Q3 2026 Fossil Group Inc Earnings Conference Call - FOSSIL GROUP INC

Good afternoon, ladies and gentlemen, and welcome to the Fossil Group third quarter 2026 earnings call. At this time, all parties are in listen-only mode. 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 DeSanto of Blue Shirt Group to begin. Hello, everyone, and thank you for joining us. With me on the call today is Franco Fogliato, Chief Executive Officer, and Randy Grebin, Chief Financial Officer. Before we begin, 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-thinking 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, 10-Q, and 10-K reports filed with the SEC. In addition, Fossil assumes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. During today's call, we will refer to constant currency results, as well as certain non-GAAP financial measures. Please note that you can find a reconciliation of actual results to constant currency reports and other information regarding non-GAP financial matters discussed on this call in Fossil's earnings release, which was filed today on Form 8K and is available in the Investors section on FossilsRoot.com. With that, I'll now turn the call over to Franco to begin. Good afternoon everyone and thank you for joining us today. We're pleased to report standout Q3 results and raise our full year guidance. The business delivered top-line growth in the quarter, driven by strong momentum across brands, channels, and geographies. Our year-to-date performance reflects the compounding benefits of our turnaround plan underpinned by disciplined execution from our teams around the world. Third quarter results exceeded our expectations in all of our key metrics. Net sales grew 2% to $276 million. Gross margin expanded to 59.9%. And adjusted operating income grew to $30 million, a $45 million increase versus a year ago. Strong consumer response to our product innovation and storytelling were all marks of the quarter. We are incredibly proud that our namesake Fossil brand grew 14% year-over-year. Additionally, traditional watch sales across all brands increased by 6%. As we continue to invest in the product, people and capabilities to drive our path forward. We also saw ongoing momentum in our key market. The U.S. posted another quarter of growth, and India continued to deliver exceptional performance. In the EMEA region, top-line trends improved considerably compared to the first half of the year. We're deploying greater resources to this important region and recently appointed a new general manager with deep brand and commercial expertise to help drive a return to growth. Looking now at our channel performance in Q3, we're pleased to have delivered strong results in both wholesale and direct-to-consumer, and to see continued momentum into the fourth quarter. Nine months into the year, 2026 is shaping up to be a defining year for the POSSI group, and we believe that we are just getting started. in addition to the financial momentum being driven by our turnaround plan we also announced the two important business developments today we're particularly pleased to have extended our licensing partnership with diesel through 2032 diesel is a storied brand with a nearly 50 year history our long-standing relationship with the esteemed diesel teams spans decades and all the tremendous value for fossil group we're excited to be moving forward together and are confident that we will build lasting growth into the future another significant development for us is the signing of a new contract with nick jonas as our global fossil brand ambassador we're thrilled to be continuing our partnership with nick who has become an important member of the fossil family since the start of our relationship two years ago nick's campaign have generated a billion of impression and the exclusive watch collection have created together have been standout performers helping to bring younger consumer to the fossil brand and driving higher average unit retail i also want to highlight that we recently strengthened our board of directors we brought in two highly seasoned executives with decades of expertise in global retail, enterprise technology, digital, and omni-channel commerce. We're confident that their valuable insights into our operations and growth plans will help us shape the future of Fossil and drive long-term shareholder value. As we continue to advance our turnaround plan, our brand-led, consumer-focused operating model is only continuing to strengthen we're delivering innovation great storytelling and value to consumer all of which is extending our competitive advantage and driving durable profitable growth all three pillars of our turnaround plan are delivery pillar number one is returning to profitable growth our success is the result of four key drivers • Reasonable product innovation supported by compelling storytelling • The ongoing optimization of our direct-to-consumer businesses • Key initiatives that are strengthening licensed brand performance • And the rapid scaling of our India business Looking at our Fossil Brand Platform, everything we do is in service to the customer and that starts with great products in the first half of 2026 we accelerated our product roadmap with exciting production like big tick and world flags a continuous flow of innovation from our icons and a fresh collaboration with high profile franchises in the second half of the year we are fast following this pipeline with a drumbeat of innovation that is reinforcing fossil