Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
FOSL > SEC Filings for FOSL > Form 10-Q on 9-May-2013All Recent SEC Filings

Show all filings for FOSSIL INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for FOSSIL INC


9-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion of the financial condition and results of operations of Fossil, Inc. and its wholly and majority-owned subsidiaries for the thirteen week period ended March 30, 2013 (the "First Quarter") as compared to the thirteen week period ended March 31, 2012 (the "Prior Year Quarter"). This discussion should be read in conjunction with the condensed consolidated financial statements and the related notes thereto.

General

We are a global design, marketing and distribution company that specializes in consumer fashion accessories. Our principal offerings include an extensive line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, soft accessories and clothing. In the watch and jewelry product categories, we have a diverse portfolio of globally recognized owned and licensed brand names under which our products are marketed. Our products are distributed globally through various distribution channels, including wholesale in countries where we have a physical presence, direct to the consumer through our retail stores and commercial websites and through third-party distributors in countries where we do not maintain a physical presence. Our products are offered at varying price points to meet the needs of our customers, whether they are value-conscious or luxury oriented. Based on our extensive range of accessory products, brands, distribution channels and price points, we are able to target style-conscious consumers across a wide age spectrum on a global basis.

Domestically, we sell our products through a diversified distribution network that includes department stores, specialty retail locations, specialty watch and jewelry stores, Company-owned retail and outlet stores, mass market stores, and through our FOSSIL catalogs and website. Our wholesale customer base includes, among others, Dillard's, JCPenney, Kohl's, Macy's, Neiman Marcus, Nordstrom, Saks Fifth Avenue, Target and Wal-Mart. In the United States, our network of Company-owned stores included 129 retail stores located in premier retail sites and 95 outlet stores located in major outlet malls as of March 30, 2013. In addition, we offer an extensive collection of our FOSSIL brand products through our catalogs and on our website, www.fossil.com, as well as proprietary and licensed watch and jewelry brands through other managed and affiliate websites.

Internationally, our products are sold to department stores, specialty retail stores and specialty watch and jewelry stores in approximately 130 countries worldwide through 25 Company-owned foreign sales subsidiaries and through a network of over 60 independent distributors. Our products are offered on airlines and cruise ships and in international Company-owned retail stores. Internationally, our network of Company-owned stores included 188 retail stores and 65 outlet stores in select international markets as of March 30, 2013. Our products are also sold through licensed and franchised FOSSIL retail stores, retail concessions operated by us and kiosks in certain international markets, as well as our websites in certain countries.

Our business is subject to economic cycles and retail industry conditions. Purchases of discretionary fashion accessories, such as our watches, handbags, sunglasses and other products, tend to decline during recessionary periods when disposable income is low and consumers are hesitant to use available credit. If economic conditions worsen or if the global or regional economies slip back into a recession, our revenues and earnings for fiscal year 2013 or beyond could be negatively impacted.

Our business is also subject to the risks inherent in global sourcing of supply. Certain key components in our products come from limited sources of supply, which exposes us to potential supply shortages that could disrupt the manufacture and sale of our products. Any interruption or delay in the supply of key components could significantly harm our ability to meet scheduled product deliveries to our customers and cause us to lose sales. Interruptions or delays in supply may be caused by a number of factors that are outside of our and our contractor manufacturers' control, such as natural disasters like the earthquake and tsunami in Japan in early fiscal year 2011.

Future sales and earnings growth are also contingent upon our ability to anticipate and respond to changing fashion trends and consumer preferences in a timely manner while continuing to develop innovative products in the respective markets in which we compete. As is typical with new products, market acceptance of new designs and products that we may introduce is subject to uncertainty. In addition, we generally make decisions regarding product designs several months in advance of the time when consumer acceptance can be measured. We believe the net sales growth we have experienced over the last several fiscal quarters is the result of our ability to design innovative watch products incorporating a number of new materials that not only differentiate us from our competition but also continue to provide a solid value proposition to consumers across all of our brands.

The majority of our products are sold at price points ranging from $85 to $600. Although the current economic environment continues to weigh on consumer discretionary spending levels, we believe that the price/value relationship and the differentiation and innovation of our products, in comparison to those of our competitors, will allow us to maintain or grow our market share in those markets in which we compete. Historically, during recessionary periods, the strength of our balance sheet, our strong operating cash flow and the relative size of our business with our wholesale customers, in comparison to that of our competitors, have allowed us to weather recessionary periods for longer periods of time and generally resulted in market share gains to us.


