Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of the financial condition and results of operations of Fossil Group, Inc. and its subsidiaries for the thirteen and thirty-nine week periods ended October 2, 2021 (the "Third Quarter" and "Year To Date Period") as compared to the thirteen and forty week periods ended October 3, 2020 (the "Prior Year Quarter" and "Prior Year YTD Period"). This discussion should be read in conjunction with the condensed consolidated financial statements and the related notes thereto.
General
We are a global design, marketing and distribution company that specializes in consumer fashion accessories. Our principal offerings include an extensive line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts, and sunglasses. In the watch and jewelry product categories, we have a diverse portfolio of globally recognized owned and licensed brand names under which our products are marketed.
Our products are distributed globally through various distribution channels including wholesale in countries where we have a physical presence, direct to consumer through our retail stores and commercial websites and through third-party distributors in countries where we do not maintain a physical presence. Our products are offered at varying price points to meet the needs of our customers, whether they are value-conscious or luxury oriented. Based on our range of accessory products, brands, distribution channels and price points, we are able to target style-conscious consumers across a wide age spectrum on a global basis.
We operate our business in three segments which are divided into geographies. Net sales for each geographic segment are based on the location of the selling entity and each reportable segment provides similar products and services.
Americas: The Americas segment is comprised of sales from our operations in the United States, Canada and Latin America. Sales are generated through diversified distribution channels that include wholesalers, distributors, and direct to consumer. Within each channel, we sell our products through a variety of physical points of sale, distributors and e-commerce channels. In the direct to consumer channel, we had 163 Company-owned stores as of the end of the Third Quarter and an extensive collection of products available through our owned websites.
Europe: The Europe segment is comprised of sales to customers based in European countries, the Middle East and Africa. Sales are generated through diversified distribution channels that include wholesalers, distributors and direct to consumer. Within each channel, we sell our products through a variety of physical points of sale, distributors, and e-commerce channels. In the direct to consumer channel, we had 128 Company-owned stores as of the end of the Third Quarter and an extensive collection of products available through our owned websites.
Asia: The Asia segment is comprised of sales to customers based in Australia, Greater China, India, Indonesia, Japan, Malaysia, New Zealand, Singapore, South Korea and Thailand. Sales are generated through diversified distribution channels that include wholesalers, distributors and direct to consumer. Within each channel, we sell our products through a variety of physical points of sale, distributors, and e-commerce channels. In the direct to consumer channel, we had 83 Company-owned stores as of the end of the Third Quarter and an extensive collection of products available through our owned websites.
Our consolidated gross profit margin is 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 watch and jewelry offerings produce higher gross profit margins than our 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, and connected products carry relatively lower margins than traditional products. 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.
Our business is subject to the risks inherent in global sourcing supply. Certain key components in our products come from limited sources of supply, which exposes us to potential supply shortages that could disrupt the manufacture and sale of
our products. Any interruption or delay in the supply of key components could significantly harm our ability to meet scheduled product deliveries to our customers and cause us to lose sales. Interruptions or delays in supply may be caused by a number of factors that are outside of our and our contractor manufacturers' control.
COVID-19: Our business operations and financial performance continue to be materially impacted by COVID-19. The COVID-19 pandemic has negatively affected the global economies, disrupted global supply chains and financial markets, and led to significant travel and transportation restrictions, including mandatory closures of non-essential businesses and orders to “shelter-in-place.” We remain focused on protecting the health and safety of our employees, customers and suppliers to minimize potential disruptions and supporting the community to address challenges posed by the global COVID-19 pandemic. The total impact of the pandemic on our business is uncertain and depends in part on future developments including the duration and spread of COVID-19, the availability and acceptance of vaccines and continuing actions taken by governmental authorities to control the outbreak and mitigate its impact, including effects of any vaccine mandates, restrictions on movement and commercial activities and further stimulus and unemployment benefits.
Supply Chain: We rely on domestic and foreign suppliers to provide us with merchandise in a timely manner and at favorable prices. Among our foreign suppliers, China is the source of a substantial majority of our imports. We have experienced, and expect to continue to experience, increased international transit times, particularly for our leathers products and packaging, and increased shipping costs for a majority of our products. A disruption in the flow of our imported merchandise from China or a material increase in the cost of those goods or transportation without any offsetting price increases may significantly decrease our profits.
Data Security: We depend on information technology systems, the Internet and computer networks for a substantial portion of our retail and e-commerce businesses, including credit card transaction authorization and processing. We also receive and store personal information about our customers and employees, the protection of which is critical to us. In the normal course of our business, we collect, retain, and transmit certain sensitive and confidential customer information, including credit card information, over public networks. Despite the security measures we currently have in place, our facilities and systems and those of our third party service providers have been, and will continue to be, vulnerable to theft of physical information, security breaches, hacking attempts, computer viruses and malware, ransomware, phishing, lost data and programming and/or human errors. To date, none of these risks, intrusions, attacks or human error have resulted in any material liability to us. While we carry insurance policies that would provide liability coverage for certain of these matters, if we experience a significant security incident, we could be subject to liability or other damages that exceed our insurance coverage, and we cannot be certain that such insurance policies will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim.
Business Strategies and Outlook: Notwithstanding the COVID-19 pandemic, we plan to execute the following strategies to enhance our brands, grow our revenue and improve profitability. The first strategic initiative is to increase brand excitement by crafting compelling stories that build upon brand equities for both owned and licensed brands across our product categories. Key to this strategy is our ongoing effort in innovation in our product categories and marketing capabilities, where we aim to build larger communities of brand loyalists. Our second strategic initiative is to increase digital engagement and online sales. We continue to invest in our owned e-commerce sites around the world and in third party marketplaces to enhance our direct to consumer engagement, which we believe can build long-term customer value. Our third strategic initiative is to expand our opportunity in mainland China and India. In these countries, we are continuing to execute against a strategy centered around localized marketing and segmented assortments. Although the impact of COVID-19 is likely to disrupt our growth trajectory in the short to intermediate term, we continue to view mainland China and India as compelling long-term opportunities. Our fourth strategic initiative is to optimize our operations. We initiated the New World Fossil – Transform to Grow (“NWF 2.0”) initiative in 2019 aimed to further simplify our operations and to re-allocate resources toward growth, and we completed our $250 million in run-rate savings goal in 2021. In addition to our NWF 2.0 program, we expect to optimize our operations with further reductions to our store footprint and increased focus on inventory management and supply chain efficiency.