industry leadership position shaping our premiumization strategy and broadening our consumer reach through expanded offering and price points the q3 introduction of machine x1 has performed extremely well demonstrating our ability to build upon fossil heritage as a democratic brand while introducing higher price points in fact the x1 has been selling ahead of our expectation globally in generating a great deal of media attention and social buffs we also deliver another court of successful high profile collaboration that position fossil at the center of culture and broaden our appeal to multiple fan bases during q3 limited edition collaboration included minecraft big tick mickey and donald spider-man and incredible cook the major highlight of our second half innovation pipeline is the launch of signature cs1 our new swiss made collection which marks the debut of fossil premium traditional watch platform building on our rich 40-year heritage signature combined fossil distinct design with elevated material precision engineering and Swiss watchmaking. Consumer response has been exceptional with initial sales trends exceeding our expectations. We premiered the collection in mid-October New Work Watch Week, creating a tremendous buzz from watch industry press and influencers. Immediately following the launch, special events were held in the key cities globally, including new york paris berlin and sydney in india our global ambassador for the signature collection hosted a one-of-a-kind celebration at his palace for international media and influencers all of these signature events were widely covered generating excitement around the collection and increased visibility for the fossil brand as we see our investment demand creation paid dividends were continuing to lean into our key marketing and storytelling initiative this includes social media influencer and events that are helping us build further cultural relevance our renewed global partnership with nick jonas is a strong example of this commitment in 2027 we will further expand partnership through a global campaign in a new nick jones design watch collection with product launching in the second half of the year turning to our omni channel initiative across the brand portfolio in the wholesale channel we have built a stronger momentum by strengthening our relationship with our partners and creating a more modern expression of our brand through point of sales investment in q3 sales in the world's channel increase of 4% globally, led by the fossil brand. Growth is being led by the standard distribution with our existing partners, as well as entry into new specialty chain and energy retailers. Looking now at our director to consumer business, we deliver growth in the fossil.com channel and positive comp sales in our fossil stores. It is gratifying to see all of our initiatives coming together and paying dividends earlier this year we brought in new team members in the america region to lead our retail and wholesale businesses and they are already producing results great product great storytelling a superior customer experience and discipline around full price selling are all driving tangible change as we expanded the breadth of our product offerings and enter new distribution while leaning into our competitive advantage to reach new consumer and grow our market share the fossil brand has brought appeal to multiple demographics a balanced assortment for both women and men and the proven ability to play in both democratic and premiums price point our initiative across product distribution marketing and events are bringing more customers into the funnel and the growing number of gen z consumer are connecting with the fossil brand moving now to our core license brands in the microcosm brand we're building momentum globally with notable strength in the u.s also in q3 during the quarter traditional watches continue to anchor the business through core platform strength and compelling line extensions the lexington collection remain our number one global franchise after launching a new iteration and our new four-year platform chelsea made an immediate impact becoming one of our top women's platform this core watch momentum was complemented by strong product elevation in jewelry where our full price category reposition in north america drove a strong boutique trends and improved performance with key wholesale partners we're pleased to see the micro course jewelry business accelerating as we continue to invest in the category through point of sales enhancement and new leadership looking now at your money group product innovation global campaigns events are driving excitement and visibility around the brand employer money recently named its first ever watch ambassador in india foreign actor is an actor filmmaker producer a singer who resonates strongly with gen z the campaign launched last month across leading business and fashion publication including fortune gq and esquire as well as major international art book The partnership highlights several key timepieces from our full lineup, including the launch of our latest evolution of Archetipo, one of the brand's most iconic collections. At Armani Exchange, the brand is riding success with youthful urban consumers and meeting them where they are true social influencer and events last month we partnered with the legendary ibiza nightclub amnesia sponsoring a 50th anniversary event that attracted a sold-out crowd and global media attention our money exchange