FOSL - NASDAQ

Good afternoon, ladies and gentlemen, and welcome to the Fossil Group, Inc. Fourth Quarter and Full Year 2025 Earnings Call. At this time, all parties are in listen-only mode. This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company. I will now turn the call over to Christine Greany of the Blueshirt Group to begin.

Hello, everyone, and thank you for joining us. With me on the call today are Franco Fogliato, Chief Executive Officer, and Randy Greben, Chief Financial Officer. Before we begin, I would like to remind you that information made available during this conference call contains forward-looking information, and actual results could differ materially from those discussed during this call. Fossil Group, Inc.’s policy on forward-looking statements and additional information concerning a number of factors that could cause actual results to differ materially from such statements is readily available in the company’s Form 8-K, 10-Q, and 10-K reports filed with the SEC. In addition, Fossil Group, Inc. assumes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. During today’s call, we will refer to constant currency results as well as certain non-GAAP financial measures. Please note that you can find a reconciliation of actual results to constant currency results and other information regarding non-GAAP measures discussed on this call in Fossil Group, Inc.’s earnings release, which was filed today on Form 8-K and is available in the Investors section on fossilgroup.com. I will now turn the call over to Franco to begin.

Hello, everyone, and thank you for joining us. 2025 was a transformative year for the company, defined by operational excellence and financial performance that exceeded our expectations. We took bold steps to advance our turnaround plan, delivering strong execution against the three pillars we laid out just one year ago. Those include refocusing on our core, rightsizing our cost structure, and strengthening our balance sheet. We built a brand-led, consumer-focused operating model, assembled an exceptional management team, and established a culture of accountability. We recently appointed a new Chief People Officer, who will be a valuable part of our efforts to continue strengthening our organizational capabilities, culture, and customer-first mindset. I am incredibly proud of our teams and want to thank everyone across the organization for their energy, passion, and hard work, and for upholding our commitment to keep the consumer at the center of everything we do. Our turnaround efforts gained traction quickly, enabling us to end the year ahead of our initial plan. We delivered full-year performance above the updated guidance we provided halfway through the year. Net sales totaled $1.0 billion, gross margin expanded 380 basis points to 55.9%, and we reduced SG&A by over $100,000,000. This drove a positive adjusted operating income of $11,000,000, a year-over-year improvement of $48,000,000. Now I will turn to the operating highlights and key accomplishments of 2025. First and foremost, we created a positive brand platform for the future. We accomplished this by improving the customer journey and delivering a robust pipeline of product innovation, all supported by powerful heritage brand storytelling. At the same time, we successfully established a full-price selling model by radically transforming our promotional cadence across channels. This enabled us to return the business to healthy gross margin in the mid-50s and improve the profitability in both our wholesale and direct-to-consumer channels. Importantly, this has strengthened our wholesale partner relationships, creating a powerful flywheel effect that is delivering benefits across all channels. Next, we reenergized our core licensed brands Michael Kors, Emporio Armani, Armani Exchange, and Diesel. Most notably, strategic investment in point of sale and a renewed focus on specialty watch retail enabled us to improve our in-store presentation and performance in the wholesale channel. We also drove momentum in our traditional watch business by prioritizing our most scalable markets in the wholesale channel, including the U.S. and India. This resulted in wholesale traditional watch growth in our core brands of 2% globally for the full year in 2025. At the same time, we took clear action to rightsize our cost structure and instituted a culture of strict cost control. Lastly, and as importantly, we transformed our balance sheet. We now have the runway and flexibility to support the next phase of our turnaround, build a sustainable, profitable business model, and deliver long-term value creation. We have entered 2026 well positioned to leverage our foundational assets, including our 40-plus-year heritage, iconic brand, innovative design, global reach, and talented teams. Also notable, the industry is experiencing strong momentum across markets and demographics. At the same time, our comeback is capturing increasing attention from consumers, partners, and the press. Just last month, I was at the Inhorgenta watch and jewelry show in Munich, where many of our brands were center stage. In 2026, we will be making more bold moves on our journey to reinvent Fossil Group, Inc. and lead the industry. It is an exciting time for the company, as we continue to foster a collaborative, creative, and energetic culture, accountability, and a stronger commitment to win. We are turning the page to a new chapter and evolving our three strategic pillars as follows: returning to profitable growth, optimizing our operating model, and building shareholder value. Over the next three years, this evolution of our turnaround is expected to generate a return to top-line growth, high single-digit adjusted operating margin, and positive free cash flow. More on our financial outlook shortly. But first, let us talk about the initiatives we will be executing against to further advance our turnaround. Within our first pillar, returning to profitable growth, our teams will be focusing on defined initiatives across the positive brand platform to fuel innovation, deepen consumer engagement, grow the traditional watch business, and reinvigorate our jewelry and leather categories. In 2026, we will be fueling innovation through design, technology, and storytelling. This includes reigniting key icons, continuing to delight our customers with culturally relevant collaborations, reviving one of Fossil’s most sought-after Y2K innovations, and introducing a selective group of premium products. Let me take you through the roadmap. Starting with our watch icons, which make up a significant portion of our business, we will be innovating and expanding upon key collections including our Everett, Arlo, Machine, and Raquel platforms and our watch rings. Additionally, we will be doubling down on our Minis collection across all of our top women’s platforms. Following the success of 2025 collaborations such as Fantastic Four, Galactus, Minecraft, Xiaobai, and Superman, we will continue activating culturally relevant partnerships with both new and returning properties in 2026. These collaborations deliver highly engaged audiences, customer acquisition at scale, and meaningful earned media. Importantly, as we anniversary successful 2025 partnerships, we are focusing on converting collaboration shoppers into long-term Fossil customers, improving retention and lifetime value. One of our most significant introductions this year is the return of Fossil BigTick, a bold animated movement that combines analog craft with digital innovation. Originally introduced in the late 1990s, BigTick is one of Fossil’s most recognizable and emotionally resonant designs. The designs are geared towards the millennial watch consumer nostalgic for Y2K, Gen