Notes Offering: On November 3, 2021, we entered into an underwriting agreement with B. Riley Securities, Inc., as representative of the several underwriters named therein, providing for the issuance and sale (the “Notes Offering”) of $140.0 million aggregate principal amount of our 7.00% Senior Notes due 2026 (the “Senior Notes”) plus up to an additional $10.0 million aggregate principal amount of Senior Notes pursuant to an option to purchase additional notes. The Senior Notes were offered pursuant to our shelf registration statement on Form S-3 (Registration No. 333-259352), which was declared effective by the Securities and Exchange Commission on September 30, 2021.
On November 8, 2021, we used the majority of the net proceeds from the Notes Offering to repay all of the outstanding borrowings under the Term Credit Agreement (as defined below). In connection with the repayment of the outstanding borrowings under the Term Credit Agreement, we incurred prepayment fees and accrued interest costs of $2.6 million and wrote off $7.1 million of debt issuance costs and $4.6 million of original issuance discount related to the Term Credit Agreement. The remaining net proceeds will be used for general corporate purposes.
For a more complete discussion of the risks facing our business, see “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K/A for the fiscal year ended January 2, 2021 and "Part II, Item 1A. Risk Factors" of this Quarter Report on Form 10-Q.
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 discussions contain 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 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. We provide constant currency financial information and the most directly comparable GAAP measure where applicable.
Comparable Retail Sales
Both stores and our own e-commerce sites are included in comparable retail sales in the thirteenth month of operation. Stores that experience a gross square footage increase of 10% or more due to an expansion and/or relocation are removed from the comparable retail sales base, but are included in total sales. These stores are returned to the comparable retail sales base in the thirteenth month following the expansion and/or relocation. Comparable retail sales are calculated on a comparable
calendar period. Therefore, the percentage change in comparable sales for 2021 were calculated on a 39-to-39 week basis to
normalize the 40-week Prior Year YTD Period with the 39-week Year To Date Period. Comparable retail sales also exclude the effects of foreign currency fluctuations.
Results of Operations
Quarterly Periods Ended October 2, 2021 and October 3, 2020
Consolidated Net Sales. Net sales increased $56.3 million, or 12.9% (11.2% in constant currency), for the Third Quarter as compared to the Prior Year Quarter. In the Third Quarter, digital sales, which include sales from our owned e-commerce channels, third-party e-commerce platforms and wholesale dot com, were 40% of worldwide net sales. Digital sales increased 29% (28% in constant currency) in the Third Quarter as compared to the Prior Year Quarter. Global comparable retail sales decreased 1% primarily due to sales declines in our owned e-commerce business partially offset by sales growth in retail stores. We have reduced our store footprint by 57 stores since the end of the Prior Year Quarter. During the Third Quarter, we closed 13 stores and opened 1 new store. The translation of foreign-based net sales into U.S. dollars increased reported net sales by $7.5 million, including favorable impacts of $3.5 million, $2.4 million and $1.6 million in our Asia, Europe and Americas segments, respectively, in the Third Quarter as compared to the Prior Year Quarter.
The following table sets forth consolidated net sales by segment (dollars in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended October 2, 2021
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|
For the 13 Weeks Ended October 3, 2020
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|
Growth (Decline)
|
|
|
Net Sales
|
|
Percentage
of Total
|
|
Net Sales
|
|
Percentage
of Total
|
|
Dollars
|
|
Percentage As Reported
|
|
Percentage Constant Currency
|
|
Americas
|
$
|
193.7
|
|
|
39.4
|
%
|
|
$
|
175.1
|
|
|
40.2
|
%
|
|
$
|
18.6
|
|
|
10.6
|
%
|
|
9.7
|
%
|
|
Europe
|
165.9
|
|
|
33.7
|
|
|
135.3
|
|
|
31.1
|
|
|
30.6
|
|
|
22.6
|
|
|
20.8
|
|
|
Asia
|
129.5
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|
|
26.3
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|
|
119.7
|
|
|
27.5
|
|
|
9.8
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|
|
8.2
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|
|
5.3
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|
Corporate
|
2.7
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|
|
0.6
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|
|
5.4
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|
|
1.2
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|
(2.7)
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|
|
(50.0)
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|
|
(50.0)
|
|
|
Total
|
$
|
491.8
|
|
|
100.0
|
%
|
|
$
|
435.5
|
|
|
100.0
|
%
|
|
$
|
56.3
|
|
|
12.9
|
%
|
|
11.2
|
%
|
Net sales information by product category is summarized as follows (dollars in millions):
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|
|
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|
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|
|
|
|
|
|
For the 13 Weeks Ended October 2, 2021
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For the 13 Weeks Ended October 3, 2020
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|
|
|
|
|
|
|
|
|
|
Growth (Decline)
|
|
|
Net Sales
|
|
Percentage
of Total
|
|
Net Sales
|
|
Percentage
of Total
|
|
Dollars
|
|
Percentage As Reported
|
|
Percentage Constant Currency
|
|
Watches
|
$
|
393.7
|
|
|
80.0
|
%
|
|
$
|
356.6
|
|
|
81.9
|
%
|
|
$
|
37.1
|
|
|
10.4
|
%
|
|
8.7
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%
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|
Leathers
|
36.4
|
|
|
7.4
|
|
|
37.7
|
|
|
8.7
|
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|
(1.3)
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|
|
(3.4)
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|
|
(4.5)
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|
Jewelry
|
52.5
|
|
|
10.7
|
|
|
28.9
|
|
|
6.6
|
|
|
23.6
|
|
|
81.7
|
|
|
78.9
|
|
|
Other
|
9.2
|
|
|
1.9
|
|
|
12.3
|
|
|
2.8
|
|
|
(3.1)
|
|
|
(25.2)
|
|
|
(26.0)
|
|
|
Total
|
$
|
491.8
|
|
|
100.0
|
%
|
|
$
|
435.5
|
|
|
100.0
|
%
|
|
$
|
56.3
|
|
|
12.9
|
%
|
|
11.2
|
%
|
The following table sets forth the number of stores on the dates indicated below:
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|
|
|
|
|
|
October 3, 2020
|
|
Opened
|
|
Closed
|
|
October 2, 2021
|
|
Americas
|
189
|
|
1
|
|
27
|
|
163
|
|
Europe
|
153
|
|
1
|
|
26
|
|
128
|
|
Asia
|
89
|
|
0
|
|
6
|
|
83
|
|
Total stores
|
431
|
|
2
|
|
59
|
|
374
|
Americas Net Sales. Americas net sales increased $18.6 million, or 10.6% (9.7% in constant currency), during the Third Quarter in comparison to the Prior Year Quarter. In the region, sales increased in the U.S. and declined in Mexico and Canada. Sales increased in our wholesale, third party e-commerce and retail stores channels, which more than offset a sales decrease in our owned e-commerce business. Comparable retail sales increased moderately during the Third Quarter, driven by traffic increases in our retail stores compared to the Prior Year Quarter.
