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Fossil(FOSL 3.43%) held its second quarter 2025 earnings call to discuss financial results, operational highlights, and strategic updates.
Date
Wednesday, August 13, 2025 at 5 p.m. ET
Call participants
Chief Executive Officer — Franco Fogliato
Chief Financial Officer — Randy Greben
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Takeaways
Net sales-- Second quarter net sales totaled $219 million. Net sales declined 16% in constant currency compared to the prior year second quarter, attributed partly to continued retail store closures and market-specific softness.
Gross margin-- The gross margin was 57.4% for fiscal Q2 2025. Gross margin expanded by 480 basis points compared to the prior year second quarter, primarily from higher product margins, improved product costing, reduced promotional activity, lower freight costs, and the exit from connected watches.
Adjusted operating income-- Adjusted operating income was $4 million for fiscal Q2 2025, excluding the $11 million gain from the European distribution center sale-leaseback in fiscal Q2 2025.
SG&A expenses-- SG&A expenses decreased by $32 million to $122 million compared to the prior year second quarter (excluding the $11 million gain). The year-over-year improvement in SG&A is attributable to having 44 fewer stores in operation compared to the prior year.
Inventory-- Inventory was $178 million for fiscal Q2 2025. Inventory levels declined 12% compared to the prior year.
Cash and equivalents-- Cash and cash equivalents totaled $110 million at the end of fiscal Q2 2025, including more than $20 million from the sale-leaseback of the German distribution center in fiscal Q2 2025.
Debt refinancing-- Announced a new $150 million asset-based revolving credit facility with Ares Management Credit Fund and a transaction support agreement with the two largest bondholders to amend and extend 7% senior notes to 2029; bondholders will provide $32 million in additional funding, covering approximately 60% of outstanding bonds.
Store optimization-- Six stores closed in fiscal Q2, bringing the year-to-date total to 34 closures as of fiscal Q2 2025, with most closures at natural lease expiry and minimal costs.
Wholesale channel trends-- Traditional watches in the Americas saw a double-digit sales increase during fiscal Q2 2025; continued strength in India and Europe, while China remains under pressure.
Cost savings initiatives-- Year-to-date, $48 million in SG&A savings have been achieved; the company is exploring sale of non-core assets for potential incremental gains.
Guidance update-- The full-year revenue outlook was raised to the high end of prior guidance for fiscal 2025, with net sales now expected to decline in the mid-teens for fiscal 2025 (including an approximately $40 million negative impact from store closures for fiscal 2025); adjusted operating margin guidance was raised to breakeven to slightly positive (from prior low single-digit negative) for fiscal 2025.
Promotional activity & pricing-- Leadership emphasized a return to a full-price selling model, citing higher average unit retail, no observed consumer pushback on surgical price increases, and improved quality of store and e-commerce traffic.
Royalty expense impact-- CFO Greben said, "In 2025, the impact will be more significant than prior years due to our smaller sales base." This indicates that fiscal Q3 2025 gross margin and adjusted operating margin will decline year-over-year and sequentially, as most royalty shortfalls are recognized in fiscal Q3.
Summary
Management highlighted three consecutive quarters of gross margin expansion and a return to positive adjusted operating profitability in fiscal Q2 2025, supported by a sharp reduction in SG&A. Balance sheet actions included a new $150 million asset-based revolving credit facility with enhanced terms and an agreement to extend 7% senior note bond maturities to 2029, supported by $32 million in additional bondholder cash funding. Raised guidance reflects improved trends in core brands, with particular strength in the Americas and India, and a more disciplined approach to promotions and pricing. Announced cost savings, inventory reductions, and an optimized store footprint further signal adherence to turnaround pillars and enhanced financial flexibility.
CFO Greben said, "We expect a more comparable gross margin rate year-over-year in Q4, as the minimum royalty reductions we've agreed with our licensed partners will benefit us moderately in 2025 and much more meaningfully in 2026."
CEO Fogliato stated, "We're pleased about the launch of this campaign, which represents a pivotal moment for Fossil." This indicates anticipation of impactful brand activations designed to support future sales channels.
No material gross margin headwind from tariffs has been reported year-to-date in 2025, with management expressing confidence in mitigation strategies involving supply chain diversification, cost-sharing, and price action.
Initial results from new U.S. retail store formats showed month-over-month increases in conversion, average daily sales, and units per transaction, with ongoing rollouts planned across North America and EMEA.
Industry glossary
Adjusted operating income: Operating profit excluding certain non-recurring or non-cash expenses, providing a view of normalized core profitability.
