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EX-31.1 - EXHIBIT 31.1 - Fossil Group, Inc.fosl-04022016xex311.htm
EX-31.2 - EXHIBIT 31.2 - Fossil Group, Inc.fosl-04022016xex312.htm
EX-32.2 - EXHIBIT 32.2 - Fossil Group, Inc.fosl-04022016xex322.htm
EX-32.1 - EXHIBIT 32.1 - Fossil Group, Inc.fosl-04022016xex321.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
__________________________________________________________________ 
FORM 10-Q 
__________________________________________________________________
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: April 2, 2016
 
OR
o     
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
 
Commission file number: 000-19848 
__________________________________________________________________ 
FOSSIL GROUP, INC.
(Exact name of registrant as specified in its charter)
 __________________________________________________________________
Delaware
 
75-2018505
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
901 S. Central Expressway, Richardson, Texas
 
75080
(Address of principal executive offices)
 
(Zip Code)
(972) 234-2525
(Registrant’s telephone number, including area code) 
__________________________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
The number of shares of the registrant’s common stock outstanding as of May 5, 2016: 48,111,204




PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
IN THOUSANDS
 
April 2, 2016
 
January 2, 2016
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
306,750

 
$
289,275

Accounts receivable - net of allowances of $74,122 and $84,558, respectively
236,792

 
370,761

Inventories
630,004

 
625,344

Prepaid expenses and other current assets
166,956

 
157,290

Total current assets
1,340,502

 
1,442,670

Property, plant and equipment - net of accumulated depreciation of $420,496 and $398,068, respectively
332,367

 
326,370

Goodwill
362,657

 
359,394

Intangible and other assets-net
224,738

 
227,227

Total long-term assets
919,762

 
912,991

Total assets
$
2,260,264

 
$
2,355,661

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
159,852

 
$
208,083

Short-term and current portion of long-term debt
23,288

 
23,159

Accrued expenses:
 

 
 

Compensation
58,490

 
61,496

Royalties
13,460

 
38,359

Co-op advertising
16,105

 
28,918

Transaction taxes
15,941

 
44,425

Other
82,956

 
76,592

Income taxes payable
2,805

 
8,497

Total current liabilities
372,897

 
489,529

Long-term income taxes payable
20,861

 
20,634

Deferred income tax liabilities
68,437

 
75,165

Long-term debt
799,939

 
785,076

Other long-term liabilities
53,697

 
52,714

Total long-term liabilities
942,934

 
933,589

Commitments and contingencies (Note 13)


 


Stockholders’ equity:
 

 
 

Common stock, 48,127 and 48,125 shares issued and outstanding at April 2, 2016 and January 2, 2016, respectively
481

 
481

Additional paid-in capital
192,183

 
187,456

Retained earnings
815,558

 
813,957

Accumulated other comprehensive income (loss)
(72,003
)
 
(80,506
)
Total Fossil Group, Inc. stockholders’ equity
936,219

 
921,388

Noncontrolling interest
8,214

 
11,155

Total stockholders’ equity
944,433

 
932,543

Total liabilities and stockholders’ equity
$
2,260,264

 
$
2,355,661

 
See notes to the condensed consolidated financial statements.

2



FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
UNAUDITED
IN THOUSANDS, EXCEPT PER SHARE DATA
 
 
For the 13 Weeks Ended April 2, 2016
 
For the 13 Weeks Ended April 4, 2015
Net sales
$
659,847

 
$
725,085

Cost of sales
311,510

 
324,361

Gross profit
348,337

 
400,724

Operating expenses:
 

 
 

Selling, general and administrative expenses
333,933

 
332,482

Restructuring charges

 
12,088

Total operating expenses
333,933

 
344,570

Operating income
14,404

 
56,154

Interest expense
5,999

 
4,178

Other income (expense) - net
2,270

 
7,186

Income before income taxes
10,675

 
59,162

Provision for income taxes
3,279

 
18,524

Net income
7,396

 
40,638

Less: Net income attributable to noncontrolling interest
1,603

 
2,568

Net income attributable to Fossil Group, Inc.
$
5,793

 
$
38,070

Other comprehensive income (loss), net of taxes:
 

 
 

Currency translation adjustment
$
17,221

 
$
(33,506
)
Cash flow hedges - net change
(10,432
)
 
61

Pension plan activity
1,714

 

Total other comprehensive income (loss)
8,503

 
(33,445
)
Total comprehensive income
15,899

 
7,193

Less: Comprehensive income attributable to noncontrolling interest
1,603

 
2,568

Comprehensive income attributable to Fossil Group, Inc.
$
14,296

 
$
4,625

Earnings per share:
 

 
 

Basic
$
0.12

 
$
0.76

Diluted
$
0.12

 
$
0.75

Weighted average common shares outstanding:
 

 
 

Basic
48,132

 
50,294

Diluted
48,256

 
50,467

 
See notes to the condensed consolidated financial statements.

