Q3 2024 Fossil Group Inc Earnings Call

Without reading permission from the company now I'll turn the call over to Christine Greenie of the Blue shirt group to begin.

Christine Greenie: Hello, everyone and thank you for joining us.

Christine Greenie: On September 4th fossil group announced the appointment of Franco fully auto as Chief Executive Officer September 18th and he will be joined on today's call by Andrew Scobey interim Chief Financial Officer.

Christine Greenie: 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.

Christine Greenie: During this call.

Christine Greenie: Fossil group's policy on forward looking statements and additional information concerning a number of factors that could cause actual results to differ materially from such statements is readily available in the company's form 8-K, 10-Q and 10-K reports.

Christine Greenie: Filed with the SEC.

Christine Greenie: 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.

Christine Greenie: During today's call we will refer to constant currency results. Please note that you can find a reconciliation of actual results to constant currency results and other information regarding non-GAAP financial measure discussed on this call and fossils earnings release, which was filed today on form 8-K and is available in the <unk>.

Speaker Change: <unk> infection.

Speaker Change: Fossil groups Dot com.

Franco: With that I'll now turn the call over to Franco.

Franco: Good afternoon, everyone and thank you for joining us I'm thrilled to be here for my first earnings call as a fossil group Chief Executive Officer, and look forward to getting to know our shareholder in the coming months.

First of all I would like to take the opportunity to thank our team globally.

Franco: Secretly jive for for leading the company during the transition.

Speaker Change: The warm welcome I have received.

Speaker Change: In my first weeks with the company.

Speaker Change: I have immersed myself in the business spending time with employees throughout the organization.

Speaker Change: In meeting customer partners and vendors.

Speaker Change: I'm conducting this deeper dive across all of our key geographies, the Americas Europe and Asia.

Speaker Change: As well as our channels and our incredible portfolio of brands.

Speaker Change: So been exciting and powering to hear universal support for fossil group.

Speaker Change: And a strong desire to win.

Speaker Change: We've also been incredibly helpful.

Speaker Change: The biggest issues facing the company.

Importantly in my first 60 days.

Speaker Change: <unk> gained condition about the opportunities we have and the action we need to take.

Speaker Change: Before I talk about the future let me tell you why I'm here.

Speaker Change: I have great admiration for the fossil brand and the role this company as Fleed the shaping the watch industry.

Speaker Change: Do you add a piece of our core phosphate Brian runs deep.

Speaker Change: We are a recognized around the world and this year.

Speaker Change: Time magazine ranking.

Speaker Change: As the fourth largest brand overall.

Speaker Change: Just the behind the World class brands.

Speaker Change: Like Apple and robotics.

Speaker Change: Over the past 27 years I've been fortunate to lead iconic global brands.

Speaker Change: Gaining valuable experience running business portfolios.

Speaker Change: Romney channel operation in multiple geographies.

Speaker Change: Also group as a 14 brands in three channels across Concord 20 counties.

Speaker Change: The level of complexity that my background is well suited for.

I own my skills seat product operations and strategy over a decade.

Speaker Change: And orchestrated a successful turnarounds at Salomon in Columbia sportswear.

Speaker Change: Most recently at southern one I started with building a competitive and execution oriented team and culture.

Speaker Change: During my two and austere tenure, we reignited with topline and drove double digit sales growth.

Speaker Change: We achieved this by creating a new brand platform streamlining our product offering building John business plans with our vendors and partners.

Speaker Change: And refocusing our distribution and pricing models.

Speaker Change: At full suite, we have incredible brands talented people and the power to unlock greater potential for the future.

Speaker Change: I have full confidence in our capabilities.

Speaker Change: This business to growth and value creation.

Speaker Change: We can achieve this through disciplined simplification and focus.

Speaker Change: Our core strength is creating great innovative watches.

Speaker Change: A marketing them with compelling storytelling.

Speaker Change: We provide a seamless shopping experience for our customer primarily in the Warsaw channel.

Speaker Change: With our direct to consumer business.

Speaker Change: Serving as an important expression of our brands.

And emotional connection to consumer.

Speaker Change: As we build the game plan to turnaround the business.

Speaker Change: We will be developing a brand led and consumer focused model to execute our plan.

Speaker Change: There are three key audience, we are prioritizing in the immediate curve.

Speaker Change: Number one is redefining and focusing on our core.