recently renewed its partnership with karthik aryan as a brand ambassador in india one of the country's most popular actors with a strong following fashion and lifestyle aryan is the face of a our fall holiday campaign which blends sporting influences music inspired details and modern functionality the campaign coincide with the september launch of our new base platform which incorporate design elements inspired by music and dj culture and have met with strong consumer response turning out to our fast-growing india market we had an exceptional quarter driven by ongoing momentum in all brands and channels there's a great deal of excitement and buzz around the ambassadorship for germany brands and fossil signatures as well as our latest product introduction and marketing campaigns we're particularly excited to see the roadmap to premiumization proving out during the quarter local consumer response to machine x1 was outstanding and served as an important stepping stone to signature which has met equally strong response in the initial weeks since launch this momentum is especially significant during this season important q4 period which began in the in the last month with the festivity leading up to Diwali. We're also driving momentum under the hood in India with ongoing operational and supply chain initiatives to ensure we are delivering strong execution across the board for our brands, our partners, and our customers. Moving to our second pillar, optimizing the operating model. We're building a leaner, more agile organization that can capture meaningful operating leverage as the top line improves. We're pleased to have made continuous progress in Q3. Looking at our supply chain in the U.S., we completed a transition to a new distribution center in the Dallas area, which is right size for today's business with room to grow. In India, we have expanded our manufacturing capacity at our factory in Chandigarh and have brought in new leadership at the facility support ongoing momentum. Because we design and assemble in India for India, we have a unique understanding of this important market and what local consumers want. We believe this provides us with a distinctly competitive advantage as we continue to drive growth and scale. Globally, we're continuing to strengthen our go-to-market execution with enhanced capabilities that are already benefiting the business. We expect to continue to drive improvement in forecasting, demand planning, and inventory management into 2027 and beyond. Technology is increasing driving our operational efficiency. We're building capabilities to simplify and modernize our infrastructure, bringing automation to key function. Example of this include a more efficient design, a campaign creation, a continuing improvement in site search and navigation on our own digital platform, as well as scaling the agentic AI across our back office. Looking at our third pillar, building shareholder value. As we continue on our long-term growth journey, we're focused on supercharging the top line across all of our brands globally. Importantly, we're maintaining healthy gross margin and driving accelerating profitability, providing us with greater optionality to invest in demand creation and build value for all of our stakeholders. Better than expected performance across the business is enabling us to raise our full year outlook. We now expect full year net sales to be in the range of $980 to $990 million and adjusted operating margin in the range of 5.5% to 6.5%, and we continue to expect to generate a positive free cash flow. Entering the final months of the year, we are laser-focused on execution during the important holiday season. We have high conviction that the strength of the watch category, the power of our brands, and our proven operating model that position us to drive durable, profitable growth and long-term shareholder value. Now, I will turn the call to Randy to discuss the financials. Thank you, Franco. We're incredibly pleased to see the business deliver on all fronts. As the top line strengthens, our healthy gross margin profile, combined with an increasingly optimized and disciplined cost structure, is driving a step change in our earnings power. Net sales in Q3 totaled $276 million. That's up 2% versus last year and includes approximately 190 basis points of impact related to our store closure program, as well as a timing shift of approximately $10 million related to wholesale shipments from Q4 into Q3. You'll recall that we had signaled the business's return to growth being projected for the fourth quarter. Notwithstanding the wholesale timing that shifted VAT growth into Q3, results were better than expected and reflect improving trends across brands, channels, and geographies as we continue to advance our turnaround plan. Moving down the P&L, we continue the drive healthy growth margin expansion, delivering Q3 growth margin of 59.9%, up 10.9 points to last year. The increase is attributable to two primary factors. First, you'll recall that we agreed to substantial reductions to minimum royalty guarantees for the full year 2026 with some of our key licensors. Q3 gross margin expansion versus a year ago reflects both the impact of those lower guarantees and our decision to amortize any expected shortfall across all four fiscal quarters versus in the third and fourth quarters only as we did in previous years. Second, fossil groups' product margins continue to benefit from our focus on driving full-price sales, ongoing