Fossil Group (NASDAQ:FOSL) reported first-quarter financial results on Wednesday. The transcript from the company's first-quarter earnings call has been provided below.
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Summary
Fossil Group reported net sales of $218 million for Q1, with a gross margin of 59.7%, indicating a strong start to the year.
The company reiterated its full-year guidance despite a challenging macro environment, driven by strong performance in wholesale core brands and traditional watches.
Fossil Group is focused on its three strategic turnaround pillars: returning to profitable growth, optimizing its operating model, and building shareholder value.
The company is advancing several initiatives, including expanding its brand platform, strengthening consumer engagement, and leveraging AI for operational efficiency.
Fossil Group noted improvements in key geographies such as the US, India, and Asia Pacific, and emphasized the success of its traditional watches and licensed brands.
The company closed 7 stores in Q1 and plans to close approximately 15 in 2026, while also focusing on enhancing the customer experience in its full-price stores.
Fossil Group maintains a cautious outlook due to geopolitical uncertainties but remains confident in achieving breakeven free cash flow for the full year.
Full Transcript
OPERATOR
Hello and welcome to Fossil Group Q1 2026 earnings conference call. Just a few reminders that all lines have been placed on mute to prevent any background noise. And that. This call is being recorded and this call may not be reproduced in whole or in part without the Company's permission. I will now be passing the call over to the presenters. You may begin 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 8K, 10Q and 10K reports filed with the SEC. In addition, Fossil Group 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. 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 of fossilgroups.com with that, I'll now turn the call over to Franco to begin
Franco
Good afternoon. Thank you Christine and welcome everyone. We're pleased to begin the year with strong financial performance. Our turnaround pillars are delivering results today while advancing our path to long term profitable growth. I want to recognize our exceptional global teams. Their commitment, creativity and disciplined execution are driving tremendous progress in our Turnaround. In the first quarter we delivered net sales of 218 million, healthy gross margin of 59.7% and strict expense control which drove another quarter of positive adjusted operating income totaling 10 million. Top line results were better than we expected, led by strong performance in wholesale core brands and key geographies as well as notable strength in traditional watches. Looking at the balance of the year, strong first quarter performance combined with continuing industry tailwinds is enabling us to confidently reiterate our full year guidance based despite the dynamic macro environment. Importantly, our teams remain rather focused on our three strategic turnaround pillars, returning to profitable growth, optimizing our operating model and building shareholder value. We're executing several initiatives across these pillars. I will now turn to sharing updates on our progress and plans. First, returning to profitable growth. We're strengthening the Fossil brand platform through action to fuel innovation, deepen consumer engagement, grow the traditional watch business and reinvigorate our jewelry and leather categories. Our creative teams are delivering compelling innovation to consumer through a blend of creativity and logic that leverage our unique heritage to build the brand heat. The quarter was highlighted by the return of Fossil bigtik which reflects our creative evolution as we draw from fossil rich archives. The storytelling around BigTic has generated tremendous visibility from global lifestyle media and leading watch industry publication. Experiential seedings of the product have drove a nostalgic excitement and placed Big Tick in the hands of media influencers and celebrities early on. In fact, Y2K media resonates with younger males driving social engagement and online conversion among Gen Z and Millennial consumers. We will be carrying this momentum forward with additional Big Tech animation launching throughout the year. In Q2 we introduced a limited edition Big Peak World Flags collection which leverages engaged fan base and excitement around global sports moments such as the FIFA World cup and Olympics. More recently we released our latest Star wars collaboration on May 4. A new Mandalorian Plus Grogu collection is garnering attention from Star wars superfan Sci fi audiences and watch enthusiasts. Next up we have exciting new collaboration with Marvel rollie out in Q3. Great storytelling remains a hallmark of the Fossil brand. Our market investments are helping us drive brand hit and new customer acquisitions and we're amplifying our messaging around important times of the year. Our recent Mother's Day campaign focused on our icon product offerings and doubled down on Minis which drove excitement around a well loved collection such as Aloe and Raquel. Next month we will be in the market with Father's Day's messaging and local events. Moving now to our Omnichannel initiatives which are focused on modernizing our brand expression wholesale, improving our e commerce business and optimizing our Fossil store portfolio. Our focus on full price integrity, channel discipline and operational excellence is building traction in key areas of the business. During Q1, wholesale grew mid single digit with our core brand traditional watch sales up high single digits in the channel. Performance was strong with both our long term wholesale partners as well as a specialty in energy retails, a new channel that is helping us build the brand awareness and create excitement among a younger democratic. From a regional standpoint in Q1 we saw broad based