A weak watch market – for both traditional styles and smart watches – is putting pressure on Fossil Group Inc.
Debt watchdog Standard & Poor’s lowered the company’s credit rating from “B-minus” to “CCC-plus,” citing “continued declines in sales, depressed profitability and consumer spending.” higher than expected cash flow, which led to very high leverage.”
The outlook on the credit rating is negative.
Last month, the watchmaker reported a 13% drop in second-quarter sales to $322 million, with declines across the board and adjusted losses before interest, taxes, depreciation and amortization of $15.4 million.
Fossil has hired Alvarez & Marsal to work on a transformation plan that enables the group to work with a digital-first mindset in its operations, move quickly and prioritize shareholder value.
The company is also reducing its cost base and moving away from its smart watch company, which was once considered a bridge to the future.
“Inflated inventories at retailers in the United States and Europe have slowed demand in Fossil’s wholesale business,” S&P said. “We also note more than 30 net store closures since the prior year period and Fossil’s strategic decision to halt future smartwatch development, which fell more than 45 percent in the most recent quarter. recent.”
All of this is expected to lead to a continued decline in sales.
“We view the company’s capital structure as unsustainable and expect negative to minimal free cash flow generation,” the ratings agency said.
“While we expect some improvement in margins over the next 12 months as a result of Fossil’s transformation program, we do not expect these benefits to materialize until 2024, resulting in limited EBITDA generation until fiscal 2024,” S&P said. “As a result, we expect negative free operating cash flow of approximately $50 million for fiscal 2023.”
Fossil ended its second quarter on July 1 with $132 million in liquidity and $73 million available under its revolving credit facility.
Companies rated CCC are considered “currently vulnerable” and rely on favorable conditions to honor their financial commitments.
S&P said it could lower its rating on Fossil again if it sees a “default scenario” within 12 months.
“This could occur if demand fails to stabilize or the company falters in its transformation plan, limiting prospects for generating positive, sustainable free cash flow,” S&P said.
Fossil shares were down 2.7% at $2.20 as of midday Friday, giving the company a market capitalization of about $115 million.
