Fossil (FOSL) Q1 2026 Earnings Transcript

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Date

Wednesday, May 13, 2026 at 5 p.m. ET

Call participants

• Chief Executive Officer — Franco Fogliato
• Executive Vice President, Chief Financial Officer and Treasurer — Randy J. Greben

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Takeaways

• Net sales -- $218 million, a 6% decline, primarily due to a 7-point headwind from the prior year's 53rd week and a 280-basis-point impact from store closures and the exit from smartwatches.
• Gross margin -- 59.7%, down 160 basis points year over year, affected by higher tariff costs and a license-brand minimum royalty shortfall, partially offset by a $4 million tariff refund (with $4 million benefiting cost of sales, $900,000 to SG&A, and $1 million as an inventory adjustment).
• Adjusted operating income -- $10 million, up from $9 million in the prior year; this figure excludes a significant portion of the tariff refund related to prior periods.
• SG&A expenses -- Reduced by 13%, outpacing the sales decline, attributed to 27 fewer operating stores, decreased compensation, and administrative costs.
• Store closures -- 7 closures during the quarter; year-end global count expected at 185, with approximately 15 total projected closures for 2026.
• Inventory -- $156 million at quarter end, down 14%, aligning with targets to increase inventory turns and higher full-price selling.
• Cash position -- $81 million in cash and cash equivalents; $28 million available under the asset-based revolver; no ATM program utilization reported.
• Operating cash flow -- Cash used in operations more than halved from the prior-year period, reflecting improved profitability and working capital management.
• Guidance -- Full-year 2026 outlook reiterated: net sales decline of 4%-6%, adjusted operating margin of 3%-5%, breakeven free cash flow, and a fourth-quarter return to top-line growth highlighted.
• Wholesale channel -- Mid single-digit growth, with core traditional watch sales up high single digits; performance described as strong with key wholesale partners, specialty, and energy retailers.
• Regional highlights -- The U.S. and India delivered broad-based growth; Japan and Australia showed improved Asia-Pacific performance attributed to new leadership.
• Brand developments -- Launches and marketing included Fossil BigTick, the Star Wars Mandalorian collection, a new Marvel collaboration in Q3, and campaigns around Mother's Day and upcoming Father's Day promotions.
• India expansion -- Over 70 new wholesale doors added, new e-commerce and CRM platforms implemented, and a focus on full-price sales and premium positioning.
• Operating model optimization -- Ongoing efforts include simplification, technology stack rationalization, and cost reduction, demonstrated by $2 million in restructuring costs versus $16 million in the prior year.
• International distribution -- An agreement was signed (subsequent to quarter end) to transition the South Africa operation to a third-party distributor, leveraging local expertise and reducing expenses.
• AI strategy -- Management emphasized a focus on Agentic AI, with progress in applying AI across marketing, e-commerce, and supply chain functions, and described the company as being at the beginning of this journey.
• Pricing and retail strategy -- Emphasis on full-price selling and selective wholesale/distribution, especially for signature product launches, with a strategy of scarcity and unique retail presence to drive brand demand.

Summary

Fossil Group (NASDAQ:FOSL) reported first-quarter net sales of $218 million and maintained a gross margin of 59.7% despite a year-over-year revenue decline. Operational cost controls resulted in a 13% reduction in SG&A expenses, attributed to store reductions, compensation, and administrative cuts, leading to positive adjusted operating income of $10 million after adjusting for nonrecurring tariff-related items. The wholesale channel and select regional markets, notably the U.S. and India, contributed to improved momentum, with traditional watches in wholesale returning to high single-digit growth. Management reiterated full-year guidance of a 4%-6% sales decline and adjusted operating margin of 3%-5%, citing increased confidence from successful product storytelling, selective premium launches such as the limited-edition Signature line, and brand-building partnerships. Cash flow and working capital trends improved, as inventory was reduced by 14% and operating cash usage decreased by more than half compared to the prior year.

