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), Constant Currency Adjusted Operating Income (Loss), Adjusted Net Income (Loss) and Adjusted Earnings (Loss) per Share: Adjusted EBITDA, Adjusted operating income (loss), Constant currency 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, restructuring expense and unamortized debt issuance costs included in loss on extinguishment of debt minus interest income. We define Adjusted operating income (loss) as operating income (loss) before impairment expense and restructuring expense. We define Constant currency adjusted operating income (loss) as operating income (loss) before impairment expense and restructuring expense and excluding the effects of foreign currency exchange rate fluctuations. 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, restructuring expense and unamortized debt issuance costs included in loss on extinguishment of debt. We have included Adjusted EBITDA, Adjusted operating income (loss), Constant currency 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), Constant currency 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), Constant currency 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 were adjusted to normalize the 14-week First Quarter with the 13-week Prior Year Quarter. Comparable retail sales also exclude the effects of foreign currency fluctuations.

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

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 are accounted for as reductions to revenue and cost of sales and an increase to customer liabilities and other current assets to the extent the returned product is 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 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 Turnaround Plan.

Results of Operations

Quarterly Periods Ended April 5, 2025 and March 30, 2024

Consolidated Net Sales. Net sales decreased $21.6 million, or 8.5% (6.2% in constant currency), for the First Quarter as compared to the Prior Year Quarter, with sales decreases in all three regions. The sales decrease was largely driven by overall category, consumer and channel softness. Declines in smartwatch sales and our store rationalization initiatives comprised approximately 520 basis points of the sales decline in the First Quarter. Sales were favorably impacted 700 basis points as a result of the First Quarter including 14 weeks as compared to 13 weeks in the Prior Year Quarter. Wholesale sales increased 3.2% (6.0% in constant currency). Direct to consumer sales declined by 25.7% (24.3% in constant currency). We have reduced our store footprint by 57 stores (20.6%), since the end of the Prior Year Quarter. Global comparable retail sales decreased 21.8%, largely due to being less promotional in our owned e-commerce channel. From a category perspective, traditional watch sales decreased 1.0% (increased 1.6% in constant currency). Net sales in smartwatches decreased 55.1% (54.0% in constant currency), as we exited the category. The leathers category decreased 37.7% (37.0% in constant currency), and jewelry sales decreased 15.2% (13.3% in constant currency). From a brand perspective, the most predominant sales declines were in FOSSIL and EMPORIO ARMANI and partially offset by sales growth in MICHAEL KORS.

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 First Quarter, the translation of foreign-based net sales into U.S. dollars decreased reported net sales by $5.8 million (2.3%) as compared to the Prior Year Quarter, including unfavorable impacts of $2.6 million, $1.8 million and $1.4 million in the Americas, Europe and Asia segments, respectively.

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

Americas Net Sales. Americas net sales decreased $12.3 million, or 11.2% (8.8% in constant currency), during the First Quarter in comparison to the Prior Year Quarter. Sales decreases were largely in the FOSSIL brand, while we had moderate sales growth in the MICHAEL KORS brand. Sales declined in our e-commerce and store channels, while wholesale sales increased slightly. Comparable retail sales decreased sharply during the First Quarter, largely due to less promotional activity in our owned e-commerce channel.

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 $1.4 million, or 1.8% (increased 0.5% in constant currency), during the First Quarter in comparison to the Prior Year Quarter. Our sales decreased across much of the Eurozone. From a channel basis, sales declines in our direct channels more than offset sales increases in our wholesale business. Comparable retail sales decreased sharply during the First Quarter, largely due to less promotional activity in our owned e-commerce business.

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 $8.2 million, or 12.5% (10.4% in constant currency), during the First Quarter in comparison to the Prior Year Quarter. The sales decreases were largely driven by mainland China and partially offset by sales increases in India. The largest sales decreases were in the EMPORIO ARMANI brand. Sales declined in all major channels. Comparable retail sales decreased moderately during the First Quarter, due to less promotional activity in our e-commerce business.

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 $143.0 million in the First Quarter increased 7.1% in comparison to $133.5 million in the Prior Year Quarter. Our gross profit margin rate increased to 61.3% in the First Quarter compared to 52.4% in the Prior Year Quarter. The year-over-year increase primarily reflects improved product margins in our core categories, exiting the smartwatch category, favorable product mix and reduced freight costs.

Operating Expenses. Total operating expenses in the First Quarter decreased to $149.7 million or 64.2% of net sales, in comparison to $162.7 million or 63.8% of net sales in the Prior Year Quarter. SG&A expenses were $133.8 million in the First Quarter compared to $152.3 million in the Prior Year Quarter. As a percentage of net sales, SG&A expenses decreased to 57.4% in the First Quarter as compared to 59.7% in Prior Year Quarter, primarily driven by cost reductions and efficiencies gained through our restructuring programs. Operating expenses in the First Quarter included $15.8 million of restructuring costs, primarily related to employee costs and professional services, while the Prior Year Quarter included $10.1 million in restructuring costs.

Operating Income (Loss). Operating loss in the First Quarter was $6.7 million as compared to an operating loss of $29.2 million in the Prior Year Quarter. The decreased operating loss was primarily driven by a higher gross profit margin rate and lower SG&A expenses, partially offset by decreased sales. As a percentage of net sales, operating margin was (2.9)% in the First Quarter and (11.5)% the Prior Year Quarter. Operating margin rate in the First Quarter included an unfavorable impact of 90 basis points due to changes in foreign currencies.

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

Interest Expense. Interest expense was $4.5 million in the First Quarter in comparison to $5.1 million in the Prior Year Quarter.

Other Income (Expense)-Net. During the First Quarter, other income (expense)-net was an expense of $(3.3) million in comparison to income of $3.9 million in the Prior Year Quarter. This change was primarily driven by net foreign currency losses in the First Quarter as compared to net foreign currency gains in the Prior Year Quarter.

Provision for Income Taxes. Income tax expense for the First Quarter was $3.4 million, resulting in an effective income tax rate of (23.3)%. For the Prior Year Quarter, income tax benefit was $6.1 million, resulting in an effective income tax rate of 20.1%. The effective tax rate in the First Quarter was unfavorable as compared to the Prior Year Quarter due to the accrual of foreign income tax on certain foreign entities with positive income; with an overall consolidated loss. No tax benefit has been accrued on the First Quarter 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. First Quarter net income (loss) attributable to Fossil Group, Inc. was a net loss of $17.6 million, or $0.33 per diluted share, in comparison to a net loss of $24.3 million, or $0.46 per diluted share, in the Prior Year Quarter. During the First Quarter, currencies unfavorably affected diluted earnings (loss) by approximately $0.13, when compared to 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), Constant Currency Adjusted Operating Income (Loss), Adjusted Net Income (Loss) and Adjusted Earnings (Loss) per Share. The following tables reconcile both Adjusted operating income (loss) and Constant currency 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.