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):
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|
|
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended October 2, 2021
|
|
For the 13 Weeks Ended October 3, 2020
|
|
|
|
|
|
|
|
|
|
|
Growth (Decline)
|
|
|
Net Sales
|
|
Percentage
of Total
|
|
Net Sales
|
|
Percentage
of Total
|
|
Dollars
|
|
Percentage As Reported
|
|
Percentage Constant Currency
|
|
Watches
|
$
|
150.2
|
|
|
77.6
|
%
|
|
$
|
142.9
|
|
|
81.6
|
%
|
|
$
|
7.3
|
|
|
5.1
|
%
|
|
4.1
|
%
|
|
Leathers
|
23.4
|
|
|
12.1
|
|
|
22.3
|
|
|
12.7
|
|
|
1.1
|
|
|
4.9
|
|
|
4.0
|
|
|
Jewelry
|
18.3
|
|
|
9.4
|
|
|
8.0
|
|
|
4.6
|
|
|
10.3
|
|
|
128.8
|
|
|
127.5
|
|
|
Other
|
1.8
|
|
|
0.9
|
|
|
1.9
|
|
|
1.1
|
%
|
|
(0.1)
|
|
|
(5.3)
|
|
|
0.0
|
|
|
Total
|
$
|
193.7
|
|
|
100.0
|
%
|
|
$
|
175.1
|
|
|
100.0
|
%
|
|
$
|
18.6
|
|
|
10.6
|
%
|
|
9.7
|
%
|
Europe Net Sales. Europe net sales increased $30.6 million, or 22.6% (20.8% in constant currency), during the Third Quarter in comparison to the Prior Year Quarter. Across Europe sales increased in most major markets, with the largest increases in Germany and the UK. Wholesale and e-commerce channel sales increased strongly while our retail store channel sales declined moderately. Despite an increase in foot traffic in the Third Quarter as compared to the Prior Year Quarter, comparable retail sales declined slightly.
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):
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended October 2, 2021
|
|
For the 13 Weeks Ended October 3, 2020
|
|
|
|
|
|
|
|
|
|
|
Growth (Decline)
|
|
|
Net Sales
|
|
Percentage
of Total
|
|
Net Sales
|
|
Percentage
of Total
|
|
Dollars
|
|
Percentage As Reported
|
|
Percentage Constant Currency
|
|
Watches
|
$
|
129.8
|
|
|
78.2
|
%
|
|
$
|
105.2
|
|
|
77.8
|
%
|
|
$
|
24.6
|
|
|
23.4
|
%
|
|
21.6
|
%
|
|
Leathers
|
7.2
|
|
|
4.3
|
|
|
8.1
|
|
|
6.0
|
|
|
(0.9)
|
|
|
(11.1)
|
|
|
(12.3)
|
|
|
Jewelry
|
25.6
|
|
|
15.4
|
|
|
18.6
|
|
|
13.7
|
|
|
7.0
|
|
|
37.6
|
|
|
36.0
|
|
|
Other
|
3.3
|
|
|
2.1
|
|
|
3.4
|
|
|
2.5
|
%
|
|
(0.1)
|
|
|
(2.9)
|
|
|
(5.9)
|
|
|
Total
|
$
|
165.9
|
|
|
100.0
|
%
|
|
$
|
135.3
|
|
|
100.0
|
%
|
|
$
|
30.6
|
|
|
22.6
|
%
|
|
20.8
|
%
|
Asia Net Sales. Net sales in Asia increased $9.8 million, or 8.2% (5.3% in constant currency), during the Third Quarter in comparison to the Prior Year Quarter. Sales increased in our wholesale and e-commerce channels, which more than offset a sales decrease in our retail stores channel. Sales increased in multiple brands during the Third Quarter, most notably in FOSSIL®. Strong sales growth in India more than offset a slight decline in Mainland China and some significant declines in other markets. Comparable retail sales decreased during the Third Quarter, with a significant decline in retail stores and a slight decline in our owned e-commerce compared to the Prior Year Quarter.
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):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended October 2, 2021
|
|
For the 13 Weeks Ended October 3, 2020
|
|
|
|
|
|
|
|
|
|
|
Growth (Decline)
|
|
|
Net Sales
|
|
Percentage
of Total
|
|
Net Sales
|
|
Percentage
of Total
|
|
Dollars
|
|
Percentage As Reported
|
|
Percentage Constant Currency
|
|
Watches
|
$
|
113.7
|
|
|
87.8
|
%
|
|
$
|
108.5
|
|
|
90.6
|
%
|
|
$
|
5.2
|
|
|
4.8
|
%
|
|
2.1
|
%
|
|
Leathers
|
5.8
|
|
|
4.5
|
|
|
7.3
|
|
|
6.1
|
|
|
(1.5)
|
|
|
(20.5)
|
|
|
(21.9)
|
|
|
Jewelry
|
8.6
|
|
|
6.6
|
|
|
2.3
|
|
|
1.9
|
|
|
6.3
|
|
|
273.9
|
|
|
256.5
|
|
|
Other
|
1.4
|
|
|
1.1
|
|
|
1.6
|
|
|
1.4
|
|
|
(0.2)
|
|
|
(12.5)
|
|
|
(18.8)
|
|
|
Total
|
$
|
129.5
|
|
|
100.0
|
%
|
|
$
|
119.7
|
|
|
100.0
|
%
|
|
$
|
9.8
|
|
|
8.2
|
%
|
|
5.3
|
%
|
Gross Profit. Gross profit of $259.5 million in the Third Quarter increased 13.0% in comparison to $229.8 million in the Prior Year Quarter, driven by the increase in sales. Our gross profit margin rate was 52.8% in the both the Third Quarter and Prior Year Quarter. The year-over-year change in gross profit primarily reflects a favorable currency impact, improved channel mix and reduced minimum licensor royalty costs offset by unfavorable product mix and region mix.
