Q2 2025 Fossil Group Inc Earnings Call

Speaker #1: Good afternoon, ladies and gentlemen, and welcome to the Fossil Group's second quarter 2025 earnings call. At this time, all parties are enlisted only mode.

Christine Greany: Good afternoon, ladies and gentlemen, and welcome to the Fossil Group's second quarter 2025 earnings call. At this time, all parties are in listen-only mode. This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company. Now, I'll turn the call over to Christine Greany of the Blue Shirt Group to begin.

Speaker #1: This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company. Now, I will turn the call over to Christine Greany of the Blue Shirt Group to begin.

Speaker #2: Hello, everyone, and thank you for joining us. With me on the call today is Franco Fogliato, Chief Executive Officer, and Randy Greben, Chief Financial Officer.

Christine Greany: Hello, everyone, and thank you for joining us. With me on the call today is Franco Fogliato, Chief Executive Officer, and Randy Greben, Chief Financial Officer. Before we begin, I would like to remind you that information made available during this conference call contains forward-looking information, and actual results could differ materially from those that will be discussed during this call. Fossil Group's policy on forward-looking statements and additional information concerning a number of factors that could cause actual results to differ materially from such statements is readily available in the company's Form 8-K, 10-Q, and 10-K reports filed with the FDC. In addition, Fossil assumes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. During today's call, we will refer to constant currency results as well as certain non-GAAP financial measures.

Speaker #2: Before we begin, I would like to remind you that information made available during this conference call contains forward-looking information, and actual results could differ materially from those that will be discussed during this call.

Speaker #2: 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 8K10Q and 10K reports filed with the SEC.

Speaker #2: 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.

Speaker #2: During today's call, we will refer to constant currency results as well as certain non-GAAP financial measures. Please note that you can find a reconciliation of actual results to constant currency results and other information regarding non-GAAP financial measures discussed on this call in Fossil's earnings release, which was filed today on Form 8K and is available in the investors' section on FossilGroup.com.

Christine Greany: Please note that you can find a reconciliation of actual results to constant currency results and other information regarding non-GAAP financial measures discussed on this call in Fossil's earnings release, which was filed today on Form 8-K and is available in the Investors section on fossilgroup.com. With that, I'll now turn the call over to Franco.

Speaker #2: With that, I'll now turn the call over to Franco.

Speaker #1: Thank you, Christine.

Franco Fogliato: Thank you, Christine. Good afternoon, everyone, and thank you for joining us today. As noted in today's press release, we delivered second-quarter financial performance above expectation, raised our full-year guidance, and announced a comprehensive debt refinancing. These developments reflect ongoing operational and financial momentum resulting from our turnaround plan. In Q2, our talented global teams drove a third consecutive quarter of both gross margin expansion and positive adjusted operating income against a complex macro backdrop. A few highlights from the quarter: net sales trends reflect continuing improvement in the wholesale channel, as well as better-than-expected comparable sales trends in our fossil retail stores. This is particularly meaningful given that we substantially lowered our promotional activity and took some strategic pricing action during the quarter.

Speaker #3: Good afternoon, everyone, and thank you for joining us today. As noted in today's press release, we delivered second quarter financial performance above expectation, raised our full-year guidance, and announced the comprehensive debt refinancing.

Speaker #3: These developments reflect ongoing operational and financial momentum resulting from our turnaround plan. In Q2, our talented global teams drove a third consecutive quarter of both gross margin expansion and positive adjusted operating income against a more complex macro backdrop.

Speaker #3: A few highlights from the quarter: net sales strength reflects continuing improvement in the wholesale channel, as well as better-than-expected comparable sales strength in our fossil retail stores.

Speaker #3: This is particularly meaningful given that we substantially lowered our promotional activity and took some strategic pricing action during the quarter. Importantly, we also fueled a strong bottom-line performance, with a gross margin of more than 57% and significant cost reductions.

Franco Fogliato: Importantly, we also fueled a strong bottom-line performance with gross margin of more than 57% and significant cost reduction, delivering positive adjusted operating income of 4 million. The results demonstrate the power of our rich brand heritage and the ability to connect with consumers around the world as we continue to execute under the three key pillars of our turnaround: refocusing on our core, right-sizing our cost structure, and strengthening our balance sheet. Next month will mark the completion of my first year at Fossil Group. Since joining the company last September, the pace of change has been fast and furious, and our progress has been notable. During this time, we have built a world-class leadership team, bringing fresh perspective to key functions across the organization. Most recently, Laxman was appointed Chief Supply Chain Officer, bringing more than 20 years of expertise to the road.

Speaker #3: Delivering positive adjusted operating income of $4 million, the results demonstrate the power of our rich brand heritage and the ability to connect with consumers around the world as we continue to execute under the three key pillars of our turnaround.

Speaker #3: Refocusing on our core, right-sizing our cost structure, and strengthening our balance sheet. Next month, we'll mark the completion of my first year at Fossil Group.

Speaker #3: Since joining the company last September, the pace of change has been fast and furious. In our progress has been notable. During this time, we have built a world-class leadership team, bringing fresh perspective to key functions across the organization.

Speaker #3: Most recently, Laxmann, who was appointed Chief Supply Chain Officer, brings more than 20 years of expertise to the role. I'm thrilled about the team we have assembled and the way everyone has united around our game plan and strong desire to succeed.

Franco Fogliato: I'm thrilled about the team we have assembled and the way everyone has united around our game plan and strong desire to succeed. We have much more work ahead, but the opportunity is significant. We're operating with excellent focus and intention. Our year-to-date results, coupled with ongoing operating and financial rigor, position us to raise our outlook for full year 2025. We have increased our top-line guidance to the high end of our previous range, and now expect to deliver breakeven to slightly positive adjusted operating margins. We're making bold moves, and it is clear that our actions are paying dividends. Now, I will move to an update on the strategies driving our results.