Thank you, Franco. 2025 was a year of tremendous progress on multiple fronts. I am pleased that we gained strong traction on our turnaround initiatives, delivered financial results ahead of our expectations, and transformed our balance sheet. Our 2025 performance reflects the strength of our brands, strategies, and teams, and demonstrates that we have the right building blocks in place to drive long-term growth and profitability. Now I will turn to the specifics of our fourth quarter and full-year performance. Net sales for Q4 totaled $274,000,000, reflecting a decline of 20%, including four points of impact from store closures. For the full year 2025, net sales were $1,000,000,000, including 330 basis points of impact from store closures and 80 basis points of impact from the exit of connected watches. Fourth quarter gross margin came in at 57.4%. That is up 350 basis points from last year and reflects the ongoing strength of product margins as well as our focus on full-price selling, which allowed us to drive structurally higher margins over the past 12 to 18 months. Indeed, full-year gross margin for 2025 was 55.9%, representing 380 basis points of expansion versus 2024, even with the continued and compounded headwind of minimum royalty guarantee shortfalls, which, as previously shared, are expected to be materially abated in full-year 2026. In 2025, we executed against several initiatives that drove a meaningful improvement in gross margin. Specifically, we substantially lowered our discount rate, strengthened our supply chain, negotiated better terms with key suppliers, retooled our open-to-buy processes, and implemented targeted price increases. I am pleased to note that all of these actions not only improved our underlying gross margin profile but also enabled us to largely mitigate tariff headwinds throughout the year. The fact that we were able to absorb the impact of tariffs in 2025 while delivering a return to healthy gross margins demonstrates the agility of our supply chain and is a testament to our teams around the globe. Looking at 2026, we expect to continue to offset the current rate structure through our mitigation strategies and have not embedded material rate changes or any tariff refunds into our forward-looking guidance. Moving now to operating expenses. Strict cost control enabled us to lower SG&A expenses by 16% versus prior year. The improvement is attributable to 49 fewer stores in operation versus a year ago, as well as lower compensation and administrative expenses. During Q4, we closed six additional stores, ending the year with 199 locations globally. All 49 closures in 2025 occurred at natural lease expiration with minimal closing costs. Given the improving performance of our fleet, we expect to reduce our number of store closures down to approximately 15 locations this year. As we continue to focus on improving our cost structure, our teams are acting with financial discipline and rigor. I am pleased to note that on a full-year basis, we slightly over-delivered on our full-year SG&A savings target of $100,000,000.

We will now begin the question and answer session. Our first question comes from the line of Tom Forte with Maxim Group. Tom, please go ahead.

Great, thanks. Franco and Randy, congrats on the strong quarter and year. I have three questions. I will go one at a time. I apologize to the extent that you may have commented on these during the prepared remarks. Question number one, what were the drivers of gross margin in the quarter, and what gives you confidence the improvements are sustainable?

Hi, Tom. Thank you. We are excited. Look, we made significant progress. I think you remember, we always said that the fourth quarter last year was the beginning of the new strategy toward the end of the fourth quarter. We wanted to build a smaller company, more profitable. We wanted to change the model from very promotional into a full-price selling model. And we are continuing with this strategy. We are very excited. I am thankful for the work the teams have done globally to drive this strategy, and the strategy is paying very much shareholder value. Not only have we seen a better gross margin with our DTC, but we have seen incredible AUR increases across the marketplace as we become less promotional through the marketplace. We are excited. We are a product and marketing company. We built greater relationships with our partners. And I have just got back from the trade show, as I mentioned in my earlier remarks. There is great momentum. We have seen customers that we have not done business with for years. They are coming back to us now because we are leading by example. So very, very encouraged.