Speaker Change: First and foremost, we believe that as an opportunity to reassess the core business.

Simplify our operating model.

Speaker Change: Anything that is not core is a distraction and we would evaluate option for these noncore assets.

Speaker Change: We see significant potential to drive change across the category.

Speaker Change: Distribution in geography.

Speaker Change: These include the traditional watches.

Speaker Change: Also.

Speaker Change: Digital in key markets globally.

Speaker Change: Focus on simplification will again be key drivers of our strategic choices.

Speaker Change: In short you.

You can expect to see us make bold moves to reignite growth in our faucet brand.

Speaker Change: As we speak we are working on a new brand platform.

Speaker Change: A new pricing architecture.

Speaker Change: A new go to market approach to prioritize our profitable channels and region and reduced penetration in the unprofitable ones.

Speaker Change: Some of the specific Xtra, we're picking the near term to reignite sales included the following.

First.

Speaker Change: We're bringing.

Speaker Change: Our global brand ambassador for the fossil brand, which we expect to announce next week.

Speaker Change: The second action, we are peaking is the return to a more normalized level and cadence on promotion.

Speaker Change: Which may create a headwind to sales, but is expected to drive further improvement in gross margin.

Speaker Change: While also strengthening our overall brand profile.

Speaker Change: Third our leveraging the success of our womens Rockhill line into our leadership position in the watch Wayne with design and material updates.

Speaker Change: And lastly, we have the re launch of our popular machine platform <unk>.

Speaker Change: Coming to market in early 'twenty five.

Speaker Change: Part of our effort to strengthen our mass offering.

Speaker Change: Ultimately, we need to outstanding product offerings at the right price points with stronger upper funnel marketing and less promotional intensity.

Speaker Change: Our new full suite brand platform would be aimed at <unk>, our coordination with consumer and deepening Faso cultural relevance.

Speaker Change: This will be supported with a strong innovation pipeline and compelling marketing in fact that we're preparing to launch a major global campaign in 2025 future in our new brand Ambassador.

As we focus on these initiatives to grow the fossil brand.

Speaker Change: We're also taking action to stabilize the sales into our major licensed brands.

Speaker Change: We expect to leave it at July as our key partnership under new and more realistic scenarios.

Speaker Change: From a distribution perspective.

Speaker Change: We see a clear opportunity to rebuild our relationship with our <unk>.

Speaker Change: Partners.

Speaker Change: Turning to our growth in this important channel.

Speaker Change: This means the prioritizing our partners from a product merchandising and promotional perspective.

Speaker Change: Okay.

Speaker Change: We also see a significant opportunity to strengthen our digital business and operates at this channel more profitable.

Speaker Change: We're moving as quickly as possible to execute it.

Speaker Change: Against these flat.

Speaker Change: The majority of which are already underway.

Speaker Change: Returning.

Speaker Change: Now to our key focus area number two is right sizing the business.

Speaker Change: In tandem with reassessing and simplifying our core.

Speaker Change: We plan to right size, our infrastructure to ensure that we're optimizing for profitability from a smaller and more focused basis.

Speaker Change: This work will begin in next year.

Speaker Change: Would be incremental to our current stock plan, which Andy will talk more about during his remarks.

Speaker Change: Our third priority is our commitment to strengthening the balance sheet and improving liquidity.

Speaker Change: We're moving quickly here and aggressively pursuing options, which may include actions to monetize assets as we refine our core and simplify our operations.

Speaker Change: The board and I are fully aligned on the opportunity set to hand, and the change in needs to occur to execute this turnaround and create value for shareholders.

Speaker Change: We have a strong sense of urgency and you can expect to see us moving swiftly.

Speaker Change: When we hold our year end earnings call I will now have.

Speaker Change: <unk> had another few months at them.

Speaker Change: At that time, I will provide an update on the actions we have taken thus far a share our comprehensive strategy and game plan for phosphate growth next chapter.

Speaker Change: Now I will turn the call to Andy to discuss the financials.

Thank you Franco we are excited to welcome you and to work together to lead our company and focusing on our key strategic priorities. Good afternoon, everyone.

Andy: As expected our third quarter performance reflects continued pressure on the topline while initiatives under our transformation and growth plan continue to drive improvement across gross margin SG&A and adjusted operating profit.

Andy: Third quarter net sales totaled $288 million down 16% in constant currency.

