Q1 2021 Fossil Group Inc Earnings Call

Prior to at the start from 'twenty, one earnings call.

All parties are in a listen only mode. This conference call is being recorded and may not be a rapid juice and whole or in part without written permission from the company now I will turn to call over to Christine Greening of the Blue shirt group to begin.

Hello, everyone and thank you for joining.

With us today on the call are Kosta cart soda, chairman and CEO, Sunil Doshi, Chief Financial Officer.

<unk> lawyer, Chief operating officer, and Gregg Mckelvin, EVP and Chief commercial officer.

I would like to remind you that information made available. During this conference call contains forward looking information.

And actual results could differ materially from those that will be discussed during this call fossil.

Fossil group's policy on forward looking statements.

And additional information concerning a number of factors that could cause actual results to differ materially from such statements is readily available in the company's form 8-K, and 10-Q reports filed with the SEC.

In addition, fossil assumes no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise except as required by law.

All references to sales during today's call reflect constant currency results unless otherwise indicated.

Please note that you can find a reconciliation and other information regarding non-GAAP financial measures discussed on this call and fossils earnings release, which was filed today on form 8-K and is available and the investors section to fossil group Dot com.

With that I will now turn the call over to Kosta to begin.

Good afternoon, everyone and thank you for joining us today.

Hope everyone has to staying well, while COVID-19 restrictions have been easing and several countries. Our thoughts are with those being impacted by another way for the pandemic, most notably in India, which is experiencing a tragic humanitarian crisis.

Our thoughts and prayers go out to our associates partners and the community at large being affected by the tragedy.

Because the global environment remains dynamic we are continuing to operate with concern and flexibility and we're prioritizing the health and safety of our team members partners and local communities.

Turning now to our first quarter performance. We are pleased with our strong start to the year and feel particularly good about how the business is positioned.

We are operating and a large addressable watch market and are seeing favorable trends and both the connected and traditional segments.

First quarter net sales came in ahead of our expectations driven by improving consumer demand and the Americas region.

Total digital sales represented more than 40% of our global revenue mix and our own websites grew 59% underscoring the dramatic shift and our business from a wholesale dominated model to a digital first organization.

We also delivered strong gross margins above 50% and continue to improve operating efficiency, which allowed us to generate positive adjusted EBITDA and the quarter.

We also made further progress against our cost reduction initiatives, which allowed us to reach the $250 million target under our new world fossil to point O program earlier than planned.

After successfully resizing the organization and cost structure, we remain focused on driving operating efficiency going forward.

Additionally, the structural economics of our business continued to improve with ongoing and outsized growth and digital.

Looking at the first quarter from a regional lens, we continued to drive robust growth and mainland China with 45% sales growth versus a year ago, and 81% sales growth since 2019.

And the balance of our Asia Pacific business was more negatively impacted by the pandemic.

And the EMEA region pandemic related restrictions and closures pressured sales and the quarter.

While conditions remained challenging and several markets. We are beginning to see some easing of restrictions and select countries, such as the UK, Italy and France.

Within the Americas region, we saw low single digit positive sales growth and the U S driven by easing restrictions and improving consumer confidence.

Sales in Canada, and Latin America were pressured by closures and restrictions and those markets during the period.

And parts of the world, where consumer confidence is strengthening and demand recovery is underway. We are seeing a return to growth and our brands and product categories.

In Q1 traditional watches and both cores and fossil grew and the U S and captured share.

And mainland China, Emporio Armani delivered strong sequential growth driven by positive response to our tailored assortments for that region.

Globally, our jewelry category saw broad based growth and our largest brands.

Longer term the opportunity for growth across all of our product categories and brands remains significant.

And the connected category, we are pleased to see our strategic initiatives bear fruit with.

With more emphasis on a core set of brands and Skus and distribution that is focused on e-commerce consumer electronics and telecom channels, we drove growth and our gen five platform and sales and margin.

In Q1, our Gen five platform officially expanded with and LTE product, which broadens our capabilities and functionality.

Our innovation roadmap remains robust fueled by our software and hardware capability that will further enable us to bring brand excitement and innovation to consumers.

Our results and Q1 reinforced that our key strategic initiatives are working and we will continue to focus on our efforts for the balance of 2021 on these same strategies digital acceleration product innovation operating efficiency and the growth opportunity in China.

Over the past few years, we have brought a digital first mindset to the entire organization and built the infrastructure needed to transform our business model.

Our past and ongoing investments and capabilities and systems, coupled with an acceleration of digital consumer behavior has gotten us to an inflection point and our business model.

