FossilFOSL

Key highlights

• Profitability outlook raised: Management raised its full year guidance and now expects adjusted operating margin, which tracks profit from running the business, to land between 4% and 6%. This update signals confidence in the turnaround plan as the company works to return to positive free cash flow for the year.
• Gross margins expand: Gross margin, the portion of sales left after making the products, rose to 62.4% from 57.5% a year ago. The company earned more per watch because it focused on full price sales and used new sourcing methods to lower its costs.
• Wholesale growth returns: Wholesale sales grew 0.9% this quarter, a significant shift from the 4.4% drop in total constant currency sales. Selling more through partner retailers is helping offset the 14.6% decline in direct sales as the company closes its own stores.
• Interest costs double: Interest expense rose to $8.3 million compared to $4.3 million last year. This increase is putting pressure on the bottom line because the company is carrying higher debt at more expensive rates while it tries to fix its operations.
• Store count shrinking: Fossil ended the quarter with 176 stores, down from 214 a year ago. Closing these locations accounted for 220 basis points, or 2.2%, of the total sales decline as the business moves away from owning its own retail shops.

Our take: This was a better quarter than the headline loss suggests. While total sales are still shrinking, the significant jump in gross margins to 62.4% shows that the plan to focus on more profitable sales is working. We still need to see sales actually grow, but the higher guidance for the year makes the long-term recovery look much more realistic.