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FOSL > SEC Filings for FOSL > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for FOSSIL GROUP, INC.

Form 10-Q for FOSSIL GROUP, INC.


8-Aug-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 Group, Inc. and its wholly and majority-owned subsidiaries for the thirteen and twenty-six week periods ended June 29, 2013 (the "Second Quarter" and "Year To Date Period," respectively) as compared to the thirteen and twenty-six week periods ended June 30, 2012 (the "Prior Year Quarter" and "Prior Year YTD Period," respectively). 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 FOSSILŪ 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 130 retail stores located in premier retail sites and 100 outlet stores located in major outlet malls as of June 29, 2013. In addition, we offer an extensive collection of our FOSSIL brand products 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 192 retail stores and 71 outlet stores in select international markets as of June 29, 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 July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, Income Taxes (Topic 740):
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"). ASU 2013-11 requires, unless certain conditions exist, an unrecognized tax benefit to be presented as a reduction to a deferred tax asset in the financial statements for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The guidance in ASU 2013-11 will become effective for us prospectively for annual periods beginning after December 15, 2013, and interim periods within those years, with early adoption permitted. Retrospective application is also permitted. We are still currently assessing the impact, if any, the adoption of ASU 2013-11 will have on our condensed consolidated results of operations and financial position.

In March 2013, FASB issued 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 periods beginning after December 15, 2013, and interim periods within those years. 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 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 reporting periods beginning on or after January 1, 2013, and interim periods within those years, 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
                                          June 29, 2013    June 30, 2012       2012

Net sales                                         100.0 %          100.0 %         11.0 %
Cost of sales                                      42.1             44.0            6.3
Gross profit                                       57.9             56.0           14.7
Operating expenses:
Selling and distribution                           30.8             30.9           10.8
General and administrative                         12.0             11.3           17.3
Operating income                                   15.1             13.8           21.4
Interest expense                                    0.2              0.2           22.4
Other (expense) income-net                         (0.1 )            0.2              *
Income before income taxes                         14.8             13.8           18.3
Provision for income taxes                          4.8              4.3           22.1
Net income                                         10.0              9.5           16.6
Net income attributable to
noncontrolling interest                             0.4              0.5          (11.6 )
Net income attributable to Fossil
Group, Inc.                                         9.6 %            9.0 %         18.1 %



* Not meaningful


                                             Percentage of Net Sales        Percentage
                                              For the 26 Weeks Ended        Change from
                                          June 29, 2013    June 30, 2012       2012

Net sales                                         100.0 %          100.0 %         13.2 %
Cost of sales                                      43.2             44.1           11.0
Gross profit                                       56.8             55.9           14.9
Operating expenses:
Selling and distribution                           30.3             30.8           11.4
General and administrative                         12.0             11.2           21.0
Operating income                                   14.5             13.9           17.7
Interest expense                                    0.2              0.2           32.8
Other (expense) income-net                          0.6              0.4              *
Income before income taxes                         14.9             14.1           19.9
Provision for income taxes                          4.5              4.2           22.4
Net income                                         10.4              9.9           18.9
Net income attributable to
noncontrolling interest                             0.3              0.5          (24.9 )
Net income attributable to Fossil
Group, Inc.                                        10.1 %            9.4 %         21.1 %



* 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
                      June 29, 2013      June 30, 2012    June 29, 2013   June 30, 2012
Wholesale:
North America        $         260.7    $         249.8            36.9 %          39.3 %
Europe                         170.7              147.7            24.2            23.2
Asia Pacific                    96.2               84.4            13.6            13.3
Total wholesale                527.6              481.9            74.7            75.8
Direct to consumer             178.6              154.2            25.3            24.2
Consolidated         $         706.2    $         636.1           100.0 %         100.0 %




                                  Amounts                     Percentage of Total
                          For the 26 Weeks Ended            For the 26 Weeks Ended
                     June 29, 2013      June 30, 2012    June 29, 2013   June 30, 2012
Wholesale:
North America        $        515.8    $         474.8            37.2 %          38.8 %
Europe                        344.6              300.7            24.8            24.5
Asia Pacific                  183.0              161.0            13.2            13.1
Total wholesale             1,043.4              936.5            75.2            76.4
Direct to consumer            343.7              289.1            24.8            23.6
Consolidated         $      1,387.1    $       1,225.6           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 Second Quarter Versus Prior Year Quarter

                Attributable to Changes in the Following Factors



                          Exchange    Organic   Total
                           Rates      Change    Change
North America wholesale        0.2 %      4.2 %    4.4 %
Europe wholesale               0.6       15.0     15.6
Asia Pacific wholesale        (3.7 )     17.7     14.0
Direct to consumer            (0.3 )     16.1     15.8
Consolidated                  (0.4 )%    11.4 %   11.0 %

Analysis of Percentage Change in Net Sales during the Year To Date Period Versus Prior Year YTD Period

                Attributable to Changes in the Following Factors





                          Exchange                   Organic   Total
                           Rates      Acquisitions   Change    Change
North America wholesale        0.1 %           1.9 %     6.6 %    8.6 %
Europe wholesale               0.4             5.7       8.5     14.6
Asia Pacific wholesale        (2.9 )           2.0      14.6     13.7
Direct to consumer            (0.3 )           1.1      18.1     18.9
Consolidated                  (0.3 )%          2.7 %    10.8 %   13.2 %