With digital and now our largest channel we are positioned to begin offsetting the topline pressure that has persisted and other channels for the past several years.

Importantly, we're seeing and ongoing strength within both our owned and third party e-commerce sites as well as improving trends and wholesale dot com.

We ended Q1 with digital sales at 41% of our global mix and that is trending higher and key markets.

Given the robust capabilities. We built we believe digital will continue its strong trajectory and ultimately exceed 50% of our total sales.

The current economics on this business, our already compelling and we expect that to become increasingly profitable as we continue to build scale.

Innovation continues to be at the heart of everything we do and in Q1, we demonstrated how innovation not only drive growth, but also supports our ESG strategy.

Our program make time for good.

Encompasses our focus on being a purpose driven organization.

Our aim is to have the highest impact possible for our people planet and communities through our sustainability platform.

And you to read more about our programs and initiatives on our Investor Relations website under sustainability.

From a product lens, our efforts on sustainable and innovative raw materials came together and Q1 with our fossil cactus leather tote and limited edition and solar watches launched across several brands.

And both cases consumers reacted favorably confirming our belief that product innovation and ESG are mutually beneficial.

From a social lens, we further enhanced our make time for good platform, where we're excited to announce that we will contribute 1% of our fossil and E. Commerce sales to the fossil foundation, whose goals include helping underserved youth around the world.

Despite the ongoing global disruption driven by the pandemic, we are encouraged by improving consumer demand and key markets and our strong start to the year.

As a result, we are raising our full year outlook to 12% to 16% sales growth and adjusted EBITDA margins to 5% to 7%.

As always we are grateful for the dedication and commitment of our teams globally and we're all energized by the opportunity to deliver topline growth and improved profitability. This year, while continuing to position the business for longer term success.

And now I'll turn the call over to Neal to discuss the financials.

Thanks, Kosta and good afternoon, everyone.

We are pleased to report better than expected results for the first quarter. Despite the ongoing disruption driven by the pandemic.

Net sales declined 7% for 10% and constant currency gross margin came in above 50% and we exercise careful cost control, resulting in 7 million of adjusted EBITDA for the quarter and 94 million and adjusted EBITDA over the trailing 12 months.

Q1, net sales totaled $363 million for the 13 week period, primarily reflecting improving consumer demand and the U S continued global strength within both our fossil and third party E Commerce channels.

Offset by traffic and sales declines and our stores and wholesale channel.

From a regional perspective, net sales and the Americas was down 1%, reflecting low single digit growth and the U S offset by ongoing pandemic, driven pressures and Canada and Latin America.

Trends remained soft and our EMEA region due to ongoing pandemic disruptions and restrictions and key European countries.

And our Asia region mainland China delivered strong sales growth of 45%.

Which was more than offset by sales declines and other countries and the region driven by pandemic conditions.

In Q1, we saw ongoing broad based global strength and digital sales, which increased globally by 40% on a year over year basis and accounted for 41% of our worldwide net sales.

As a reminder, our digital sales consist of our own E Commerce channels third party e-commerce platforms and wholesale dot com.

Now looking at the business from our own DTC perspective, which encompasses our own e-commerce sites and stores.

Comparable DTC sales were down 14% versus last year as sales growth on our E. Commerce sites was more than offset with traffic driven sales declines from our retail stores globally.

Globally traffic and conversion trends have remained consistent with recent quarters with some modest traffic improvement in the Americas offset by trends in EMEA.

We ended the quarter with 395 company owned stores down 12% versus a year ago.

Turning to category performance Global watch sales declined 9% and Q1 of <unk>.

Sequential improvement from the 29% decline and Q4 of 2020 and delivered 1% growth and the Americas region.

And our jewelry category, we grew sales by 22% globally with increases in the Americas and APAC regions.

Moving down the P&L first quarter gross margin came in at 53%.

That compares to 35, 9% and Q1 of last year. When we took significant actions to move through older generation connected inventory and incurred minimum and licensed product royalties due to lower sales volume, resulting from the onset of the pandemic.

In total these prior year actions did not impact Q1 of this year to the same extent as last year and taken together accounted for approximately 300 basis points of improvement and the year over year comparison.

Gross margin and the first quarter of 2021 also benefited from favorable product channel and region mix as well as favorable currency impacts of 110 basis points.

Partially offset by higher freight costs.

Total operating expenses, which include impairments and restructuring costs were $199 million, a decrease of $75 million or 27% as we maintained our focus on strict cost control.

SG&A expense was $187 million, and Q1 down $58 million or 24% compared to a year ago and reflects structural cost reductions across several areas of the business.