Speaker #3: We have much more work ahead, but the opportunity is significant. We're operating with excellent focus and intention, our year-to-date results coupled with ongoing operating and financial rigor position us to raise our outlook for full year 2025.

Speaker #3: We have increased our top-line guidance to the high end of our previous range and now expect to deliver break-even to slightly positive adjusted operating margins.

Speaker #3: We're making bold moves and it is clear that our actions are paying dividends. Now, I will move to an update on the strategies driving our results.

Speaker #3: Looking at the strategies under our first pillar, refocusing on our core, since we initiated this turnaround, we've been bringing a new fossil brand platform to life to elevate the design and storytelling and initiatives to create a standout experience for the customer.

Franco Fogliato: Looking at the strategies under our first pillar, refocusing on our core, since we initiated this turnaround, we've been bringing a new fossil brand platform to life to elevate the design and storytelling and initiatives to create a standout experience for the customer. On the digital side, we recently launched a second phase of improvements under our website redesign. The site features richer storytelling and a more seamless customer journey designed to drive increased engagement times and higher conversion rates. I encourage you to visit fossil.com, where we recently refreshed our landing pages to highlight Fossil's innovation around core classics, elevating the traditional watch platforms that reflect our history of design and storytelling. On the product and marketing front, our engine is fired up. Fossil traditional watch icons like the Neutra, Raquel, and Machine platforms were top performance in Q2.

Speaker #3: On the digital side, we recently launched a second phase of improvements under our website redesign. The site features richer storytelling and a more seamless customer journey, designed to drive increased engagement times and higher conversion rates.

Speaker #3: I encourage you to visit fossil.com where we recently refreshed our landing pages to highlight Fossil's innovation around core classics elevating the traditional watch platforms that reflect our history of design and storytelling.

Speaker #3: On the product and marketing front, our engine is fired up. Fossil traditional watch icons like the Neutra, Raquel, and Machine platforms were top performance in Q2.

Speaker #3: This collection reflects our heritage and remains an important part of our product pipeline. Equally important, we have a long history of on-trend collaboration that enabled us to enhance our storytelling and drive brand heat.

Franco Fogliato: This collection reflects our heritage and remains an important part of our product pipeline. Equally important, we have a long history of on-trend collaboration that enables us to enhance our storytelling and drive brand heat. Our latest launches, Fossil Purse, Shabby, Superman, and Fantastic Four, have been standouts, drawing significant media attention, delivering outsized performance across our content channels and capturing consumer mindshare. This year, we're increasing our investment in upper funnel marketing initiatives to cultivate enthusiasm for the fossil brand through unique and immersive experiences. Consistent influencer and in-person activation around key commercial and cultural moments globally have contributed to rising engagement rates, press impression, and improving top-line trends in traditional watches. In Q3, our global teams are gearing up for the official worldwide launch of Nick Jonas as a Fossil Global Brand Ambassador.

Speaker #3: Our latest launches, Fossil Per Sharpie, Superman, and Fantastic Four, have been standouts drawing significant media attention, delivering outsized performance across our content channels and capturing consumer mind share.

Speaker #3: This year, we're increasing our investment in upper-funnel marketing initiatives to cultivate enthusiasm for the Fossil brand through unique and immersive experiences. Consistent influencer and in-person activation around key commercial and cultural moments globally have contributed to rising engagement rates press impression and improving top-line trends in traditional watches.

Speaker #3: In Q3, our global teams are getting up for the official worldwide launch of Nick Jonas as a Fossil global brand ambassador. We have a series of exciting consumer activation and VIP events planned.

Franco Fogliato: We have a series of exciting consumer activations and VIP events planned, which will kick off next week when we welcome consumers and fans to the Fossil Diner, a branded pop-up experience in New York City. We will be replicating a traditional New Jersey diner, bringing this to life in an iconic Manhattan space with exclusive merchandise and experiences. We will also be investing in a robust wholesale marketing strategy to support the campaign launch. This includes window takeovers at our world-saved partners globally, point-of-sale marketing, new features, and improved storytelling collateral. We're thrilled about the launch of this campaign, which represents a pivotal moment for Fossil. We're confident that Nick's global reach and influence will help us build increased awareness of the Fossil brand, create excitement around our product offerings, and drive cultural relevance.

Speaker #3: Which will kick off next week when we welcome consumers and fans to the Fossil Diner, a branded pop-up experience in New York City. We will be replicating a traditional New Jersey diner bringing this to life in an iconic Manhattan space with exclusive merchandise and experiences.

Speaker #3: We will also be investing in a robust wholesale marketing strategy. To support the campaign launch, this includes window takeovers at our world-saved partners globally, point-of-sale marketing, new features, and improved storytelling collateral.

Speaker #3: We're thrilled about the launch of this campaign, which represents a pivotal moment for Fossil. We're confident that Nick's global reach and influence will help us build increased awareness of the Fossil brand, create excitement around our product offerings, and drive cultural relevance.

Speaker #3: Turning now to our core licensed brands, Armani Horse and Diesel, we have strengthened our position in the wholesale channel by investing in point-of-sale and in-store presentation.

