,145 | | | | | — | | | 13,145 | |
| Tax (expense) benefit | — | | | 978 | | | | | — | | | 978 | |
| Total other comprehensive income (loss) | (15,080) | | | (1,947) | | | | | 7,984 | | | (9,043) | |
| | | | | | | | | |
| Ending balance | $ | (90,681) | | | $ | 2,397 | | | | | $ | 11,966 | | | $ | (76,318) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | January 1, 2022 |
| | | Cash Flow Hedges | | | | |
| Currency
Translation
Adjustments | | Forward
Contracts | | | | Pension
Plan | | Total |
| Beginning balance | $ | (61,178) | | | $ | 850 | | | | | $ | 1,428 | | | $ | (58,900) | |
| Other comprehensive income (loss) before reclassifications | (14,423) | | | 5,860 | | | | | 2,859 | | | (5,704) | |
| Tax (expense) benefit | — | | | 8 | | | | | (305) | | | (297) | |
| Amounts reclassed from accumulated other comprehensive income (loss) | — | | | 2,374 | | | | | — | | | 2,374 | |
| Tax (expense) benefit | — | | | — | | | | | — | | | — | |
| Total other comprehensive income (loss) | (14,423) | | | 3,494 | | | | | 2,554 | | | (8,375) | |
| | | | | | | | | |
| Ending balance | $ | (75,601) | | | $ | 4,344 | | | | | $ | 3,982 | | | $ | (67,275) | |
|
| | | | | | | | | | | | | | | | | | | |
| | December 30, 2017 |
| | | | Cash Flow Hedges | | | | |
| | Currency Translation Adjustments | | Forward Contracts | | Interest Rate Swaps | | Pension Plan | | Total |
| Beginning balance | $ | (101,867 | ) | | $ | 10,693 |
| | $ | (343 | ) | | $ | (3,907 | ) | | $ | (95,424 | ) |
| Other comprehensive income (loss) before reclassifications | 37,368 |
| | (34,873 | ) | | 437 |
| | 2,677 |
| | 5,609 |
|
| Tax (expense) benefit | — |
| | 9,785 |
| | (159 | ) | | (442 | ) | | 9,184 |
|
| Amounts reclassed from accumulated other comprehensive income (loss) | — |
| | (1,076 | ) | | (214 | ) | | — |
| | (1,290 | ) |
| Tax (expense) benefit | — |
| | (3,221 | ) | | 149 |
| | — |
| | (3,072 | ) |
| Total other comprehensive income (loss) | 37,368 |
| | (20,791 | ) | | 343 |
| | 2,235 |
| | 19,155 |
|
| Ending balance | $ | (64,499 | ) | | $ | (10,098 | ) | | $ | — |
| | $ | (1,672 | ) | | $ | (76,269 | ) |
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | | | Cash Flow Hedges | | | | |
| | Currency Translation Adjustments | | Forward Contracts | | Interest Rate Swaps | | Pension Plan | | Total |
| Beginning balance | $ | (81,707 | ) | | $ | 8,114 |
| | $ | (693 | ) | | $ | (6,220 | ) | | $ | (80,506 | ) |
| Other comprehensive income (loss) before reclassifications | (19,773 | ) | | 22,638 |
| | (1,149 | ) | | 2,650 |
| | 4,366 |
|
| Tax (expense) benefit | (283 | ) | | (9,073 | ) | | 419 |
| | (337 | ) | | (9,274 | ) |
| Amounts reclassed from accumulated other comprehensive income (loss) | 104 |
| | 16,143 |
| | (1,699 | ) | | — |
| | 14,548 |
|
| Tax (expense) benefit | — |
| | (5,157 | ) | | 619 |
| | — |
| | (4,538 | ) |
| Total other comprehensive income (loss) | (20,160 | ) | | 2,579 |
| | 350 |
| | 2,313 |
| | (14,918 | ) |
| Ending balance | $ | (101,867 | ) | | $ | 10,693 |
| | $ | (343 | ) | | $ | (3,907 | ) | | $ | (95,424 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | January 2, 2016 |
| | | | Cash Flow Hedges | | | | |
| | Currency Translation Adjustments | | Forward Contracts | | Interest Rate Swaps | | Pension Plan | | Total |
| Beginning balance | $ | (27,241 | ) | | $ | 14,980 |
| | $ | (502 | ) | | $ | (3,647 | ) | | $ | (16,410 | ) |
| Other comprehensive income (loss) before reclassifications | (54,466 | ) | | 33,475 |
| | 2,430 |
| | (2,846 | ) | | (21,407 | ) |
| Tax (expense) benefit | — |
| | (10,712 | ) | | (886 | ) | | 463 |
| | (11,135 | ) |
| Amounts reclassed from accumulated other comprehensive income (loss) | — |
| | 44,859 |
| | 2,730 |
| | 210 |
| | 47,799 |
|
| Tax (expense) benefit | — |
| | (15,230 | ) | | (995 | ) | | (20 | ) | | (16,245 | ) |
| Total other comprehensive income (loss) | (54,466 | ) | | (6,866 | ) | | (191 | ) | | (2,573 | ) | | (64,096 | ) |
| Ending balance | $ | (81,707 | ) | | $ | 8,114 |
| | $ | (693 | ) | | $ | (6,220 | ) | | $ | (80,506 | ) |
18.19. Major Customer, Segment and Geographic Information
Major Customer
Wholesale customers of the Company consist principally of major department stores and specialty retail stores located throughout the world. No individual customer accounts for 10% or more of the Company's net sales.
Segment Information
The Company reports segment information based on the "management approach". The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company's reportable segments.
The Company manages its business primarily on a geographic basis. The Company's reportable operating segments are comprised of (i) Americas, (ii) Europe and (iii) Asia. Each reportable operating segment includes sales to wholesale and distributor customers, and sales through Company-owned retail stores and e-commerce activities based on the location of the selling entity. The Americas segment primarily includes sales to customers based in Canada, Latin America and the United States. The Europe segment primarily includes sales to customers based in European countries, the Middle East and Africa. The Asia segment primarily includes sales to customers based in Australia, China (including Hong Kong, Macau and Taiwan), India, Indonesia, Japan, Malaysia, New Zealand, Singapore, South Korea Taiwan and Thailand. Each reportable operating segment provides similar products and services.