• CEO Franco Fogliato stated, "our order books are building earlier and we are beginning to develop longer term plans together, demonstrating the confidence of our partners have in our brands."
• Growth in the U.S. and India underpinned results, while Asia-Pacific improvement was linked to a new leadership structure.
• AI infrastructure development, described as Agentic AI, is reportedly shaping process optimization and margin improvements across business functions.
• The company announced that its South Africa subsidiary will be transitioned to a distributor model in the upcoming quarter to further streamline its international footprint.
• Fossil's strategy for premium releases is to "work with strategy of scarcity. And we are driving brand heat. We are driving brand demand," minimizing inventory risk while targeting margins and halo effects on core icon lines.

Industry glossary

• Agentic AI: AI systems capable of autonomous action and decision-making to optimize business processes, cited as a core element in current operational improvements.
• BigTick: Fossil's archival watch collection relaunch, referenced as a flagship brand storytelling initiative and a catalyst for brand engagement and sales momentum.
• Energy retailers: Retailers focused on current trends and faster-changing consumer segments, often used as early access points for priority product launches and youth-focused marketing.
• GMR true-up: Yearly adjustment of guaranteed minimum royalty payments due under licensed brand agreements, with accounting treatment shifting from back-half to all quarters in 2026 for improved gross margin consistency.
• ATM program: At-the-market equity distribution program enabling the company to sell shares directly into the market at prevailing prices without a traditional secondary offering; not utilized as of quarter end.

Full Conference Call Transcript

Franco Fogliato: Good afternoon. Thank you, Christine, and welcome everyone. We are pleased to begin the year with strong financial performance. Our turnaround pillars are delivering results today while advancing our path to long term profitable growth. I want to recognize our exceptional global teams. Their commitment, creativity, and disciplined execution are driving tremendous progress in our turnaround. In the first quarter, we delivered net sales of $218 million healthy gross margin of 59.7% and strict expense control which drove another quarter of positive adjusted operating income totaling $10 million Top line results were better than we expected. Led by strong performance in wholesale core brands and key geographies. As well as notable strength in traditional watches.

Looking at the balance of the year, strong first quarter performance, combined with continuing industry tailwinds is enabling us to confidently reiterate our full year guidance despite the dynamic macro environment. Importantly, our teams remain laser focused on our 3 strategic turnaround pillars. Returning to profitable growth optimizing our operating model, and building shareholder value. We are executing several initiatives across these pillars. I will now turn to sharing updates on our progress and plans. First, returning to profitable growth. We are strengthening the Positive Brand platform through action to fuel innovation deepen consumer engagement, grow the traditional watch business, and reinvigorate our jewelry and leather categories.

Our creative teams are delivering compelling innovation to the consumer through a blend of creativity and logic that leverage our unique heritage to build the brand heat. The quarter was highlighted by the return of Fossil BigTick which reflects our traffic evolution as we draw from Fossil's rich archives. The story telling around BigTick has generated tremendous visibility from global lifestyle media in leading watch industry publication. Experiential seedings of the product that drove a nostalgic excitement and placed BigTick in the hands of media, influencer, and celebrities early on. In fact, Y2K media resonate with younger males driving social engagement and online conversion among Gen Z and millennial consumers.

We will be carrying this momentum forward with additional BigTick animation launching throughout the year. In Q2, we introduced a limited edition BigTick World Flags collection. Which leverages an engaged fan base around the global sports moment such as the FIFA World Cup and Olympics. More recently, we released our latest Star Wars collaboration on May 4, A new Mandalorian plus drawable collection is garnering attention from Star Wars superfan sci-fi and watch enthusiasts. Next up, we have exciting new collaboration with Marvel rolling out in Q3. Great storytelling remains a hallmark of the Fossil brand. Our market investments are helping us drive brand heat and new customer acquisition.

And we are amplifying our messaging around important times of the year. Our recent Mother's Day campaign focused on our iconic product offerings, Double Down minis which drove excitement around the well loved collection such as Arlo and Machine. Next month, we will be in the market with Father's Day's messages and local events. Moving now to our omnichannel initiatives, which are focused on modernizing our brand expression wholesale improving our e commerce business and optimizing our store portfolio. Our focus on full-price integrity, channel discipline and operational excellence is building traction in key areas of the business. During Q1, wholesale grew mid single digit with our core brand of traditional watch sales up high single digits in the channel.