Our international operations are subject to many risks, including foreign currency. Generally, a strengthening of the U.S. dollar against currencies of other countries in which we operate will reduce the translated amounts of sales and operating expenses of our subsidiaries, which results in a reduction of our consolidated operating income. We manage these currency risks by using derivative instruments. The primary risks managed by using derivative instruments are the future payments by non-U.S. dollar functional currency subsidiaries of intercompany inventory transactions denominated in U.S. dollars. We enter into foreign exchange forward contracts to manage fluctuations in global currencies that will ultimately be used to settle such U.S. dollar denominated inventory purchases.

For a more complete discussion of the risks facing our business, see "Part I, Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 29, 2012.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods reported. On an on-going basis, we evaluate our estimates and judgments, including those related to product returns, bad debt, inventories, long-lived asset impairment, impairment of goodwill and trade names, income taxes, warranty costs, hedge accounting, litigation reserves and stock-based compensation. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Our estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no changes to the critical accounting policies disclosed in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2012.

Recently Issued Accounting Standards

In March 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-05, Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity ("ASU 2013-05"). ASU 2013-05 addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The guidance outlines the events when cumulative translation adjustments should be released into net income and is intended by FASB to eliminate some disparity in current accounting practice. The guidance in ASU 2013-05 will become effective for us for annual and interim periods beginning after December 15, 2013. We will apply the guidance prospectively to any derecognition events that may occur after the effective date, and we do not expect the adoption of ASU 2013-05 to have a material impact on our condensed consolidated results of operations or financial position.

In February 2013, the FASB issued ASU 2013-04, Liabilities (Topic 405):
Obligations Resulting From Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date ("ASU 2013-04"). The update requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed as of the reporting date. The amount is equal to the sum of the obligation the entity agreed to pay among its co-obligors and any additional amount the entity expects to pay on behalf of its co-obligors. ASU 2013-04 will become effective for us for annual and interim periods beginning after December 15, 2013 and is required to be applied retrospectively to all prior periods presented for obligations that existed upon adoption of ASU 2013-04. We do not expect the adoption of ASU 2013-04 to have a material impact our condensed consolidated results of operations or financial position.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210):
Disclosures about Offsetting Assets and Liabilities ("ASU 2011-11"), to address certain comparability issues between financial statements prepared in accordance with GAAP and those prepared in accordance with International Financial Reporting Standards. In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities ("ASU 2013-01"), which clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11. ASU 2011-11 will require an entity to provide enhanced disclosures about certain financial instruments and derivatives, as defined in ASU 2013-01, to enable users to understand the effects of offsetting in the financial statements as well as the effects of master netting arrangements on an entity's financial condition. The amendments in ASU 2011-11 and ASU 2013-01 are effective for annual and interim reporting periods beginning on or after January 1, 2013, with respective disclosures required for all comparative periods presented. We do not expect the adoption of ASU 2011-11 and ASU 2013-01 to have a material impact on our condensed consolidated results of operations or financial position.


Recently Adopted Accounting Standards

In July 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment ("ASU 2012-02"). The amendments in this update permit an entity to make a qualitative assessment to determine if it is more likely than not that an indefinite-lived intangible asset other than goodwill is impaired. If an entity concludes that it is more likely than not that the fair value of an indefinite-lived intangible asset other than goodwill is less than its carrying amount, it is required to perform the quantitative impairment test for that asset. This ASU aligns the guidance of impairment testing for indefinite-lived intangible assets other than goodwill with that in ASU 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment ("ASU 2011-08"). The guidance in ASU 2012-02 was effective for us beginning December 30, 2012 and did not have a material impact on our condensed consolidated results of operations or financial position.

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220):
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"). FASB issued ASU 2013-02 to improve the transparency of changes in other comprehensive income ("OCI") and items reclassified out of accumulated other comprehensive income ("AOCI") in financial statements. ASU 2013-12 requires an entity to provide information about amounts reclassified out of AOCI by component. In addition, an entity must present either on the face of the income statement or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income. See "Note 6-Stockholders' Equity and Benefit Plans" for additional disclosures about our OCI. The guidance in ASU 2013-02 became effective for us on December 30, 2012 and did not have a material impact on our condensed consolidated results of operations or financial position.

Results of Operations

The following tables set forth, for the periods indicated, (i) the percentages of our net sales represented by certain line items from our condensed consolidated statements of comprehensive income and (ii) the percentage changes in these line items between the periods indicated.