The Company evaluates the performance of its reportable segments based on net sales and operating income (loss). Net sales for geographic segments are based on the location of the selling entity. Operating income (loss) for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. GeneralCorporate includes peripheral revenue generating activities from factories and intellectual property and general corporate expenses, including certain administrative, legal, accounting, technology support costs, equity compensation costs, payroll costs attributable to executive management, brand management, product development, art, creative/product design, marketing,
strategy, compliance and back office supply chain expenses that are not allocated to the various segments because they are managed at the corporate level internally. The Company does not include intercompany transfers between segments for management reporting purposes.
Summary information by operating segment was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year 2023 |
| Net Sales | | Operating
Income (Loss) | | Depreciation
and
Amortization | | Long-term
Assets | | Total Assets |
| Americas | $ | 640,779 | | | $ | 82,746 | | | $ | 3,734 | | | $ | 72,512 | | | $ | 266,691 | |
| Europe | 437,358 | | | 40,962 | | | 4,907 | | | 76,115 | | | 213,929 | |
| Asia | 328,198 | | | 38,162 | | | 2,508 | | | 58,192 | | | 191,886 | |
| Corporate | 6,049 | | | (304,894) | | | 13,279 | | | 60,521 | | | 305,524 | |
| Consolidated | $ | 1,412,384 | | | $ | (143,024) | | | $ | 24,428 | | | $ | 267,340 | | | $ | 978,030 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year 2022 |
| Net Sales | | Operating
Income (Loss) | | Depreciation
and
Amortization | | Long-term
Assets | | Total Assets |
| Americas | $ | 744,027 | | | $ | 116,401 | | | $ | 4,834 | | | $ | 84,247 | | | $ | 343,556 | |
| Europe | 541,343 | | | 91,087 | | | 5,856 | | | 86,200 | | | 269,097 | |
| Asia | 377,600 | | | 52,090 | | | 3,071 | | | 48,054 | | | 206,925 | |
| Corporate | 19,469 | | | (261,051) | | | 8,870 | | | 74,327 | | | 418,550 | |
| Consolidated | $ | 1,682,439 | | | $ | (1,473) | | | $ | 22,631 | | | $ | 292,828 | | | $ | 1,238,128 | |
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | | | | | | | | | |
| | Fiscal Year 2017 |
| | Net Sales | | Operating Income (Loss) | | Depreciation and Amortization | | Long-term Assets | | Total Assets |
| Americas | $ | 1,316,149 |
| | $ | (46,035 | ) | | $ | 21,214 |
| | $ | 81,444 |
| | $ | 463,175 |
|
| Europe | 974,198 |
| | 33,783 |
| | 21,368 |
| | 113,621 |
| | 471,375 |
|
| Asia | 497,816 |
| | (10,897 | ) | | 10,798 |
| | 33,160 |
| | 216,660 |
|
| Corporate | | | (401,127 | ) | | 28,197 |
| | 139,159 |
| | 507,162 |
|
| Consolidated | $ | 2,788,163 |
| | $ | (424,276 | ) | | $ | 81,577 |
| | $ | 367,384 |
| | $ | 1,658,372 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Fiscal Year 2016 |
| | Net Sales | | Operating Income | | Depreciation and Amortization | | Long-term Assets | | Total Assets |
| Americas | $ | 1,524,912 |
| | $ | 241,118 |
| | $ | 22,612 |
| | $ | 313,437 |
| | $ | 741,082 |
|
| Europe | 1,002,076 |
| | 174,205 |
| | 22,505 |
| | 237,801 |
| | 534,413 |
|
| Asia | 515,383 |
| | 77,626 |
| | 12,676 |
| | 81,434 |
| | 237,695 |
|
| Corporate | | | (365,803 | ) | | 33,704 |
| | 206,935 |
| | 673,707 |
|
| Consolidated | $ | 3,042,371 |
| | $ | 127,146 |
| | $ | 91,497 |
| | $ | 839,607 |
| | $ | 2,186,897 |
|
| | | | Fiscal Year 2015 |
| | Net Sales | | Operating Income | | Depreciation and Amortization | | Long-term Assets | | Total Assets |
| Fiscal Year 2021 | | | Fiscal Year 2021 |
| Net Sales | | | Net Sales | | Operating
Income | | Depreciation
and
Amortization | | Long-term
Assets | | Total Assets |
| Americas | $ | 1,661,899 |
| | $ | 354,295 |
| | $ | 26,021 |
| | $ | 427,026 |
| | $ | 905,168 |
|
| Europe | 1,069,820 |
| | 210,514 |
| | 21,671 |
| | 204,947 |
| | 543,649 |
|
| Asia | 497,117 |
| | 71,684 |
| | 13,073 |
| | 57,754 |
| | 203,304 |
|
| Corporate | | | (345,259 | ) | | 24,532 |
| | 223,264 |
| | 703,540 |
|
| Consolidated | $ | 3,228,836 |
| | $ | 291,234 |
| | $ | 85,297 |
| | $ | 912,991 |
| | $ | 2,355,661 |
|
The following table shows revenue for each class of similar products for fiscal years 2017, 20162023, 2022 and 20152021 (in thousands):
| | | | Fiscal Year 2017 | | Fiscal Year 2016 | | Fiscal Year 2015 |
| | Net Sales | | Percentage of Total | | Net Sales | | Percentage of Total | | Net Sales | | Percentage of Total |
| Watches | $ | 2,199,031 |
| | 78.9 | % | | $ | 2,330,275 |
| | 76.6 | % | | $ | 2,475,814 |
| | 76.7 | % |
| Fiscal Year 2023 | | | Fiscal Year 2023 | | Fiscal Year 2022 | | Fiscal Year 2021 |
| Net Sales | | | Net Sales | | Percentage
of Total | | Net Sales | | Percentage