Performance was strong with both our long term wholesale partners as well as with specialty and energy retailers. A new channel that is helping us build brand awareness and create excitement among the younger demographics. From a regional standpoint, in Q1, we saw broad based strength in both The U. S. And India. Additionally, we were pleased to see improved performance in key Asia Pacific markets such as Japan and Australia in the quarter. The results are a testament to new leadership that is advancing our commercial strategy across the region. From a high level perspective, our wholesale partner relationships are strengthened. We continue to work on full price selling and deliver compelling product as source.

In fact, our order books are building earlier and we are beginning to develop longer term plans together, demonstrating the confidence of our partners have in our brands. Our direct to consumer model keeps us close to the consumer, providing a deeper understanding of customer needs and fostering more relevant brand building. On the e commerce front, we are continuing drive channel profitability on a smaller sales base through 2 key focus areas. 1, our commitment to full price selling, and 2, initiative to strengthen the online customer journey.

This included continuous improvement to our new Fossil brand platform, with fresh content, and functional updates that enable us to showcase more cohesive brand presentation, drive customer engagement and strengthen brand perception as we aim to build scale. A great example of this is the recent launch of a new navigation across our Fossil e-commerce sites, globally. This Enables richer brand storytelling within the navigation experience and sharpened focus on our collection. Making it easier for customer to discover and shop key product stories. The enhancements to reduce friction points across the browsing journey and empower our merchandising team with greater flexibility to respond quickly to trend and key commercial moments.

In the retail channel, we closed 7 stores in Q1, and remain on track to close approximately 15 locations in 2026. It is worth noting that we have significantly scaled back our plans to downsize the portfolio as a result of improving performance in our full-price stores. It is clear that our initiative to deliver more engaging customer experience are bearing fruit In Q1, our performance was particularly strong in our full price stores. In the near term, we are further advancing our Store of the Future strategy by rolling out an expanded suite of selling tools that equip our associate with the skills needed to maximize full price sales.

Longer term, we plan to test and learn to build a refined store model that generates compelling returns and presents an opportunity for major expansion. Moving now to our core licensed brand, where we are seeing growth across the spectrum, including the Armani Group diesel and Michael Kors. I will start with the Michael Kors brand where we were pleased to see year over year growth in Q1, Productivity and newness were the momentum in the wholesale channel further supported by the ongoing work being done by the Michael Kors team to drive brand heat. Additionally, the shift toward a more competitive pricing architecture in jewelry is driving increased AUR and improve the brand position.

In Emporio Armani, the brand achieved a strong sell through across channels, driven by elevated assortment, a shift toward premium offerings, and compelling high visibility marketing campaigns. The Armani Exchange brand, healthy performance is attributable to higher full price sales strength in women's and product newness. Looking now at India, where we are successfully scaling a proven growth engine. During Q1, we executed against the key initiative we outlined on our last earnings call. Specifically, we broaden our reach with the addition of more than 70 new wholesale doors. We drove the premium position with new price points resulting in a higher mix of full price sales as well as a higher average unit retail.

We implemented a new e-commerce platform and CRM integration tool to enhance our omnichannel capabilities. And we continue to leverage our market leadership position and build brand heat through strong execution across Fossil, Armani, Diesel and Michael Kors. Moving to our second turnaround pillar, optimizing our operating model. Our teams are acting on a number of initiatives to strengthen our go to market execution. Including both operational investment and infrastructure improvement, Simplification across the organization continue as we further streamline operation rationalize our investment and consolidate our IT stack. This includes the ongoing simplification of our analytics platform which has reduced cost and enhanced our capabilities establishing the data architecture required for Agentic AI.

As part of our broader strategy, To Build A More Competitive And Profitable Model In Smaller International Geographies, Subsequent To Q End We Signed An Agreement To Transition Another International Market To A Distributor Aligning With The Best In Class Partner In South Africa. This strategy enable us to leverage the local knowledge and the expertise of regional distributors while lowering our operating expenses. Driving strong flow-through of gross profit to the bottom line. I will now turn to our third and final pillar, building shareholder value. Ongoing progress across the business is setting the stage for us to continue to drive improved profitability and deliver positive free cash flow.

