Fossil Group, Inc. (FOSL) on Q1 2021 Results - Earnings Call Transcript
Operator: Good afternoon, ladies and gentlemen. Welcome to the Fossil Group First Quarter 2021 Earnings Call. 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 Blueshirt Group to begin.
Christine Greany: Hello, everyone, and thank you for joining us. With us today on the call are Kosta Kartsotis, Chairman and CEO; Sunil Doshi, Chief Financial Officer; Jeff Boyer, Chief Operating Officer; and Greg McKelvey, EVP and Chief Commercial Officer. 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.
Kosta Kartsotis: Good afternoon, everyone, and thank you for joining us today. We hope everyone is staying well. While COVID restrictions have been easing in several countries, our thoughts are with those being impacted by another wave of the pandemic, most notably in India, which is experiencing a tragic humanitarian crisis. Our thoughts and prayers go out to our associates, partners and the community at large being affected by the tragedy. Because the global environment remains dynamic, we are continuing to operate with concern and flexibility and we're prioritizing the health and safety of our team members, partners and local communities. Turning now to our first quarter performance. We are pleased with our strong start to the year and feel particularly good about how the business is positioned. We are operating in a large addressable watch market and are seeing favorable trends in both the connected and traditional segments. First quarter net sales came in ahead of our expectations, driven by improving consumer demand in the Americas region. Total digital sales represented more than 40% of our global revenue mix and our own websites grew 59%, underscoring the dramatic shift in our business from a wholesale dominated model to a digital-first organization. We also delivered strong gross margins above 50% and continue to improve operating efficiency, which allowed us to generate positive adjusted EBITDA in the quarter. We also made further progress against our cost reduction initiatives, which allowed us to reach the $250 million target under our New World Fossil 2.0 program earlier than planned. After successfully re-sizing the organization and cost structure, we remain focused on driving operating efficiency going forward. Additionally, the structural economics of our business continue to improve with ongoing and outsized growth in digital.
Sunil Doshi: Thanks, Kosta, and good afternoon, everyone. We are pleased to report better-than-expected results for the first quarter, despite the ongoing disruption driven by the pandemic.Net sales declined 7% or 10% in constant currency. Gross margin came in above 50%, and we exercised careful cost control, resulting in $7 million of adjusted EBITDA for the quarter and $94 million in adjusted EBITDA over the trailing 12 months. Q1 net sales totaled $363 million for the 13-week period, primarily reflecting improving consumer demand in the U.S., continued global strength within both our Fossil and third party e-commerce channels, offset by traffic and sales declines in our stores and wholesale channel.
A - Christine Greany: Thanks, Sunil. Let's move to some questions. Jeff, you achieved the $250 million target under the New World Fossil 2.0 program actually exceeded that, what should we anticipate in terms of further cost savings and where are you looking to capture further efficiencies?
Jeff Boyer: Sure, Christine. Over the past few years, we have successfully resized the organization and our cost structure to better align with the fundamental shifts in transformation of the business model which Kosta had mentioned earlier. We'll continue our efforts to further streamline our cost structure through lower overhead costs and also a smaller, but more profitable and more efficient store portfolio. In addition, we are expanding our programs to also improve gross margin performance through enhancing our sourcing and inventory management initiatives, as well as taking some select pricing actions, where that's appropriate. We expect the benefits of these various programs will enable us to invest in our digital-first strategy, drive top line growth, while still expanding our bottom line operating margins
Christine Greany: Great. Thank you. Turning to Kosta, what is your view of the consumer as the pandemic begins to taper? As consumers become increasingly comfortable with going out and returning to stores, what do you think the optimal mix of digital business looks like going forward?
Kosta Kartsotis: When the U.S. and China, we're starting to see a return to normal with more people out and about and participate in a social activities. There obviously is pent-up demand and the stimulus checks in the United States are making an impact on retail. We're very pleased to see a renewed interest in accessories. The exact size and timing of the consumer rebound globally is difficult to call at this point, but we're encouraged by the strength of the business in both the United States and in China. We're also doing very well in Europe, when you consider it's mostly closed down. You can tell the consumer there is ready to start shopping again. Regarding the optimal mix of business, digital versus bricks, it's very interesting to see the changes in the consumer. They are ready to buy and more likely to buy online even as things open up. We expect this trend will continue and over the next few years, over 50% of our sales will be conducted in digital channels with a further expansion highly likely. With that as the consumer shopping landscape of the future, we continue to invest in digital capabilities and channels to meet the need. As Jeff mentioned, we believe we can make the necessary digital investments and improve our operating margin as we transform our business model to be more digital first. This is a game-changing opportunity for the company.
Christine Greany: Great. Thank you. Sunil, how should we think about the puts and takes around expenses this year? And what are you seeing relative to some of the big labor and freight headwinds that a lot of companies are talking about?