Asset-based revolving credit facility: A line of credit secured by company assets, typically used to provide liquidity for working capital.
Minimum royalty guarantee: The minimum royalty payments required by licensing agreements, even if actual royalty-earning sales fall below the threshold.
SG&A: Selling, general, and administrative expenses; often a major controllable cost line in the income statement.
Sale-leaseback: A transaction where a company sells an asset and then leases it back from the buyer, freeing up capital while maintaining operational use.
Average unit retail (AUR): Average selling price per unit, a key indicator for pricing power and product mix.
Full Conference Call Transcript
Franco Fogliato: Thank you, Christine. Good afternoon, everyone, and thank you for joining us today. As noted in today's press release, we delivered second quarter financial performance above expectations, raised our full-year guidance, and announced comprehensive debt refinancing. These developments reflect ongoing operational and financial momentum resulting from our turnaround plan. In Q2, our talented global teams drove a third consecutive quarter of both gross margin expansion and positive adjusted operating income against a complex macro backdrop. A few highlights from the quarter: Net sales trends reflect continuing improvement in the wholesale channel, as well as better-than-expected comparable sales trends in our Fossil retail stores.
This is particularly meaningful given that we substantially lowered our promotional activity and took some strategic pricing action during the quarter. Importantly, we also fueled the strong bottom-line performance with a gross margin of more than 57% and significant cost reduction, delivering positive adjusted operating income of $4 million. The results demonstrate the power of our rich brand heritage and the ability to connect with consumers around the world as we continue to execute under the three key pillars of our turnaround: refocusing on our core, rightsizing our cost structure, and strengthening our balance sheet. Next month will mark the completion of my first year at Fossil Group.
Since joining the company last September, the pace of change has been fast and furious, and our progress has been notable. During this time, we have built a world-class leadership team bringing fresh perspective to key functions across the organization. Most recently, Lax Laxmanen was appointed Chief Supply Chain Officer, bringing more than twenty years of expertise to the role. I'm thrilled about the team we have assembled and the way everyone has united around our game plan and strong desire to succeed. We have much more work ahead; the opportunity is significant. We're operating with excellent focus and intention. Our year-to-date results, coupled with ongoing operating and financial rigor, position us to raise our outlook for full-year 2025.
We have increased our top-line guidance to the high end of our previous range and now expect to deliver breakeven to slightly positive adjusted operating margins. We're making bold moves, and it is clear that our actions are paying dividends. Now I will move to an update on the strategies driving our results. Looking at the strategies under our first pillar, refocusing on our core. Since we initiated this turnaround, we've been bringing a new Fossil brand platform to life through elevated design and storytelling and initiatives to create a standout experience for the customer. On the digital side, we recently launched the second phase of improvement under our website redesign.
The site features richer storytelling and a more seamless customer journey designed to drive increased engagement times and higher conversion rates. I encourage you to visit fossilgroup.com, where we recently refreshed our landing pages to highlight Fossil's innovation around core classics, elevating the traditional watch platforms that reflect our history of design and storytelling. On the product and marketing front, our engine is fired up. Fossil's traditional watch icons like the Neutra, Raquel, and Maschine platforms were top performers in Q2. This collection reflects our heritage and remains an important part of our product pipeline. Equally important, we have a long history of our own client collaborations that enable us to enhance our storytelling and drive brand heat.
Our latest launches, such as Peanuts, Superman, and Fantastic Four, have been standouts, drawing significant media attention, delivering outsized performance across our content channels, and capturing consumer mindshare. This year, we're increasing our investment in upper-funnel marketing initiatives to cultivate enthusiasm for the Fossil brand through unique and immersive experiences. Consistent influencer and in-person activation around key commercial and cultural moments globally have contributed to rising engagement rates, press impressions, and improving top-line trends in traditional watches. In Q3, our global teams are gearing up for the official worldwide launch of Nick Jonas as a Fossil global brand ambassador.
We have a series of exciting consumer activations and VIP events planned, which will kick off next week when we welcome consumers and fans to the Fossil Diner, a branded pop-up experience in New York City. We will be replicating a traditional New Jersey diner, bringing this to life in an iconic Manhattan space with exclusive merchandise and experiences. We will also be investing in a robust wholesale marketing strategy to support the campaign launch. This includes window takeovers at our wholesale partners globally, point-of-sale marketing, new fixtures, and improved storytelling collateral. We're pleased about the launch of this campaign, which represents a pivotal moment for Fossil.