Our strong start to 2026. reinforced the effectiveness and durability of our turnaround plan. The impact of simplification and focus is clear. Our brand led consumer focus model is enabling us to build a smaller, more profitable business that is positioned to return to growth in the fourth quarter of this year. The progress and momentum we saw throughout 2025 carried into 2026. With only 1 quarter of the year delivered, we are holding our guidance in light of the geopolitical climate and its potential impact on the consumer. We continue to have strong conviction in the trajectory of the business and am committed to building long-term shareholder value.

Now, I will turn the call to Randy to discuss the financials.

Randy J. Greben: Thank you, Franco. We delivered another strong quarter across the P and L. Reflecting the strength of our brand portfolio and continued traction within our turnaround pillars. While our top line outperformance was primarily driven by better than expected wholesale results, including the shift of some receipts previously anticipated in Q2 moving into Q1 we continue to make progress towards strengthening our DTC channel. In fact, facet of our business is contributing to the success of our turnaround. Net sales in Q1 totaled $218 million that is down 6% from last year.

Looking deeper, the comparison versus last year includes 7 points of unfavorable impact as we lapped the extra week in last year's first quarter as well as another 280 basis points related to the net impact of our store closure program and our smartwatch exit. Taking these factors into account, we are clearly demonstrating that the business is stabilizing and poised to return to top line growth. First quarter gross margin came in at 59.7% down 160 basis points year over year reflecting both strong product margins and our ongoing focus on full price selling. Similar to revenue, there is quite a bit to unpack as it relates to the inputs to our results.

First, we incurred higher tariff expenses this year versus 2025. While prevailing tariff rates at present remain lower than they were before this year's court ruling, they are still elevated as compared to where they were prior to Liberation Day, which you will recall was a Q2 25 event. Next, we recognize a portion of our anticipated full year minimum royalty shortfall in the quarter. As a reminder, in recent years, the GMR true-up was recognized in our second half with the majority of it being booked in Q3. Concurrent with negotiating, more favorable license agreement terms for 2026 last year,, we are now amortizing the shortfall throughout all 4 quarters.

It bears reminding that the quantum amount of shortfall is forecast to be materially lower than in recent years and should result in much more consistent quarterly gross margin we continue to anticipate being in the mid to upper 50% range. These 2 impacts higher tariff expense and license branded minimum royalties, were partially offset by the recognition of a tariff refund claim during the quarter. Of the total $5.9 million claim, $4 million was recognized as reduction to cost of sales, $900 thousand was recognized as a reduction to SG&A, and the remaining $1 million was recorded as a reduction to inventory on the balance sheet.

The majority of the $4 million cost of goods benefit is related to costs incurred in 2025 and, therefore, has been adjusted out of our operating income. Net, our Q1 gross margin is very healthy and reflects not only the power of our portfolio of brands, but also the strength of our robust supply chain. Importantly, we remain confident that we can maintain this margin profile throughout the balance of the year. it is also worth noting that we have not embedded any further refunds into our 2026 outlook. Turning now to operating expenses. We lowered SG&A dollars by 13% which exceeded our sales decline and drove expense leverage in the quarter.

The improvement is attributable to 27 fewer stores in operation versus a year ago as well as lower compensation and administrative expenses. During Q1, we closed 7 stores and expect to close-up to 15 in total this year. This would put us at 185 locations globally at year-end 2026. As you heard from Franco, we are continuing to focus on optimizing our operating model by capturing efficiencies and rationalizing investments across key areas of the business including go to market information technology. I will also point out that restructuring costs have come down considerably totaling just $2 million in Q1 26 versus $16 million a year ago.

The leverage we achieved in SG&A with costs coming out in excess of our sales decline is a tangible example of the discipline that underpins all of the efforts of the group today. And subsequent to quarter end, we have continued to fine tune the operating model. Including, as Franco mentioned, signing the agreement to transition our South Africa subsidiary to a distributor during Q2. The combination of healthy gross margins and expense control absolutely translated to the bottom line. Where we delivered another quarter of profitability. Q1 adjusted operating income came in at $10 million versus $9 million a year ago.

Turning to the balance sheet, We ended the quarter with $81 million of cash and cash equivalents, and $28 million of availability under our asset based revolver reflecting our seasonal working capital cadence. Additionally, as of quarter end, we had no utilization under our ATM program. Inventory at quarter end totaled $156 million, down 14% versus last year, which is in line with our expectations to increase turns even as we lean into more full price selling. In Q1 of this year, our cash used in operations reduced by over 50% from the same period last year, reflecting our strengthening profitability and improved working capital management. Moving now to guidance.