Franco Fogliato: Turning now to our core licensed brands, Armani, Corse, and Diesel, we have strengthened our position in the wholesale channel by investing in point-of-sale and in-store presentation. This is driving improved results in key markets, including the US, India, Germany, and the UK, while China's performance remains under pressure by the macro environment. From a brand perspective, Corse and Armani Exchange both demonstrate year-over-year growth in the wholesale channel during the first half of the year. While Armani's performance was challenging in China, the brand grew in other key markets, including North America and EMEA, in the first half. Next, we're remaining focused on optimizing our global wholesale footprint. We're prioritizing key geographies where we continue to see strengthening trends. This includes the Americas, where Fossil traditional watch sales were up double digits in the second quarter, as well as India, where we're seeing strong momentum across brands and channels.

Speaker #3: This is driving improved results in key markets, including the U.S., India, Germany, and the U.K. While trialing out performance remains under pressure from the macro environment.

Speaker #3: From a brand perspective, closing Armani Exchange both demonstrates year-over-year growth in the wholesale channel during the first half of the year. While Armani performance was challenging in China, the brand grew in other key markets, including North America and EMEA in the first half.

Speaker #3: Next, we are remaining focused on optimizing our global wholesale footprint. We are prioritizing key geographies where we continue to see strengthening trends. This includes America, where Fossil traditional watch sales were up double digits in the second quarter, as well as India, where we are seeing strong momentum across brands and channels.

Speaker #3: Additionally, we're gaining traction quickly with our European distributor partners, driving increased sales and profitability in those geographies. Our aggressive action to strengthen channel profitability is paying dividends.

Franco Fogliato: Additionally, we're gaining traction quickly with our European distributor partners, driving increased sales and profitabilities in those geographies. Our aggressive actions to strengthen channel profitability are paying dividends. Our strategic decision to dramatically scale back promotional activity in our e-commerce channel is driving significant improvement in our gross margin profile and bottom-line profitability. We're also seeing uplift in key performance indicators, including traffic quality and average unit retail in both our fossil stores and e-commerce sites. This is having a halo effect across other channels, most notably in wholesale. We're pleased to be leading by example with our return to a full-price selling model, further demonstrating our commitment to strengthening our relationship with our wholesale partners. Looking at our fossil retail stores, we're continuing to optimize the portfolio through the closure of underperforming doors. In Q2, we exited an additional six locations.

Speaker #3: Our strategic decision to dramatically scale back promotional activity in our e-commerce channel is driving significant improvement in our gross margin profile and bottom-line profitability.

Speaker #3: We're also seeing uplift in key performance indicators, including traffic quality and average unit retail, in both our Fossil stores and e-commerce sites. This is adding a yellow effect across other channels, most notably wholesale.

Speaker #3: We're pleased to be leading by example with our return to a full-price selling model further demonstrating our commitment to strengthening our relationship with our wholesale partners.

Speaker #3: Looking at our fossil retail stores, we're continuing to optimize the portfolio through the closure of underperforming doors. In Q2, we exited an additional six locations.

Speaker #3: As part of our efforts to deliver an engaging shopping experience and improve fleet productivity, we have begun prototyping our store of the future, which blends lifestyle selling, data-led decision-making, and purpose-driven strategy.

Franco Fogliato: As part of our efforts to deliver an engaging shopping experience and improve fleet productivity, we have begun prototyping our store of the future, which blends lifestyle selling, data-led decision-making, and purpose-driven strategy. The new program is shifting our selling culture to one that is rooted in proactive clienteling and outreach and prioritizes personalized service and community. We started with a pilot in our home base of Dallas and are quickly expanding to more than 50 of our US stores this summer. The initial results are compelling. We're seeing month-over-month increase in conversion, average daily sales, and unit per transaction. We're planning to roll out the program to all of our North American locations this year and have some pilot stores underway in EMEA.

Speaker #3: The new program is shifting our selling culture to one that is rooted in proactive clientele and outreach and prioritizes personalized service and community. We started with a pilot in our home base of Dallas, and are quickly expanding to more than 50 of our US stores this summer.

Speaker #3: The initial results are compelling. We're seeing month-over-month increases in conversion, average daily sales, and units per transaction. We're planning to roll out the program to all of our North American locations this year and have some pilot stores underway in EMEA.

Speaker #3: Turning to our second turnaround pillar, right-sizing Fossil Group's cost structure. We've taken action to strengthen our operating model and continue to act with financial rigor to position the business for long-term profitable growth.

Franco Fogliato: Turning to our second turnaround pillar, right-sizing Fossil Group's cost structure, we've taken action to strengthen our operating model and continue to act with financial rigor to position the business for long-term profitable growth. Our cost-cutting actions have generated nearly 50 million of savings in the first half of 2025, and we remain on track to capture full-year FG&A savings of 100 million. Additionally, we're continuing to evaluate incremental opportunities, including the potential sale of non-core assets. Lastly, I will turn to our third key pillar: strengthening the balance sheet. I'm pleased to share that we have successfully refinanced our rewarding credit facility and entered into a transaction support agreement with our largest bond holders to amend and extend our bond maturities into 2029.

Speaker #3: Our cost-cutting actions have generated nearly $50 million in savings in the first half of 2025. We remain on track to capture full-year SG&A savings of $100 million.

Speaker #3: Additionally, we're continuing to evaluate incremental opportunities, including the potential sale of non-core assets. Lastly, I would turn to our third key pillar: strengthening the balance sheet.

Speaker #3: I'm pleased to share that we have successfully refinanced our revolving credit facility and entered into a transaction support agreement with our largest bondholders to amend and extend our bond maturities into 2029.

Speaker #3: This balance sheet transformation, which Randy Greben will cover in more detail, will meaningfully improve our liquidity and provide us with added flexibility to execute our turnaround and return Fossil to a profitably growing, cash-generating organization.