3



FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
IN THOUSANDS
 
For the 13 Weeks Ended April 2, 2016
 
For the 13 Weeks Ended April 4, 2015
Operating Activities:
 

 
 

Net income
$
7,396

 
$
40,638

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation, amortization and accretion
24,765

 
22,113

Stock-based compensation
7,297

 
4,346

Decrease in allowance for returns-net of inventory in transit
(7,792
)
 
(869
)
Loss on disposal of assets
421

 
2,202

Impairment losses

 
1,270

Decrease in allowance for doubtful accounts
(2,950
)
 
(1,320
)
Excess tax benefits from stock-based compensation
(5
)
 
(354
)
Deferred income taxes and other
280

 
247

Changes in operating assets and liabilities, net of effect of acquisitions:
 

 
 

Accounts receivable
149,673

 
158,594

Inventories
7,861

 
(49,087
)
Prepaid expenses and other current assets
(17,490
)
 
(30,391
)
Accounts payable
(51,469
)
 
(5,718
)
Accrued expenses
(76,472
)
 
(50,900
)
Income taxes payable
(6,981
)
 
(5,801
)
Net cash provided by operating activities
34,534

 
84,970

Investing Activities:
 

 
 

Additions to property, plant and equipment
(19,670
)
 
(16,860
)
Decrease (increase) in intangible and other assets
607

 
(1,402
)
Skagen Designs arbitration settlement

 
5,968

Business acquisitions-net of cash acquired

 
(4,970
)
Net cash used in investing activities
(19,063
)
 
(17,264
)
Financing Activities:
 

 
 

Acquisition of common stock
(5,548
)
 
(116,047
)
Distribution of noncontrolling interest earnings and other
(4,544
)
 
(5,056
)
Excess tax benefits from stock-based compensation
5

 
354

Debt borrowings
207,900

 
1,070,363

Debt payments
(193,495
)
 
(1,055,584
)
Proceeds from exercise of stock options
57

 
444

Net cash provided by (used in) financing activities
4,375

 
(105,526
)
Effect of exchange rate changes on cash and cash equivalents
(2,371
)
 
(1,598
)
Net increase (decrease) in cash and cash equivalents
17,475

 
(39,418
)
Cash and cash equivalents:
 

 
 

Beginning of period
289,275

 
276,261

End of period
$
306,750

 
$
236,843

 
See notes to the condensed consolidated financial statements.

4



FOSSIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
 
1. FINANCIAL STATEMENT POLICIES
Basis of Presentation. The condensed consolidated financial statements include the accounts of Fossil Group, Inc., a Delaware corporation, and its wholly and majority-owned subsidiaries (the “Company”).
The condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to present a fair statement of the Company’s financial position as of April 2, 2016, and the results of operations for the thirteen-week periods ended April 2, 2016 (“First Quarter”) and April 4, 2015 (“Prior Year Quarter”), respectively. All adjustments are of a normal, recurring nature.
These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K filed by the Company pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for the fiscal year ended January 2, 2016 (the “2015 Form 10-K”). Operating results for the First Quarter are not necessarily indicative of the results to be achieved for the full fiscal year.
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which require the Company 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. Actual results could differ from those estimates. The Company has not made any changes in its significant accounting policies from those disclosed in the 2015 Form 10-K.
Business. The Company is a global design, marketing and distribution company that specializes in consumer fashion accessories. Its 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, the Company has a diverse portfolio of globally recognized owned and licensed brand names under which its products are marketed. The Company's products are distributed globally through various distribution channels, including wholesale in countries where it has a physical presence, direct to the consumer through its retail stores and commercial websites and through third-party distributors in countries where the Company does not maintain a physical presence. The Company's products are offered at varying price points to meet the needs of its customers, whether they are value-conscious or luxury oriented. Based on its extensive range of accessory products, brands, distribution channels and price points, the Company is able to target style-conscious consumers across a wide age spectrum on a global basis.
Hedging Instruments. The Company is exposed to certain market risks relating to foreign exchange rates and interest rates. The Company actively monitors and attempts to manage these exposures using derivative instruments including foreign exchange forward contracts ("forward contracts") and interest rate swaps. The Company’s foreign subsidiaries periodically enter into forward contracts to hedge the future payment of intercompany inventory transactions denominated in U.S. dollars. Additionally, during the First Quarter, the Company entered into forward contracts to manage fluctuations in Japanese yen exchange rates that will be used to settle future third-party inventory component purchases by a U.S. dollar functional currency subsidiary. If the Company was to settle its euro, British pound, Canadian dollar, Japanese yen, Mexican peso, Australian dollar and U.S dollar forward contracts as of April 2, 2016, the result would have been a net loss of approximately $3.3 million, net of taxes. This unrealized loss is recognized in other comprehensive income (loss), net of taxes on the Company's consolidated statements of income and comprehensive income. Additionally, to the extent that any of these contracts are not considered to be perfectly effective in offsetting the change in the value of the cash flows being hedged, any changes in fair value relating to the ineffective portion of these contracts would be recognized in other income (expense)-net on the Company's consolidated statements of income and comprehensive income. Also, the Company has entered into interest rate swap agreements to effectively convert portions of its variable rate debt obligations to fixed rates. Changes in the fair value of the interest rate swaps are recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity (loss), and are recognized in interest expense in the period in which the payment is settled. To reduce exposure to changes in currency exchange rates adversely affecting the Company’s investment in foreign currency-denominated subsidiaries, the Company periodically enters into forward contracts designated as net investment hedges. Both realized and unrealized gains and losses from net investment hedges are recognized in the cumulative translation adjustment component of other comprehensive income (loss), and will be reclassified into earnings in the event the Company's underlying investments are liquidated or disposed. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. See “Note 10—Derivatives and Risk Management” for additional disclosures about the Company’s use of derivatives.

