A weak watch market — for each conventional kinds and smartwatches — is placing the squeeze on Fossil Group Inc.
Debt watchdog Customary & Poor’s lower the corporate’s credit standing to “CCC-plus” from “B-minus,” citing “persevering with gross sales declines, depressed profitability, and higher-than-expected money burn, which has led to very excessive leverage.”
The outlook on the credit standing is destructive.
Final month the watchmaker reported a 13 p.c drop in second-quarter gross sales to $322 million with broad-based declines and adjusted losses earlier than curiosity, taxes, depreciation and amortization of $15.4 million.
Fossil employed Alvarez & Marsal to work on a change plan that has the group working with a digital-first mindset in its operations, shifting shortly and prioritizing shareholder worth.
The corporate can also be lowering its value base and backing away from its smartwatch enterprise, which was as soon as seen as a bridge to the longer term.
“Bloated retailer inventories within the U.S. and Europe have slowed demand in Fossil’s wholesale enterprise,” S&P stated. “We additionally notice greater than 30 web retailer closures because the prior-year interval and Fossil’s strategic choice to cease future improvement of smartwatches, which dropped greater than 45 p.c in the newest quarter.”
All of that’s anticipated to result in persevering with gross sales declines.
“We view the corporate’s capital construction as unsustainable, forecasting destructive to minimal free money move era,” the score company stated.
“Whereas we anticipate some enchancment in margins over the subsequent 12 months from Fossil’s transformation program, we don’t anticipate these advantages will materialize till 2024, resulting in constrained EBITDA era by fiscal 2024,” S&P stated. “In consequence, we forecast destructive free working money move of about $50 million in fiscal 2023.”
Fossil ended its second quarter on July 1 with $132 million of money and $73 million obtainable underneath its revolving credit score facility.
CCC-rated corporations are deemed to be “presently susceptible” and depend on favorable situations to satisfy their monetary commitments.
S&P stated it might decrease its score on Fossil once more if it sees a “default situation” inside 12 months.
“This might happen if demand doesn’t stabilize or the corporate falters on its transformation plan, limiting prospects for sustained constructive free money move era,” S&P stated.
Shares of Fossil fell 3.1 p.c to $2.19 on Friday, giving the corporate a market capitalization of about $115 million.