of Total | | Net Sales | | Percentage
of Total |
| Watches: | |
| Traditional watches | |
| Traditional watches | |
| Traditional watches | | $ | 1,015,077 | | | 71.9 | % | | $ | 1,158,889 | | | 68.9 | % | | $ | 1,288,499 | | | 68.9 | % |
| Smartwatches | |
| Total watches | | Total watches | $ | 1,096,026 | | | 77.6 | % | | $ | 1,310,491 | | | 77.9 | % | | $ | 1,512,398 | | | 80.9 | % |
| Leathers | 325,502 |
| | 11.7 |
| | 393,761 |
| | 12.9 |
| | 409,381 |
| | 12.7 |
|
| Jewelry | 211,694 |
| | 7.6 |
| | 251,391 |
| | 8.3 |
| | 272,146 |
| | 8.4 |
|
| Other | 51,936 |
| | 1.8 |
| | 66,944 |
| | 2.2 |
| | 71,495 |
| | 2.2 |
|
| Total | $ | 2,788,163 |
| | 100.0 | % | | $ | 3,042,371 |
| | 100.0 | % | | $ | 3,228,836 |
| | 100.0 | % | Total | $ | 1,412,384 | | | 100.0 | | 100.0 | % | | $ | 1,682,439 | | | 100.0 | | 100.0 | % | | $ | 1,870,036 | | | 100.0 | | 100.0 | % |
Geographic Information
Net sales and long-livedlong-term assets related to the Company's operations in the U.S., Europe, Asia and all other international markets were as follows (in thousands):
| | | | | | | | | | | |
| Fiscal Year 2023 |
| Net Sales (1) | | Long-term
Assets |
| United States | $ | 514,666 | | | $ | 107,085 | |
| Europe | 438,148 | | (2) | 85,575 | |
| Asia | 330,869 | | (3) | 64,211 | |
| All other international | 128,701 | | | 10,469 | |
| Consolidated | $ | 1,412,384 | | | $ | 267,340 | |
| | | | | | | | | | | |
| Fiscal Year 2022 |
| Net Sales (1) | | Long-term
Assets |
| United States | $ | 619,981 | | | $ | 133,100 | |
| Europe | 543,585 | | (2) | 96,365 | |
| Asia | 381,845 | | (3) | 53,050 | |
| All other international | 137,028 | | | 10,313 | |
| Consolidated | $ | 1,682,439 | | | $ | 292,828 | |
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | |
| | Fiscal Year 2017 |
| | Net Sales (1) | | Long-term Assets |
| United States | $ | 1,157,568 |
| | $ | 189,209 |
|
| Europe | 974,198 |
| (2) | 127,344 |
|
| Asia | 497,816 |
| | 40,874 |
|
| All other international | 158,581 |
| | 9,957 |
|
| Consolidated | $ | 2,788,163 |
| | $ | 367,384 |
|
|
| | | | | | | |
| | Fiscal Year 2016 |
| | Net Sales (1) | | Long-term Assets |
| United States | $ | 1,355,586 |
| | $ | 470,358 |
|
| Europe | 1,002,077 |
| (2) | 260,277 |
|
| Asia | 515,383 |
| | 93,111 |
|
| All other international | 169,325 |
| | 15,861 |
|
| Consolidated | $ | 3,042,371 |
| | $ | 839,607 |
|
| | | | Fiscal Year 2015 |
| | Net Sales (1) | | Long-term Assets |
| Fiscal Year 2021 | | | Fiscal Year 2021 |
| Net Sales (1) | | | Net Sales (1) | | Long-term
Assets |
| United States | $ | 1,491,638 |
| | $ | 379,461 |
|
| Europe | 1,069,820 |
| (2) | 224,018 |
|
| Asia | 497,117 |
| | 66,140 |
|
| All other international | 170,261 |
| | 243,372 |
|
| Consolidated | $ | 3,228,836 |
| | $ | 912,991 |
|
| |
(1)
| Net sales are based on the location of the selling entity. |
| |
(2)
| Net sales from Germany accounted for more than 10% of the Company's consolidated net sales and were approximately $406.2 million, $467.7 million and $505.4 million in fiscal years 2017, 2016 and 2015, respectively. |
(1)Net sales are based on the location of the selling entity (including exports).
19.(2)Net sales from Germany (including exports) accounted for more than 10% of the Company's consolidated net sales and were approximately $173.3 million, $194.1 million and $237.1 million in fiscal years 2023, 2022 and 2021, respectively.
(3)Net sales from China (including Hong Kong, Macau and Taiwan and exports) accounted for more than 10% of the Company's consolidated net sales and were approximately $140.4 million, $174.2 million and $261.4 million in fiscal years 2023, 2022 and 2021, respectively.
20. Restructuring
In the first quarter of fiscal year 2023, the Company announced its Transform and Grow plan ("TAG") designed to reduce operating costs, improve operating margins, and advance the Company’s commitment to profitable growth. The Company implementedhas now expanded the scope and duration of TAG to focus on a multi-year restructuring program that beganmore comprehensive review of its global business operations. The expansion of TAG will put greater emphasis on initiatives to exit or minimize certain product offerings, brands and distribution, and to strengthen gross margin and increase the level of operating expense efficiencies. TAG is estimated to generate approximately $300 million of annualized operating income benefits by the end of 2025. The Company estimates approximately $100 million to $120 million in total charges over the duration of TAG and estimates approximately $35 million of charges in fiscal year 2016 called2024. Aided by these measures, the Company's long-term goal is to achieve adjusted gross margins in the low to mid 50% range and adjusted operating margins of approximately 10%.