Cost reduction under our new World fossil to no program accounted for $53 million and savings in Q1.

Most of which was realized through lower operating expenses.

Inclusive of Q1's cost reductions, we have now realized $279 million and cumulative cost reductions as part of the NWF to pointed out program exceeding the programs $250 million goal earlier than planned.

Taken together Q1, adjusted EBITDA was $7 million adjusted EBITDA margin was 2% and operating loss narrowed substantially versus the prior year.

Turning to income taxes, our Q1 income tax provision was $2 million, reflecting an increase and deferred tax valuation allowances on current operating losses, and an increase and withholding for foreign taxes.

In Q1 diluted net loss per share was <unk> 47.

Compared to a diluted net loss per share of $1 69, a year ago.

Both to 2021 and 2020 periods included new World fossil restructuring charges of 12, and <unk> 15 per diluted share respectively.

Moving to the balance sheet and cash flow. We ended Q1 with total liquidity of approximately $250 million, including cash and cash equivalents of $247 million.

Total debt at the end of Q1 was $195 million.

We ended the first quarter with total inventories of $322 million down 27% versus last year as we closely manage inbound receipts and light of ongoing pandemic, driven impacts and have driven improvements and our overall SKU productivity and inventory turns.

From a capital allocation perspective. In addition to normal course, working capital needs Q1 use of cash included the pay down of a portion of our revolving credit facility and the normal quarterly amortization of our term loan.

Capital expenditures remained tightly controlled and totaled $2 million, which is in line with our full year plan of approximately $20 million.

Turning now to our outlook given our given our better than expected performance. In Q1, we are raising our full year 2021 outlook. We now expect full year net sales to increase and the range of 12% to 16%.

And the second quarter, we anticipate that net sales will increase and the range of 50% to 55% compared to Q2 to 2020.

As a reminder year over year comparisons are easier in Q2, and 21% due to the extreme pandemic impacts and the second quarter of last year.

Additionally, we now expect full year adjusted EBITDA margin of approximately 5% to 7%.

With that I'll turn the call back to Christine to take us through some Q&A.

Thanks Sunil.

Move to some questions.

Yes.

The $250 million target under the new World fossil to point out program actually exceeded that.

Should we anticipate in terms of further cost savings and where are you looking to capture further efficiencies.

Sure Christine and over the past few years, we have successfully resize the organization and our cost structure to better align with the fundamental shifts and transformation of the business business model, which costs had mentioned earlier, we will continue our efforts to further streamline our cost structure through lower over.

<unk> costs, and also a smaller but more profitable and more efficient store portfolio.

In addition, we are expanding our programs to also improve gross margin performance through enhancing our sourcing and inventory management initiatives as well as taking some select pricing actions, where that's appropriate.

We expect the benefits of these various programs will enable us to invest and our digital first strategy drive topline growth, while still expanded our bottomline to operating margins.

Great. Thank you.

Turning to call Scott.

What is your view of the consumer as the pandemic begins to taper and.

Consumers become increasingly comfortable with going out and returning to storage. What do you think the optimal mixed and digital business looks like going forward.

When the U S and China, we're starting to see a return to normal with more people out and about and participate in a social activities. There are obviously as pent up demand and the stimulus checks and the United States for making an impact at retail we're very pleased to see a renewed interest and accessories.

The exact size and timing of the consumer rebound globally is difficult to call at this point, but we're encouraged by the strength of the business and both the United States and in China.

And we're also doing very well and Europe. When you consider it's mostly closed down you can tell the consumer there is ready to start shopping again.

Regarding the optimal mix of business digital versus bricks, and it's very interesting to see the changes and the consumer they are ready to buy and more likely to buy online even as things open up.

We expect this trend will continue and over the next few years over 50% of our sales will be conducted and digital channels.

With a further expansion highly likely.

With that as the consumer shopping landscape for the future, we continue to invest and digital capabilities and channels to meet the need as Jeff mentioned, we believe we can make the necessary digital investments and improve our operating margin as we transform our business model to be more digital first.

This is a game changing opportunity for the company.

Great. Thank you chenille, how should we think about the puts and takes around expenses. This year and what are you seeing relative to some of that lag.

Labor and freight headwinds that a lot of companies are talking about.

Yes, Thanks Christine.

Yes kind of narrowing down on expenses and we think about this year. The company's it's helpful to think about the bigger picture over the last couple of years. The company has undertaken a significant effort to reduce its opex as part of its new world fossil program.

A lot of that reduction took place and 2019 and 2020 and we saw some of the benefits of that come through and this first quarter.