                                           Percentage of Net Sales          Percentage
                                            For the 13 Weeks Ended         Change from
                                       March 30, 2013    March 31, 2012        2012

Net sales                                       100.0 %           100.0 %          15.5 %
Cost of sales                                    44.4              44.2            16.1
Gross profit                                     55.6              55.8            15.0
Operating expenses:
Selling and distribution                         29.8              30.7            12.0
General and administrative                       11.9              11.0            25.2
Operating income                                 13.9              14.1            13.8
Interest expense                                  0.2               0.2               *
Other income-net                                  1.4               0.4               *
Income before income taxes                       15.1              14.3            21.6
Provision for income taxes                        4.2               3.9            22.8
Net income                                       10.9              10.4            21.1
Net income attributable to
noncontrolling interest                           0.3               0.5           (38.8 )
Net income attributable to
Fossil, Inc.                                     10.6 %             9.9 %          24.2 %



* Not meaningful

Net Sales. The following tables set forth consolidated net sales by segment and the percentage relationship of each segment to consolidated net sales for the periods indicated (in millions, except percentage data):

                                               Amounts                         Percentage of Total
                                        For the 13 Weeks Ended                For the 13 Weeks Ended
                                  March 30, 2013      March 31, 2012     March 30, 2013    March 31, 2012
Wholesale:
North America                    $          255.2    $          225.0              37.5 %            38.2 %
Europe                                      173.9               152.9              25.6              25.9
Asia Pacific                                 86.8                76.7              12.7              13.0
Total wholesale                             515.9               454.6              75.8              77.1
Direct to consumer                          165.0               134.9              24.2              22.9
Consolidated                     $          680.9    $          589.5             100.0 %           100.0 %


The following table illustrates by factor the total year-over-year percentage change in net sales by segment and on a consolidated basis:

Analysis of Percentage Change in Net Sales during the First Quarter Versus Prior Year Quarter

                Attributable to Changes in the Following Factors



                          Exchange                   Organic   Total
                           Rates      Acquisitions   Change    Change
North America wholesale        0.1 %           4.0 %     9.3 %   13.4 %
Europe wholesale               0.2            11.2       2.3     13.7
Asia Pacific wholesale        (2.1 )           4.1      11.2     13.2
Direct to consumer            (0.4 )           2.4      20.3     22.3
Consolidated                  (0.2 )%          5.5 %    10.2 %   15.5 %

The following net sales discussion excludes the impact on sales growth attributable to foreign currency exchange rate changes as noted in the above table.

Consolidated Net Sales. Net sales rose 15.7% as a result of double-digit sales growth across each of our wholesale and retail operations in comparison to the Prior Year Quarter. Our acquisition of Skagen Designs, Ltd. and certain of its international affiliates ("Skagen") on April 2, 2012 contributed $29.1 million towards overall sales during the First Quarter. On an organic basis, excluding sales related to acquisitions, worldwide net sales increased 10.2% for the First Quarter. Global watch sales were the key driver, increasing 15.6%, or $65.4 million, while jewelry sales increased 5.4%, or $2.1 million. These sales gains were partially offset by sales decreases in eyewear of 35.7%, or $4.8 million, and leathers of 1.3%, or $1.3 million. The decrease in eyewear was primarily a result of our repositioning of the FOSSIL branded products in this category, while the decrease in leathers was the result of decreased sell through rates at retail.

North America Wholesale Net Sales. Net sales from the North America wholesale segment increased 13.3%, or $29.8 million, during the First Quarter in comparison to the Prior Year Quarter. North America sales were negatively impacted by approximately $10 million as a result of the misalignment of our fiscal calendar with the National Retail Federation ("NRF") calendar, on which many of our customers operate. The NRF calendar included an extra week in January 2013 as compared to our fiscal calendar. The extra week on our fiscal calendar will take place in January 2014, leaving every month in this fiscal year misaligned. Accordingly, our fiscal calendar will not re-align with the NRF calendar until January 2014. Additionally, sales were favorably impacted by a timing shift of approximately $15 million from the second quarter of fiscal 2013 into the First Quarter. We believe this favorable shift was largely attributable to the early timing of Easter in the current fiscal year as compared to the prior fiscal year. North America sales growth was primarily driven by a 22.9%, or $37.0 million, increase in watch sales, including $9.9 million of sales related to SKAGEN branded products during the First Quarter. These sales gains were partially offset by decreases in our leathers and eyewear categories of 6.3%, or $2.9 million, and 35.1%, or $2.3 million, respectively. The decrease in leather product sales was primarily attributable to decreased sell through rates in our women's handbags category. The First Quarter was also negatively impacted by the discontinuation of our footwear business. U.S. shipments increased 12.9%, or $25.8 million, while shipments from our Canadian and Mexican subsidiaries increased 16.5% and 35.3%, respectively, during the First Quarter as compared to the Prior Year Quarter.

Europe Wholesale Net Sales. Europe wholesale net sales rose 13.5%, or $20.5 million, including a $12.8 million contribution from sales of SKAGEN branded products during the First Quarter in comparison to the Prior Year Quarter. Growth in our watch category made the most significant contribution, increasing 22.1%, or $24.1 million. Sales to third party distributors favorably impacted the First Quarter, increasing 18.2%, or $5.7 million, as compared to the Prior Year Quarter as a result of increased sell-through rates. These sales gains were partially offset by decreases in the eyewear and leathers categories of 61.0%, or $2.7 million, and 18.6%, or $2.5 million, respectively. The decrease in eyewear was largely due to door reduction, while the decrease in leathers was primarily attributable to decreased sell-through rates at retail.