Franco Fogliato: This balance sheet transformation, which Randy will cover in more detail, will meaningfully improve our liquidity and provide us with added flexibility to execute our turnaround and return Fossil to a profitably growing, cash-generating organization. We're incredibly grateful to our stakeholders for their support and appreciate their conviction in our team, our business plan, and our long-term vision. Looking ahead, I'm confident we have what is needed to win: world-class teams, a clear strategy, and a plan of action, a solid balance sheet, and a strong brand equity underpinned by 40-year heritage in watchmaking. As we face an increasingly complex environment, we're controlling what we can and leaning into our strengths. Halfway through the year, we're performing ahead of our expectations and gaining increasing traction against our initiatives.

Speaker #3: We're incredibly grateful to our stakeholders for their support and appreciate their conviction in our team, our business plan, and our long-term vision. Looking ahead, I'm confident we have what is needed to win.

Speaker #3: World-class teams, a clear strategy, and a plan of action a solid balance sheet and a strong brand equity underpinned by 40-year heritage in watchmaking.

Speaker #3: As we face an increasingly complex environment, we're controlling what we can in leaning into our strengths halfway through the year where performing ahead of our expectation and gaining increasing traction against our initiatives.

Speaker #3: Importantly, as we continue on our path to restoring top-line growth, we're strengthening our underlying operating model and unlocking efficiencies, which is driving improved profitability.

Franco Fogliato: Importantly, as we continue on our path to restoring top-line growth, we're strengthening our underlying operating model and unlocking efficiencies, which is driving improved profitability. We greatly appreciate the support of our shareholders and look forward to keeping you updated on our progress. Now, I will turn the call over to Randy to review the second quarter financials and discuss our outlook.

Speaker #3: We greatly appreciate the support of our shareholders and look forward to keeping you updated on our progress. Now, I will turn the call over to Randy to review the second quarter financial and discuss our outlook.

Speaker #4: Thank you, Franco, and good afternoon, everyone. We're pleased to have delivered another quarter of outperformance across the P&L as we continue to advance our turnaround strategies.

Randy Greben: Thank you, Franco, and good afternoon, everyone. We're pleased to have delivered another quarter of outperformance across the P&L as we continue to advance our turnaround strategies. As a result of our strong year-to-date performance, we're raising full-year guidance on the top and bottom line, with adjusted operating margin now expected to be breakeven to slightly positive. Second quarter net sales total $219 million, down 16% in constant currency and in line with our expectations. The second quarter gross margin expanded 480 basis points compared to last year, coming in at 57.4%. You'll note that this is now the third consecutive quarter of meaningful gross margin expansion. The year-over-year increase primarily reflects higher product margins in our core categories, driven by improved product costing, our exit from connected watches, lower freight costs, and importantly, a completely refreshed philosophy with significantly lower reliance on discounts and promotions.

Speaker #4: As a result of our strong year-to-date performance, we're raising full-year guidance on the top and bottom line, with adjusted operating margin now expected to be break-even to slightly positive.

Speaker #4: Second quarter net sales totaled $219 million, down 16% in constant currency and in line with our expectations. Second quarter gross margin expanded 480 basis points compared to last year, coming in at 57.4%.

Speaker #4: You'll note that this is now the third consecutive quarter of meaningful gross margin expansion. The year-over-year increase primarily reflects higher product margins in our core categories, driven by improved product costing, our exit from connected watches, lower freight costs, and, importantly, a completely refreshed philosophy with significantly lower reliance on discounts and promotions.

Speaker #4: We are proactively addressing the tariff landscape and remain confident that we can mitigate the full impact to our cost of goods sold in 2025.

Randy Greben: We are proactively addressing the tariff landscape and remain confident that we can mitigate the full impact to our cost of goods sold in 2025. As a global organization with a flexible supply chain and significant scale, we are well positioned. We have several tactics in our arsenal, ranging from cost-sharing with vendors to optimizing our sourcing allocations and distribution to strategic pricing actions. Specific initiatives include partnering with our longstanding suppliers to drive cost reduction on our key platforms, utilizing our strong supply base to optimize costs across multiple sourcing regions and supply chain tiers, leveraging our free trade zone status at our Dallas distribution center, and implementing surgical price increases. With respect to pricing, thus far, we have not seen any pushback from the consumer, which we view as a testament to our democratic pricing architecture.

Speaker #4: As a global organization with a flexible supply chain and significant scale, we are well positioned. We have several tactics in our arsenal, ranging from cost-sharing with vendors to optimizing our sourcing allocation to distribution, to strategic pricing actions.

Speaker #4: Specific initiatives include partnering with our long-standing suppliers to drive cost reduction on our key platforms, utilizing our strong supply base to optimize costs across multiple sourcing regions and supply chain tiers, leveraging our free trade zone status at our Dallas distribution center, and implementing surgical price increases.

Speaker #4: With respect to pricing, thus far, we have not seen any pushback from the consumer, which we view as a testament to our democratic pricing architecture.

Speaker #4: Continuing down the P&L and looking at operating expenses, our commitment to strict cost control was evident in the quarter. Our teams brought down SG&A by $32 million to $122 million, excluding an $11 million gain from the sale-leaseback of our European distribution center, which we discussed on our May earnings call and, as expected, closed in Q2.

Randy Greben: Continuing down the P&L and looking at operating expenses, our commitment to strict cost control was evident in the quarter. Our teams brought down FG&A by $32 million to $122 million, excluding an $11 million gain from the sale leaseback of our European distribution center, which we discussed on our May earnings call and, as expected, closed in Q2. As a percentage of sales, FG&A was 340 basis points lower versus prior year, coming in at 55.7%. The year-over-year improvement in FG&A is attributable to 44 fewer stores in operation versus a year ago, lower compensation and administrative expenses, and a planned decrease in performance marketing spend. On a year-to-date basis, we have delivered $48 million of FG&A savings, putting us well on track to capture our targeted full-year savings of $100 million. During Q2, we closed another six stores, bringing us to 34 closures year to date.