strength in both the US and India. Additionally, we were pleased to see improved performance in key Asia Pacific markets such as Japan and Australia in the quarter. The results are a testament to new leadership that is advancing our commercial strategy across the region from a high level perspective. Our wholesale partner relationship are strengthened as we continue to walk the walk on full price selling and deliver compelling product as sources. In fact, our order books are building earlier and we're beginning to develop longer term plans together, demonstrating the confidence our partners have in our brands. Our direct to consumer model keeps us close to consumer, providing a deeper understanding of customer needs and fostering more relevant brand building. On the E commerce front, we're continuing to drive channel profitability on a smaller sales base through two key focus areas 1 our commitment to full price selling and 2 initiatives to strengthen the online customer journey. This included continuous improvement to our new fossil brand platform with fresh content and functional updates that enable us to showcase a more cohesive brand presentation, drive customer engagement and strengthen brand perception as we aim to build scale. A great example of this is the recent launch of a new navigation across our fossil e commerce site globally. This enables richer brand storytelling within the navigation experience and sharpened focus on our collection making it easier for customers to discover and shop key product stories. The enhancement reduces friction points across the whole journey and empower our merchandising team with greater flexibility to respond quickly to trends and key commercial moments in the retail channel. We closed 7th store in Q1 and remain on track to close approximately 15 locations in 2026. It is worth noting that we have significantly scaled back our plans to downsize the portfolio as a result of improving performance in our full price stores. It is clear that our initiative to deliver a more engaging customer experience very first in Q1 harm performance was particularly strong in our full price stores. In the near term we're further advancing our store of the future strategy by rolling out an expanded suite of selling tools that equip our associates with the skills needed to maximize full price sales. Longer term, we plan to test and learn to build a refined store model that generates compelling returns and presents an opportunity for major expansion. Moving now to our core licensed brand where we are seeing growth across the spectrum including Armani Group, Diesel and Michael Kors. I will start with the Michael Kors brand where we were pleased to see year over year growth in Q1 productivity and newness towards momentum in the wholesale channel, further supported by the ongoing work being done by the Michael Kors team to drive brand heat. Additionally, the shift toward a more competitive pricing architecture in Jewelry is driving increased AUR and improved brand positioning in employer money. The brand achieved a strong sell through across channels driven by elevated assortment, a shift toward premium offerings and compelling high visibility marketing campaigns. In the Armani Exchange trend, healthy performance is attributable to higher full price sales, strengthening winners and product new looking now at India where we successfully scaling a proven growth engine during Q1 we executed against the key initiatives we outlined on our last earning call. Specifically, we broadened our reach with the addition of more than 70 new wholesale doors. We drove a premium position with new price points resulting in a higher mix of full priced sales as well as a higher average retail detail We implemented new E Commerce platform and CRM integration tool to enhance our omnichannel capabilities and we continue to leverage our market leadership position and build brand it through strong execution across Hostel, Armani, Diesel and Coast. Moving to our second turnaround pillar optimizing our operating model, Our teams are actually a number of initiatives to strengthen our go to market execution including both operational investment and infrastructure improvement. Simplification across the organization continue as we further streamline operation, rationalize our investment and consolidate our IT stack. This includes the ongoing simplification of our analytics platform which has reduced cost and enhanced our capabilities establishing the data architecture required for generative AI as part of our broader strategy to build a more competitive and profitable model in small and international geographies. Subsequent to a quarter end we signed an agreement to transition another international market to a distributor model aligning with the best in class partner in South Africa. This strategy enabled us to leverage the local knowledge and the expertise of regional distributors while lowering our operating expenses driving strong flow through of gross profit to the bottom line. I will now turn to our third and final pillar, building shareholder value. Ongoing progress across the business is setting the stage for us to continue to drive improved profitability and deliver positive free cash flow. Our strong start to 2026 reinforced the effectiveness and durability of our turnaround plan. The impact of simplification and focus is clear. Our brand led consumer focus model is enabling us to build a smaller, more profitable business that is positioned to return to growth in the fourth quarter of this year. The progress and momentum we saw throughout 2025 carried into the first quarter of 2026 with only one quarter of the year delivered. We are holding our guidance in light of the geopolitical climate and its potential impact on the consumer. We continue to have a strong condition in the trajectory of the business and am I committed to building long term shareholder value. Now I will turn the call to Randy to discuss the financials.