And we move through 2021, we will begin to lap some of those cost reductions that were put into place and the prior years and some of the temporary expense savings from last year's extreme COVID-19, driven shutdowns, which will result in some variability and the year over year comparisons relative to Q1 on.

On a sequential basis, we expect some dollar increases and SG&A relative to Q1 for normal variable expenses that flex with sales and for our marketing and investments to drive sales, but this will still translate to leveraging our expenses relative to 2020 and 2019.

With respect to cost inflation, while we haven't seen any material impacts from inflation at this point it might be helpful to break it down for our business for.

From a wage rate standpoint to potential impacts from hourly wage rate inflation and the U S market is low given that our store fleet and store payroll is a relatively small part of our infrastructure and given that our effective hourly wage rate is already well above current minimum wage.

On the cost of goods side, we haven't seen any significant changes and raw material pricing that would impact the overall cost to goods, but we'll keep our eye on that.

More broadly we do believe there are opportunities to consider to offset inflation in the future, whether thats and pricing or other productivity opportunities throughout the supply chain.

Okay.

And could you provide some additional color commentary on the revised guidance that you provided today.

Yes, yes share and sharing maybe it's helpful to kind of go back to the original guidance and sharing our original sales guidance a couple of months back which was 10% to 15% revenue growth, we had been seeing some improvements and the underlying demand coming out of the fourth quarter as vaccine to vaccine deployment was becoming more of a reality, what's been clearer and Q1 is that.

And the vaccines are a critical step and getting the pandemic under control and stepping to the first quarter, we saw outperformance and.

In the U S, our largest market and continued momentum and mainland China.

However, we have experienced some extensions of lockdowns and most of the EMEA countries and most recently, we've seen for severe spikes and the pandemic and India and other countries.

And our APAC region. So taking this into account we have flowed through to the results from Q1, while for the balance of the year reflected improvements in the U S with some tempering and parts of APAC and EMEA and.

And all of that's reflected in our full year expectations of 12% to 16% net sales growth.

From an adjusted EBITDA perspective, we expect that the increase and full year sales to flow through and to leverage and improve our overall adjusted EBITDA margins to the 5% to 7% that we share.

Okay. That's helpful. Thank you and.

Just to wrap up with a question for Greg.

And we've heard a number of Tom and regarding fossil digital first strategy could you just talk about gone to the key pillars of the program again for us.

As Kosta mentioned in his prepared remarks, our goal is to become a digital first powerhouse where product innovation and brand storytelling combined with leading digital marketing analytics and e-commerce capabilities will unlock accelerated growth.

The three key pillars of our digital initiatives are one expanding the success of our DTC and wet brand websites to the rest of the world on a global scalable cloud based platform to.

To continuing to build on and scale to success, we're already having with our third party E com and wholesale dot com programs, and adding new partners to those programs and.

And three building brand heat and accelerating demand through high ROI digital marketing initiatives.

On our last call I shared with you that we are seeing meaningful results and our underlying performance metrics based on the investments we've made to date.

And our direct to consumer channel, which includes our own brands, such as fossil and Skagen and Michelle is worth as well as our multi brand watch station online and store concept, we're seeing and E. Commerce sales force platform that have resulted in a doubling of our conversion rate and increased order value.

Our highly engaged community and our CRM database, which increased 45% last year, and which we expect to increase another 50% this year.

Our high customer lifetime value to customer acquisition cost ratio that has created a very compelling business case that we're investing behind.

Now, let me spend a minute or two on a couple of our other near term initiatives. The expansion of our third party e-commerce marketplace offerings and the scaling up of our wholesale dot com efforts. These.

<unk> programs are effectively additional points of distribution and the digital ecommerce space and.

These indirect channels, we've been very successful and establishing category leadership and gaining share with the top pure play ecommerce companies across the world. While also driving significant growth and digital sales with our top wholesale customers as well we have plans to aggressively expand our offering of traditional watches smart watches weather and jewelry offerings on these platforms that <unk>.

And on and at the same time expand the number of marketplaces and wholesale dotcom sites and each of our three regions Americas EMEA and APAC. These expansion plans to provide us with a number of additional sales opportunities and the second half of this year and will be further expanded on as we enter 2020 to we're incredibly pleased with the progress that our teams are making and.

Look forward to sharing more positive results and the quarters ahead.

Thanks, Gregg that was very helpful color I'm going to turn it back to coast debt to close this out.

And thanks, everyone for joining us we look forward to speaking to you again on our second quarter call.

This concludes today's conference call. Thank you for participating you may now disconnect.

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