The following table shows a summary of TAG plan charges (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year | Fiscal Year 2023 | | | | | | | | |
| Cost of sales | $ | 5,537 | | | | | | | | | |
| Selling, general and administrative expenses | 43,279 | | | | | | | | | |
| Consolidated | $ | 48,816 | | | | | | | | | |
The following table shows a rollforward of the accrued liability related to the Company’s TAG plan (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year 2023 |
| Liabilities | | | | Cash Payments | | Non-cash Items | | Liabilities |
| December 31, 2022 | | Charges | | | | December 30, 2023 |
| Stores and facilities closures | $ | — | | | $ | 7,245 | | | $ | — | | | $ | 7,245 | | | $ | — | |
| Professional services | — | | | 6,648 | | | 6,531 | | | — | | | 117 | |
| Severance and employee-related benefits | — | | | 29,386 | | | 20,951 | | | 318 | | | 8,117 | |
| Charges related to exits of certain product offerings | $ | — | | | $ | 5,537 | | | $ | 1,716 | | | $ | — | | | $ | 3,821 | |
| Total | $ | — | | | $ | 48,816 | | | $ | 29,198 | | | $ | 7,563 | | | $ | 12,055 | |
TAG plan restructuring charges by operating segment were as follows (in thousands):
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | |
| 2023 | | |
| Americas | $ | 4,582 | | | |
| Europe | 9,812 | | | |
| Asia | 12,519 | | | |
| Corporate | 21,903 | | | |
| Consolidated | $ | 48,816 | | | |
In fiscal year 2022, the Company completed its New World Fossil ("NWF"). As part of 2.0 (“NWF the Company targets to improve operating profit and support sales growth through a leaner infrastructure and an enhanced business model. The Company is working to achieve greater efficiencies from production to distribution through activities such as organizational changes, reducing its overall product assortment, optimizing its base cost structure and consolidating facilities. The Company also intends to build a quicker and thereby more responsive operating platform. The Company is reducing its retail footprint to reflect the evolving shopping habits of today's consumer, which includes restructuring costs, such as store impairment, recorded lease obligations and termination fees and accelerated depreciation. Of the total estimated $150 million restructuring charges, approximately $27.8 million and $48.2 million were recorded during fiscal year 2016 and 2017, respectively. The Company estimates total fiscal year 2018 NWF restructuring charges of approximately $50 million.
During fiscal year 2015, the Company completed a2.0”) restructuring program to refine its operating structure and store locations. The costs associated with this plan included various charges, including severance and other employment-related costs, professional services and costs related to store closures.
it launched in 2019.The following tables show a rollforward of the liabilities incurred underaccrued liability related to the Company'sCompany’s NWF 2.0 restructuring plansplan (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year 2023 |
| Liabilities | | | | Cash Payments | | | | Liabilities |
| December 31, 2022 | | | | | | December 30, 2023 |
| | | | | | | | | |
| Professional services | 74 | | | | | 74 | | | | | — | |
| Severance and employee-related benefits | 2,821 | | | | | 2,821 | | | | | — | |
| Total | $ | 2,895 | | | | | $ | 2,895 | | | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year 2022 |
| Liabilities | | | | Cash Payments | | Non-cash Items | | Liabilities |
| January 1, 2022 | | Charges | | | | December 31, 2022 |
| Store closures | $ | 300 | | | $ | 787 | | | $ | 612 | | | $ | 475 | | | $ | — | |
| Professional services | 643 | | | 166 | | | 735 | | | — | | | 74 | |
| Severance and employee-related benefits | 4,388 | | | 5,168 | | | 6,431 | | | 304 | | | 2,821 | |
| Total | $ | 5,331 | | | $ | 6,121 | | | $ | 7,778 | | | $ | 779 | | | $ | 2,895 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year 2021 |
| Liabilities | | | | Cash Payments | | Non-cash Items | | Liabilities |
| January 2, 2021 | | Charges | | | | January 1, 2022 |
| Store closures | $ | 240 | | | $ | 1,215 | | | $ | 500 | | | $ | 655 | | | $ | 300 | |
| Professional services | 2,280 | | | 5,695 | | | 7,332 | | | — | | | 643 | |
| Severance and employee-related benefits | 7,741 | | | 14,979 | | | 18,332 | | | — | | | 4,388 | |
| Total | $ | 10,261 | | | $ | 21,889 | | | $ | 26,164 | | | $ | 655 | | | $ | 5,331 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Fiscal Year 2017 |
| | Liabilities | | | | Cash payments | | Non-cash items | | Liabilities |
| | December 31, 2016 | | Charges | | | | December 30, 2017 |
| Store closures | $ | 4,546 |
| | $ | 13,045 |
| | $ | 6,636 |
| | $ | 7,982 |
| | $ | 2,973 |
|
| Professional services and other | 794 |
| | 3,507 |
| | 2,618 |
| | 1,498 |
| | 185 |
|
| Severance and employee-related benefits | — |
| | 31,619 |
| | 29,098 |
| | 1,204 |
| | 1,317 |
|
| Total | $ | 5,340 |
| | $ | 48,171 |
| | $ | 38,352 |
| | $ | 10,684 |
| | $ | 4,475 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Fiscal Year 2016 |
| | Liabilities | | | | Cash payments | | Non-cash items | | Liabilities |
| | January 2, 2016 | | Charges | | | | December 31, 2016 |
| Store closures | $ | — |
| | $ | 22,247 |
| | $ | 3,430 |
| | $ | 14,271 |
| | $ | 4,546 |
|
| Professional services | — |
| | 4,057 |
| | 3,263 |
| | — |
| | 794 |
|
| Supply chain relocation | — |
| | 1,474 |
| | — |
| | 1,474 |
| | — |
|
| Total | $ | — |
| | $ | 27,778 |
| | $ | 6,693 |
| | $ | 15,745 |
| | $ | 5,340 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Fiscal Year 2015 |
| | Liabilities | | | | Cash payments | | Non-cash items | | Liabilities |
| | January 3, 2015 | | Charges | | | | January 2, 2016 |
| Store closures | $ | — |
| | $ | 8,715 |
| | $ | 4,753 |
| | $ | 3,962 |
| | $ | — |
|
| Professional services | — |
| | 5,462 |
| | 5,462 |
| | — |
| | — |
|
| Severance and employee-related benefits | — |
| | 10,223 |
| | 10,223 |
| | — |
| | — |
|
| Total | $ | — |
| | $ | 24,400 |
| | $ | 20,438 |
| | $ | 3,962 |
| | $ | — |
|
RestructuringNWF 2.0 restructuring charges by operating segment were as follows by fiscal year (in thousands):
| | | | | | | | | | | | | | | |
| | | 2022 | | 2021 | | |
| Americas | | | $ | 234 | | | $ | 2,356 | | | |
| Europe | | | 1,754 | | | 9,868 | | | |
| Asia | | | 1,610 | | | 5,072 | | | |
| Corporate | | | 2,523 | | | 4,593 | | | |
| Consolidated | | | $ | 6,121 | | | $ | 21,889 | | | |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Americas | $ | 12,964 |
| | $ | 19,745 |
| | $ | 8,715 |
|
| Europe | 12,606 |
| | 1,888 |
| | 3,554 |
|
| Asia | 9,894 |
| | 746 |
| | 210 |
|
| Corporate | 12,707 |
| | 5,399 |
| | 11,921 |
|
| Consolidated | $ | 48,171 |
| | $ | 27,778 |
| | $ | 24,400 |
|
20. Subsequent Events