SunilDoshi: Yes. Thanks, Christine. Yes, kind of narrowing down on expenses when you think about this year. The company's -- it's helpful to think about the bigger picture over the last couple of years. The company has undertaken significant effort to reduce its OpEx as part of its New World Fossil program. A lot of that reduction took place in 2019 and 2020, and we saw some of the benefits of that come through in this first quarter. As we move through 2021, we'll begin to lap some of those cost reductions that were put into place in the prior years and some of the temporary expense savings from last year's extreme COVID-driven shutdowns, which will result in some variability in the year-over-year comparisons relative to Q1. On a sequential basis, we expect some dollar increases in SG&A relative to Q1 for normal variable expenses that flex with sales and for marketing investments to drive sales. But this will still translate to leveraging our expenses relative to 2020 and 2019. With respect to cost inflation, while we haven't seen any material impacts from inflation at this point, it might be helpful to break it down for our business. From a wage rate standpoint, the potential impact from hourly wage rate inflation in the U.S. market is low, given that our store fleet and store payroll is a relatively small part of our infrastructure and given that our effective hourly wage rate is already well above current minimum wage. On the cost of goods side, we haven't seen any significant changes in raw material pricing that would impact the overall cost of goods, but we'll keep our eye on that. More broadly, we do believe there are opportunities to consider to offset inflation in the future, whether that's in pricing or other productivity opportunities throughout the supply chain.
Christine Greany: Okay. And could you provide some additional color commentary on the revised guidance that you provided today?
Sunil Doshi: Yes, yes, sure. In sharing -- maybe it's helpful to kind of go back to the original guidance -- in sharing our original sales guidance a couple of months back, which was 10% to 15% revenue growth, we have been seeing some improvements in the underlying demand coming out of the fourth quarter as vaccine deployment was becoming more of a reality. What's been clear in Q1 is that the vaccines are a critical step in getting the pandemic under control and stepping through the first quarter, we saw outperformance in the U.S., our largest market, and continued momentum in Mainland China. However, we've experienced some extensions of lockdowns in most of the EMEA countries and most recent, we've seen some severe spikes in the pandemic in India and other countries in our APAC region. So taking this into account, we have flowed through the results from Q1, while for the balance of the year reflected improvements in the U.S., with some tempering in parts of APAC and EMEA. And all of that's reflected in the full year expectations of 12% to 16% net sales growth. From an adjusted EBITDA perspective, we expect that the increase in full year sales to flow through and to leverage and improve our overall adjusted EBITDA margins to the 5% to 7% that we shared.
Christine Greany: That was helpful. Thank you. And just to wrap up with a question for Greg. We've heard a number of comments regarding Fossil digital first strategy. Can you just talk about kind of the key pillars of the program again for us?
Greg McKelvey: Yes. As Kosta mentioned in his prepared remarks, our goal is to become a digital-first powerhouse, where product innovation and brand storytelling combined with leading digital marketing, analytics and e-commerce capabilities, will unlock accelerated growth. The 3 key pillars of our digital initiatives are, 1, expanding the success of our DTC owned brand websites to the rest of the world on our global scalable cloud-based platform. 2, continuing to build on and scale the success we're already having with our third-party e-com and wholesale.com programs, and adding new partners to those programs. And 3, building brand heat and accelerating demand through high ROI digital marketing initiatives. On our last call, I shared with you that we're seeing meaningful results in our underlying performance metrics based on the investments we've made to-date. In our direct-to-consumer channel, which includes our own brands such as Fossil, Skagen, and Michele as well as our multi-brand WatchStation online and store concept, we're seeing an e-commerce Salesforce platform that resulted in a doubling of our conversion rate and increased order value. A highly engaged community in our CRM database, which increased 45% last year and which we expect to increase another 50% this year. A high customer lifetime value to customer acquisition cost ratio that has created a very compelling business case that we're investing behind. Now, let me spend a minute or two on a couple of our other near-term initiatives, the expansion of our third-party e-commerce marketplace offerings and the scaling up of our wholesale.com efforts. These expansion programs are effectively additional points of distribution in the digital e-commerce space. In these indirect channels, we've been very successful in establishing category leadership and gaining share with the top pure-play e-commerce companies across the world, while also driving significant growth in digital sales with our top wholesale customers as well. We have plans to aggressively expand our offering of traditional watches, smartwatches, leather and jewelry offerings on these platforms that we're already on, and at the same time, expand the number of marketplaces and wholesale.com sites in each of our 3 regions, Americas, EMEA and APAC. These expansion plans provide us with a number of additional sales opportunities in the second half of this year and will be further expanded on as we enter 2022. We're incredibly pleased with the progress that our teams are making and look forward to sharing more positive results in the quarters ahead.
Christine Greany: Thanks, Greg. That was very helpful color. I'm going to turn it back to Kosta to close this out.
Kosta Kartsotis: Thanks everyone for joining us. We look forward to speaking to you again on our second quarter call.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