Speaker #4: As a percentage of sales, SG&A was 340 basis points lower versus the prior year, coming in at 55.7%. The year-over-year improvement in SG&A is attributable to 44 fewer stores in operation compared to a year ago.

Speaker #4: Lower compensation and administrative expenses, and a planned decrease in performance marketing spend. On a year-to-date basis, we have delivered $48 million of SG&A savings, putting us well on track to capture our targeted full-year savings of $100 million.

Speaker #4: During Q2, we closed another six stores, bringing us to 34 closures year-to-date. We expect to close 45 to 50 locations this year, as we work toward optimizing the fleet and improving productivity.

Randy Greben: We expect to close 45 to 50 locations this year as we work toward optimizing the fleet and improving productivity. As a reminder, virtually all of our store closures are occurring at natural lease expiration with minimal closing costs. Turning now to earnings, we delivered a third consecutive quarter of profitability. Second quarter adjusted operating income came in at positive $4 million compared to a loss of $17 million a year ago. This strength drove Q2 adjusted operating margin of 1.7%. Of note, adjusted operating income does not include the $11 million gain that I just discussed. Moving to the balance sheet, we ended the quarter with $110 million of cash and cash equivalents, which includes more than $20 million from the sale leaseback of our German distribution center. Inventory levels were down 12% compared to the prior year and totaled $178 million.

Speaker #4: As a reminder, virtually all of our store closures are occurring at natural lease expiration, with minimal closing costs. Turning now to earnings, we delivered a third consecutive quarter of profitability.

Speaker #4: Second quarter adjusted operating income came in at a positive $4 million compared to a loss of $17 million a year ago. This strength drove Q2 adjusted operating margin of 1.7%.

Speaker #4: Of note, adjusted operating income does not include the $11 million gain I just discussed. Moving to the balance sheet, we ended the quarter with $110 million of cash and cash equivalents, which includes more than $20 million from the sale leaseback of our German distribution center.

Speaker #4: Inventory levels were down 12% compared to the prior year, and totaled $178 million. Most importantly, as Franco pointed out, subsequent to quarter end, we meaningfully strengthened the balance sheet.

Randy Greben: Most importantly, as Franco pointed out, subsequent to quarter end, we meaningfully strengthened the balance sheet, a critical pillar under our turnaround plan that we have been working with urgency to address. The comprehensive financing plan we announced today considerably improves our liquidity position and provides us with a runway to transform Fossil into a consistent, profitable grower and strong cash flow generator. Let me unpack the mechanics of what we announced. We are pleased to have secured a new $150 million asset-based revolving credit facility with Aries Management Credit Fund, a best-in-class lender and partner. The new facility, which has a five-year maturity, is commensurate with the size of our current business, carries enhanced terms, and provides increased availability to meet our working capital needs.

Speaker #4: A critical pillar under our turnaround plan that we have been working with urgency to address. The comprehensive financing plan we announced today considerably improves our liquidity position and provides us with a runway to transform Fossil into a consistent profitable grower and strong cash flow generator.

Speaker #4: Let me unpack these mechanics of what we announced. We are pleased to have secured a new $150 million asset-based revolving credit facility with areas management credit funds a best-in-class lender and partner.

Speaker #4: The new facility, which has a five-year maturity, is commensurate with the size of our current business, carries enhanced terms, and provides increased availability to meet our working capital needs.

Speaker #4: Concurrently, we have signed a transaction support agreement with our two largest bondholders to amend and extend the maturity on our 7% senior notes into 2029.

Randy Greben: Concurrently, we have signed a transaction support agreement with our two largest bond holders to amend and extend the maturity on our 7% senior notes into 2029. We are pleased to have reached this collaborative agreement with these key stakeholders, which also includes their commitment to provide a cash backstop of $32 million in additional funding to further fuel our turnaround. Their support covers approximately 60% of our outstanding bonds, and we expect to launch a public exchange later this month to address the balance of our notes. We look forward to sharing the results of the exchange with the investor community prior to year end. Before moving to guidance, I'd like to underscore the importance of these balance sheet movements. As Franco mentioned, we are confident that we now have ample liquidity to affect our turnaround. A big thank you to our bond holders, advisors, and new partners.

Speaker #4: We are pleased to have reached this collaborative agreement with these key stakeholders which also includes their commitment to provide a cash backstop of $32 million in additional funding to further fuel our turnaround.

Speaker #4: Their support covers approximately 60% of our outstanding bonds, and we expect to launch a public exchange later this month to address the balance of our notes.

Speaker #4: We look forward to sharing the results of the exchange with the investor community prior to year-end. Before moving to guidance, I'd like to underscore the importance of these balance sheet movements.

Speaker #4: As Franco mentioned, we are confident that we now have ample liquidity to affect our turnaround. A big thank you to our bondholders, advisors, and new partners.

Speaker #4: Turning now to guidance. Based on the results we're seeing from our turnaround initiatives and ongoing momentum across the business, we are raising our full-year outlook for 2025 as follows.

Randy Greben: Turning now to guidance. Based on the results we're seeing from our turnaround initiatives and ongoing momentum across the business, we are raising our full-year outlook for 2025 as follows. We expect worldwide net sales to decline in the mid-teens, which includes approximately $40 million of impact related to retail store closures. This compares to prior guidance of a decline in the mid to high teens. We are also taking up our expectations on the bottom line, reflecting the combination of gross margin expansion and significant cost reduction. Our updated outlook calls for breakeven to slightly positive adjusted operating margins, which compares to prior guidance of negative adjusted operating margins in the low single digits. To provide more context, I'll speak to the cadence of profitability in the second half.