Strong execution against our turnaround pillars is enabling us to reiterate our outlook for the full year 2026. While results to date are in fact ahead of expectations, we believe this is prudent given the uncertainty that exists in the geopolitical environment and the potential effects on input costs consumer behavior. We continue to expect worldwide net sales to decline in the range of 4% to 6%. Of note, the net impact of store closures and the extra week in 2025 are worth about 360 basis points.

Further, we continue to anticipate that 2026 will be second half weighted and will be punctuated by an expected return to top line growth in the fourth quarter as we continue to harness the compounding benefits of our turnaround initiatives. On the bottom line, we continue to expect adjusted operating margin in the range of 3% to 5%. Lastly, we continue to expect to achieve breakeven free cash flow on a full year basis. Now I will ask the operator to open the call to Q&A.

Operator: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, kindly press 1 on your telephone keypad. To raise your hand and join the queue. If you would like to withdraw your question, simply press 1 again. If you are called upon to ask question and are listening via loud speaker on your device, please speak up your handset and ensure that your phone is not on mute when you are asking a question. Your question comes from the line Thomas Forte. From Maxim Group. Please go ahead.

Analyst (Tom Forte): Great. Thanks. So first off, Franco and Randy, congratulations on super impressive performance. I have 1 question and 1 follow-up. I will go 1 at a time. So I think you commented, Franco, in your prepared remarks that you had a return to top line growth in traditional watches which I believe is the first time in years how should we think about the sustainability of that performance?

Franco Fogliato: Tom, thank you very much. Look, we are excited. We are 1 quarter in. In particular, we are excited about the performances across traditional watches in the wholesale channel where we have been performing very well. We are still doing a lot of work from our DTC in particular with closing stores. And reducing some of the sales we were doing on e-com that were at the beginning of 2025, we still had a lot of inventory that was old and from before I joined the company. The greatest thing is not only we are making progress with the wholesale accounts, but also we are seeing we are selling at a higher AUR driving better gross margin.

So overall, we are very encouraged. I mentioned a lot of work we have done at the beginning when I joined the company, only got to market towards 2024. The pipeline in 2025 got to the market in 2025. In particular, the Nick Jonas collection, we have BigTick now in 2026, and we have a full pipeline ready to go as we enter later this year, the second half and we are working on 2027. So a lot of work we have done has been into turning around our traditional watch categories. We are very excited.

And this is honestly combined with a tailwind in the industry, in particular in the Americas region where we are a lot of younger consumers coming back to the space. Which is very encouraging for all of us. Randy, anything? The only thing that I would add is the combined power of not only having the traditional watch category perform in a manner of strength that it has not in some time, But coupling that with full price selling, you really see that flow through the gross margin.

Randy J. Greben: And this is a quarter where we have demonstrated the ability to translate that gross margin through to the bottom line. it is a it is a tangible proof point of the strategy coming together.

Analyst (Tom Forte): Excellent. And then for my follow-up, Franco, you used the words agentic AI. Which is something I have heard a lot. From Amazon, really from all the big mega cap technology companies. What are your thoughts on how you are preparing Fossil for Agentic AI and what it could mean for you in the future.

Franco Fogliato: it is a great question. Look, we are absolutely focused on driving generally speaking, AI as an opportunity for the company. In particular, Agentic AI. We are seeing we are making great progress We are at the beginning of the journey where a lot of parts in the company are from marketing, e-com, supply chain, where we are applying AI already. We have got a great vision for the company and we are just at the beginning of the journey. it is shaping the way we work. We are definitely better in the-- this is this is a different company from what we used to do.

Right now, we are focusing on execution, and Agenetic AI is an opportunity for us to improve our execution of the plan as we progress forward.

Randy J. Greben: When we created the current version of the pillars that we are using, that power this phase of our turnaround strategy. AI was at the heart, not just of growth, which is where you started this question, Tom, but also very much within pillar 2, which the optimization of the operating model. We already have a number of use cases that drive efficiency and or remove cost. And I think like a lot of companies, recognize that we are just scratching the surface. We are at the very beginning of this journey. But important to know that we are on it alongside many of our other competitors and other companies out there.

