Fossil Group Inc

Key Measures of Financial Performance and Key Non-GAAP Financial Measures

Constant Currency Financial Information: As a multinational enterprise, we are exposed to changes in foreign currency exchange rates. The translation of the operations of our foreign-based entities from their local currencies into U.S. dollars is sensitive to changes in foreign currency exchange rates and can have a significant impact on our reported financial results. In general, our overall financial results are affected positively by a weaker U.S. dollar and are affected negatively by a stronger U.S. dollar as compared to the foreign currencies in which we conduct our business.

As a result, in addition to presenting financial measures in accordance with accounting principles generally accepted in the United States of America ("GAAP"), our discussion contains references to constant currency financial information, which is a non-GAAP financial measure. To calculate net sales on a constant currency basis, net sales for the current fiscal year for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average rates during the comparable period of the prior fiscal year. We present constant currency information to provide investors with a basis to evaluate how our underlying business performed excluding the effects of foreign currency exchange rate fluctuations. The constant currency financial information presented herein should not be considered a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP. Reconciliations between constant currency financial information and the most directly comparable GAAP measure are included where applicable.

Adjusted EBITDA, Adjusted Operating Income (Loss), Adjusted Net Income (Loss) and Adjusted Earnings (Loss) per Share: Adjusted EBITDA, Adjusted operating income (loss), Adjusted net income (loss) and Adjusted earnings (loss) per share are non-GAAP financial measures. We define Adjusted EBITDA as our income (loss) before income taxes, plus interest expense, amortization and depreciation, impairment expense, other non-cash charges, stock-based compensation expense and restructuring expense, minus interest income. We define Adjusted operating income (loss) as operating income (loss) before impairment expense and restructuring expense. We define Adjusted net income (loss) and Adjusted earnings (loss) per share as net income (loss) attributable to Fossil Group, Inc. and diluted earnings (loss) per share, respectively, before impairment expense and restructuring expense. We have included Adjusted EBITDA, Adjusted operating income (loss), Adjusted net income (loss) and Adjusted earnings (loss) per share herein because they are widely used by investors for valuation and for comparing our financial performance with the performance of our competitors. We also use these non-GAAP financial measures to monitor and compare the financial performance of our operations. Our presentation of Adjusted EBITDA, Adjusted operating income (loss), Adjusted net income (loss) and Adjusted earnings (loss) per share may not be comparable to similarly titled measures other companies report. Adjusted EBITDA, Adjusted operating income (loss), Adjusted net income (loss) and

Adjusted earnings (loss) per share are not intended to be used as alternatives to any measure of our performance in accordance with GAAP.

Comparable Retail Sales: Both stores and e-commerce sites are included in comparable retail sales in the thirteenth month of operation. Stores that experience a gross square footage change of 10% or more due to an expansion and/or relocation are removed from the comparable store sales base, but are included in total sales. These stores are returned to the comparable store sales base in the thirteenth month following the expansion and/or relocation. Comparable retail sales also exclude the effects of foreign currency fluctuations.

Store Counts: While macro economic factors have shifted sales away from traditional brick and mortar stores towards digital channels, store counts continue to provide a key metric for management. Both the size and quality of our store fleet have a direct impact on our sales and profitability. Over time, we have made progress right-sizing our fleet of stores by focusing on closing our least profitable stores.

Total Liquidity: We define total liquidity as cash and cash equivalents plus available borrowings on our revolving credit facility. We monitor and forecast total liquidity to ensure we can meet our financial obligations.

Components of Results of Operations

Revenues from sales of our products, including those that are subject to inventory consignment agreements, are recognized when control of the product is transferred to the customer and in an amount that reflects the consideration we expect to be entitled in exchange for the product. We accept limited returns from customers. We continually monitor returns and maintain a provision for estimated returns based upon historical experience and any specific issues identified. Our product returns provision is accounted for as a reduction to revenue and cost of sales and increases to customer liabilities and other current assets to the extent the returned product is expected to be resalable.