Operating Expenses. Total operating expenses in the Third Quarter were $211.7 million, or 43.0% of sales, compared to $212.3 million, or 48.7% of sales, in the Prior Year Quarter. SG&A expenses were $205.7 million in the Third Quarter compared to $202.0 million in the Prior Year Quarter, reflecting higher marketing costs largely offset by decreased compensation and store costs. As a percentage of net sales, SG&A expenses decreased to 41.8% in the Third Quarter as compared to 46.4% in the Prior Year Quarter. Restructuring costs in the Third Quarter were $5.4 million, primarily related to employee costs, professional services and store closures, while restructuring costs in the Prior Year Quarter were $5.7 million. Other long-lived asset impairments in the Third Quarter were $0.6 million compared to $4.6 million in the Prior Year Quarter, due to lower retail store impairment. The translation of foreign-denominated expenses during the Third Quarter increased operating expenses by $2.1 million as a result of the weaker U.S. dollar.
Operating Income (Loss). Operating income in the Third Quarter was $47.8 million as compared to operating income of $17.5 million in the Prior Year Quarter. The improvement in operating income was primarily driven by increased sales in the
Third Quarter compared to the Prior Year Quarter. As a percentage of net sales, operating margin was 9.7% in the Third Quarter compared to 4.0% in the Prior Year Quarter. Operating margin in the Third Quarter included a favorable impact of 210 basis points due to changes in foreign currencies.
Operating income (loss) by segment is summarized as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended October 2, 2021
|
|
For the 13 Weeks Ended October 3, 2020
|
|
Change
|
|
Operating Margin
|
|
|
|
|
Dollars
|
|
Percentage
|
|
2021
|
|
2020
|
|
Americas
|
$
|
46.6
|
|
|
$
|
45.1
|
|
|
$
|
1.5
|
|
|
3.3
|
%
|
|
24.0
|
%
|
|
25.7
|
%
|
|
Europe
|
40.5
|
|
|
12.3
|
|
|
28.2
|
|
|
229.3
|
|
|
24.4
|
|
|
9.1
|
|
|
Asia
|
24.0
|
|
|
25.7
|
|
|
(1.7)
|
|
|
(6.6)
|
|
|
18.5
|
|
|
21.5
|
|
|
Corporate
|
(63.3)
|
|
|
(65.6)
|
|
|
2.3
|
|
|
3.5
|
|
|
|
|
|
|
Total operating income (loss)
|
$
|
47.8
|
|
|
$
|
17.5
|
|
|
$
|
30.3
|
|
|
173.1
|
%
|
|
9.7
|
%
|
|
4.0
|
%
|
Interest Expense. Interest expense decreased by $1.6 million during the Third Quarter compared to the Prior Year Quarter, primarily driven by a lower debt balance.
Other Income (Expense)-Net. During the Third Quarter, other income (expense)-net was an expense of $0.5 million in comparison to zero in the Prior Year Quarter. The year-over-year change was primarily driven by net transactional currency losses in the Third Quarter.
Provision for Income Taxes. Income tax expense for the Third Quarter was $9.0 million, resulting in an effective income tax rate of 22.0%. For the Prior Year Quarter, income tax benefit was $6.8 million, resulting in an effective income tax rate of (71.4)%. The effective tax rate in the Third Quarter was unfavorable as compared to the Prior Year Quarter since no tax benefit was accrued on the U.S. net operating loss ("NOL"), unlike in the Prior Year Quarter. The Global Intangible Low-Taxed Income (“GILTI”) provision of the Tax Cuts and Jobs Act requires the inclusion of certain foreign income in the tax return which will absorb most of the U.S. NOL. Foreign income taxes are also paid on this same foreign income, resulting in double taxation. The remaining U.S. NOL is offset with a valuation allowance since there is no certainty of any future tax benefit. The Prior Year Quarter tax rate benefited from the enactment of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which was in effect in the Prior Year Quarter but expired in 2021. The CARES Act allowed U.S. taxpayers to carry back NOLs arising in tax years 2018, 2019 and 2020 to prior years when the tax rate was 35%. In the Prior Year Quarter, we recognized a U.S. tax benefit from fiscal year 2019 and 2020 tax losses, which were carried back to offset taxable income reported in prior years. No tax benefit has been accrued on the Third 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. Third Quarter net income (loss) attributable to Fossil Group, Inc. was income of $31.4 million, or $0.60 per diluted share, in comparison to net income of $16.0 million, or $0.31 per diluted share, in the Prior Year Quarter. Diluted earnings (loss) per share in the Third Quarter included restructuring charges of $0.08 per diluted share. Diluted earnings (loss) per share in the Prior Year Quarter included restructuring charges of $0.09 per diluted share. Currency fluctuations favorably impacted diluted earnings per share by $0.15 during the Third Quarter.
Fiscal Year To Date Periods Ended October 2, 2021 and October 3, 2020
Consolidated Net Sales. Net sales increased $180.6 million or 16.6% (13.0% in constant currency) for the Year To Date Period as compared to the Prior Year YTD Period. We experienced sales increases in all three geographic segments and in the watches and jewelry product categories, while leathers decreased. In the Year To Date Period, digital sales, which include sales from our owned e-commerce channels, third party e-commerce platforms and wholesale dot com, were 41% of worldwide net sales. Digital sales increased 31% (26% in constant currency) in the Year To Date Period, compared to the Prior Year YTD Period. Comparable retail sales decreased 1.6% on a 39-week calendar basis during the Year To Date Period primarily due to traffic declines related to the COVID-19 pandemic.