Randy
Thank you Franco. We delivered another strong quarter across the P&L reflecting the strength of our brand portfolio and continued traction within our turnaround pillars. While our top line outperformance was primarily driven by better than expected wholesale results including the shift of some receipts previously anticipated in Q2. Moving into Q1 we continue to make progress towards strengthening our D2C channel. In fact, every facet of our business is contributing to the success of our turnaround. Net sales in Q1 totaled $218 million. That's down 6% from last year. Looking deeper, the comparison versus last year includes 7 points of unfavorable impact as we lapped the extra week in last year's first quarter as well as another 280 basis points related to the net impact of our store closure program and our smartwatch exit. Taking these factors into account, we are clearly demonstrating that the business is stabilizing and poised to return to top line growth. First quarter gross margin came in at 69.7%, down 160 basis points year over year, reflecting both strong product margins and our ongoing focus on full price selling. Similar to revenue, there's quite a bit to unpack as it relates to the inputs to our results. First, we incurred higher tariff expenses this year versus Q1 of 2025. While prevailing tariff rates at present remain lower than they were before this year's court ruling, they are still elevated as compared to where they were prior to Liberation Day, which you will recall with the Q2 2025 eventually. Next, we recognized a portion of our anticipated full year minimum royalty shortfall in the quarter. As a reminder in recent years, the GMR true-up was recognized in our second half with the majority of it being booked in Q3. Concurrent with negotiating more favorable license agreement terms for 2026 last year, we are now amortizing the shortfall throughout all four quarters. It bears reminding that the quantum amount of shortfall is forecast to be materially lower than in recent years and should result in much more consistent quarterly gross margin which we continue to anticipate being in the mid to upper 50% range. These two impacts, higher tariff expense and licensed brand minimum royalties, were partially offset by the recognition of a tariff refund claim during the quarter. Of the total $5.9 million claim, $4 million was recognized as a reduction to cost of sales, $900,000 was recognized as a reduction to SG&A, and the remaining $1 million was recorded as a reduction to inventory. On the balance sheet, the majority of the $4 million cost of goods benefit is related to costs incurred in 2025 and therefore has been adjusted out of our operating income Net-net. Our Q1 gross margin is very healthy and reflects not only the power of our portfolio of brands but also the strength of our robust supply chain. Importantly, we remain confident that we can maintain this margin profile throughout the balance of the year. It's also worth noting that we have not embedded any further refunds into our 2026 outlook. Turning now to operating expenses, we lowered SG&A dollars by 13% which exceeded our sales decline and drove expense leverage in the quarter. The improvement is attributable to 27 fewer stores in operation versus a year ago, as well as lower compensation and administrative expenses. During Q1 we closed seven stores and expect to close up to 15 in total this year. This would put us at 185 locations globally at the end of 2026. As you heard from Franco, we are continuing to focus on optimizing our operating model by capturing efficiencies and rationalizing investments across key areas of the business, including go to market and information. I will also point out that restructuring costs have come down considerably, totaling just $2 million in Q1 2026 versus $16 million a year ago. The leverage we achieved in SGA with costs coming out in excess of our sales decline is a tangible example of the discipline that underpins all of the efforts of the group today and subsequent to quarter end, we've continued to fine tune the operating model, including as Franco mentioned, signing the agreement to transition our South Africa subsidiary to a distributor during Q2. The combination of healthy gross margins and expense control absolutely translated to the bottom line. When we delivered another quarter of profitability, Q1 adjusted operating income came in at $10 million versus $9 million a year ago. Turning to the balance sheet, we ended the quarter with $81 million of cash and cash equivalents and $28 million of availability under our asset based revolver, reflecting our seasonal working capital cadence. Additionally, as of quarter end we had no utilization under our ATM program. Inventory at quarter end totaled $156 million, down 14% versus last year, which is in line with our expectations to increase turns even as we lean into more full price selling. In Q1 of this year, our cash used in operations reduced by over 50% from the same period last year, reflecting our strengthening profitability and improved working capital management. Moving now to guidance, strong execution against our turnaround pillars is