Speaker #4: We expect worldwide net sales to decline in the mid-teens, which includes approximately $40 million of impact related to retail store closures. This compares to prior guidance of a decline in the mid to high teens.

Speaker #4: We are also taking up our expectations on the bottom line, reflecting the combination of gross margin expansion and significant cost reduction. Our updated outlook calls for break-even to slightly positive adjusted operating margins, which compares to prior guidance of negative adjusted operating margin in the low single digits.

Speaker #4: To provide more context, I'll speak to the cadence of profitability in the second half. First and foremost, we continue to expect to deliver healthy gross margins in the mid to upper 50s on a full-year basis.

Randy Greben: First and foremost, we continue to expect to deliver healthy gross margins in the mid to upper 50s on a full-year basis. From an accounting perspective, we recognize any minimum royalty deficits in the second half of the year, the majority of which are recorded in our third quarter. In 2025, the impact will be more significant than prior years due to our smaller sales base. Therefore, in Q3, we anticipate that gross margin and adjusted operating margin will decline on both a year-over-year and sequential basis. Excluding royalty shortfalls, we expect Q3 gross margins to increase versus prior year. Our turnaround efforts began to take root in Q4 of last year, when we started to see meaningful gross margin expansion associated with our lower promotional full-price selling strategies.

Speaker #4: From an accounting perspective, we recognize any minimum royalty deficits in the second half of the year. The majority of which are recorded in our third quarter.

Speaker #4: In 2025, the impact will be more significant than in prior years due to our smaller sales base. Therefore, in Q3, we anticipate that gross margin and adjusted operating margin will decline on both a year-over-year and sequential basis.

Speaker #4: Excluding royalty shortfalls, we expect Q3 gross margin to increase versus the prior year. Our turnaround efforts began to take root in Q4 of last year, when we started to see meaningful gross margin expansion associated with our lower promotional full-price selling strategies.

Speaker #4: Therefore, we expect a more comparable gross margin rate year-over-year in Q4, as the minimum royalty reductions we've agreed with our licensed partners benefit us moderately in 2025 and much more meaningfully in 2026, when we expect to bend the curves of these minimum royalty guarantee shortfalls.

Randy Greben: Therefore, we expect a more comparable gross margin rate year-over-year in Q4, as the minimum royalty reductions we've agreed with our licensed partners benefited moderately in 2025 and much more meaningfully in 2026, when we expect to bend the curve of these minimum royalty guarantee shortfalls. Implicit in our outlook is a return to positive adjusted operating income in the fourth quarter. In summary, we are entering the second half of the year with momentum from both an operational and financial perspective. Our teams are delivering strong execution against our turnaround pillars and are acting with financial rigor, remaining committed to driving long-term profitable growth and building durable shareholder value. Now I'll ask the operator to open the call to Q&A.

Speaker #4: Implicit in our outlook is a return to positive adjusted operating income in the fourth quarter. In summary, we are entering the second half of the year with momentum from both an operational and financial perspective.

Speaker #4: Our teams are delivering strong execution against our turnaround pillars, and are acting with financial rigor, remaining committed to driving long-term profitable growth and building durable shareholder value.

Speaker #4: Now, I’ll ask the operator to open the call to Q&A.

Speaker #1: Thank you. We'll now begin the question and answer session. Your first question comes from the line of Francesco Marmo from Maxim Group. Your line is live.

Christine Greany: Thank you. We'll now begin the question and answer session. Your first question comes from the line of Francesco Marmo from Maxim Group. Your line is live.

Speaker #5: Great. Thank you. And hi, everybody. Thank you for taking the question, and congratulations on the quarter. I would like to start with the ongoing impressive gross margin improvement.

Francesco Marmo: Great, thank you. Hi, everybody. Thank you for taking my question and congratulations on the quarter. Well, let's start from the ongoing impressive gross margins improvement. I understand that there's a lot of moving parts, but I was hoping you guys could focus a bit more on the impact of the changes in your promotional activity in your price increases. And I also was hoping you guys could give us some color if there was any impact from Paris.

Speaker #5: I understand there's a lot of moving parts, but I was hoping you could focus a bit more on the impact of the changes in your promotional activity in relation to your price increases.

Speaker #5: And I also was hoping you guys could give us some color if there was any impact from tariffs.

Speaker #6: Hi, Francesco. Thanks for the question. Look, what we're extremely pleased, as I mentioned, you know, since I joined the company, for us, it was very important to really move it into a full-price model.

Franco Fogliato: Hi, Francesco. Thanks for the question. Look, we're extremely pleased. As I mentioned, you know, since I joined the company, for us, it was very important to really move it into a full-price model. And the full-price model, combined with the very strong work done by the supply chain teams, has led to this improvement into gross margin, which we think, you know, we guide in the mid to high 50s in a long-term perspective. We're very pleased. I would say what is very pleased in what we've seen over the last month since we've changed our strategy is that our brands are so strong that despite being less promotional, we haven't seen really any decrease. Consumers have been, you know, paying the value for the brand. They understand that the product has more value than what we were asking for, and they've been very resilient.

Speaker #6: And the full-price model combined with the very strong work done by the supply chain teams has led to this improvement into gross margin, which we think, you know, we got in the mid to high 50s in the long-term perspective.

Speaker #6: We're very pleased. I would say that what is very pleasing in what we've seen over the last month since we've changed our strategy is that our brands are so strong that despite being less promotional, we haven't seen really any decrease. Consumers have been paying the value for the brand; they understand that the product has more value than what we were asking for.

