After the markets closed on Wednesday, we got another progress report on specialty retailer Fossil Group (FOSL) , which reported first quarter results. FOSL has been quite an interesting under-the-radar story in recent years. It tanked in 2017, rose from the ashes the following year, tanked yet again through 2020, but has been on the rise yet again. As the love/hate cycle has continued with investors, the company has made great progress in putting its financial house in order.
First quarter revenue of $363 million, while down 7% year/year was better than the company expected. Unfortunately, no analysts currently cover the company, so we are stuck with company expectations instead of a consensus. That revenue drop was due to a 12% decline in company-owned stores, as well as the fact that it compared a "COVID quarter", to a "partial COVID quarter".
FOSL's cost cutting efforts are bearing fruit, the company cut operating expenses by $75 million year/year, and reduced the operating loss from $134 million to $17 million. Gross margins rose from 35.9% to 50.3%. Digital sales, which represented 41% of total revenue, grew 40%.
Since re-discovering FOSL in late 2017, I've been impressed with how the company has improved its balance sheet. At that time, the company had $485 million in debt, and $167 million in cash, for net debt of $318 million. Even that represented progress - at year-end 2016, the company had total debt of $808 million, and cash of $289 million, for net debt of $519 million. Fast forward to Q1 of this year, and FOSL has debt down to $195 million, and cash at $247 million, for net cash $52 million. Last year at this time, debt was at $320 million, while cash stood at $245 million.
FOSL's current enterprise value or EV (market cap - cash + debt) is about $533 million. At year-end 2017, EV was around $577 million, with a stock price of $7.77, 32% below Thursday's closing price. Debt represented a larger piece of EV at that time, and the company was in considerably worse shape than it is now.
Back to expectation for the future: management expects FY2021 revenue growth of between 12% and 16%, and EBITDA margins of between 5% and 7%. Again, no analyst expectations here.
I've been keenly aware, both times I've taken positions in FOSL since early 2018, that it is not in a great sector. Retail has been experiencing major changes for years, and dinosaurs will continue to go extinct. But this was never a case of purchasing the name due to growth prospects. It was through the lens of deeper value, and despite the company's fleas, my presumption that it has been overly punished by the markets at times.