Cost of Sales includes raw material costs, assembly labor, assembly overhead including depreciation expense, assembly warehousing costs and shipping and handling costs related to the movement of finished goods from assembly locations to sales distribution centers and from sales distribution centers to customer locations. Additionally, cost of sales includes customs duties, product packaging cost, royalty cost associated with sales of licensed products, the cost of molding and tooling, inventory shrinkage and damages and restructuring charges.

Gross Profitand gross profit margin are influenced by our diversified business model that includes, but is not limited to: (i) product categories that we distribute; (ii) the multiple brands, including both owned and licensed, we offer within several product categories; (iii) the geographical presence of our businesses; and (iv) the different distribution channels we sell to or through.

The attributes of this diversified business model produce varying ranges of gross profit margin. Generally, on a historical basis, our fashion branded traditional watch and jewelry offerings produce higher gross profit margins than our smartwatches and leather goods offerings. In addition, in most product categories that we offer, brands with higher retail price points generally produce higher gross profit margins compared to those of lower retail priced brands. However, smartwatches carry relatively lower margins than our other major product categories. Gross profit margins related to sales in our Europe and Asia businesses are historically higher than our Americas business, primarily due to the following factors: (i) premiums charged in comparison to retail prices on products sold in the U.S.; (ii) the product sales mix in our international businesses, in comparison to our Americas business, is comprised more predominantly of watches and jewelry that generally produce higher gross profit margins than leather goods; and (iii) the watch sales mix in our Europe and Asia businesses, in comparison to our Americas business, are comprised more predominantly of higher priced licensed brands.

Operating Expenses include selling, general and administrative ("SG&A"), other long-lived asset impairments and restructuring charges. SG&A expenses include selling and distribution expenses primarily consisting of sales and distribution labor costs, sales distribution center and warehouse facility costs, depreciation expense related to sales distribution and warehouse facilities, the four-wall operating costs of our retail stores, point-of-sale expenses, advertising expenses and art, design and product development labor costs. SG&A also includes general and administrative expenses primarily consisting of administrative support labor and support costs such as treasury, legal, information services, accounting, internal audit, human resources, executive management costs and costs associated with stock-based compensation. Restructuring charges include costs to reorganize, refine and optimize our Company’s infrastructure and store closures under our TAG and New World Fossil initiatives.

Results of Operations

Quarterly Periods Ended September 28, 2024 and September 30, 2023

Consolidated Net Sales. Net sales decreased $56.3 million, or 16.4%, for the Third Quarter as compared to the Prior Year Quarter, with sales declines in all three regions. The sales decrease was largely driven by overall category, consumer and channel softness. Our exit of smartwatches and store closures as part of our TAG initiatives negatively impacted sales in the Third Quarter by $23.2 million as compared to the Prior Year Quarter. Wholesale sales declined 12.1% (11.9% in constant currency), reflecting lower purchases by wholesale accounts due to tighter management of inventories and lower end-consumer demand. Direct to consumer sales declined by 23.7% (23.9% in constant currency), due to a smaller store base and declines in our comparable retail sales. We have reduced our store footprint by 52 stores (17%), since the end of the Prior Year Quarter. Global comparable retail sales decreased 12% due to decreases in both stores and our owned e-commerce websites. From a category perspective, traditional watch sales decreased 11.7% (11.6% in constant currency). Net sales in smartwatches decreased 76.9% (77.1% constant currency), as we exited the category. The leathers category decreased 27.6% (27.6% in constant currency) compared to the Prior Year Quarter, and jewelry sales decreased 9.0% (9.5% in constant currency). From a brand perspective, the most predominant sales declines were in FOSSIL, EMPORIO ARMANI and MICHAEL KORS brands.

The following table sets forth consolidated net sales by segment (dollars in millions):

Net sales information by product category is summarized as follows (dollars in millions):

In the Third Quarter, the translation of foreign-based net sales into U.S. dollars mostly offset between regions, with favorable impacts of $1.4 million in Europe offset by unfavorable impacts of $1.2 million and $0.2 million and in our Americas and Asia segments, respectively, as compared to the Prior Year Quarter.