The following table sets forth consolidated net sales by segment (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 39 Weeks Ended October 2, 2021
|
|
For the 40 Weeks Ended October 3, 2020
|
|
Growth (Decline)
|
|
|
Net Sales
|
|
Percentage
of Total
|
|
Net Sales
|
|
Percentage
of Total
|
|
Dollars
|
|
Percentage As Reported
|
|
Percentage Constant Currency
|
|
Americas
|
$
|
523.0
|
|
|
41.3
|
%
|
|
$
|
433.8
|
|
|
40.0
|
%
|
|
$
|
89.2
|
|
|
20.6
|
%
|
|
19.3
|
%
|
|
Europe
|
399.5
|
|
|
31.6
|
|
|
343.1
|
|
|
31.6
|
|
|
56.4
|
|
|
16.4
|
|
|
10.7
|
|
|
Asia
|
331.6
|
|
|
26.2
|
|
|
295.2
|
|
|
27.2
|
|
|
36.4
|
|
|
12.3
|
|
|
7.6
|
|
|
Corporate
|
11.7
|
|
|
0.9
|
|
|
13.1
|
|
|
1.2
|
|
|
(1.4)
|
|
|
(10.7)
|
|
|
(11.5)
|
|
|
Total
|
$
|
1,265.8
|
|
|
100.0
|
%
|
|
$
|
1,085.2
|
|
|
100.0
|
%
|
|
$
|
180.6
|
|
|
16.6
|
%
|
|
13.0
|
%
|
In the Year To Date Period, the translation of foreign-based net sales into U.S. dollars increased reported net sales by $39.2 million, including favorable impacts of $19.6 million, $14.0 million and $5.5 million in our Europe, Asia and Americas segments, respectively, compared to the Prior Year YTD Period.
Net sales information by product category is summarized as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 39 Weeks Ended October 2, 2021
|
|
For the 40 Weeks Ended October 3, 2020
|
|
Growth (Decline)
|
|
|
Net Sales
|
|
Percentage
of Total
|
|
Net Sales
|
|
Percentage
of Total
|
|
Dollars
|
|
Percentage As Reported
|
|
Percentage Constant Currency
|
|
Watches
|
$
|
1,014.7
|
|
|
80.2
|
%
|
|
$
|
876.0
|
|
|
80.7
|
%
|
|
$
|
138.7
|
|
|
15.8
|
%
|
|
12.2
|
%
|
|
Leathers
|
103.8
|
|
|
8.2
|
|
|
111.6
|
|
|
10.3
|
|
|
(7.8)
|
|
|
(7.0)
|
|
|
(9.5)
|
|
|
Jewelry
|
119.2
|
|
|
9.4
|
|
|
67.3
|
|
|
6.2
|
|
|
51.9
|
|
|
77.1
|
|
|
70.9
|
|
|
Other
|
28.1
|
|
|
2.2
|
|
|
30.3
|
|
|
2.8
|
|
|
(2.2)
|
|
|
(7.3)
|
|
|
(9.9)
|
|
|
Total
|
$
|
1,265.8
|
|
|
100.0
|
%
|
|
$
|
1,085.2
|
|
|
100.0
|
%
|
|
$
|
180.6
|
|
|
16.6
|
%
|
|
13.0
|
%
|
Americas Net Sales. Americas net sales increased $89.2 million, or 20.6% (19.3% in constant currency), during the Year To Date Period in comparison to the Prior Year YTD Period. During the Year To Date Period, sales increased in most brands in our watch portfolio, with the largest increases in MICHAEL KORS® and FOSSIL. Geographically, sales increased in the U.S. and Mexico and declined in Canada. Comparable retail sales in the region increased moderately on a 39-week calendar basis during the Year To Date Period, driven by improved conversion and increased traffic compared to the Prior Year YTD Period.
The following table sets forth product net sales and changes in product net sales on both a reported and constant-currency basis from period to period for the Americas segment (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 39 Weeks Ended October 2, 2021
|
|
For the 40 Weeks Ended October 3, 2020
|
|
Growth (Decline)
|
|
|
Net Sales
|
|
Percentage
of Total
|
|
Net Sales
|
|
Percentage
of Total
|
|
Dollars
|
|
Percentage As Reported
|
|
Percentage Constant Currency
|
|
Watches
|
$
|
413.4
|
|
|
79.1
|
%
|
|
$
|
346.6
|
|
|
79.9
|
%
|
|
$
|
66.8
|
|
|
19.3
|
%
|
|
18.0
|
%
|
|
Leathers
|
63.9
|
|
|
12.2
|
|
|
67.7
|
|
|
15.6
|
|
|
(3.8)
|
|
|
(5.6)
|
|
|
(6.6)
|
|
|
Jewelry
|
40.5
|
|
|
7.7
|
|
|
14.7
|
|
|
3.4
|
|
|
25.8
|
|
|
175.5
|
|
|
172.1
|
|
|
Other
|
5.2
|
|
|
1.0
|
|
|
4.8
|
|
|
1.1
|
|
|
0.4
|
|
|
8.3
|
|
|
10.4
|
|
|
Total
|
$
|
523.0
|
|
|
100.0
|
%
|
|
$
|
433.8
|
|
|
100.0
|
%
|
|
$
|
89.2
|
|
|
20.6
|
%
|
|
19.3
|
%
|
Europe Net Sales. Europe net sales increased $56.4 million, or 16.4% (10.7% in constant currency), during the Year To Date Period in comparison to the Prior Year YTD Period. During the Year To Date Period, most of the brands in the portfolio increased, with the largest sales increases in MICHAEL KORS, FOSSIL and EMPORIO ARMANI, driven mainly by increases in digital sales. Comparable retail sales in the region decreased significantly on a 39-week calendar basis during the Year To Date Period, driven by traffic declines due to the COVID-19 pandemic.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 39 Weeks Ended October 2, 2021
|
|
For the 40 Weeks Ended October 3, 2020
|
|
Growth (Decline)
|
|
|
Net Sales
|
|
Percentage
of Total
|
|
Net Sales
|
|
Percentage
of Total
|
|
Dollars
|
|
Percentage As Reported
|
|
Percentage Constant Currency
|
|
Watches
|
$
|
309.5
|
|
|
77.5
|
%
|
|
$
|
265.2
|
|
|
77.3
|
%
|
|
$
|
44.3
|
|
|
16.7
|
%
|
|
11.0
|
%
|
|
Leathers
|
19.9
|
|
|
5.0
|
|
|
22.6
|
|
|
6.6
|
|
|
(2.7)
|
|
|
(11.9)
|
|
|
(17.3)
|
|
|
Jewelry
|
62.0
|
|
|
15.5
|
|
|
47.5
|
|
|
13.8
|
|
|
14.5
|
|
|
30.5
|
|
|
24.2
|
|
|
Other
|
8.1
|
|
|
2.0
|
|
|
7.8
|
|
|
2.3
|
|
|
0.3
|
|
|
3.8
|
|
|
(1.3)
|
|
|
Total
|
$
|
399.5
|
|
|
100.0
|
%
|
|
$
|
343.1
|
|
|
100.0
|
%
|
|
$
|
56.4
|
|
|
16.4
|
%
|
|
10.7
|
%
|