Credit Agreement. On January 29, 2018, the Company, as U.S. borrower, and certainTable of its foreign subsidiaries, as non-U.S. borrowers, entered into a Second Amended and Restated Credit Agreement (the "Second A&R Credit Agreement"). The Second A&R Credit Agreement provides for (i) revolving credit loans in the amount of $325 million, subject to a borrowing base (as described below), (the "Second A&R Revolving Credit Facility"), with an up to $45.0 million subfacility for letters of credit, and (ii) a term loan made to the Company in the amount of $425 million (the "Term Loan Facility"). The Second A&R Credit Agreement expires and is due and payable on December 31, 2020.Contents
Availability under the Second A&R Revolving Credit Facility and any letters of credit are subject to a borrowing base equal to, (a) with respect to Fossil Group Inc., the sum of (i) 85% of eligible U.S. accounts receivable and 90% of net U.S. credit card receivables (less any dilution reserve), (ii) the lesser of (A) 65% of the lower of cost or market value of eligible U.S. finished good inventory and (B) 85% of the appraised net orderly liquidation value of eligible U.S. finished good inventory, and (iii) until the earlier of (x) March 31, 2018 and (y) the date on which certain foreign subsidiaries of Fossil Group Inc. join the Second A&R Credit Agreement as non-U.S. borrowers, (A) 35% of eligible foreign accounts receivable of certain pledged foreign subsidiaries, plus (B) the least of (x) 35% of the lower of cost or market value of eligible foreign finished good inventory of such pledged foreign subsidiaries, (y) 35% of the appraised net orderly liquidation value of eligible foreign finished good inventory of such pledged foreign subsidiaries, and (z) $100,000,000, minus (C) all indebtedness for borrowed money of such pledged foreign subsidiaries (subject to exceptions) minus (iv) the aggregate amount of reserves, if any, established by the Administrative Agent in good faith and in the exercise of reasonable business judgment from the perspective of a secured asset-based lender; and (b) with respect to each non-U.S. borrower, the sum of (i) 85% of eligible accounts receivable of the non-U.S. borrowers (less any dilution reserve) and (ii) the least of (A) 65% of the lower of cost or market value of eligible foreign finished goods inventory of the non-U.S. borrowers, (B) 85% of the appraised net orderly liquidation value of eligible foreign finished goods inventory of the non-U.S. borrowers, and (C) $185,000,000 minus (iii) the aggregate amount of reserves, if any, established by the Administrative Agent in good faith and in the exercise of reasonable business judgment from the perspective of a secured asset-based lender.
In connection with the Second A&R Credit Agreement, the Company and all of its domestic subsidiaries entered into a Collateral Agreement in favor of the Administrative Agent, pursuant to which the Company and such subsidiaries granted liens on all or substantially all of their assets in order to secure the Company’s obligations under the Second A&R Credit Agreement and the other loan documents (the “Obligations”). Additionally, all of the Company’s domestic subsidiaries entered into a Guaranty Agreement in favor of the Administrative Agent, pursuant to which such subsidiaries guarantee the payment and performance of the Obligations. Additionally, Fossil Group Europe and the other non-U.S. borrowers from time to time party to the Second A&R Credit Agreement are required to enter into security instruments with respect to all or substantially all of their assets that can be pledged under applicable local law.
Amounts outstanding under the Second A&R Revolving Credit Facility bear interest per annum at the (a) LIBOR rate plus the applicable interest margin, (b) the daily LIBOR rate plus the applicable interest margin or (c) the base rate plus the applicable interest margin. The applicable interest margin varies from 4.00% to 5.00% for LIBOR rate loans and daily LIBOR rate loans and 1.50% to 3.00% for base rate loans and is based on the Company’s average daily excess availability under the Second A&R Revolving Credit Facility for the most recently ended calendar quarter, which is an amount equal (a) the lesser of (i) $325 million and (ii) the aggregate borrowing base minus (b) the amount of all outstanding borrowings and letter of credit obligations under the Second A&R Revolving Credit Facility, for each day during the applicable period divided by the number of days in such period. The applicable interest margin will increase by 1% per annum on each anniversary of the closing of the Second A&R Credit Agreement. The base rate loans under the Second A&R Revolving Credit Facility are available only to the Company and Fossil Group Europe and loans denominated in U.S. dollars.
Amounts outstanding under the Term Loan Facility bear interest at a rate per annum equal to (a) the LIBOR rate plus 7%, increasing to the LIBOR rate plus 8% on the first anniversary of the closing of the Second A&R Credit Agreement and the LIBOR rate plus 9% on the second anniversary of the closing of the Second A&R Credit Agreement and thereafter or (b) the base rate plus 5.5%, increasing to the base rate plus 6.5% on the first anniversary of the closing of the Second A&R Credit Agreement and to the base rate plus 7.5% on the second anniversary of the closing of the Second A&R Credit Agreement and thereafter.
The Company is required to repay the outstanding principal balance of the Term Loan Facility in the amount of $25 million on March 31, 2018, $125 million on March 31, 2019, $75 million on March 31, 2020 and the outstanding balance on December 31, 2020. Additionally, loans under the Second A&R Credit Agreement may be prepaid, in whole or in part, at the option of the Company, in minimum principal amounts of (a) $1.0 million or increments of $1.0 million in excess thereof, with respect to a base rate loan under the Second A&R Revolving Credit Facility, (b) $5.0 million or increments of $1.0 million in excess thereof, with respect to a LIBOR rate loan or a daily LIBOR rate loan under the Second A&R Revolving Credit Facility, and (c) $5.0 million or increments of $1.0 million in excess thereof, with respect to the Term Loan Facility. Loans under the Second A&R Credit Agreement must be repaid with the net cash proceeds of certain asset sales, insurance and condemnation events, certain debt and equity issuances and certain cash dividends received from the Company’s subsidiaries. The Company may permanently reduce the revolving credit commitment at any time, in whole or in part, without premium or penalty, in a minimum aggregate principal amount of not less than $3.0 million or increments of $1.0 million in excess thereof.