We're confident that Nick's global reach and influence will help us build increased awareness of the Fossil brand, create excitement around our product offerings, and drive cultural relevance. Turning now to our core licensed brands, Armani, Kors, and Diesel. We have strengthened our position in the wholesale channel by investing in point-of-sale and in-store presentation. This is driving improved results in key markets, including the U.S., India, Germany, and the UK, while China performance remains under pressure by the macro environment. From a brand perspective, Kors and Armani Exchange both demonstrated year-over-year growth in the wholesale channel during the first half of the year.
While Emporio Armani's performance was challenged in China, the brand grew in other key markets, including North America and EMEA in the first half. Next, we're remaining focused on optimizing our global wholesale footprint. We are prioritizing key geographies where we continue to see strengthening trends. This includes the Americas, where Fossil's traditional watch sales were up double digits in the second quarter, as well as India, where we are seeing strong momentum across brands and channels. Additionally, we're gaining traction quickly with our European distributor partners, driving increased sales and profitability in those geographies. Our aggressive actions to strengthen channel profitability are paying dividends.
Our strategic decision to dramatically scale back promotional activity in our e-commerce channel is driving significant improvement in our gross margin profile and bottom-line profitability. We're also seeing uplift in key performance indicators, including traffic quality and average unit retail in both our Fossil stores and e-commerce site. This is adding a halo effect across other channels, most notably in wholesale. We're pleased to be leading by example with our return to a full-price selling model, further demonstrating our commitment to strengthening our relationship with our wholesale partners. Looking at our Fossil retail stores, we're continuing to optimize the portfolio through the closure of underperforming doors. In Q2, we exited an additional six locations.
As part of our efforts to deliver engaging shopping experiences and improve fleet productivity, we have begun prototyping our store of the future, which blends lifestyle selling, data-led decision-making, and purpose-driven strategy. The new program is shifting our selling culture to one that is rooted in proactive clienteling and outreach and prioritizes personalized service and community. We started with a pilot in our home base of Dallas and are quickly expanding to more than 50 of our U.S. stores this summer. Initial results are compelling; we're seeing month-over-month increases in conversion, average daily sales, and units per transaction.
We're planning to roll out the program to all of our North American locations this year and have some pilot stores underway in EMEA. Turning to our second turnaround pillar, rightsizing Fossil Group's cost structure. We've taken action to strengthen our operating model and continue to act with financial rigor to position the business for long-term profitable growth. Our cost-cutting actions have generated nearly $50 million in savings in 2025, and we remain on track to capture full-year SG&A savings of $100 million. Additionally, we're continuing to evaluate incremental opportunities, including the potential sale of non-core assets. Lastly, I will turn to our third key pillar, strengthening the balance sheet.
I'm pleased to share that we have successfully refinanced our revolving credit facility and entered into a transaction support agreement with our largest bondholders to amend and extend our bond maturities into 2029. This balance sheet transformation, which Randy will cover in more detail, will meaningfully improve our liquidity and provide us with added flexibility to execute our turnaround and return Fossil to a profitably growing, cash-generating organization. We're incredibly grateful to our stakeholders for their support and appreciate their conviction in our team, our business plan, and our long-term vision.
Looking ahead, I'm confident we have what is needed to win: world-class teams, a clear strategy and a plan of action, a solid balance sheet, and strong brand equity underpinned by a forty-year heritage in watchmaking. As we face an increasingly complex environment, we're controlling what we can and leaning into our strengths. Halfway through the year, we're performing ahead of our expectations and gaining increasing traction against our initiatives. Importantly, as we continue on our path to restoring top-line growth, we're strengthening our underlying operating model and unlocking efficiencies, which is driving improved profitability. Greatly appreciate the support of our shareholders and look forward to keeping you updated on our progress.
Now I will turn the call over to Randy Greben to review the second quarter financials and discuss our outlook.
Randy Greben: Thank you, Franco, and good afternoon, everyone. We're pleased to have delivered another quarter of outperformance across the P&L as we continue to advance our turnaround strategies. As a result of our strong year-to-date performance, we're raising full-year guidance on the top and bottom line, with adjusted operating margin now expected to be breakeven to slightly positive. Second quarter net sales totaled $219 million, down 16% in constant currency and in line with our expectations. Second quarter gross margin expanded 480 basis points compared to last year, coming in at 57.4%. You'll note that this is now the third consecutive quarter of meaningful gross margin expansion.