supply chain optimization, and lower prevailing tariff rates versus last year. Importantly, we continue to expect these drivers to support a healthy gross margin profile in the upper 50s for the full year. Looking at operating expenses, S, G, and A totaled $135 million, down $12 million, or 8% versus prior year, primarily reflecting fewer stores in operation, lower compensation and administrative expenses, and the timing of demand-creating marketing investments. As a percentage of sales, SGA leveraged 540 basis points, coming in at 48.9%. Although SG&A rate in the third quarter was slightly better than our long-term target of less than 50%, we anticipate that Q4 will be in the low 50s, reflecting strong operational discipline balanced with the continued investment in demand generation to support our product innovation pipeline, all while driving improved profitability. We ended Q3 with two fewer stores, putting us at 174 locations globally. With our store optimization program essentially completed, we are advancing our store of the future strategy to drive increased productivity. We continue to see brick and mortar as an essential part of our omnichannel strategy and believe there is a longer term opportunity to evolve and elevate our existing store concept and ultimately drive more powerful unit economics. Turning to earnings, we delivered another quarter of strong flow through to the bottom line, with Q3 adjusted operating income of $30 million and an adjusted operating margin of 11%. We were net income positive on the reported currency basis, delivering $12 million on the bottom line, or $0.19 per diluted share. On a year-to-date basis, reported currency net income was approximately break-even. We expect that top-line improvement and strong flow-through will enable us to achieve positive reported net income and EPS for the full year 2026, reflecting a substantial comeback from the losses of recent years. Looking at the balance sheet, we ended the quarter in solid financial condition with $77 million of cash equivalents and $35 million of ABL availability with no utilization under our ATM program. Inventory at quarter end totaled $189 million, up 13% versus a year ago and in support of our seasonal expectations and growth plans. Given our strong operating momentum and confidence in the business outlook, we intend to continue to invest for growth while maintaining discipline and balance. Moving now to guidance, we are raising our full-year outlook as follows. Worldwide net sales are now expected to be in the range of $980 million to $990 million, which compares to prior guidance of down 3% to 5%, or $955 million to $975 million. Adjusted operating margins is now expected to be in the range of 5.5% to 6.5%, up from prior guidance of 4% to 3%. As we deliver meaningful flow-through on sales to the bottom line, we continue to expect the business to generate positive free cash flow. It's worth noting that our implied guidance for the fourth quarter takes into account the wholesale timing shift of approximately $10 million I mentioned earlier. It's particularly gratifying to see our initiatives begin to deliver across the P&L. Our results reflect the hard work of our teams globally and demonstrate a significantly improved operating model. Now, I'll ask the operator to open the call to Q&A. Thank you. question please press star 1 1 in your telephone and wait for your name to be announced to withdraw your question please first star 1-1 again please stand by while we compile the Q&A roster our first question comes from the line of Thomas Forte with maximum group LLC your line is now open great so first off Franklin any performance outstanding job executing the turnaround I have three questions i'll join two together and then i'll ask one separately so the first two on the physical store base are we at a point now where we could think about future openings in addition to any potential closures and then randy were there any refunds from tariffs in the quarter hey tom thank you very much this is franco uh look let me pick up on the physical store uh we've done we think the work is now behind us we're still you know comping some closure in 2026 generally speaking we remain very opportunistic about openings going forward we have seen improving performances with our stores that are very encouraging and in particular we're very encouraged about the performances of our full price stores with the fossil brand so look at it is a very encouraging so the fossil brand has shown a very strong momentum in q3 and then Tom with respect to your second question no there were no refunds from tariffs in the quarter okay thank you and then my follow-up question and I apologize if I'm a little early on this one but looking ahead can you talk about your capital allocation plans when you start generating free cash flow including paying down debt and any other things you'd like to highlight yeah look if I will take the lead about Randy is definitely the person who complemented it look we we want to grow the company and we're very pleased to see the company returning to positive EPS and we're pleased with the really the positive free cash flow growth is a company priority but Randy you may want we haven't spoken about capital allocation but we have been consistent in saying that our priority has been returning the company to growth and for the period of time that we've been executing the turnaround our belief has continued to be that the highest and best use of the next