The Company is required to pay a commitment fee on the unused amounts of the commitments under the Second A&R Revolving Credit Facility, payable quarterly in arrears, of 0.5% on the average daily unused portion of the overall commitment under the Second A&R Revolving Credit Facility.
The repayment obligation under the Second A&R Credit Agreement can be accelerated upon the occurrence of an event of default, including the failure to pay principal or interest, a material inaccuracy of a representation or warranty, violation of covenants, cross-default, change in control, bankruptcy events, failure of a loan document provision, certain ERISA events and material judgments.
Financial covenants governing the Second A&R Credit Agreement require the Company to maintain (a) a minimum fixed charge coverage ratio measured quarterly on a rolling twelve-month basis of 1.15 to 1.00 if the Company’s quarter-end balances of cash and cash equivalents plus the excess availability under the Second A&R Revolving Credit Facility is less than $200 million; (b) a maximum leverage ratio measured as of the last day of each fiscal quarter for the period of four fiscal quarters ending on such date of (i) 4.5 to 1.0 for the period ending March 31, 2018, (ii) 4.75 to 1.0 for the period ending June 30, 2018, (iii) 5.0 to 1.0 for the period ending September 29, 2018, (iv) 4.25 to 1.0 for the period ending December 29, 2018, (v) 3.75 to 1.0 for each fiscal quarter ending during the period from December 30, 2018 through September 28, 2019, and (vi) 3.5 to 1.0 thereafter; (c) a minimum trailing twelve-month EBITDA tested quarterly of $110 million (beginning with the fiscal quarter ending December 29, 2018); (d) a minimum liquidity covenant of unrestricted cash and cash equivalents plus available and unused capacity under the Second A&R Revolving Credit Facility equal to $160 million; and (e) maximum capital expenditures of $35 million per year. Additionally, the Company is restricted from making open market repurchases of its common stock.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness of our "disclosure controls and procedures" ("Disclosure Controls"), as defined by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of December 30, 2017,2023, the end of the period covered by this Annual Report on Form 10-K. The Disclosure Controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer ("CEO")CEO and Chief Financial Officer ("CFO").CFO. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Based upon this evaluation, our CEO and CFO have concluded that our Disclosure Controls were effective at the reasonable assurance level as of December 30, 2017.2023.
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external reporting purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate over time.
Management, including our CEO and our CFO, assessed the effectiveness of the Company's internal control over financial reporting as of December 30, 2017.2023. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013). Based on its assessment and those criteria, management has concluded that the Company maintained effective internal control over financial reporting as of December 30, 2017.2023.
Deloitte & Touche LLP, the independent registered public accounting firm that audited the Company's consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the Company's internal control over financial reporting, which is included herein.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting other than our change in CFO as described in our Form 8-K filed on August 14, 2017, during the quarter ended December 30, 20172023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Fossil Group, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Fossil Group, Inc. and subsidiaries (the “Company”) as of December 30, 2017,2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 30, 2017,2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended December 30, 2017,2023, of the Company and our report, dated March 2, 2018,13, 2024, expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Dallas, Texas
March 2, 201813, 2024
Item 9B. Other Information
None.None of the Company’s directors or officers adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the Company’s quarter ended December 30, 2023.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information under the headings "Directors and Nominees," "Executive Officers," "Section"Delinquent Section 16(a) Beneficial Ownership Reporting Compliance"Reports" and "Board Committees and Meetings" in our proxy statement to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report, is incorporated herein by reference.
We have adopted a code of ethics that applies to all our directors and employees, including the principal executive officer, principal financial officer, principal accounting officer and controller. The full text of our Code of Conduct and Ethics is published on the Investors section of our website at www.fossilgroup.com. We intend to disclose any future amendments to certain provisions of the Code of Conduct and Ethics, or waivers of such provisions granted to executive officers and directors, on this website within five business days following the date of any such amendment or waiver.
Item 11. Executive Compensation
The information required in response to this Item is incorporated herein by reference to our proxy statement to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required in response to this Item is incorporated herein by reference to our proxy statement to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required in response to this Item is incorporated herein by reference to our proxy statement to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report.
Item 14. Principal Accountant Fees and Services
The information required in response to this Item is incorporated herein by reference to our proxy statement to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report.
PART IV
Item 15. Exhibits and Consolidated Financial Statement Schedules
| |
(a) | Documents filed as part of Report. |
(a)Documents filed as part of Report. The exhibits required to be filed by this Item 15 are set forth in the Exhibit Index accompanying this report.