Stores. The following table sets forth the number of stores on the dates indicated below:

Americas Net Sales. Americas net sales decreased $31.3 million, or 20.5% (19.7% in constant currency), during the Third Quarter in comparison to the Prior Year Quarter. Sales decreases were largely in the FOSSIL and MICHAEL KORS brands. Sales decreased in wholesale, stores and e-commerce channels. Comparable retail sales were moderately negative during the Third Quarter.

The following table sets forth product net sales and the changes in product net sales on both a reported and constant currency basis from period to period for the Americas segment (dollars in millions):

Europe Net Sales. Europe net sales decreased $10.7 million, or 9.9% (11.2% in constant currency), during the Third Quarter in comparison to the Prior Year Quarter. Sales decreases were largely in the FOSSIL brand. Our sales decreased across much of the Eurozone and in all major channels. Comparable retail sales decreased moderately during the Third Quarter, with sales declines in our stores and owned e-commerce.

The following table sets forth product net sales and the changes in product net sales on both a reported and constant currency basis from period to period for the Europe segment (dollars in millions)

Asia Net Sales. Net sales in Asia decreased $14.0 million, or 16.9% (16.6% in constant currency), during the Third Quarter in comparison to the Prior Year Quarter. The sales decreases were largely driven by mainland China. The largest sales decreases were in the EMPORIO ARMANI and FOSSIL brands. Comparable retail sales decreased slightly during the Third Quarter, driven by our retail stores and partially offset by our owned e-commerce sales increases.

The following table sets forth product net sales and the changes in product net sales on both a reported and constant currency basis from period to period for the Asia segment (dollars in millions):

Gross Profit. Gross profit of $142.2 million in the Third Quarter decreased 12.0% in comparison to $161.7 million in the Prior Year Quarter. Our gross profit margin rate increased to 49.4% in the Third Quarter compared to 47.0% in the Prior Year Quarter. Our gross profit margin rate increase primarily reflects initiatives under our TAG Plan, including improved product margins in our core categories and our exit from the smartwatch category. These favorable impacts were partially offset by increased licensor minimum royalty costs.

Operating Expenses. Total operating expenses in the Third Quarter decreased by 19.9% to $166.7 million or 57.9% of net sales, in comparison to $208.1 million or 60.5% of net sales in the Prior Year Quarter. SG&A expenses were $160.9 million in the Third Quarter as compared to $191.4 million in the Prior Year Quarter. As a percentage of net sales, SG&A expenses increased to 55.9% in the Third Quarter as compared to 55.6% in the Prior Year Quarter due to decreased sales. Restructuring expenses were $4.8 million in the Third Quarter, compared to $16.0 million in the Prior Year Quarter. We incurred other long-lived asset impairment charges of $1.0 million in the Third Quarter compared to charges of $0.6 million in the Prior Year Quarter. The translation of foreign-denominated expenses during the Third Quarter did not significantly impact operating expenses.

Operating Income (loss). Operating loss in the Third Quarter was $24.5 million as compared to an operating loss of $46.4 million in the Prior Year Quarter. As a percentage of net sales, operating margin was (8.5)% in the Third Quarter compared to

(13.5)% in the Prior Year Quarter. Operating margin rate in the Third Quarter included an unfavorable impact of 30 basis points due to changes in foreign currencies.

Operating income (loss) by segment is summarized as follows (dollars in millions):

Interest Expense. Interest expense decreased by $0.8 million during the Third Quarter compared to the Prior Year Quarter, primarily driven by decreased borrowings.

Other Income (Expense)-Net. During the Third Quarter, other income (expense)-net was income of $3.6 million in comparison to expense of $3.1 million in the Prior Year Quarter, reflecting net currency gains in the Third Quarter as compared net currency losses in the Prior Year Quarter.

Provision for Income Taxes. Income tax expense for the Third Quarter was $6.2 million, resulting in an effective income tax rate of (23.9)%. For the Prior Year Quarter, income tax expense was $5.6 million, resulting in an effective income tax rate of (10.1)%. The effective tax rate in the Third Quarter was unfavorable as compared to the Prior Year Quarter due to income tax accrued on certain foreign income and no tax benefit has been accrued on the U.S. tax losses and certain foreign tax losses due to the uncertainty of whether they can be used in the future, ultimately resulting in a negative effective tax rate.