dollar has been towards growth we'll continue to evaluate that generating free cash flow gives us options be it investing in growth or thinking about capital allocations differently we're proud of of the fact that the business has gotten to the point where it is expected to deliver positive pre-cash flow, giving us those options that we're excited about putting to use. Excellent. Bravo. Great job. Thank you, Tom. Thank you. Appreciate it. Thank you so much. Our next question comes from the line of Jeremy Hamlin with Craig Hallam Capital Group. Your line is now open. Thanks. Thanks. And I'll add my congratulations on the job well done and the momentum in the business. If we look at the geographic markets and how you are seeing that kind of transform here, you've got clearly momentum in Asia, building momentum inthe U.S. Can you talk a little bit about what you're starting to see in Europe and, you know, in terms of obviously the Middle East conflict has clearly had some dampening effect on the business. But can you talk about, you Know, are you starting to See seeds of kind of improvement in Europe? And how are you thinking about it here in Q4 from a geographic perspective? Thank you, Jeremy. Look, we have seen positive trends, in particular in quarter three, compared to the first half of the year. We always mentioned that Europe repositioning was really related to the war, but also the change of some markets into distributors, which we thought was better for the long-term growth of the company. and we knew it was something in the short term from a top-line perspective, but eventually we'll drive a more profitable company with the right partner in the country. The combination of those, together with, obviously, has led to a pretty difficult time in Europe. We're seeing better trends there. We expect the market to continue to improve. We believe it's a very important market for us, and we're bringing in new talent dedicated to the market, to the return of the market to grow as we go forward. Got it. And then switching to brands, right? So you talked about the Fossil brand really seeing momentum up almost 14%, constant currency in Q3. Can you just discuss with us, you know, are there other brands where you're seeing momentum, maybe Coors, Armani? And, you know, within that, what are you seeing in terms of price points? As it looks like the market is really starting to see momentum in kind of the sub, you know, 500 and maybe even sub 300 price point is maybe the strongest part of the traditional watch market. Yeah, for sure. We see very encouraging trends in the traditional watch market led by Gen Z consumers coming into the space. Now, those younger consumers, they are not really looking at the luxury market. They are looking at sub-$500, and they are looking to use those watches as everyday accessories. We are well-positioned to really drive and grow with that trend. We've got great brands, very relevant. Microcosm is a world-class brand that sees a growing momentum. Our money doesn't need a presentation very strong across the globe. But we're very encouraged about being positioned to capture that growth, and we're particularly very pleased not only with the, I would say, the innovation of the product, but the improving go-to-market presentation in the store with our world-class wholesale partners that are very pleased to see a strong comeback of the Fossil Group. Great. And then I wanted to ask, congratulations on getting the diesel extension in place. That certainly is a good lead-in to ask about your other large licensing agreements. Can you discuss, you know, progress that you might have made on those long-term extensions and, you know, when do you expect to have a deal in place? You know, do you have confidence in getting those deals done? And then when do YOU think you can update us? Thank you, Jeremy. Yes, we are in advanced conversation. We're very pleased that we have a long-term relationship with all our partners. We signed these, and we continue to make progress in what I would call a work-in-progress advanced conversation we will update our stakeholders as we go forward. But, you know, those relationships are very important to us, and a long term relationship with both of money and microcores. Jeremy, just to add, you know, our confidence level remains high at the ability to get to acceptable long-term extensions with the remaining large license source. And then, Randy, as a follow-up on that, you know, in terms of thinking about some of the royalty guarantees and the shortfall payments that you've had over the last several years, those have obviously been big impediments in terms of your gross margin, do you have a sense for, you know, what type of, you know, the new agreements that you have in place, what those shortfall payments might look like as we get into next year? I mean, it seems like this year is clearly less than, you know, $15, $20 million versus last year, maybe it was something more like $50 million. Any color you might be able to share with us at this point now with the company seeing significantly better sales run rates? If you look at the gross margin performance in the quarter, again, in the very high upper 50s, we're really proud of the way the full price model has delivered. What you don't see this year is the impact of shortfalls like you saw in prior Q3s. when we think about the ongoing negotiations with our license partners, maintaining continuity of that gross margin rate through the year, so not having