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| March 13, 2024 | | |
March 2, 2018 | | FOSSIL GROUP, INC. |
| | /s/ KOSTAJEFFREY N. KARTSOTISBOYER |
| | KostaJeffrey N. Kartsotis,Boyer,
Chairman of the Board of Directors andInterim Chief Executive Officer and Director
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Signature | | Capacity | | Date |
| | | | |
Signature | | Capacity | | Date |
| | | | |
/s/ KOSTA N. KARTSOTIS | | Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) | | March 2, 2018 |
Kosta N. Kartsotis | | | | |
| /s/ JEFFREY N. BOYER | | Interim Chief Executive Officer and Director (Principal Executive Officer) | | March 13, 2024 |
| Jeffrey N. Boyer | | | | |
| /s/ SUNIL M. DOSHI | | Executive Vice President, Chief Financial Officer
and Treasurer (Principal Financial and Accounting Officer) | | March 2, 201813, 2024 |
Jeffrey N. BoyerSunil M. Doshi | | | | |
| /s/ MARK R. BELGYA | | Director | | March 13, 2024 |
| Mark R. Belgya | | | | |
| /s/ WILLIAM B. CHIASSON | | Director | | March 2, 201813, 2024 |
| William B. Chiasson | | | | |
| /s/ SUZANNE M. COULTER | | Director | | March 13, 2024 |
| Suzanne M. Coulter | | | | |
/s/ MAURIA A. FINLEYKIM HARRIS JONES | | Director | | Director | March 2, 201813, 2024 |
Mauria A. FinleyKim Harris Jones | | | | |
| /s/ KEVIN MANSELL | | Chairman of the Board of Directors | | March 13, 2024 |
| Kevin Mansell | | | | |
/s/ DIANE L. NEALMARC R. Y. REY | | Director | | Director | March 2, 201813, 2024 |
Diane L.NealMarc R. Y. Rey | | | | |
/s/ THOMAS M. NEALON | | Director | | March 2, 2018 |
Thomas M. Nealon | | | | |
/s/ MARK D. QUICK | | Director | | March 2, 2018 |
Mark D. Quick | | | | |
/s/ JAMES E. SKINNER | | Director | | March 2, 2018 |
James E. Skinner | | | | |
| /s/ GAIL B. TIFFORD | | Director | | March 2, 201813, 2024 |
| Gail B. Tifford | | | | |
/s/ JAMES M. ZIMMERMAN | | Director | | March 2, 2018 |
James M. Zimmerman | | | | |
SCHEDULE II
FOSSIL GROUP, INC. AND SUBSIDIARIES
VALUATIONS AND QUALIFYING ACCOUNTS
Fiscal Years 2015, 20162021, 2022 and 20172023
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Additions | | Deductions | | |
| Classification | Balance at
Beginning of
Period | | Charged
to
Operations | | Charged to Other Accounts | | Actual
Returns or
Writeoffs | | Balance at
End of Period |
| Fiscal Year 2021: | | | | | | | | | |
| Account receivable allowances: | | | | | | | | | |
| Bad debts | $ | 20,774 | | | $ | 3,070 | | | $ | — | | | $ | 7,456 | | | $ | 16,388 | |
| Markdowns | $ | 15,613 | | | $ | 27,385 | | | $ | — | | | $ | 29,230 | | | $ | 13,768 | |
| Sales returns | $ | 49,826 | | | $ | 75,936 | | | $ | — | | | $ | 85,641 | | | $ | 40,121 | |
| Deferred tax asset valuation allowance | $ | 109,250 | | | $ | 20,535 | | | $ | (2,706) | | | $ | 4,126 | | | $ | 122,953 | |
| Fiscal Year 2022: | | | | | | | | | |
| Account receivable allowances: | | | | | | | | | |
| Bad debts | $ | 16,388 | | | $ | 6,305 | | | $ | — | | | $ | 8,046 | | | $ | 14,647 | |
| Markdowns | $ | 13,768 | | | $ | 23,736 | | | $ | — | | | $ | 29,043 | | | $ | 8,461 | |
| Sales returns | $ | 40,121 | | | $ | 90,092 | | | $ | — | | | $ | 94,393 | | | $ | 35,820 | |
| Deferred tax asset valuation allowance | $ | 122,953 | | | $ | 14,794 | | | $ | 5,599 | | | $ | — | | | $ | 143,346 | |
| Fiscal Year 2023: | | | | | | | | | |
| Account receivable allowances: | | | | | | | | | |
| Bad debts | $ | 14,647 | | | $ | 3,535 | | | $ | — | | | $ | 5,566 | | | $ | 12,616 | |
| Markdowns | $ | 8,461 | | | $ | 31,325 | | | $ | — | | | $ | 32,243 | | | $ | 7,543 | |
| Sales returns | $ | 35,820 | | | $ | 95,812 | | | $ | — | | | $ | 98,234 | | | $ | 33,398 | |
| Deferred tax asset valuation allowance | $ | 143,346 | | | $ | 50,493 | | | $ | 1,769 | | | $ | 3,005 | | | $ | 192,603 | |
|
| | | | | | | | | | | | | | | |
| | | | Additions | | Deductions | | |
| Classification | Balance at Beginning of Period | | Charged (Credited) to Operations | | Actual Returns or Writeoffs | | Balance at End of Period |
| Fiscal Year 2015: | |
| | |
| | |
| | |
|
| Account receivable allowances: | |
| | |
| | |
| | |
|
| Sales returns | $ | 68,207 |
| | $ | 136,067 |
| | $ | 135,539 |
| | $ | 68,735 |
|
| Bad debts | $ | 11,840 |
| | $ | 6,307 |
| | $ | 2,324 |
| | $ | 15,823 |
|
| Deferred tax asset valuation allowance | $ | 6,821 |
| | $ | 4,236 |
| | $ | 200 |
| | $ | 10,857 |
|
| Fiscal Year 2016: | |
| | |
| | |
| | |
|
| Account receivable allowances: | |
| | |
| | |
| | |
|
| Sales returns | $ | 68,735 |
| | $ | 122,018 |
| | $ | 123,852 |
| | $ | 66,901 |
|
| Bad debts | $ | 15,823 |
| | $ | 4,520 |
| | $ | 7,538 |
| | $ | 12,805 |
|
| Deferred tax asset valuation allowance | $ | 10,857 |
| | $ | 8,793 |
| | $ | 235 |
| | $ | 19,415 |
|
| Fiscal Year 2017: | |
| | |
| | |
| | |
|
| Account receivable allowances: | |
| | |
| | |
| | |
|
| Sales returns | $ | 66,901 |
| | $ | 148,814 |
| | $ | 140,515 |
| | $ | 75,200 |
|
| Bad debts | $ | 12,805 |
| | $ | 7,140 |
| | $ | 7,017 |
| | $ | 12,928 |
|
| Deferred tax asset valuation allowance | $ | 19,415 |
| | $ | 59,676 |
| | $ | 777 |
| | $ | 78,314 |
|
EXHIBIT INDEX
| | Exhibit Number | Exhibit Number | | Description | Exhibit
Number | | Description |
| 3.1 |
| | | 3.1 | | | | | |
| 3.2 |
| | | 3.2 | | | | | |
| 3.3 |
| | | 3.3 | | | | | |
| 3.4 | | 3.4 | | | |
| 4.1 | | 4.1 | | | |
| 4.2 | | 4.2 | | | |
| 4.3 | | 4.3 | | | |
| 4.4 | | 4.4 | | | |
| 10.1 |
