Fossil Group, Inc.
Q4 2020 Earnings Call Transcript

Published: 10 Mar 2021

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Fossil Group Fourth Quarter 2020 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 thanks for joining us. With us today on the call are Kosta Kartsotis, Chairman and CEO; Jeff Boyer, Chief Operating Officer and CFO; 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. Fossil Group's policy on forward-looking statements and additional information concerning a number of factors that could cause actual results to differ materially from such statements is readily available in the company's Form 8-K and 10-Q reports filed with the SEC.

[Kosta Kartsotis:]

Good afternoon, and thanks for joining us today. We hope everyone is staying healthy and safe. 2020 was an unprecedented year for all of us, and for Fossil it was also a year of transformation. We are extremely grateful to all our team members across the organization for working through the near-term operational challenges, while also continuing to execute against the longer-term strategic priorities that will position the business for sustainable top line growth. Before we review our fourth quarter results, I wanted to take a few moments to share our perspective on 2020. While the pandemic created significant disruption to our business, in many regards, it validated and accelerated our transformation efforts particularly the digital acceleration that was already underway. With the loss in sales in 2020 that arose from the pandemic's impact on retail traffic, we doubled down on our digital strategies. As a result, we ended the year with approximately 40% of our global revenues coming from digital channels versus 20% in 2019. We accomplished this by focusing on our new e-commerce platform, completing the U.S. implementation in early 2020 and extending it beyond the U.S. to other markets. We grew our file size significantly and began testing more targeted digital marketing with positive outcomes on conversion, sales and awareness. We also greatly improved our capabilities to compete on third-party e-commerce platforms like Tmall and Amazon. In addition, we made tremendous progress in transforming the company's operations last year, utilizing our New World Fossil 2.0 initiative as a platform for change. New World Fossil includes streamlining the organization and generating greater efficiency in our processes and work streams. As the pandemic unfolded, we expanded this program to include the reduction of our store count and the optimization of our store operating costs. Our target for New World Fossil 2.0 was expanded from the original $200 million level and is currently on track to capture at least $250 million of operating expense savings before the end of 2021.

[Jeffrey Boyer:]

Thanks, Kosta. The fourth quarter came in better than we expected, reflecting strong execution by our global teams in a tough environment. Despite a net sales decline of 26% or 28% in constant currency, we maintained strong gross margins, reduced operating expenses, delivered a significant improvement in adjusted EBITDA and generated positive cash flow from operations. Q4 net sales totaled $528 million, primarily reflecting continued strength within both our Fossil and third-party e-commerce channels and strong growth in Mainland China including notable performance on 11/11 day. From a regional perspective, performance in the Americas and EMEA was softer than total sales trends, principally reflecting pandemic disruptions and heightened restrictions in key European countries. In Asia, sales declined high single digits due to ongoing pandemic impacts partially offset by continued growth in Mainland China and return to growth in India. Digital sales, which we define as our own e-commerce channels, third-party e-commerce and wholesale dot-com remains strong, increasing 25% on a year-over-year basis. Within our direct-to-consumer segment, sales growth of 50% in our own e-commerce channels partially offset traffic declines in our brick-and-mortar stores. Net sales in our Fossil retail stores declined 44%, which primarily reflects pandemic headwinds and lower store count. Globally, traffic and conversion trends remained consistent with recent quarters. Turning to category performance. Watches were down 29% versus last year, with the performance in our APAC region outpacing Americas and EMEA. In connected watches, we achieved net sales growth in our most recent Gen 5 display watches, which partially offset declines in older generation products. Fourth quarter gross margin came in at 49.2%.

[A - Christine Greany:]

Thanks, Jeff. I'll start with Kosta. Kosta, you talked about the importance of your digital business and initiatives to further accelerate that channel. You also stressed the importance of driving product innovation. How should we think about the importance of those strategies and how they're interrelated?

[Kosta Kartsotis:]

Great question, Christine. The key to it is giving consumers customized communications that are more relevant to them. Our digital platform gives us a greater capacity to show innovation and tell stories to our consumers. So keep in mind that about 70% of our customers in our stores are - already shopped online before they go into the store. With our data and analytic capabilities, we're able to personalize communications, which gives us a more engaged consumer. And that has a significant impact on conversion as well as the lifetime value of that consumer. The technology also enables us to build a much larger community that we can speak to on a regular basis, which again gives us a larger audience for new ideas in watches and accessories. It is a significant game changer for how we do business.

[Christine Greany:]

Terrific. Jeff, moving to you now. Could you help us understand your expectations for cash flow in 2021? And what are the capital allocation priorities?

[Jeffrey Boyer:]

Sure, Christine. This year, we continue to expect to generate solid cash flow and improve our overall liquidity position, much like we did this past year. This financial flexibility will allow us to reduce our revolving credit balance and will also allow us to amortize our term loan by approximately $40 million in 2021. The net impact of all this is expected to be a modest increase in our year-end cash level and also a material decline in our debt outstanding. As we go throughout this year and as we strengthen our financial position as we come out of the pandemic, we'll continue to make important investments in our core operations. Specifically, we'll fund our critical digital initiative that you've heard some about today as well as a part of our business with normal inventory, expense and capital resources. Our planned digital investments are within our current operating plan and our 2021 CapEx budget of approximately $20 million in 2021.

[Christine Greany:]

Great, Jeff. Greg, could you talk more about your digital agenda what type of investments you plan to make in the near-term and over time, to become that digitally led company that Kosta talked about?

[Gregory McKelvey:]

Sure. Our goal is to become a digital-first powerhouse, where product innovation and brand storytelling, combined with leading digital marketing and e-commerce capabilities to unlock accelerated growth. And 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 Watch Station online and store concept, we're seeing, number one an e-commerce Salesforce platform that has unlocked a doubling of our conversion rate and increasing average order value through AI-driven personalization and post-purchase customer engagement; number two, a highly engaged community of more than 8 million customers in our CRM database which increased 45% year-over-year despite brick-and-mortar stores being closed or materially impacted for most of the year; and number three, a high customer lifetime value to customer acquisition cost ratio that has created a compelling business case that we're investing behind. In our indirect channels, we've also been successful in establishing category leadership and getting share with the top pure-play e-commerce companies across the world and are also driving significant growth in digital sales with our top wholesale customers as well. To build on this momentum, we have an aggressive multiyear investment plan focused on further accelerating sales growth by installing industry-leading capabilities in 4 key areas. Number one, digital marketing and activation, which allow us to deliver targeted and personalized media campaigns that build brand heat, community and traffic. Number two, personalized omnichannel customer experience in commerce, which will allow us to serve our customers in whatever combination of online and offline interactions are best for them, deliver a much more engaging and personalized shopping experience and expand the geographic footprint of our platform across all of our markets. Number three, an artificial intelligence-driven CRM capability, which allows us to leverage first-party data capture to drive post-purchase engagement, including cross-sell and upsell opportunities, and deliver hyper-personalized marketing campaigns and e-commerce experiences across search, social, e-mail, text and on our sites. And finally, number four, advanced marketing and e-commerce analytics, where our methodology helps ensure that our investments drive the right short-term and long-term value for our business. Together, these capabilities are creating a platform that we believe will unlock a new wave of accelerated digital growth in our business.

[Christine Greany:]

Great. Thanks, team. Kosta, just back to you for closing comments.

[Kosta Kartsotis:]

Well, thanks, everyone, for joining us. We look forward to talking to you on our next call. Have a good day.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.