Franco Fogliato: Thank you, Franco. Thank you, Randy. Thank you very much, Tom.

Operator: Your question comes from Owen Rickert with Northland Capital Market. Please go ahead.

Analyst (Owen Rickert): Hey, guys. Congrats on a great quarter, and thanks for taking my questions here. Firstly, on BigTick, sounds like the initial launch has been great and that the rollout is going to be over a few quarters here. Where are we in that rollout right now? How many doors is it in today versus the eventual target? And secondly, on BigTick, are you seeing any evidence of a halo effect on the broader Fossil brand at accounts that are carrying BigTick?

Franco Fogliato: Yeah. Thank you very much for the question. Look, we are excited because the BigTick, particularly Y2K, has been really, really well covered from the press. We are seeing great sell out We have chosen a strategy of a very key distribution in particular with energy retailers, our DTC and stores that we feel like they are driving brand heat and brand demand. So initially, the strategy was to use our incredible archives to drive consumer back into our brand as we would be moving off the really deep activity into a full-price selling model. And this is paying off.

We will release-- we have the BigTick World Flags coming out now, which is really celebrating some of the big sports moments, in particular think about the FIFA World Cup or other events related to countries which are very exciting. We also have additional movements on BigTick coming out later this year. This has 2 effects. Continue to drive consumers towards the rich archives of the brand. And we have a unique history and heritage, but also drives a positive effect around the what we call, the icons. Because it drives brand heat to drive brand momentum.

And that is really always-- the goal has always been to build BigTick as the brand story which drives consequently sales across all our icons and is paying off.

Analyst (Owen Rickert): Got it. Thanks. And secondly for me, it sounds like Signature is launching later this year. What does the initial retail door plan look like for Signature? How selective will distribution be? And how are you thinking about inventory risk at a price point that fossils really never operated in before?

Franco Fogliato: Great question. Look, we are excited. This is going to be a limited launch We are working with strategy of scarcity. And we are driving brand heat. We are driving brand demand. We started to show some of our partners our product. They are excited about the quality of the product. So to your point, we will be very much measured on the inventory we are going to produce. We will create scarcity We will make sure that the presence and the way we come up at retail is unique and differentiated.

And we wanted this to be the pinnacle of the brand with the ultimate goal to drive brand heat credibility in the watch industry as we are a watch company with more than 40 years of history, but also drive sales on our icons.

Randy J. Greben: If I can add 1 thing, while it is a step up from where we are currently selling, the majority of our fossil timepieces, it is worth reminding that we have got a number of other brands and many of those brands participate at price points that are significantly higher than where we are aiming to launch signature. Which suggests that we have got the right supply chain in place to make sure that we are mitigating any sort of risk, buying appropriately, We will not lose the discipline that you can already see on the balance sheet, Owen, with respect to churn. So we will buy it smart. And to Franco's point, scarcity allows us to do that.

Also drives consumer demand. It is, again, a haloing effect for all of the partners that will launch that will carry it.

Analyst (Owen Rickert): Great. Super helpful. And then and then lastly for me, you guys previously called out India is the closest thing to a vertically integrated operation. Fossil really has anywhere globally. Can you just give us a sense about how you are feeling about the India business right now, just given some of the ongoing macro concerns in the region?

Franco Fogliato: Well, I have to say our India business is 1 of our strongest assets. We are very pleased with our performances. We called that out as a pillar. We remain not only a leader in the region, but we are very well performing. We are excited about the opportunities I think I spent a lot of time down in India. it is a growing industry and the watch category is very strong, and we have a leading position So no concern from our side. We were not immune with what is happening in the world, but we know our business. And, we have a competitive advantage there with probably 1 of the best team in the industry.

And we have seen great momentum.

Analyst (Owen Rickert): Awesome. Thanks for taking my questions, guys.

Franco Fogliato: Thank you, Owen. Thank you very much.

Operator: Thank you. There are no further questions at this time, so I will now turn the call back to management. For the closing comments. Please go ahead.

Franco Fogliato: Thank you everyone for joining today. We are pleased with our turnaround progress, and we look forward to updating everyone on our Q2 earning call. Thank you.

Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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