Thank you, Franco. And, Tom, wonderful to hear from you. The only thing that I would add is, while Franco likes to say 2025 is in the past and we are now living in 2026, if you look at 2025, our gross margin performance was actually quite sustainable and consistent, other than the dip that we took in the third quarter, which, as we have spoken about, was related to royalty shortfalls. As we have successfully renegotiated our minimum guarantees for 2026, that third-quarter divot should not be in place, and you should see that continued sustained performance. So, really, the past is a very positive indication. We have already locked in the improvement that we were seeking for 2026.

Alright, wonderful, and I appreciate both of you answering all my questions. Alright, so question number two. It looks like you are guiding to an inflection point in sales and a return to growth in 2026. What gives you confidence you will be able to achieve that goal?

Yeah, look. The last eighteen months have been a transformation of the company. We are in the middle of the journey. We see the light at the end of the tunnel, a smaller company returning to growth. And we are excited about the opportunities. I keep saying I am excited about what we have done, but that is history. I am excited about what we are delivering to the market now in terms of innovation. But I guarantee you, we are more excited about what is coming next. You know, the pipeline takes eighteen months to get there. We are so excited about the opportunities. We think as we are driving a smaller DTC, we have seen a very good return from our wholesale channel, beyond our expectations in 2025. Consumers are very resilient. They love our portfolio of brands. Customers have a long-term relationship with the company. We are driving the company to get back into growth because the company has incredible assets and incredible brands.

Alright, excellent. Alright, so third and final question for me. It seems like you have already made a number of adjustments to manage expenses. In the next evolution of your turnaround plan, you talk about further improving the cost structure. What more can you do that you have not already done?

Yeah, it is a great question. Let me take the lead, and then I will have Randy jump in, and he is driving that. Look, as an organization, we are driving continuous improvement that we are really anchoring into the discipline of managing the company. We will constantly evaluate what we do and constantly find a better way to do that. It is all about the innovation, the way we bring the product to market, the focus on driving the business. We are so pleased because, honestly, since we refinanced the business in November, this is a different company. Everything we do is about how we grow and become more efficient. We are very, very pleased. I think there are plenty of opportunities still there. We are looking at store performance, market performance, channel performance. This is really part of what we want to drive—accountability and focus on driving shareholder value.

So a few things that I would like to add, if I could. If you think about the work that we have done to manage expenses, it has been very broad, and we are quite proud of the breadth and depth of where we have made adjustments to our business. One of the things that is important as we look into the future is the continued optimization of the business. And if you think about ways that that may play out, we have lots of opportunity as it relates to the simplification of our technology stack, places in which we can leverage automation or AI. And then, as you move forward into the more medium-term horizon of our turnaround, that is when we start to play a little bit of offense as well, and we get the benefit of sales leverage as we return to growth.

Thank you for taking my questions.

Thank you very much.

Your next question comes from the line of Owen Rickert with Northland Capital Markets. Owen, please go ahead.

Hey, guys. Congrats on a great quarter, and the outlook is pretty solid here. I have about four questions for you. I guess, firstly, you know, deepening consumer engagement is cited as a key growth driver going forward. Can you just maybe elaborate on what that means tactically? Is that more marketing spend in the first half of the year? And, I guess, how are you measuring an engagement improvement?

Yeah, great. Hi, Owen. Thanks again. Look, we are excited that we are a product and marketing company. Part of the strategy in the turnaround plan was to refocus the company on the fundamentals. When I joined the company and we assembled a world-class management team, we clearly said product takes time. And we saw some of that coming through fall 2025. Really, spring 2026 is very exciting. You have seen we launched BigTick with Fossil. It is an incredible success, and we are just at the beginning. So we think innovation in product and the way we bring storytelling to the market will be the key differentiator. Think about the animation we just launched with BigTick. This is, to us, just the beginning. When I think about our core licensed brands, which is really the second pillar of returning to growth—think about Michael Kors, Armani, Diesel—those are world-class brands that consumers are shopping every day. We see good momentum. We are investing in jewelry. We are investing in traditional watches. We see great momentum there. And the third pillar we are really, probably to some extent, proud of is really our Indian market that has been overperforming the company. India is the fourth-largest economy in the world and has been one of the fastest growing in the last few years. It is an industry that is growing. We are very well positioned there. We have seen strong growth, and we think that market will continue to grow for us. So very excited. It is early days. Look, we are here for the long run. We think that as we get the company back to the fundamentals, the opportunity is there, and we are really focused on driving these performances going forward.