Asia Pacific Wholesale Net Sales. Asia Pacific wholesale net sales rose 15.3%, or $11.7 million, during the First Quarter in comparison to the Prior Year Quarter. The growth was primarily driven by our watch category and included $3.1 million of SKAGEN branded products. At the end of the First Quarter, we operated 281 concession locations in Asia with a net 11 new concessions opened during the First Quarter. For the First Quarter, concession sales increased by 26.1% with comp sales growing 4.0% in comparison to the Prior Year Quarter.

Direct to Consumer Net Sales. Direct to consumer net sales for the First Quarter increased by 22.7%, or $30.7 million, in comparison to the Prior Year Quarter, primarily the result of square footage growth of 24.2% and comparable store sales increases of 4.3%. The comparable store sales gain represents the 20th consecutive quarter of positive comparable store sales increases and comes on top of comparable store sales gains of 7.7% and 21.3% in the first quarter of fiscal 2012 and 2011, respectively.


Global outlet comparable store sales increased 2.1% for the First Quarter in comparison to the Prior Year Quarter.

The following table sets forth the number of stores by brand and concept as of March 30, 2013 and March 31, 2012:

                                  March 30, 2013                   March 31, 2012
                                    Outside of                       Outside of
                           North      North                 North      North
                          America    America      Total    America    America      Total
FOSSIL accessory stores       105          145       250       102          145       247

FOSSIL outlet stores           77           47       124        65           27        92
Watch Station
International outlet
stores                         22           14        36        10            3        13
Outlet stores                  99           61       160        75           30       105

FOSSIL clothing stores         31            2        33        29            4        33

Full-price Watch
Station International           4            8        12         2            4         6
Other full-price
multi-brand                     0            9         9         0            7         7
Full-price multi-brand          4           17        21         2           11        13

SKAGEN branded                  5            8        13         0            0         0

Total Stores                  244          233       477       208          190       398

During the First Quarter, we opened 11 new stores and closed 7 stores. The 11 new stores opened included four accessory stores, three Watch Station International stores, one multi-brand store, two Fossil outlet stores, and one Watch Station International outlet store. For fiscal year 2013, we anticipate opening approximately 70-75 net new retail stores globally, with a focus on outlet and accessory stores.

A store is included in comparable store sales in the thirteenth month of operation. Stores that experience a gross square footage increase of 10% or more due to an expansion and/or relocation are removed from the comparable store sales base, but are included in total sales. These stores are returned to the comparable store sales base in the thirteenth month following the expansion and/or relocation.

Gross Profit. Gross profit of $378.5 million in the First Quarter increased 15.0% in comparison to $329.0 million in the Prior Year Quarter. The increase was a result of increased net sales partially offset by a 20 basis point reduction in gross profit margin to 55.6% compared to 55.8% in the Prior Year Quarter. Foreign currency exchange rate changes negatively impacted gross profit margin by approximately 20 basis points during the First Quarter. Additionally, gross profit margin was unfavorably impacted by a higher percentage of lower margin sales to third party distributors. Partially offsetting these negative influences on gross profit margin were improved margins in Company-owned full price retail stores and an increase in the sales mix of higher margin watch products and Direct to consumer sales in comparison to the Prior Year Quarter.

Operating Expenses. Total operating expenses increased by $38.0 million and, as a percentage of net sales, remained flat at 41.7% in the First Quarter as compared to the Prior Year Quarter. The translation of foreign-based expenses in the First Quarter decreased operating expenses by approximately $2.6 million as a result of the stronger U.S. dollar. Total operating expenses increased from the Prior Year Quarter due to the expansion of our retail store and concession base, infrastructure investments to support growth in the Asia Pacific region and global initiatives, as well as the impact of newly acquired businesses.


The following tables set forth operating expenses on a segment basis and the relative percentage of operating expenses to net sales for each segment for the periods indicated (in millions, except for percentage data):

                                             For the 13 Weeks Ended March 30, 2013                For the 13 Weeks Ended March 31, 2012
                                         Operating Expense          % of Net Sales            Operating Expense          % of Net Sales
North America wholesale                 $              48.7                         19.1 %   $              41.7                         18.5 %
Europe wholesale                                       56.0                         32.2                    47.2                         30.9
Asia Pacific wholesale                                 42.0                         48.4                    38.9                         50.7
Direct to consumer                                     98.3                         59.6                    83.1                         61.6
. . .
  Add FOSL to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for FOSL - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.