Speaker #6: And they've been very resilient. So we've seen a strong increase in AR; we're very pleased. We believe that this is a new model that we can continue over the long run.

Franco Fogliato: So we've seen a strong increase in AUR. We're very pleased. And we believe that this is a new model that we can continue over the long run. Same on our supply chain, but I will ask Randy to jump in. He's going to give you an idea on all of the work that's been happening.

Speaker #6: Same on our supply chain, but I will ask Randy to jump in. He's going to give you an idea of all the work that's been happening.

Speaker #6: Yeah. Thank you, Franco. And thank you, Francesco, very much for the question. To address specifically your question, we have not seen any negative impact on our gross margins year-to-date from tariffs.

Randy Greben: Yeah, thank you, Franco, and thank you, Francesco, very much for the question. To address specifically your question, we have not seen any negative impact in our gross margins year to date from tariffs. As I shared in my prepared remarks, we have a litany of strategies that we are employing to address tariffs. Obviously, that situation remains quite fluid with nearly daily or weekly changes. But as we've said in the past, and we continue to believe into the future, our diverse, sophisticated supply chain affords us with a number of levers that we can pull to effectively mitigate any sort of incremental tariff pressure.

Speaker #6: As I shared in my prepared remarks, we have a litany of strategies that we are employing to address tariffs. Obviously, that situation remains quite fluid with nearly daily or weekly changes.

Speaker #6: But, as we've said in the past—and we continue to believe into the future—our diverse, sophisticated supply chain affords us a number of levers that we can pull to effectively mitigate any sort of incremental tariff pressure.

Speaker #6: One thing that I do want to mention, though, because while tariffs right now are not currently a tailwind or a headwind that we're unable to manage through, we did want to make sure that folks understood the way in which minimum royalty guarantees do impact our business.

Randy Greben: One thing that I do want to mention, though, because while tariffs right now are not currently a tailwind or a headwind that we're unable to manage through, we did want to make sure that folks understood the way in which minimum royalty guarantees do impact our business. We'd shared externally prior to this call that we'd achieved modest royalty reductions in '25 and meaningful royalty reductions in '26. That's why in Q3 in years past, and certainly in 2025, we would expect a divot in our gross margin percentage from the recognition of those minimum royalty rate shortfalls. Our underlying margin rate remains quite strong, very much in line with the actions that Franco just articulated.

Speaker #6: We'd shared externally prior to this call that we'd achieved modest royalty reductions in 2025 and meaningful royalty reductions in 2026. That's why in Q3, in years past, and certainly in 2025, we would expect a divot in our gross margin percentage from the recognition of those minimum royalty rate shortfalls.

Speaker #6: Our underlying margin rate remains quite strong, very much in line with the actions that Franco just articulated.

Speaker #5: Okay, great. Thank you so much. That was extremely helpful. And then shifting gears for a second, talking about wholesale, it looks like a pretty resilient part of your business, and it sounds like you guys are working closely with the partners.

Francesco Marmo: Okay, great. Thank you so much. That was extremely helpful. And then shifting gears one second, talking about wholesale, it looks like a pretty resilient part of your business, and it sounds like you guys are working closely with your partners. I was wondering whether you guys could give us some color on the initiatives you are taking and in general the trends that you're seeing in that channel. Thank you.

Speaker #5: I was wondering whether you could give us some color on the initiatives you are taking and, in general, the trends that you're seeing in that channel.

Speaker #5: Thank you.

Speaker #6: Yeah. Great question. Francesco, look, let me take the lead and maybe Randy can give some color. We're excited. I've been in a roadshow since I joined the company talking to our really our largest partners globally.

Franco Fogliato: Yeah, great question, Francesco. Look, let me take the lead and maybe Randy can give some color. We're excited. I've been in a roadshow since I joined the company, talking to our really largest partners globally. The love that our partners have for our brands is extremely high, but they're also being very critical to all of us about our promotional activity, which led us to really start to lead by example. We're building a great relationship. I think when I was talking to them early days, they loved my story. They said, "We want to see action." We proved that in quarter four. They said, "Great, let's see the future." We proved in Q1, and we doubled down in Q2. And even last week, our teams were in New York meeting with the largest accounts. They've all been very complimentary. You guys are now leading the industry by example.

Speaker #6: The love of our partners for our brands is extremely high, but they've also been very critical of all of us about our promotional activity, which led us to really start to lead by example.

Speaker #6: We're building great relationships. I think when I was talking to them in the early days, they loved my story. They said, "We want to see action."

Speaker #6: We proved that in Q4. They said, "Great. Let's see the future." We proved in Q1, and we doubled down in Q2. And even last week, our teams were in New York meeting with the largest accounts.

Speaker #6: They all have been very complimentary. You guys are now leading the industry by example. You're driving stronger relationships. This is step number one.

Franco Fogliato: You're driving a stronger relationship. This is step number one. Step number two is about what we are doing to invest with them. And we've been very clear over the last over the plan that wholesale channel was really a priority for the company. We are doubled down on investing in store presentation for this year. The project is really taking life now with a lot of new features delivered to our accounts globally, as well as we are doubled down on activities from a marketing perspective. And I will mention the pretty soon launch of the Nick Jonas collaboration, which we are excited about hitting our wholesale partners globally. So we're building a relationship. We know it takes time. We want to be credible. We want to be their best partner, and we will focus on continuing to do that. And we're seeing this paying off dividends.

Speaker #6: Step number two is about what we are doing to invest with them. And we've been very clear over the last, over the plan that the wholesale channel was really a priority for the company.

Speaker #6: We are doubled down on investing in store presentation for this year. The project is really taking life now, with a lot of new features delivered to our accounts globally.

