Fossil Group's Q3 2025 Earnings Call: Contradictions in Channel Strategy, Inventory Management, and Asia Market Performance

Date of Call: None provided

Financials Results

• Revenue: $267M, down 7% in constant currency versus prior year
• Gross Margin: 48.7%, down 70 bps versus prior year
• Operating Margin: Adjusted operating loss of $15M, improved from $22M a year ago

Guidance:

• Worldwide net sales expected to decline mid-teens in 2025 (includes ~ $40M impact from store closures).
• Adjusted operating margin expected to be breakeven to slightly positive for full year 2025.
• Q4 gross margin anticipated to be similar to last year; combined with ongoing expense control expected to drive positive adjusted operating margin.
• Completed note exchange extends debt to 2029 and provides ~$32.5M incremental financing to support execution.

Business Commentary:

* Improved Financial Performance: - Fossil Group reported a sales decline of 7% in Q3, narrower than the previous year's decline, with a notable improvement in the wholesale channel and Fossil retail stores. - This improvement was driven by a shift in the timing of certain shipments, strategic initiatives, and a focus on full-price selling, which enhanced average unit retail and gross margin.

• Wholesale Channel Growth and DTC Strategy:
• The wholesale channel experienced a 3% increase in constant currency sales, while the direct-to-consumer channel's sales were relatively flat.

• This discrepancy is attributed to Fossil's strategic shift towards reducing promotional activity in its direct-to-consumer channel, leading to higher average unit retail and improved gross margins in the wholesale channel.

• Balance Sheet Strengthening:

• Fossil successfully completed a bond restructuring, extending debt maturity to 2029 and securing over $32 million of new capital.

• This achievement was a key milestone in Fossil's turnaround plan, providing financial flexibility for future growth and strengthening the company's balance sheet.

• Asia Market Performance:

• The Asia region reported positive constant currency growth, with notable improvements in India, Japan, and a slight uptick in China.

• The growth was driven by strong market positions, robust retail performance, and strategic decisions to reduce promotional activity, leading to improved gross margins.

• Inventory Optimization:

• Fossil's inventory was down 26% year-over-year, consistent with the company's expectations and strategic focus.
• This improvement is attributed to reduced SKU count, better inventory management, and alignment with market demand, all contributing to a leaner and more efficient business model.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management highlighted a completed bond restructuring bringing >$32M in new capital and extended maturities, narrowed net sales decline to 7%, improved underlying gross margins despite a royalty true-up (Q3 gross margin 48.7%, down 70 bps YOY), and materially narrowed adjusted operating loss to $15M from $22M, reiterating full-year breakeven to slightly positive operating margin.

Q&A:

• Question from Francesco Marmo (Maxim Group): Your wholesale grew 3% in constant currency, while direct-to-consumer (you referenced a 22% decline) — can you help us understand what is driving that gap and any regional differences?
  Response: The gap is intentional: e-commerce was intentionally downsized via a reduced promotional strategy to improve margin, while physical stores are performing well and wholesale is growing; regionally U.S. stores are strong, Asia is mixed.

• Question from Francesco Marmo (Maxim Group): Asia showed positive constant currency trends this quarter with strength in traditional watches and jewelry and gross margin expansion — can you give color on what's happening in the region?
  Response: Asia strength is led by India (robust retail and market growth) and improving Japan (Diesel strong); China remains pressured and smaller versus prior periods.

• Question from Francesco Marmo (Maxim Group): Your inventory appears leaner each quarter — what initiatives are driving this improvement and how does the tighter inventory position fit with distribution and promotional strategy?
  Response: Inventory reduction (down 26% YoY) reflects tighter open-to-buy, fewer SKUs, focus on bestsellers and targeted product investment, improving working capital and availability while supporting a full-price, lower-promotion strategy.

Contradiction Point 1

Impact of Strategy on Channels

It highlights a shift in the company's strategic focus on channels, which could impact revenue and profitability expectations.

