Fossil Group, Inc. announced financial results for the third quarter ended 3rd October, 2020.
“The organization continues to execute well in the face of a challenging environment. We outperformed our topline expectations in the third quarter, reflecting ongoing momentum in our digital channels and strong growth in mainland China, as well as trend improvement in the wholesale channel globally,” stated Kosta Kartsotis, Chairman and CEO.
“In addition, we are making good progress on our strategic priorities, with accelerated initiatives around our digital expansion programs and structural cost reduction efforts. Given the uncertain environment, we are remaining agile and continuing to closely manage liquidity, expenses and inventory as we position the business for future growth,” continued Kosta.
Worldwide net sales totaled $435.5 million, a decrease of 19% on a reported basis and 20% in constant currency compared to $539.5 million in the third quarter of fiscal 2019. The year-over-year decline was primarily due to COVID-19 related traffic declines in both Fossil stores and wholesale doors. Partly offsetting brick-and-mortar sales declines was growth in digital channels, with owned e-commerce websites increasing 66% and dedicated third party marketplaces growing 44%, both on a constant currency basis.
Gross profit totaled $229.8 million compared to $278.5 million in the third quarter of 2019. Gross margin increased 120 basis points to 52.8% versus 51.6% a year ago, primarily reflecting a higher mix of e-commerce sales, favorable region and product mix and favorable pricing on sell-through of older generation connected products, partially offset by heightened promotional activity and an unfavorable currency impact of approximately 120 basis points.
Operating expenses totaled $212.3 million compared to $287.7 million a year ago. Operating expenses in the third quarter of 2020 included $5.7 million of restructuring costs, primarily related to employee costs, professional services and store closures, while operating expenses in the third quarter of 2019 included $7.0 million of restructuring costs. Third quarter selling, general and administrative expenses decreased on a year-over-year basis, reflecting lower compensation, marketing and discretionary costs.
Third quarter operating income was $17.5 million compared to operating loss of $9.2 million in the third quarter of 2019. Net income totaled $16.0 million, or $0.31 per diluted share, compared to net loss of $25.9 million, or ($0.51) per diluted share, in the third quarter of 2019. Per share data included restructuring charges of $0.09 per diluted share in the third quarter of 2020 while per share data in the third quarter of 2019 included non-cash intangible asset impairment charges of $0.25 per diluted share and restructuring expenses of $0.11 per diluted share.
During the third quarter of fiscal 2020, currencies, including both the translation impact on operating earnings and the impact of foreign currency hedging contracts, unfavorably affected income per diluted share by approximately $0.09.
During 2019, the Company initiated NWF 2.0, which was designed to deliver gross margin benefits and operating expense reductions totaling $200 million over the three-year period from 2019 to 2021. As a result of the unprecedented impact of COVID-19, earlier this year the Company significantly expanded its NWF 2.0 initiative to $250 million to include additional organizational efficiencies and accelerate its digital initiatives. The Company expects to generate $100 million in expense savings in 2020.
As of 3rd October, 2020, the Company had cash and cash equivalents of $324 million and total debt of $239 million, including $162 million of borrowings under its Term Credit Agreement. Inventories at the end of third quarter 2020 totaled $360 million, a decrease of 37% versus a year ago, reflecting accelerated inventory reduction actions, primarily in older generation connected product, and proactive management of inbound receipts to align with reduced consumer demand.
As of 3rd October, 2020, the Company had total liquidity of $356 million, comprised of $324 million of cash and cash equivalents and $32 million of availability under its revolving credit facility. The Company expects to end the fourth quarter of 2020 with approximately $300 million to $325 million of cash and cash equivalents and approximately $30 million of availability under its revolving credit facility.
The Company anticipates that impacts from COVID-19 will continue to pressure sales in the fourth quarter of 2020, with ongoing strength in e-commerce channels offset by contraction in Fossil retail stores and the wholesale channel. Worldwide net sales are expected to decline in the range of 40% to 30%.