Asia Net Sales. Asia net sales increased $36.4 million, or 12.3% (7.6% in constant currency), during the Year To Date Period in comparison to the Prior Year YTD Period. During the Year To Date Period, sales increased in multiple brands, with the largest sales increases in EMPORIO ARMANI, ARMANI EXCHANGE® and FOSSIL. The majority of the region's sales increase came from mainland China and India, while sales in South Korea declined. For the Year To Date Period, comparable retail sales declined moderately on a 39-week calendar basis, driven by traffic declines due to the COVID-19 pandemic.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 39 Weeks Ended October 2, 2021
|
|
For the 40 Weeks Ended October 3, 2020
|
|
Growth (Decline)
|
|
|
Net Sales
|
|
Percentage
of Total
|
|
Net Sales
|
|
Percentage
of Total
|
|
Dollars
|
|
Percentage As Reported
|
|
Percentage Constant Currency
|
|
Watches
|
$
|
290.8
|
|
|
87.7
|
%
|
|
$
|
264.1
|
|
|
89.5
|
%
|
|
$
|
26.7
|
|
|
10.1
|
%
|
|
5.6
|
%
|
|
Leathers
|
20.1
|
|
|
6.1
|
|
|
21.4
|
|
|
7.2
|
|
|
(1.3)
|
|
|
(6.1)
|
|
|
(10.3)
|
|
|
Jewelry
|
16.7
|
|
|
5.0
|
|
|
5.1
|
|
|
1.7
|
|
|
11.6
|
|
|
227.5
|
|
|
207.8
|
|
|
Other
|
4.0
|
|
|
1.2
|
|
|
4.6
|
|
|
1.6
|
|
|
(0.6)
|
|
|
(13.0)
|
|
|
(15.2)
|
|
|
Total
|
$
|
331.6
|
|
|
100.0
|
%
|
|
$
|
295.2
|
|
|
100.0
|
%
|
|
$
|
36.4
|
|
|
12.3
|
%
|
|
7.6
|
%
|
Gross Profit. Gross profit of $664.0 million in the Year To Date Period increased $153.2 million, or 30.0%, in comparison to $510.7 million in the Prior Year YTD Period primarily due to the increase in net sales. Gross profit margin rate increased to 52.5% in the Year To Date Period compared to 47.1% in the Prior Year YTD Period. The gross profit margin rate increased primarily due to decreased liquidation and inventory valuation adjustments of older generation connected products, which most heavily impacted the first quarter of fiscal year 2020. Additionally, the gross profit margin rate was favorably impacted by currency changes, reduced levels of minimum licensed product royalties and reduced tariffs, partially offset by unfavorable region mix and product mix.
Operating Expenses. For the Year To Date Period, total operating expenses decreased to $618.6 million, or 48.9% of sales, compared to $664.4 million, or 61.2% of sales, in the Prior Year YTD Period. SG&A expenses were $593.5 million in the Year To Date Period compared to $611.2 million in the Prior Year YTD Period, mainly due to corporate and regional infrastructure reductions and lower store costs as a result of store closures and were partially offset by increased marketing costs. As a percentage of net sales, SG&A expenses decreased to 46.9% in the Year To Date Period as compared to 56.3% in the Prior Year YTD Period, mainly driven by the contraction of sales in the Prior Year YTD Period due to the COVID-19 pandemic. During the Year To Date Period, we incurred restructuring costs of $18.7 million in comparison to restructuring costs of $25.6 million in the Prior Year YTD Period. We incurred $6.3 million of other long-lived asset impairments and no non-cash intangible asset impairment charges in the Year To Date Period compared to charges of $25.1 million and $2.5 million, respectively, in the Prior Year YTD Period. The translation of foreign-denominated expenses during the Year To Date Period increased operating expenses by $16.7 million as a result of the weaker U.S. dollar.
Operating Income (Loss). Operating income was $45.4 million in the Year To Date Period as compared to a loss of $153.6 million in the Prior Year YTD Period. The improvement in operating income (loss) primarily resulted from the $180.6 million increase in net sales due to the effects of the COVID-19 pandemic in the Prior Year YTD Period, improved margin rate and reduced operating expenses in the Year To Date Period compared to the Prior Year YTD Period. As a percentage of net sales, operating margin was 3.6% in the Year To Date Period as compared to (14.2)% in the Prior Year YTD Period and was positively impacted by approximately 190 basis points due to changes in foreign currencies.
Operating income (loss) by segment is summarized as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 39 Weeks Ended October 2, 2021
|
|
For the 40 Weeks Ended October 3, 2020
|
|
Change
|
|
Operating Margin
|
|
|
|
|
Dollars
|
|
Percentage
|
|
2021
|
|
2020
|
|
Americas
|
$
|
109.2
|
|
|
$
|
12.7
|
|
|
$
|
96.5
|
|
|
759.8
|
%
|
|
20.9
|
%
|
|
2.9
|
%
|
|
Europe
|
67.6
|
|
|
2.2
|
|
|
65.4
|
|
|
2,972.7
|
|
|
16.9
|
|
|
0.6
|
|
|
Asia
|
50.6
|
|
|
44.8
|
|
|
5.8
|
|
|
12.9
|
|
|
15.2
|
|
|
15.2
|
|
|
Corporate
|
(182.0)
|
|
|
(213.3)
|
|
|
31.3
|
|
|
14.7
|
|
|
|
|
|
|
Total operating income (loss)
|
$
|
45.4
|
|
|
$
|
(153.6)
|
|
|
$
|
199.0
|
|
|
129.6
|
%
|
|
3.6
|
%
|
|
(14.2)
|
%
|
Interest Expense. Interest expense decreased by $3.1 million during the Year To Date Period primarily driven by a lower debt balance.
Other Income (Expense)-Net. During the Year To Date Period, other income (expense)-net was income of $0.9 million compared to expense of $6.4 million in the Prior Year YTD Period. This change was primarily driven by reduced net foreign currency losses during the Year To Date Period as compared to the Prior Year YTD Period.