Andy: 600 basis points of the decline is attributable to our smartwatch exit and store closures.

Andy: We continue to see stabilization trends and fossil traditional watches, which is which declined 4% globally on a cost basis in Q3, as well as India, which was up about 10% excluding connected.

Andy: We also see strength and in selected licensed brands such as ammonia exchange.

Skechers and Tory Burch.

Andy: Challenging area of our business continues to be our larger license watch brands as some of our partners worked through their respective repositioning efforts. We are working closely with them to adapt our plans and programs accordingly.

Gross margin expanded 240 basis points versus last year at 49, 4%. This can be traced primarily to the exit of connected and tag benefits from retail pricing.

Andy: <unk> initiatives and account renegotiations.

Mental royalties for several brands with contractual minimums, partially offset these margin benefits.

Andy: SG&A expenses were down $31 million to $161 million compared to last year, representing a 16% decrease as we focus on cost takeout.

Andy: Year over year reductions are attributable to lower store operating costs on fewer stores.

Andy: Lower compensation and administrative expenses, resulting from our tag initiatives.

And decreased marketing spend versus the prior year.

Andy: These ongoing cost actions are expected to drive continuing continued reductions in SG&A dollars in the fourth quarter with Q4 comparisons expect it to be similar to Q3.

Andy: Okay.

Andy: During Q3, we closed seven stores ending the quarter with 251 stores at 17% reduction compared to a year ago. We.

Andy: We have exited 53 locations year to date and expect to close up to 58 by year end as a reminder, these closures occur at natural lease expiration with very minimal closing costs.

Our focus on gross margin expansion and cost reduction allow us to significantly improve the adjusted operating loss in the third quarter on a year over year basis, we narrowed our Q3 adjusted operating loss to $19 million, reflecting an improvement of 39% compared to the adjusted operating loss of 31.

Andy: $1 million last year.

Andy: We remain on track to achieve continued benefits across margin gross margin and operating expenses from our tag plan in the coming quarters.

Andy: This includes SKU rationalization.

Pricing.

Andy: Promotional actions workforce reductions procurement and indirect cost savings and store closures.

Andy: We expect to capture annualized adjusted operating income benefit of $100 million and full year 2024, and $300 million of annualized total planned benefits by the end of 2025.

Andy: Turning to the balance sheet, we ended the quarter with total liquidity of $130 million.

Andy: <unk> $106 million in cash and cash equivalents at.

Andy: And $24 million available under our revolving credit facility inventory.

Andy: Inventory levels decreased by 30% compared to a year ago, which aligns with our expectations.

Andy: Operating cash use was $23 million, reflecting expected inventory investments in the quarter.

Andy: We made progress against our asset monetization opportunities in Q3, completing the sale of our building in France, which generated approximately $8 million in net proceeds and Additionally, we are making further progress towards the sale leaseback of our distribution center located in Germany, which we expect to close in the first quarter of next year.

Andy: We continue working with our advisors on our strategic review as we focus on reassessing, our core business and simplifying our operating model. This.

Andy: This includes an ongoing analysis of our business model.

Andy: Development of strategic initiatives.

The refinement of our financial plans.

Speaker Change: And comprehensive reviews of our capital structure and financing alternatives as Franco mentioned, we are reviewing options for our smaller owned noncore assets or brands to improve focus and execution on our major businesses.

Speaker Change: Moving to guidance, we are revising our outlook for the full year to reflect current business trends and our assertive action to stabilize the business, which Frank will discuss.

Speaker Change: Worldwide net sales are expected to be approximately $1 1 billion, while the adjusted operating margin loss is expected to range from negative 6% to negative 8%.

Speaker Change: We expect the business to have positive cash flow in 2024 with sufficient liquidity for the foreseeable future.

Speaker Change: We remain on track to achieve at least $100 million of annualized P&L benefits in 2024 across margin and SG&A under our tag plant restructuring costs related to tax are estimated to be approximately $40 million for the full year of 2024 now.

Speaker Change: Now I'll turn the call back to Frank <unk> for closing comments.

Frank: Thank you everyone for listening today, I'm incredibly grateful to be here and we're committed to turning around this business and creating value for our shareholders. We recognize there is a lot of the IV lifting to do we are up to the desk.

Speaker Change: We look forward to talking to you on our year aimed earning call when we outline our new strategic plan for the future.

Speaker Change: Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.