Net Income (Loss) Attributable to Fossil Group, Inc. Third Quarter net income (loss) attributable to Fossil Group, Inc. was a net loss of $32.0 million, or $0.60 per diluted share, in comparison to a net loss of $61.1 million, or $1.16 per diluted share, in the Prior Year Quarter. During the Third Quarter, currencies favorably affected loss per diluted share by approximately $0.07.

Adjusted Net Income (Loss). Adjusted net income (loss) for the Third Quarter was a net loss of $27.4 million with adjusted loss per diluted share of $0.51 compared to adjusted net loss of $49.0 million with adjusted loss per diluted share of $0.93 in the Prior Year Quarter.

Adjusted EBITDA. The following table reconciles Adjusted EBITDA to the most directly comparable GAAP financial measure, which is income (loss) before income taxes. Certain line items presented in the table below, when aggregated, may not foot due to rounding (dollars in millions).

Adjusted Operating Income (Loss), Adjusted Net Income (Loss) and Adjusted Earnings (Loss) per Share. The following tables reconcile Adjusted operating income (loss), Adjusted net income (loss) and Adjusted earnings (loss) per share to the most directly comparable GAAP financial measures, which are operating income (loss), net income (loss) attributable to Fossil Group, Inc. and diluted earnings (loss) per share, respectively. Certain line items presented in the table below, when aggregated, may not foot due to rounding.

Fiscal Year To Date Periods Ended September 28, 2024 and September 30, 2023

Consolidated Net Sales. Net sales decreased $188.4 million or 19.0% (18.7% in constant currency) for the Year To Date Period as compared to the Prior Year YTD Period. Sales declined in all three regions and all major channels. Global comparable retail sales decreased 12% due to sales decreases in our retail stores and owned e-commerce websites. Sales of smartwatches declined due to exiting the category. From a brand perspective, sales decreased throughout most of our brand portfolio, with the most predominant declines in FOSSIL, EMPORIO ARMANI and MICHAEL KORS brands.

The following table sets forth consolidated net sales by segment (dollars in millions):

Net sales information by product category is summarized as follows (dollars in millions):

In the Year To Date Period, the translation of foreign-based net sales into U.S. dollars decreased reported net sales by $2.7 million, including unfavorable impacts of $4.3 million and $0.3 million in our Asia and Americas segments, respectively, and partially offset by a favorable impact of $1.9 million in our Europe segment, compared to the Prior Year YTD Period.

Americas Net Sales. Americas net sales decreased $86.2 million, or 19.7% (19.7% in constant currency), during the Year To Date Period in comparison to the Prior Year YTD Period. The sales declines were across most brands, but most significantly in the FOSSIL and MICHAEL KORS brands. Sales declined in all major channels. Comparable retail sales decreased moderately during the Year To Date Period.

The following table sets forth product net sales and the changes in product net sales on both a reported and constant currency basis from period to period for the Americas segment (dollars in millions):

Europe Net Sales. Europe net sales decreased $51.0 million, or 16.9% (17.5% in constant currency), during the Year To Date Period in comparison to the Prior Year YTD Period. Sales decreased across the Eurozone and in the majority of our brands, with the largest declines in FOSSIL, MICHAEL KORS and EMPORIO ARMANI brands. Sales declined in all major channels. Comparable retail sales in the region decreased moderately during the Year To Date Period.

The following table sets forth product net sales and the changes in product net sales on both a reported and constant currency basis from period to period for the Europe segment (dollars in millions):

Asia Net Sales. Asia net sales decreased $47.6 million, or 19.2% (17.5% in constant currency), during the Year To Date Period in comparison to the Prior Year YTD Period. Net Sales declined across all channels. Sales growth in India and Australia were more than offset by declines in mainland China and the rest of Asia. Sales declines were predominantly in the EMPORIO ARMANI and FOSSIL brands. Comparable retail sales declined moderately for the Year To Date Period.

