Fossil Group, Inc. Q2 FY2025 earnings call

• Turnaround Pillars: Focused on three key pillars - refocus on core, rightsize cost structure, and strengthen balance sheet.
• Refocus on Core: Launched new brand platform, website redesign with richer storytelling, successful collaborations like Fossil per Shelby, Superman, and Fantastic Four, and planned global launch of Nick Jonas as a brand ambassador with consumer activations.
• Rightsizing Cost Structure: Achieved nearly $50M of savings in H1 2025 and on track for $100M SG&A savings in full year, with evaluation of noncore asset sales.
• Balance Sheet: Successfully refinanced revolving credit facility and amended bond maturities into 2029, improving liquidity.

In the second quarter, net sales trends showed improvement in the wholesale channel and better-than-expected comparable sales strength in Fossil retail stores. Gross margin was over 57%. For core licensed brands, Kors and Armani Exchange saw year-over-year growth in the wholesale channel in key markets. Fossil retail stores continued to optimize the portfolio by closing 6 underperforming locations in Q2 and began prototyping the store of the future, with initial positive results. Revenue contribution details weren't explicitly broken down by percentage in the transcript but focused on overall performance across segments.

• Raised full-year net sales guidance to a mid-teens decline (including ~$40M impact from retail store closures).
• Adjusted operating margins now expected to be breakeven to slightly positive.
• Q3 expected gross margin and adjusted operating margin decline due to minimum royalty shortfalls, but Q4 expected positive adjusted operating income as royalty reductions benefit and full price selling model continues.

• Tariffs remain a fluid situation, but strategies like cost sharing with vendors, optimizing sourcing allocations, and surgical price increases are in place to mitigate potential impact.

Q: Congratulations on the quarter. I would like to start from the ongoing impressive gross margins improvement. I understand that there's a lot of moving parts, but I was hoping you guys could focus a bit more on the impact of the changes in your promotional activity in your price increases. And then also I was hoping you guys could give us some color if there was any impact from tariffs?

A: Francesco, thanks for the question. Look, we're extremely pleased. As I mentioned, since I joined the company, for us, it was very important to really move into a full price model. And the full price model, combined with the very strong work done by the supply chain teams has led this improvement into gross margin, which we think we guided in the mid- to high 50s in a long-term perspective. We're very pleased. I would say what is very pleased in what we have seen over the last month since we changed our strategy is that our brands are so strong that despite being less promotional, we haven't seen really any decrease. Consumers have been paying the value for the brand. They understand that the product has more value than what we were asking for, and they've been very resilient. So we've seen a strong increase in AUR. We're very pleased, and we believe that this is a new model that we can continue over the long run. Same on our supply chain, but I will ask Randy to jump in. He's going to give you an idea on all of the work that's been happening. Randy J. Greben: Yes. Thank you, Franco. And thank you, Francesco, very much for the question. To address specifically your question, we have not seen any negative impact in our gross margins year-to-date from tariffs. As I shared in my prepared remarks, we have a litany of strategies that we are employing to address tariffs. Obviously, that situation remains quite fluid with nearly daily or weekly changes. But as we've said in the past, and we continue to believe into the future, our diverse, sophisticated supply chain affords us with a number of levers that we can pull to effectively mitigate any sort of incremental tariff pressure. One thing that I do want to mention, though, because while tariffs right now are not currently a tailwind or a headwind that we're unable to manage through, we did want to make sure that folks understood the way in which minimum royalty guarantees do impact our business. We shared externally prior to this call that we'd achieved modest royalty reductions in '25 and meaningful royalty reductions in '26. That's why in Q3 in years past and certainly in 2025, we would expect a debit in our gross margin percentage from the recognition of those minimum royalty rate shortfalls. Our underlying margin rate remains quite strong, very much in line with the actions that Franco just articulated.

Q: Talking about wholesale, it looks like a pretty resilient part of your business, and it sounds like you guys are working closely with your partners. I was wondering whether you guys could give us some color on the initiatives you are taking and in general, the trends that you're seeing in that channel?

A: Yes, great question. So Francesco, look, let me take the lead and maybe Randy can give some color. We're excited. I've been in a roadshow since I joined the company talking to our -- really our largest partners globally. The love that our partners have for our brands is extremely high. But they've also been very critical to all of us about our promotional activity, which led us to really start to lead by example. We're building great relationship. I think -- when I was talking to them early days, they loved my story. They said we want to see action. We proved that in quarter 4. They said, great. Let's see the future. We proved in Q1, and we doubled down in Q2. And even last week, our teams were in New York meeting with the largest accounts, they all have been very complementary. You guys are now leading the industry by example. You're driving stronger relationship. This is step #1. Step #2 is about what we are doing to invest with them. And we've been very clear over the last -- over the plan that wholesale channel was really a priority for the company. We are doubled down on investing in-store presentation for this year. The project is really taking live now with a lot of new fixture delivered to our accounts globally as well as we are doubled down on activities from a marketing perspective. And I will mention the pretty soon launch of the Nick Jonas collaboration, which we are excited about hitting our wholesale partners globally. So we're building a relationship. We know it takes time. We want to be credible. We want to be their best partner, and we will focus on continuing to do that, and we're seeing this paying off dividends.

Q: We're seeing anecdotal evidence of a renewed interest in traditional fashion watches among younger consumers. And then we've been following clearly the Fossil brand really closely. And we noticed that several of the limited edition collaboration are actually sold out on your website. I'm talking about the -- Fantastic Four, Superman S-Shield and Minecraft. So I was wondering whether you guys saw any strength in that younger consumer category? What kind of products are those customers more interested in? And then when it comes to the collaboration side of things, I was hoping you guys could give us an idea of the kind of initiatives you guys are undertaking to manage and promote those launches and how you see that brand momentum kind of reverberate across the broader offering of the Fossil brand?

A: Great question. Thanks for asking. Look, we're definitely seeing a comeback of the traditional watch. I would say it's really different by region, definitely very strong in India, in the Americas. We don't see that really happening in China. China has been still -- even has been a little better, but we still don't see those consumers there. From what we see is exciting because you see this new generation coming and the relevance of the smart watch for them is not quite there. The traditional watch becomes an accessory, a way to express themselves. They don't need to -- they really don't need to take the smart watch approach in general as I've done over the years or many other consumers have done over the years. So we're excited about the traditional watch coming back. I think a collaboration are helping us to connect with some very key communities that drive brand awareness and brand momentum. I think we have an amazing team that has been able to refocus the business into what we are good on, which is really building great product and telling stories. And those communities and those collaborations are just helping我们 to tell a better story. You're right, I recall Minecraft, honestly, we didn't expect that. It was impressive. We were sold out within hours. Shelby, Superman has been -- I'm really, really proud of the work the teams have done because it really has led Fossil to a different level, to a new level. And -- but I'm also very excited about what's coming next. I'm going to be in New York next week, and I can't wait to see the new collaboration with Nick Jonas. This is going to be by far the biggest activation we've done for the Fossil brand since years. So I look forward to tell more in the next call about the success of this collaboration.