Provision for Income Taxes. Income tax expense for the Year To Date Period was $19.2 million, resulting in an effective income tax rate of 73.8%. The Prior Year YTD Period income tax benefit was $91.3 million resulting in an effective tax rate of 49.7%. The effective tax rate in the Year To Date Period differed from the Prior Year YTD Period primarily due to changes enacted in the CARES Act allowing a U.S. NOL carryback. The Year To Date Period effective tax rate was higher as compared to the Prior Year YTD Period because income tax expense was accrued on certain foreign entities with positive taxable income whereas no income tax benefit was recognized for U.S. and certain foreign entity losses.
Net Income (Loss) Attributable to Fossil Group, Inc. For the Year To Date Period, net income was $5.8 million, or $0.11 per diluted share, in comparison to a loss of $92.1 million, or $1.81 per diluted share, in the Prior Year YTD Period. The year-over-year improvement was mainly driven by increased sales due to the effects of the COVID-19 pandemic in the Prior Year YTD Period, improved margin rate and reduced operating expenses in the Year To Date Period, compared to the Prior Year YTD Period. Currency fluctuations favorably impacted diluted earnings per share by $0.44 in the Year To Date Period, as compared to the Prior Year YTD Period.
Liquidity and Capital Resources
Our cash and cash equivalents balance at the end of the Third Quarter was $181.8 million, including $167.9 million held in banks outside the U.S., in comparison to cash and cash equivalents of $323.6 million at the end of the Prior Year Quarter and $316.0 million at the end of fiscal year 2020. Historically, our business operations have not required substantial cash during the first several months of our fiscal year. Generally, starting in the third quarter, our cash needs begin to increase, typically reaching a peak in the September-November time frame as we increase inventory levels in advance of the holiday season. Our quarterly cash requirements are also impacted by debt repayments, restructuring charges, strategic investments such as acquisitions and other capital expenditures. We believe cash flows from operations, including our current and planned cost savings measures, combined with existing cash on hand and amounts available under our credit facilities will be sufficient to fund our cash needs for the next twelve months. Although we believe we have adequate sources of liquidity in the short-term and long-term, the success of our operations, in light of the market volatility and uncertainty as a result of the COVID-19 pandemic, among other factors, could impact our business and liquidity.
For the Year To Date Period, we had an operating cash flow deficit of $37.0 million. Net income of $6.8 million and favorable net non-cash items of $102.5 million were more than offset by an increase in working capital items of $146.3 million. During the Year To Date Period, we had net debt payments of $94.8 million and capital expenditures of $6.7 million.
Accounts receivable, net of allowances, increased by 32.5% to $251.5 million at the end of the Third Quarter compared to $189.8 million at the end of the Prior Year Quarter, mainly driven by the increase in sales. Days sales outstanding for our wholesale businesses for the Third Quarter increased to 60 days compared to 54 days in the Prior Year Quarter.
Inventory at the end of the Third Quarter was $398.3 million, which increased by 10.8% from the end of the Prior Year Quarter ending inventory balance of $359.5 million.
At the end of the Third Quarter, we had net working capital of $418.1 million compared to net working capital of $457.9 million at the end of the Prior Year Quarter. At the end of the Third Quarter, we had $41.2 million of short-term borrowings and $97.4 million in long-term debt.
For fiscal year 2021, we expect total capital expenditures to be approximately $15 million. Our capital expenditure budget is an estimate and is subject to change.
Senior Notes: On November 8, 2021, we sold $150.0 million aggregate principal amount of our Senior Notes, generating net proceeds of approximately $141.7 million. On November 8, 2021, we used the majority of the net proceeds from the Notes Offering to repay all of the outstanding borrowings under the Term Credit Agreement. In connection with the repayment of the outstanding borrowings under the Term Credit Agreement, we incurred prepayment fees and accrued interest costs of $2.6 million. The remaining net proceeds will be used for general corporate purposes.
The Senior Notes are our general unsecured obligations. The Senior Notes bear interest at the rate of 7.00% per annum. Interest on the Senior Notes is payable quarterly in arrears on February 28, May 31, August 31 and November 30 of each year, commencing on February 28, 2022. The Senior Notes will mature on November 30, 2026. We may redeem the Senior Notes for cash in whole or in part at any time at our option. Prior to November 30, 2023, the redemption price will be $25.00 per $25.00 principal amount of Senior Notes, plus a “make-whole” premium plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. On and after November 30, 2023 we may redeem the Senior Notes (i) on or after November 30, 2023 and prior to November 30, 2024, at a price equal to $25.50 per $25.00 principal amount of Senior Notes, (ii) on or after November 30, 2024 and prior to November 30, 2025, at a price equal to $25.25 per $25.00 principal amount of Senior Notes and (iii) on or after November 30, 2025, at a price equal to $25.00 per $25.00 principal amount of Senior Notes, plus (in each case noted above) accrued and unpaid interest, if any, to, but excluding, the date of redemption.
Term Credit Agreement: On February 20, 2020, we entered into Amendment No. 1 to that certain Term Credit Agreement, dated as of September 26, 2019, by and among us, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders (the “Term Credit Agreement Lenders”) party thereto (as amended to date, the “Term Credit Agreement”). On May 12, 2020, we entered into Amendment No. 2 to the Term Credit Agreement to extend the deadline for delivery of our unaudited quarterly financial statements and related deliverables for the fiscal quarter ended April 4, 2020. On June 5, 2020, we entered into Amendment No. 3 (the “Third Amendment”) to the Term Credit Agreement to further modify certain terms of the Term Credit Agreement to address the financial impact of COVID-19. On November 8, 2021, we used the majority of the net proceeds from the Notes Offering to repay all of the outstanding borrowings under the Term Credit Agreement. In connection with the repayment of the outstanding borrowings under the Term Credit Agreement, we incurred prepayment fees and accrued interest costs of $2.6 million and wrote off $7.1 million of debt issuance costs and $4.6 million of original issuance discount related to the Term Credit Agreement.