meaningful shortfalls, is clearly an objective of ours. Got it. Thanks. I'll hop out of the queue. Congratulations. Thank you, Jeremy. Our next question comes from the line of Ryan Myers with Lake Street Capital Markets. Your line is now open hey guys thanks for taking my questions you know congrats on the awesome quarter in progress here the first question for me and randy i think you kind of talked a little bit in your prepared remarks but just can you revisit this and just sort of help bridge the gap between where the operating margin came in during the quarter and you know what you're expecting in q4 sounded like you're expected some reinvestment but just wanted to make sure i fully understood that. The point that we were making with respect to the margin, and thanks for the question, Ryan, was similar to the point that I was just making, which is we've in years past seen fairly significant divots in the third quarter from the recognition of that royalty shortfall. The fact that the margin maintained in relative terms from Q2 to Q3 versus the significant reduction last year, you can largely attribute that improvement to the change in royalty shortfall. There's a small amount that has impacted both Q1 and Q2 because of our decision to amortize it, but the easiest way to think about it is that divot that existed in Q3 last year which has gone away in Q2 this year represents in broad strokes the recovery of that shortfall Okay, got it, makes sense. and then just you know a question on the wholesale business maybe just update us on you know what you're seeing in terms of you know door expansion there if you've been able to expand in any other retailers or if a lot of the momentum you've seen it's just been with existing partners yeah look we're we're excited and ryan is um i think we're seeing uh in particularly in in the u.s growing trend with gen z um new retailers coming on board including a what we call energy specialty retailers, specialty stores, we're growing with existing distribution. Europe has been a little softer in general from a retail perspective. Obviously, the war, the combination between the war and recent happenings in several countries haven't helped that much, but that trend in the watch industry is, we believe, is going to soon get to Europe. Strong momentum in India continuing, and we're seeing some better momentum with watches coming back in Asia. Our wholesale partners are very supportive of the strategy of the company. We're building, we'll continue to build a long-term relationship. I spend a lot of time out there talking to them, and they're very pleased with the performances of the group, and we're excited about the opportunity going into the future. Got it. Thanks for taking my questions. Thank you, Ryan. Thank you. Our next question comes from the line of Owen Rickert with Northland Capital Markets. Your line is now open. Hey, guys. Thanks for asking my questions here in Unreal Quarter. Awesome to see. First, for me, I know it's still pretty early since the recent launch of the Signature Collection, and per your prepared remarks, it sounds like performance has been really strong since launch. But can you just comment on how you're feeling about your first entrance into this new price point? And maybe how should we expect this collection to expand throughout 2027 and beyond? Thanks, Owen. We're excited. Look, I think I've been always positive about the launch of our signature Swiss made range. I remember having this conversation when I joined the company. I don't think anyone believed in it at that time. We're seeing a stronger momentum beyond our expectation. Look, ultimately, this is never going to be the biggest area. We remain a democratic brand focused to Gen Z consumer. in a lower price point but the credibility we're building with simply great product is fantastic for the fossil brand and we're seeing so strong momentum to the point where um yeah the coverage has been beyond anyone expectation awesome awesome great to hear and then lastly for me the Nick Jonas partnership expansion through 27 and 28 is great to see as well. Can you just give us a sense of maybe the marketing spend commitment tied to this deal and how you're measuring ROI on other ambassador partnerships like this one, maybe relative to more traditional media spend? Yeah, look, it's very exciting to see what Nick and Fossil have done together. I think Nick has helped to transform the brand, shape the character of the brand. He's been passionate beyond the agreement. He has been a part of the family. He has gone beyond the agreeement on what he needed to do. He's a great singer, actor, investor. He's part of The Fossil Family. he's um he's really done a a great job we we've seen the evolution of the brand over time now sometimes it's difficult to have a precise roii in um in this investment but ultimately i think the performances of the fossil brand returning to grow and in particular growing double digit on the course of three years, just a way to indicate what the opportunity is going forward. So we're so excited about him continuing with us. Thanks, guys. Appreciate it. Thank you. Thank you, Owen. And I'm currently showing no further questions at this time. I'd now like to hand the call back over to management for closing remarks. Thank you everyone for listening today. We wish everyone good health during the upcoming holiday season. Thank you. This concludes today's conference. Thank you for your participation. You may now disconnect.