The year-over-year increase primarily reflects higher product margins in our core categories driven by improved product costing, our exit from connected watches, lower freight costs, and importantly, a completely refreshed philosophy with significantly lower reliance on discounts and promotions. We are proactively addressing the tariff landscape and remain confident that we can mitigate the full impact to our cost of goods sold in 2025. As a global organization with a flexible supply chain and significant scale, we are well-positioned. We have several tactics in our arsenal, ranging from cost-sharing with vendors to optimizing our sourcing allocations and distribution to strategic pricing actions.
Specific initiatives include partnering with our long-standing suppliers to drive cost reduction on our key platforms, utilizing our strong supply base to optimize costs across multiple sourcing regions and supply chain tiers, leveraging our free trade zone status at our Dallas distribution center, and implementing surgical price increases. With respect to pricing, thus far, we have not seen any pushback from the consumer, which we view as a testament to our democratic pricing architecture. Continuing down the P&L and looking at operating expenses, our commitment to strict cost control was evident in the quarter.
Our teams brought down SG&A by $32 million to $122 million, excluding an $11 million gain from the sale-leaseback of our European distribution center, which we discussed on our May earnings call and, as expected, closed in Q2. As a percentage of sales, SG&A was 340 basis points lower versus prior year, coming in at 55.7%. The year-over-year improvement in SG&A is attributable to 44 fewer stores in operation versus a year ago, lower compensation and administrative expenses, and a planned decrease in performance marketing expense. On a year-to-date basis, we have delivered $48 million of SG&A savings, putting us well on track to capture our targeted full-year savings of $100 million.
During Q2, we closed another six stores, bringing us to 34 closures year-to-date. We expect to close 45 to 50 locations this year, as we work toward optimizing the fleet and improving productivity. As a reminder, virtually all of our store closures are occurring at natural lease expiration with minimal closing costs. Turning now to earnings. We delivered a third consecutive quarter of profitability. Second quarter adjusted operating income came in at positive $4 million compared to a loss of $17 million a year ago. This strength drove Q2 adjusted operating margin of 1.7%. Of note, adjusted operating income does not include the $11 million gain I just discussed. Moving to the balance sheet.
We ended the quarter with $110 million of cash and cash equivalents, which includes more than $20 million from the sale-leaseback of our German distribution center. Inventory levels were down 12% compared to the prior year and totaled $178 million. Most importantly, as Franco pointed out, subsequent to quarter-end, we meaningfully strengthened the balance sheet. A critical pillar under our turnaround plan that we have been working with urgency to address. The comprehensive financing plan we announced today considerably improves our liquidity position and provides us with a runway to transform Fossil into a consistently profitable grower and strong cash flow generator. Let me unpack the mechanics of what we announced.
We are pleased to secure the new $150 million asset-based revolving credit facility with Ares Management Credit Fund, a best-in-class lender and partner. The new facility, which has a five-year maturity, is commensurate with the size of our current business, carries enhanced terms, and provides increased availability to meet our working capital needs. Concurrently, we have signed a transaction support agreement with our two largest bondholders to amend and extend the maturity on our 7% senior notes into 2029. We are pleased to have reached this collaborative agreement with these key stakeholders, which also includes their commitment to provide a cash tax stock of $32 million in additional funding to further fuel our turnaround.
Their support covers approximately 60% of our outstanding bonds, and we expect to launch a public exchange later this month to address the balance of our notes. We look forward to sharing the results of the exchange with the investor community prior to year-end. Before moving to guidance, I'd like to underscore the importance of these balance sheet movements. As Franco mentioned, we are confident that we now have ample liquidity to effect our turnaround. A big thank you to our bondholders, advisers, and new partners. Turning now to guidance. Based on the results we're seeing from our turnaround initiatives and ongoing momentum across the business, we are raising our full-year outlook for 2025.
We expect worldwide net sales to decline in the mid-teens, which includes approximately $40 million of impact related to retail store closures. This compares to prior guidance of a decline in the mid to high teens. We are also taking up our expectations on the bottom line, reflecting the combination of gross margin expansion and significant cost reduction. Our updated outlook calls for breakeven to slightly positive adjusted operating margins, which compares to prior guidance of negative adjusted operating margin in the low single digits. To provide more context, I'll speak to the cadence of profitability in the second half.
First and foremost, we continue to expect to deliver healthy gross margins in the mid to upper 50s on a full-year basis. From an accounting perspective, we recognize any minimum royalty deficits in the second half of the year, the majority of which are reported in our third quarter. In 2025, the impact will be more significant than prior years due to our smaller sales base. Therefore, in Q3, we anticipate that gross margin and adjusted operating margin will decline on both a year-over-year and sequential basis. Excluding royalty shortfalls, we expect Q3 gross margin to increase versus prior year.