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 11.4% for the Second Quarter representing sales growth across each of our wholesale and retail operations in comparison to the Prior Year Quarter. Global watch sales delivered the strongest performance, increasing 15.2%, or $72.5 million. We believe that we continue to gain market share in the watch category as we maximize the potential for our brands with our global distribution infrastructure and design innovation. Our jewelry category also favorably impacted the Second Quarter, increasing 23.9%, or $9.0 million, as our new global assortment resonated well with consumers. These sales gains were partially offset by sales decreases in leathers of 5.1%, or $5.0 million, and eyewear of 39.2%, or $4.0 million, as a result of decreased sell through rates at retail. For the Year To Date Period, net sales increased by 13.5%, or $165.1 million, representing sales growth in each of our wholesale and direct to consumer businesses.

North America Wholesale Net Sales. North America wholesale net sales increased 4.2%, or $10.5 million, during the Second Quarter in comparison to the Prior Year Quarter. The Second Quarter was negatively impacted by a timing shift of approximately $15 million from the Second Quarter into the first quarter of fiscal 2013 due to the early timing of Easter in the current fiscal year as compared to the prior fiscal year. North America sales growth was led by an 8.9%, or $17.4 million, increase in watches and a 19.8%, or $1.8 million, increase in the jewelry category. Our leathers and eyewear businesses experienced sales decreases of 12.2%, or $4.8 million, and 63.1%, or $2.5 million, respectively. North America wholesale sales increased across geographies as our U.S. shipments increased 2.6% or $5.9 million, during the Second Quarter, while our subsidiaries in Canada and Mexico delivered increases of 27.7% and 10.5%, respectively. For the Year To Date Period, North America wholesale net sales increased 8.5%, or $40.4 million, compared to the Prior Year YTD Period. This increase was principally driven by sales gains in watches and jewelry, partially offset by decreases in leathers and eyewear. The Year To Date Period was 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.

Europe Wholesale Net Sales. Europe wholesale net sales rose 15.0%, or $22.1 million, during the Second Quarter in comparison to the Prior Year Quarter representing growth across multiple geographies within the European region. Sales growth was primarily a result of a 17.0%, or $19.6 million, increase in our watch category and a 22.6%, or $4.2 million, increase in our jewelry business. Sales to third party distributors also favorably contributed to the Second Quarter, increasing 13.1%, or $4.3 million, as a result of increased sell-through rates. The Second Quarter was negatively impacted by decreases in the leathers and eyewear categories of 24.0%, or $2.0 million, and 66.4%, or $1.5 million, respectively. The decrease in leathers was primarily attributable to decreased sell-through rates at retail, while the decrease in eyewear was largely due to door reduction. Europe wholesale net sales increased 14.2%, or $42.6 million, for the Year To Date Period as compared to the Prior Year YTD Period, led by a 19.4%, or $43.7 million, increase in watch sales and a 10.8%, or $4.5 million, increase in our jewelry business. These sales gains were partially offset by decreases in our eyewear and leathers categories of 62.8%, or $4.2 million, and 19.3%, or $4.1 million, respectively.


Asia Pacific Wholesale Net Sales. Asia Pacific wholesale net sales rose 17.7%, or $14.9 million, during the Second Quarter in comparison to the Prior Year Quarter. This increase was principally attributable to watch sales increasing 20.6%, or $15.5 million, partially offset by a 41.7%, or $0.8 million, decrease in jewelry sales. We experienced strong growth across most markets led by China, India and Japan. At the end of the Second Quarter, we operated 294 concession locations in Asia with a net 13 new concessions opened during the Second Quarter. For the Second Quarter, concession sales increased by 27.9% with comp sales growing 4.2% in comparison to the Prior Year Quarter. For the Year To Date Period as compared to the Prior Year YTD Period, Asia Pacific wholesale net sales rose 16.6%, or $26.7 million, principally as a result of the same factors experienced during the Second Quarter. Concession sales increased by 27.0%, with comp sales growing 4.1% in the Year To Date Period in comparison to the Prior Year YTD Period.

Direct to Consumer Net Sales. Direct to consumer net sales for the Second Quarter increased by 16.1%, or $24.9 million, in comparison to the Prior Year Quarter, primarily the result of a 17.4% increase in the average number of Company-owned stores open during the Second Quarter partially offset by comparable store sales decreases of 0.1%. For the Year To Date Period, net sales from our Direct to consumer segment increased 19.2%, or $55.5 million, in comparison to the Prior Year YTD Period, primarily as a result of a 15.9% increase in the average number of Company-owned stores open and comparable store sales increases of 2.0%.

The following table sets forth the number of stores by concept for the periods indicated below:

                                  June 29, 2013                     June 30, 2012
                          North       Other                 North       Other
                         America   International   Total   America   International   Total
Full price accessory         108             153     261       104             154     258
Outlets                      108              67     175        85              36     121
Clothing                      30               2      32        32               2      34
Full price multi-brand         6              19      25         2              12      14
Total stores                 252             241     493       223             204     427

During the Second Quarter, we opened 21 new stores and closed five stores. For . . .

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