The only thing that I would add is, Owen, you suggested in your question that we would be spending more on marketing. Our anticipation is actually that we will be spending slightly less on marketing in 2026. We will certainly be spending the marketing dollars that we do spend better. We will be more optimized in terms of the way we deploy our funds—smarter media mix modeling, smarter use of ambassadors. We have got a robust pipeline of initiatives that we expect to really drive efficiency as we work through this year and into the next.

Got it. Thanks, guys. Next for me, you mentioned those three pillars of the next evolution—profitable growth, optimizing the operating model, and building that shareholder value. I guess, how do you think about sequencing those? Is profitable growth the prerequisite for everything else, or are the three pillars running in parallel?

Look. Let me take this, and then I will leave Randy to dig in and give you more visibility. Look, we always said that returning the company to growth is a priority. We think the reason why we have done everything we have done so far is because we believe the company has an opportunity to return to growth. We also see the industry coming back, which is very encouraging. And it is very pleasing to see younger generations coming back into traditional watches. All of this is very exciting. The first eighteen months for me with the company have been simply fantastic. They have been exciting. And I look every day at all the opportunities, and I think, we are doing the right work to focus on what matters, which is really profitable sales. And once we are really driving this and we see our DTC stabilizing because we are less promotional and we continue to invest in our wholesale channel, there is no reason why the company should not grow given the strong assets we have here.

Owen, I do not necessarily view them as sequential. There really should be a flywheel effect. If you think about the third pillar, building shareholder value, that should be borne through an improvement in profitability, our ability to grow and then strategically invest for growth, and, of course, to generate cash, all borne through efficiencies in the operating model and growing the top line. So much less about sequencing, more about getting all three to fuel each other.

Got it. Got it. Super helpful, guys. And then we are seeing some pretty nice tailwinds with consumer adoption. I guess, as you think about the consumer you are trying to target, has your view of that target consumer for, I guess, the Fossil brand and licensed brands evolved through this transformation process or this turnaround process at all?

Owen, thanks for the question. This is probably the most impressive thing I have seen in my career: the resilience of our consumer. Literally, we moved from a model that was highly dependent on promotional sales into a model highly dependent on full-price sales. And we have seen no slowdown. We have seen consumers coming back, buying our product. We saw that we lost some consumers in our Fossil brand, and, to be honest, I am not even sure we wanted them because they were looking for deals. And we got back some of the consumers we lost because we were very promotional. And there is only one way of defining that: the resilience of our brand. So we are very pleased with this. So thanks for asking the question because every time we discuss internally, that is probably the biggest and best surprise we had. I would have thought we would have been impacted more, but it did not happen. The consumer came back, and they were, “We love what you guys are doing for Fossil.” And the BigTick response is just a phenomenon, as we are capturing not only the cohort of consumers that saw BigTick in the 1990s, but we are catching this new generation that wants a real brand. So very exciting. Thanks for asking.

Great. Great. And then last for me, guys. When you talk to your wholesale partners today versus, let us say, a year ago, how has that conversation been evolving? Are they leaning in more, asking for more products, more marketing support? What is the qualitative feel of those relationships right now?

It is a great question. Look, we are on the phone with them, obviously, weekly. Some of them are decades-long relationships. They are impressed. They are impressed with the speed of change we have driven with the company. They love the consistency. And I recall—I think I said this in the previous call—the first time I met with them, in October or November 2024, they said, “We love your story, but we have heard the story before.” When I met them again in Q1 2025, they said, “Well, you have been consistent. Keep going this way.” And now they recognize we are walking the talk. And they love it. And, to be honest, the results are paying. They are seeing more sales support for our brands. They are seeing more margin because they are less promotional. And suddenly, from being probably not very inspiring, we went to leading by example. And we have great relationships. I was in Munich, in Germany, for the trade show—jewelry and watch trade show—and, literally, a year ago, they were happy we were back, but this year was really surprising. They are coming, and we literally had customers that had not done business with us for years. They are back and want to deal with Fossil Group, Inc. You know, this company has got a great reputation, and it was one of the reasons I thought this company had an opportunity to have a much stronger future. And I think the first indications from our partners are very encouraging.

Great. Thanks for taking my questions, guys.

Thank you, Owen. Thank you so much.

That concludes our question and answer session. I will now turn the call back over to Franco for any closing remarks. Franco?

Thank you, everyone, for listening to today’s call. We are excited about where we are headed and look forward to talking with you after the Q1 results.