| (1)(2) | | 10.1 | | (2) | (2) | |
| 10.2 |
| (2) | | 10.2 | | (2) | (2) | |
| 10.3 |
| (2) | | 10.3 | | | | | |
| 10.4 |
| (2) | | 10.4 | | | | | |
| 10.5 |
| (2) | | 10.5 | | (2) | (2) | |
| 10.6 |
| (2) | | 10.6 | | (2) | (2) | |
| 10.7 |
| (2) | | 10.7 | | (2) | (2) | |
| 10.8 |
| (2) | | 10.8 | | | Credit Agreement, dated as of September 26, 2019, by and among Fossil Group, Inc., Fossil Partners, L.P., Fossil Group Europe GmbH, Fossil Asia Pacific Limited, Fossil (Europe) GmbH, Fossil (UK) Limited, Fossil Canada Inc. and certain lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent and an issuing lender, J.P. Morgan AG, as French collateral agent, JPMorgan Chase Bank, N.A., Citizens Bank, N.A. and Wells Fargo Bank, National Association, as joint bookrunners and joint lead arrangers and Citizens Bank, N.A. and Wells Fargo Bank, National Association, as co-syndication agents (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on October 1, 2019). | | Credit Agreement, dated as of September 26, 2019, by and among Fossil Group, Inc., Fossil Partners, L.P., Fossil Group Europe GmbH, Fossil Asia Pacific Limited, Fossil (Europe) GmbH, Fossil (UK) Limited, Fossil Canada Inc. and certain lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent and an issuing lender, J.P. Morgan AG, as French collateral agent, JPMorgan Chase Bank, N.A., Citizens Bank, N.A. and Wells Fargo Bank, National Association, as joint bookrunners and joint lead arrangers and Citizens Bank, N.A. and Wells Fargo Bank, National Association, as co-syndication agents (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on October 1, 2019). |
| 10.9 |
| | | 10.9 | | | Amendment No. 2 to the Credit Agreement, dated as of April 24, 2020, by and among Fossil Group, Inc., Fossil Partners, L.P., Fossil Group Europe GmbH, Fossil Asia Pacific Limited, Fossil (Europe) GmbH, Fossil (UK) Limited, Fossil Canada Inc., Fossil France S.A., the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed on April 27, 2020). | | Amendment No. 2 to the Credit Agreement, dated as of April 24, 2020, by and among Fossil Group, Inc., Fossil Partners, L.P., Fossil Group Europe GmbH, Fossil Asia Pacific Limited, Fossil (Europe) GmbH, Fossil (UK) Limited, Fossil Canada Inc., Fossil France S.A., the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed on April 27, 2020). |
| 10.10 |
| | | 10.10 | | (2) | (2) | |
| 10.11 |
| (2) | | 10.11 | | (2) | (2) | |
| 10.12 |
| (2) | | 10.12 | | (2) | (2) | |
| 10.13 |
| (2) | | 10.13 | | (2) | (2) | |
| 10.14 |
| (2) | |
| 10.15 |
| (2) | |
| 10.16 |
| (2) | |
| 10.17 |
| (2) | |
| 10.18 |
| (2) | |
|
| | | |
Exhibit Number | | Description |
| 10.19 |
| (2) | |
| 10.20 |
| | Second Amended & Restated Credit Agreement, dated as of January 29, 2018, by and among Fossil Group, Inc., Fossil Group Europe GMBH, certain of the Company’s foreign subsidiaries and certain lenders party thereto, Wells Fargo Bank, National Association, as administrative agent and an issuing lender, Bank of America, N.A. and JPMorgan Chase Bank, N.A., as syndication agents, HSBC Bank USA, National Association, Compass Bank and Fifth Third Bank, as documentation agents, and Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and JPMorgan Chase Bank, N.A., as joint lead arrangers and joint bookrunners (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on January 30, 2018).
|
| 10.21 |
| (2) | |
| 10.22 |
| (2) | |
| 10.23 |
| (2) | |
| 10.24 |
| (2) | |
| 21.1 |
| (1) | |
| 23.1 |
| (1) | |
| 31.1 |
| (1) | |
| 31.2 |
| (1) | |
| 32.1 |
| (3) | |
| 32.2 |
| (3) | |
| 101.INS |
| (1) | XBRL Instance Document. |
| 101.SCH |
| (1) | XBRL Taxonomy Extension Schema Document. |
| 101.DEF |
| (1) | XBRL Taxonomy Extension Definition Link Document. |
| 101.CAL |
| (1) | XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.LAB |
| (1) | XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE |
| (1) | XBRL Taxonomy Extension Presentation Linkbase Document. |
93
| | | | | | | | |
Exhibit
Number | | Description |
| 10.14 | | (2) | |
| 10.15 | | | Amendment No. 4, dated as of November 8, 2022, among Fossil Group, Inc., Fossil Partners, L.P., Fossil Intermediate, Inc., Fossil Stores I, Inc., Fossil Trust, Fossil Group GmbH, Fossil Asia Pacific Limited, Fossil (Europe) GmbH, Fossil (UK) Limited, Fossil Canada Inc., Fossil France SAS, Fossil Stores France SAS, FAST Europe SARL, and JPMorgan Chase Bank, N.A., as administrative agent, and the other agents and lenders party thereto (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on November 10, 2022). |
| 10.16 | | (2) | |
| 10.17 | | (2) | |
| 10.18 | | (2) | |
| 10.19 | | (2) | |
| 10.20 | | (2) | |
| 10.21 | | (2) | |
| 21.1 | | (1) | |
| 23.1 | | (1) | |
| 31.1 | | (1) | |
| 31.2 | | (1) | |
| 32.1 | | (3) | |
| 32.2 | | (3) | |
| 97 | | (1)(2) | |
| 101.INS | (1) | Inline XBRL Instance Document. |
| 101.SCH | (1) | Inline XBRL Taxonomy Extension Schema Document. |
| 101.DEF | (1) | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.CAL | (1) | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.LAB | (1) | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE | (1) | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| 104 | | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| |
(2) | Management contract or compensatory plan or arrangement. |
(1)Filed herewith.
(2)Management contract or compensatory plan or arrangement.
(3)Furnished herewith.
101