What's driving the gap between 3% wholesale growth (constant currency) and -22% store comp declines? Are there regional differences with some regions being more retail-heavy? - Francesco Marmo (Maxim Group)

20251114-2025 Q3: The decline of direct-to-consumer isn't due to store performance, but is a result of a strategic reduction in e-commerce activity to improve margin architecture. - Randy Greben(CFO)

Is there any specific guidance provided for Q2 revenue? - Christine Greany (The Blueshirt Group)

2025Q1: We are making strides in modernizing our in-store experience and optimizing our store portfolio. - Franco Fogliato(CEO)

Contradiction Point 2

Inventory Management and Productivity

It involves changes in the company's approach to inventory management and productivity, which are crucial for operational efficiency and cost management.

What initiatives are driving the inventory improvement and how does the tighter inventory align with your distribution and promotional strategy? - Francesco Marmo (Maxim Group)

20251114-2025 Q3: Franco Fogliato: The company aims to be smaller but more profitable, with a focus on core products and improved working capital management. Inventory control and reduced SKUs are driving improvement. - Franco Fogliato(CEO)

Not explicitly stated. - Christine Greany (The Blueshirt Group)

2025Q1: We're advancing quickly on several fronts. First, we are delivering a robust pipeline of product innovation with core Fossil icons, such as our award-winning Raquel line for women and our classic Machine series for men. - Franco Fogliato(CEO)

Contradiction Point 3

Asia Market Performance

It highlights differing perspectives on the performance of the Asia market, which could impact regional growth strategies and revenue projections.

Could you provide more details on the factors contributing to Asia's flat reported currency growth but positive constant currency growth, along with the strength in traditional watches, jewelry, and regional gross margin expansion? - Francesco Marmo (Maxim Group)

20251114-2025 Q3: Asia's performance was led by India, where the company has a strong position and market growth. China showed some improvement, although not yet at positive growth. - Franco Fogliato(CEO)

Not explicitly stated. - Christine Greany (The Blueshirt Group)

2025Q1: Our teams have been working closely with our business partners to manage logistics, pricing and promotions to navigate these challenges. As a result, we achieved healthy growth in China, which was up mid-teens. - Franco Fogliato(CEO)

Contradiction Point 4

Impact of Strategy on Wholesale and Retail Sales

It highlights a shift in the company's strategy and its impact on wholesale and retail sales, which are key metrics for understanding sales channels and revenue streams.

Wholesale grew 3% in constant currency while store comps fell 22%. Can you explain the gap? - Francesco Marmo (Maxim Group)

20251114-2025 Q3: The decline of direct-to-consumer isn't due to store performance, but is a result of a strategic reduction in e-commerce activity to improve margin architecture. Performance varies across channels, with wholesale strong and e-commerce smaller by design. - Randy Greben(CFO), Franco Fogliato(CEO)

Can you share details about the wholesale initiatives and trends in that channel? - Francesco Marmo (Maxim Group)

2025Q2: We have been strengthening our relationships with wholesale partners by leading by example and reducing promotional activity. We're investing in in-store presentation and marketing efforts, such as the upcoming Nick Jonas collaboration, to enhance our presence globally. - Franco Fogliato(CEO & Director)

Contradiction Point 5

Regional Performance and Challenges

It involves the company's regional performance, particularly in Asia, which is critical for understanding their growth strategy and market focus.

Asia reported positive constant currency growth and flat reported currency results this quarter, with strength in traditional watches and jewelry and gross margin expansion. Can you provide more details on the region's performance? - Francesco Marmo (Maxim Group)

20251114-2025 Q3: Asia's performance was led by India, where the company has a strong position and market growth. - Franco Fogliato(CEO)

Asia reported positive growth this quarter in constant currency but flat in reported currency, with strength in traditional watches and jewelry and gross margin expansion. Could you provide more details on the region's performance? - Francesco Marmo (Maxim Group)

2025Q3: Asia faced some challenges. - Franco Fogliato(CEO)