Revolving Facility: On September 26, 2019, we and Fossil Partners L.P., as the U.S. borrowers, and Fossil Group Europe GmbH, Fossil Asia Pacific Limited, Fossil (Europe) GmbH, Fossil (UK) Limited and Fossil Canada Inc., as the non-U.S. borrowers, certain other of our subsidiaries from time to time party thereto designated as borrowers, and certain of our subsidiaries from time to time party thereto as guarantors, entered into a secured asset-based revolving credit agreement (the “Revolving Facility”) with JPMorgan Chase Bank, N.A. as administrative agent (the "ABL Agent"), J.P. Morgan AG, as French collateral agent, JPMorgan Chase Bank, N.A., Citizens Bank, N.A. and Wells Fargo Bank, National Association as joint bookrunners and joint lead arrangers, and Citizens Bank, N.A. and Wells Fargo Bank, National Association, as co-syndication agents and each of the lenders from time to time party thereto (the "ABL Lenders").
The Revolving Facility provides that the ABL Lenders may extend revolving loans in an aggregate principal amount not to exceed $225.0 million at any time outstanding (the “Revolving Credit Commitment”), of which up to $125.0 million is available under a U.S. facility, an aggregate of $70.0 million is available under a European facility, $20.0 million is available under a Hong Kong facility, $5.0 million is available under a French facility, and $5.0 million is available under a Canadian facility, in each case, subject to the borrowing base availability limitations described below. The Revolving Facility also includes an up to $45.0 million subfacility for the issuance of letters of credit (the “Letters of Credit”). The French facility includes a $1.0 million subfacility for swingline loans, and the European facility includes a $7.0 million subfacility for swingline loans. The Revolving Facility is subject to a line cap equal to the lesser of the total Revolving Credit Commitment and the aggregate borrowing bases under the U.S. facility, the European facility, the Hong Kong facility, the French facility and the Canadian facility. Loans under the Revolving Facility may be made in U.S. dollars, Canadian dollars, euros, Hong Kong dollars or pounds sterling.
The Revolving Facility is an asset-based facility, in which borrowing availability is subject to a borrowing base equal to:(a) with respect to us, the sum of (i) the lesser of (x) 90% of the appraised net orderly liquidation value of eligible U.S. finished goods inventory and (y) 65% of the lower of cost or market value of eligible U.S. finished goods inventory, plus(ii) 85% of the eligible U.S. accounts receivable, plus (iii) 90% of eligible U.S. credit card accounts receivable, minus (iv) the aggregate amount of reserves, if any, established by the ABL Agent; (b) with respect to each non-U.S. borrower (except for the French Borrower), the sum of (i) the lesser of (x) 90% of the appraised net orderly liquidation value of eligible foreign finished goods inventory of such non-U.S. borrower and (y) 65% of the lower of cost or market value of eligible foreign finished goods inventory of such non-U.S. borrower, plus (ii) 85% of the eligible foreign accounts receivable of such non-U.S. borrower, minus (iii) the aggregate amount of reserves, if any, established by the ABL Agent; and (c) with respect to the French Borrower, (i) 85% of eligible French accounts receivable minus (ii) the aggregate amount of reserves, if any, established by the ABL Agent. Not more than 60% of the aggregate borrowing base under the Revolving Facility may consist of the non-U.S. borrowing bases.
We had net payments of $30.0 million during the Year To Date Period under the Term Credit Agreement at an average interest rate of 10.0%. We had net payments of $64.0 million under the Revolving Facility during the Year To Date Period at an average interest rate of 1.8%. Amounts available under the Revolving Facility are reduced by any amounts outstanding under standby letters of credit. As of October 2, 2021, we had available borrowing capacity of $123.6 million under the Revolving Facility. At October 2, 2021, we were in compliance with all debt covenants related to our credit facilities. On November 8, 2021, we issued $150.0 million of Senior Notes, repaid the outstanding borrowings under the Term Credit Agreement, incurred prepayment fees and accrued interest costs of $2.6 million and wrote off $7.1 million of debt issuance costs and $4.6 million of original issuance discount related to the Term Credit Agreement.
Off Balance Sheet Arrangements
As of October 2, 2021, there were no material changes to our off balance sheet arrangements as set forth in commitments and contingencies in our Annual Report on Form 10-K/A for the fiscal year ended January 2, 2021.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods reported. On an on-going basis, we evaluate our estimates and judgments, including those related to product returns, inventories, long-lived asset impairment, impairment of trade names, income taxes and warranty costs. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Our estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
There have been no changes to the critical accounting policies disclosed in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K/A for the fiscal year ended January 2, 2021.
Forward-Looking Statements
The statements contained in this Quarterly Report on Form 10-Q that are not historical facts, including, but not limited to, statements regarding our expected financial position, results of operations, business and financing plans found in this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 3. Quantitative and Qualitative Disclosures About Market Risk,” constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and involve a number of risks and uncertainties. The words “may,” “believes,” “will,” “should,” “seek,” “forecast,” “outlook,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “predict,” “potential,” “plan,” “expect” or the negative or plural of these words or similar expressions identify forward-looking statements. The actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: the effect of worldwide economic conditions; the impact of COVID-19; the length and severity of COVID-19; the pace of recovery following COVID-19 and the availability, widespread distribution and use of effective vaccines; significant changes in consumer spending patterns or preferences; interruptions or delays in the supply of key components; acts of war or acts of terrorism; loss of key facilities; data breach or information systems disruptions; changes in foreign currency valuations in relation to the U.S. dollar; lower levels of consumer spending resulting from COVID-19, a general economic downturn or generally reduced shopping activity caused by public safety (including COVID-19) or consumer confidence concerns; the performance of our products within the prevailing retail environment; customer acceptance of both new designs and newly-introduced product lines, including risks related to the expanded launch of connected accessories; changes in the mix of product sales; our ability to maintain proper inventory levels; financial difficulties encountered by customers and related bankruptcy and collection issues; the effects of vigorous competition in the markets in which we operate; compliance with debt covenants and other contractual provisions; risks related to the success of our business strategy and restructuring programs; the termination or non-renewal of material licenses; risks related to foreign operations and manufacturing; changes in the costs of materials, labor and advertising; government regulation and tariffs; our ability to secure and protect trademarks and other intellectual property rights; levels of traffic to and management of our retail stores; and the outcome of current and possible future litigation.
In addition to the factors listed above, our actual results may differ materially due to the other risks and uncertainties discussed in our Quarterly Reports on Form 10-Q and the risks and uncertainties set forth in our Annual Report on Form 10-K/A for the fiscal year ended January 2, 2021. Accordingly, readers of this Quarterly Report on Form 10-Q should consider these facts in evaluating the information and are cautioned not to place undue reliance on the forward-looking statements contained herein. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.