Speaker #6: As well as we are doubled down on activities from a marketing perspective and I will mention the pretty soon launch of the Nick Jonas collaboration, which we are excited about hitting our wholesale partners globally.

Speaker #6: So we’re building relationships. We know it takes time. We want to be credible. We want to be their best partner, and we will focus on continuing to do that.

Speaker #6: And we're seeing this paying off dividends.

Speaker #5: Okay. Great. Thank you very much, Franco. And then if I have time, if I can make it one more. So we're seeing anecdotal evidence of a renewed interest in traditional fashion watches among younger consumers.

Francesco Marmo: Okay, great. Thank you very much, Franco. And then if I have time, if I can make in one more. So we're seeing anecdotal evidence of a renewed interest in traditional fashion watches among younger consumers. And then we've been following clearly the Fossil brand really closely. And we noticed that several of the limited edition collaborations are actually sold out on your website. I'm talking about the Fantastic Four, the Superman as Shield, and Minecraft. So I was wondering whether you guys saw any strength in that younger consumer category. What kind of products are those customers more interested in?

Speaker #5: And then we've been following clearly the fast food brand really closely. We noticed that several of the limited edition collaborations are actually sold out on your website.

Speaker #5: I'm talking about the Fantastic Four, the Superman S shield, and Minecraft. So I was wondering whether you saw any strengths in that younger consumer category?

Speaker #5: What kind of products are those customers more interested in? And then when it comes to the collaborations type of things, I was hoping you guys could give us an idea of the kind of initiatives you guys are undertaking to manage and promote those launches and how you see that brand momentum kind of reverberate across the broader offering on the fast food brands.

Francesco Marmo: And then when it comes to the collaboration side of things, I was hoping you guys could give us an idea of the kind of initiatives you guys are undertaking to manage and promote those launches and how you see that brand momentum kind of reverberate across the broader offering on the Fossil brand.

Speaker #6: Yeah, great, great question. Thanks for asking. Look, we're definitely seeing a comeback of the traditional watch. I would say it's really different by region.

Franco Fogliato: Yeah, great question. Thanks for asking. Look, we're definitely seeing a comeback of the traditional watch. I would say it's really different by region. Definitely very strong in India, in the Americas. We don't see that really happening in China. China has been still, even Saud has been a little better, but we still don't see those consumers there. From what we see, it's exciting because you see this new generation coming, and the relevance of the smartwatch for them is not quite there. The traditional watch becomes an accessory, a way to express themselves. They don't need to, they really don't need to take the smartwatch approach in general, as I've done over the years or many other consumers have done over the years. So we're excited about the traditional watch coming back.

Speaker #6: Definitely very strong in India. In the Americas, we don't see that really happening. In China, it has been said that the situation is a little better, but we still don't see those consumers there.

Speaker #6: From what we see, it's exciting because you see this new generation coming, and the relevance of the smartwatch for them is not quite there.

Speaker #6: The traditional watch becomes a necessity, a way to express themselves. They don't need to they really don't need to take the smartwatch approach in general as I've done over the years or many other consumers have done over the years.

Speaker #6: So we're excited about the traditional watch coming back. I think a collaboration is helping us to connect with some very key communities that drive brand awareness and brand momentum.

Franco Fogliato: I think collaborations are helping us to connect with some very key communities that drive brand awareness and brand momentum. I think we have an amazing team that has been able to refocus the business into what we are good on, which is really building great products and telling stories. And those communities and those collaborations are just helping us to tell a better story. You're right. I recall Minecraft. Honestly, we didn't expect that. It was impressive. We were sold out within hours. Shabby, Superman. It's been, I'm really, really proud of the work the teams have done because it really has led Fossil to a different level, to a new level. But you know, I'm also very excited about what's coming next. I'm going to be in New York next week, and I can't wait to see the new collaboration with Nick Jonas.

Speaker #6: I think we have an amazing team that has been able to refocus the business into what we are good on, which is really building great product and telling stories.

Speaker #6: And those communities and those collaborations are just helping us to tell a better story. You're right. I recall Minecraft; honestly, we didn't expect that.

Speaker #6: It was impressive. We were sold out within hours. Shelby, Superman, it's been I'm really, really proud of the work the teams have done because it really has led Fossil to a different level, to a new level.

Speaker #6: And, but you know, I'm also very excited about what's coming next. I'm going to be in New York next week, and I can't wait to see the new collaboration with Nick Jonas.

Speaker #6: This is going to be by far the biggest activation we've done for the Fossil brand in years. I look forward to sharing more in the next call about the success of these collaborations.

Franco Fogliato: This is going to be by far the biggest activation we've done for the Fossil brand since years. So I look forward, you know, to tell more in the next call about the success of this collaboration.

Speaker #5: Okay. Great. Thank you very much, Franco. That was extremely clear. Thank you.

Francesco Marmo: Okay, great. Thank you very much, Franco. That was extremely clear. Thank you.

Speaker #6: Thank you, Francesco.

Franco Fogliato: Thank you, Francesco.

Speaker #1: There are no further questions for Q&A. I'll turn the call back to management for closing comments.

Christine Greany: There are no further questions for Q&A. I'll turn the call back to management for closing comments.

Speaker #6: Thank you, everyone, to joining today. We're excited about the future, and we're looking forward to see you and talk to you for Q3 earnings.

Franco Fogliato: Thank you, everyone, for joining today. We're excited about the future, and we're looking forward to seeing you and talking to you for Q3 earnings. Thank you.

Speaker #6: Thank you.

Speaker #1: This concludes the meeting. You may now disconnect.

Christine Greany: This concludes the meeting. You may now disconnect.

Speaker 6: Please wait. The conference will begin shortly.