enabling us to reiterate our outlook for the full year. 2026, while up to date, are in fact ahead of expectations. We believe this is prudent given the uncertainty that exists in the geopolitical environment and the potential effects on input costs and consumer behavior. We continue to expect worldwide net sales to decline in the range of 4% to 6%. Of note, the net impact of store closures and the extra week in 2025 are worth about 360 basis points. Further. Further, we continue to anticipate that 2026 will be second half weighted and will be punctuated by an expected return to top line growth in the fourth quarter as we continue to harness the compounding benefits of our turnaround initiatives. On the bottom line, we continue to expect adjusted operating margin in the range of 3% to 5%. Lastly, we continue to expect to achieve breakeven free cash flow on a full year basis. Now I'll ask the operator to open the call to Q and A.
OPERATOR
Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a kindly press Star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press Star one again. If you are called upon to ask question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute. When you are asking a question, your question comes from the line. Thomas Forte from Maxium Group, please go ahead.
Thomas Forte (Equity Analyst)
Great, thanks. So first off, Franco and Randy, congratulations on super impressive performance. I have one question and one follow up. I'll go one at a time. I think you commented Franco in your prepared remarks that you had a return to top line growth in traditional watches which believe it's the first time in years. How should we think about the sustainability of that performance?
Franco
Tom, thank you very much. Look, we're excited. We're one quarter in. In particular we're excited about the performances across the traditional watches in the wholesale channel where we've been performing very well. We're still doing a lot of work from our DTC in particular with closing stores and reducing some of the sales we were doing on E Comm that were, you know, at the beginning of 2025 we still had a lot of inventory that was old and bought prior to joining the company. The greatest thing is not only we're making progress with the whole state account, but also we're seeing we're selling at a higher AUR driving better gross margin. So overall we're very encouraged. I mentioned a lot of work we'd done at the beginning when I joined the company only got to market towards the end of 24. The pipeline in 25 sorry, got to the market at the end of 25. In particular the Nick Jonas collection. We have a big tick now in 2026 and we have a full pipeline ready to go as we Enter later this year, the second half and we're working on 2027. So a lot of work we've done has been into turning around our traditional watch categories. We were very excited and this is honestly combined with a tailwind in the industry, particularly in the American region where we're seeing a lot of younger consumers coming back to the space, which is very encouraging for all of us. Randy, anything?
Randy
The only thing that I would add is the combined power of not only having the traditional watch category perform in a manner of strength that it hasn't in some time, but coupling that with full price selling. You really see that flow through the gross margin. And this is a quarter where we've demonstrated the ability to translate that gross margin through to the bottom line. It's a tangible proof point of the strategy coming together.
Thomas Forte (Equity Analyst)
Excellent. And then for my follow up, Franco, you used the word generative commerce, which is something I've heard a lot from Amazon, really from all the big mega cap technology companies. What are your thoughts on how you're preparing for fossil for generative commerce mean for you in the future?
Franco
It's a great question. Look, we're absolutely focused on driving, generally speaking AI as an opportunity for the company. In particular generative AI we're seeing, we're making great progress. We're at the beginning of journey where a lot of barriers in the company from marketing e comm supply chain where we're applying AI already we got a great vision for the company and we're just the beginning of the journey is shaping the way we work. We are definitely better in the, you know, this is a different company from what we used to do. Right now we're focusing to execution and generative AI is an opportunity for us to improve our execution of the plan as we progress forward.
Randy
When we created the current version of the pillars that we're using that power, this phase of our turnaround strategy AI was at the heart not just of growth, which is where you started this question, Tom, but also very much within pillar two, which is the optimization of the operating model. We already have a number of use cases that drive efficiency and or remove cost. And I think like a lot of companies, we recognize that we're just scratching the surface. We're at the very beginning of this journey and but important to know that we're on it alongside many of our other competitors and other companies out there.