The following table sets forth product net sales and the changes in product net sales on both a reported and constant currency basis from period to period for the Asia segment (dollars in millions):

Gross Profit. Gross profit of $412.6 million in the Year To Date Period decreased $66.5 million, or 13.9%, in comparison to $479.0 million in the Prior Year YTD Period. Gross profit margin rate increased to 51.4% in the Year To Date Period compared to 48.3% in the Prior Year YTD Period. Our gross profit margin rate increase primarily reflects initiatives under our TAG Plan, including improved product margins in our core categories and our exit from the smartwatch category. These favorable impacts were partially offset by increased licensor minimum royalty costs.

Operating Expenses. For the Year To Date Period, total operating expenses decreased to $500.2 million compared to $598.1 million in the Prior Year YTD Period. SG&A expenses were $466.7 million in the Year To Date Period in comparison to $569.5 million in the Prior Year YTD Period. As a percentage of net sales, SG&A expenses increased to 58.1% in the Year To Date Period as compared to 57.5% in the Prior Year YTD Period, mainly driven by decreased sales. During the Year To Date Period, we incurred restructuring costs of $31.6 million in comparison to restructuring costs of $27.7 million in the Prior Year YTD Period. We incurred other long-lived asset impairment charges of $1.9 million in the Year To Date Period compared to charges of $0.8 million in the Prior Year YTD Period. The translation of foreign-denominated expenses during the Year To Date Period decreased operating expenses by $1.3 million when compared to the Prior Year YTD Period, as a result of the stronger U.S. dollar.

Operating Income (Loss). Operating income (loss) was a loss of $87.7 million in the Year To Date Period as compared to a loss of $119.0 million in the Prior Year YTD Period. As a percentage of net sales, operating margin was (10.9)% in the Year To Date Period as compared to (12.0)% in the Prior Year YTD Period. Operating income (loss) was not significantly impacted by changes in foreign currencies in the Year To Date Period as compared the Prior Year YTD Period.

Operating income (loss) by segment is summarized as follows (dollars in millions):

Interest Expense. Interest expense decreased by $2.0 million during the Year To Date Period, primarily driven by a decreased debt balance compared to the Prior Year YTD Period.

Other Income (Expense)-Net. During the Year To Date Period, other income (expense)-net was income of $9.0 million in comparison to an income of $6.8 million in the Prior Year YTD Period. The change in other income (expense)-net was primarily due to increased net currency gains and interest income in the Year To Date Period as compared to the Prior Year YTD Period.

Provision for Income Taxes. Income tax expense for the Year To Date Period was $2.3 million, resulting in an effective income tax rate of (2.4)%. The Prior Year YTD Period income tax benefit was less than $0.1 million resulting in an effective tax rate of 0.03%. The Year to Date Period effective tax rate was unfavorable to the Prior Year YTD Period due to income tax accrued on certain foreign income and no tax benefit has been accrued on the U.S. tax losses and certain foreign tax losses due to the uncertainty of whether they can be used in the future.

Net Income (Loss) Attributable to Fossil Group, Inc. For the Year To Date Period, net loss was $95.1 million, or $1.80 per diluted share, in comparison to a loss of $128.9 million, or $2.47 per diluted share, in the Prior Year YTD Period. Diluted loss per share in the Year To Date Period, as compared to the Prior Year YTD Period, was positively impacted by $0.02 per diluted share due to the impact of currency.

Adjusted Net Income (Loss). Adjusted net loss for the Year To Date Period was $68.8 million with adjusted loss per diluted share of $1.30 compared to adjusted net loss of $101.0 million with adjusted loss per diluted share of $1.94 in the Prior Year YTD Period.

Adjusted EBITDA. The following table reconciles Adjusted EBITDA to the most directly comparable GAAP financial measure, which is income (loss) before income taxes. Certain line items presented in the table below, when aggregated, may not foot due to rounding (dollars in millions).

Adjusted Operating Income (Loss), Adjusted Net Income (Loss) and Adjusted Earnings (Loss) per Share. The following tables reconcile Adjusted operating income (loss), Adjusted net income (loss) and Adjusted earnings (loss) per share to the most directly comparable GAAP financial measures, which are operating income (loss), net income (loss) attributable to Fossil Group, Inc. and diluted earnings (loss) per share, respectively. Certain line items presented in the table below, when aggregated, may not foot due to rounding.