Our turnaround efforts began to take root in Q4 of last year when we started to see meaningful gross margin expansion associated with our lower promotional full-price selling strategy. Therefore, we expect a more comparable gross margin rate year-over-year in Q4 as the minimum royalty reductions we've agreed with our licensed partners benefit us moderately in 2025 and much more meaningfully in 2026 when we expect to bend the curve of these minimum royalty guarantee shortfalls. Implicit in our outlook is a return to positive adjusted operating income in the fourth quarter. In summary, we are entering the second half of the year with momentum from both an operational and financial perspective.
Our teams are delivering strong execution against our turnaround pillars and are acting with financial rigor, remaining committed to driving long-term profitable growth and building durable shareholder value. Now I'll ask the operator to open the call to Q&A.
Operator: Thank you. We'll now begin the question and answer session. Your first question comes from the line of Francesco Marmo from Maxim Group. Your line is live.
Francesco Marmo: Great. Thank you. And hi, everybody. For taking the question and congratulations on the quarter. I would like to start from the ongoing impressive gross margins improvement. I understand that there's a lot of weight parts, but I was hoping you guys could focus a bit more on the impacts of the changes in your promotional activity and your price increases. Then also, I was hoping you guys could give us some color if there was any impact from tariffs.
Franco Fogliato: Hi, Francesco. Thanks for the question. Look, we're 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, you know, we guide up in the mid to high fifties in a long-term perspective. We're very pleased. I would say what is very pleasing in what we've 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, you know, paying the value for the brand that 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 gonna give you an idea on all of the work that has been happening.
Randy Greben: Yeah. 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, the situation remains quite fluid, with nearly daily or weekly changes. 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'd 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 divot 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.
Francesco Marmo: Okay. Great. Thank you so much. That was extremely helpful. And then shifting gear one second. 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 actions you are taking and, in general, the trends that you're seeing in that channel.
Franco Fogliato: Yeah. Great question, Francesco. Look. Let me take the lead, and maybe Randy can give some color. We're excited. I've been on a roadshow since I joined the company talking to our really our largest partners globally. The love our partners have for our brands is extremely high. But they're also being very critical to all of us about our promotional activity, which led us to really start to lead by example. We're building great relationships. 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 four, they said, great. Let's see the future.
And even, you know, last week, our teams were in New York meeting with our largest account. They're all very complementary. You guys are now leading the industry by example, you're driving stronger relationships. This is step number one. Step number two is about what we are doing to invest with them. And, we've been very clear over the last over the plan that the wholesale channel was really a priority for the company. We are doubling down on investing in store presentation for this year. The projects are really taking live now, with a lot of new fixtures delivered to our accounts globally, as well as we are doubling 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. We're building relationships. 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.
Francesco Marmo: Okay. Great. Thank you very much, Franco. And then if I have time, if I can make into one more, so we're seeing anecdotal evidence of a renewed interest in traditional fashion watches among younger consumers. And then we'll be following clearly the Fossil brand really closely. And we noticed that several of the limited edition collaborations are actually sold out on your website. I'm talking about the Fantastic Four, Superman, S.H.L., 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 on the Fossil brand.
Franco Fogliato: Great. 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 and the Americas. We don't see that really happening in China. China has been still even though it has been a little better, but still don't see those consumers there. From what we see, it's exciting because you see this new generation coming, and the relevance of the smartwatch for them is not quite there. The traditional watch becomes an accessory, a way to express themselves. They don't need to take the smartwatch 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 collaborations 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 at, which is really building great products and telling stories. And those communities and those collaborations are just helping us 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, it's 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 I'm but, you know, I'm also very excited about what's coming next. I'm gonna be in New York next week. And I can't wait to see the new collaboration with Nick Jonas. This is gonna be by far the biggest activation we've done for the Fossil brand in years. So I look forward to telling more in the next call about the success of this collaboration.
Francesco Marmo: Okay. Great. Thank you very much, Franco. That was extremely clear. Thank you.
Randy Greben: Thank you, Francesco.
Operator: There are no further questions for Q&A. I'll turn the call back to management for closing comments.
Franco Fogliato: Thank you, everyone, for joining today. We're excited about the future and we're looking forward to seeing you and talking to you for the Q3 earnings. Thank you.
Operator: This concludes the meeting. You may now disconnect.