Thomas Forte (Equity Analyst)
Thank you, Franco. Thank you, Randy. Thank you very much.
OPERATOR
Your question comes from Owen Rickard with Northland Capital Market. Please go ahead.
Owen Rickard (Analyst)
Hey guys, congrats on a Great quarter and thanks for taking my questions here. Firstly, on Big Tick sounds like the initial launch has been great and that the rollout is going to be over a few quarters here. Where are we in that rollout right now? How many doors is it in today versus the eventual target? And secondly on Big Tick, are you seeing any evidence of a halo effect on the broader fossil brand at accounts that are carrying bigtic?
Franco
Yeah, thank you very much for the question. Look, we're excited because the BigTic in particularly Y2K has been really, really well covered from the press. We're seeing great sell out. We have chosen a strategy of varying key distribution in particular with energy retailers, our DTC and stores that we feel like they're driving branded and brand demand. So initially the strategy was to use our incredible archives to drive the consumer back into our brand as we'd be moving off the, you know, really the promotional activity into a full price selling model and this is paying off release. We have the BigTic world flags coming out now which is really celebrating some of the big sports moments. In particular think about the FIFA World cup or you know, other events related to countries which are very exciting. We also have additional movements on BigTic coming out later this year. This as a two effect continue to drive consumer towards the archives of the brand and we have a unique history and heritage but also drives the positive effect around what we call the icons because it drive a brand, it drive a brand momentum and that really always this the goal has always been to build BigTick as the brand story which drive consequently sales across all our icons and it's paying off.
Owen Rickard (Analyst)
Got it, thanks. And secondly for me it sounds like Signature is launching later this year. What does the initial retail door plan look like for Signature? How selective will distribution be and how are you thinking about inventory risk at a price point that Fossils really never operated in before?
Franco
Great question. Look, we're excited this is going to be a limited launch. We're working with strategy of scarcity and we're driving brand, we're driving brand demand. We started to show to some of our partners our product. They are excited about the quality of the product. So to your point, we will be very much measured on the inventory we're going to produce. We will create scarcity, we will make sure that they, the presence and the way we come at retail is unique and differentiated and we want this to be the pinnacle with the brand with the ultimate goal to drive brand credibility in the watch industry as we have a, we are a watch company with more than 40 years of history, but also drive sales on our icons.
Randy
If I can add one thing, while it is a step up from where we are currently selling the majority of our fossil timepieces, it is worth reminding that we have got a number of other brands and many of those brands participate at points that are significantly higher than where we are aiming to launch Signature, which suggest that we've got the right supply chain in place to make sure that we're mitigating any sort of risk buying appropriately. We won't lose the discipline that you can already see on the balance sheet, Owen, with respect to turns. So we'll buy it smart. And to Franco's point, scarcity allows us to do that, also drives consumer demand and is again a haloing effect for all of the partners that will launch that will carry it.
Owen Rickard (Analyst)
Great. Super helpful. And then lastly, for me, you guys previously called out India as the closest thing to a vertically integrated operation fossil really has anywhere globally. Can you just give us a sense about how you're feeling about the India business right now, just given some of the ongoing macro concerns in the region?
Franco
Well, I got to say, our India business is one of our strongest assets. We're very pleased with our performances. We call that out as a pillar. We remain not only a leader in the region, but we're very well performing. We're excited about the opportunities. I think I spent a lot of time down in India. It's a growing industry and the watch category is very strong and we have a leading position. So not concerned from our side what we're not immune from what the world, what is happening in the world, but we know our business and we have a competitive advantage there with probably one of the best team in the industry and we've seen great momentum.
Owen Rickard (Analyst)
Awesome. Thanks for taking my questions, guys.
Franco
Thank you, Owen, thank you very much.
OPERATOR
Thank you. There are no further questions at this time, so I will now turn the call back to management for the closing comments. Please go ahead. Thank you everyone for joining today. We're pleased with our turnaround progress and we look forward to updating everyone on our Q2 earning call. Thank you,
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.
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