5



Operating expenses. Operating expenses include selling, general and administrative expenses (“SG&A”) and restructuring charges. SG&A expenses include selling and distribution expenses primarily consisting of sales and distribution labor costs, sales distribution center and warehouse facility costs, depreciation expense related to sales distribution and warehouse facilities, the four-wall operating costs of the Company’s retail stores, point-of-sale expenses, advertising expenses and art, design and product development labor costs. SG&A also includes general and administrative expenses primarily consisting of administrative support labor and “back office” or support costs such as treasury, legal, information services, accounting, internal audit, human resources, executive management costs and costs associated with stock-based compensation. Restructuring charges include costs to reorganize, refine and optimize the Company’s infrastructure and store closures.
Earnings Per Share (“EPS”). Basic EPS is based on the weighted average number of common shares outstanding during each period. Diluted EPS adjusts basic EPS for the effects of dilutive common stock equivalents outstanding during each period using the treasury stock method.
The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS (in thousands, except per share data):
 
For the 13 Weeks Ended April 2, 2016
 
For the 13 Weeks Ended April 4, 2015
Numerator:
 

 
 

Net income attributable to Fossil Group, Inc.
$
5,793

 
$
38,070

Denominator:
 

 
 

Basic EPS computation:
 

 
 

Basic weighted average common shares outstanding
48,132

 
50,294

Basic EPS
$
0.12

 
$
0.76

Diluted EPS computation:
 

 
 

Basic weighted average common shares outstanding
48,132

 
50,294

Effect of stock options, stock appreciation rights, restricted stock units and performance restricted stock units
124

 
173

Diluted weighted average common shares outstanding
48,256

 
50,467

Diluted EPS
$
0.12

 
$
0.75

Approximately 1.4 million and 0.4 million weighted shares issuable under stock-based awards were not included in the diluted EPS calculation at the end of the First Quarter and Prior Year Quarter, respectively, because they were antidilutive. Approximately 1.1 million weighted performance shares were not included in the diluted EPS calculation as the performance targets were not met as of the First Quarter.
Recently Issued Accounting Standards. In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for annual periods, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted. The Company is still evaluating the effect of adopting ASU 2016-09. 
In March 2016, the FASB issued ASU 2016-04, Liabilities—Extinguishments of Liabilities (Subtopic 405-20)- Recognition of Breakage for Certain Prepaid Stored-Value Products (“ASU 2016-04”). ASU 2016-04 entitles a company to derecognize amounts related to expected breakage to the extent that it is probable a significant reversal of the recognized breakage amount will not subsequently occur. ASU 2016-04 is effective for annual periods, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. The Company is still evaluating the effect of adopting ASU 2016-04.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842):Amendments to the FASB Accounting Standards Codification® (“ASU 2016-02”), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and modifies accounting, presentation and disclosure for both lessors and lessees. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. ASU 2016-02 is effective for annual periods, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is still evaluating the effect of adopting ASU 2016-02.

6



In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 affects reporting entities that measure inventory using first-in, first-out or average cost. Specifically, ASU 2015-11 requires that inventory be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for annual periods beginning after December 15, 2016, with early adoption permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), to provide guidance on management’s responsibility to perform interim and annual assessments of an entity’s ability to continue as a going concern and to provide related disclosure. ASU 2014-15 applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”), deferring the effective date of ASU 2014-09. The new revenue standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 and allows either a full retrospective adoption to all periods presented or a modified retrospective adoption approach with the cumulative effect of initial application of the revised guidance recognized at the date of initial application. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). ASU 2016-08 is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing ("ASU 2016-10"). ASU 2016-10 clarifies the implementation guidance on identifying performance obligations. Early adoption is permitted for periods beginning after December 15, 2016. The Company is evaluating the effect of adopting ASU 2014-09.
Recently Adopted Accounting Standards. In accordance with U.S. GAAP, the following provisions, which had no material impact on the Company’s financial position, results of operations or cash flows, were adopted effective the first quarter of fiscal year 2016:
ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis
ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period

2. ACQUISITIONS AND GOODWILL
Fossil Spain Acquisition.    On August 10, 2012, the Company’s joint venture company, Fossil, S.L. (“Fossil Spain”), entered into a Framework Agreement (the “Framework Agreement”) with several related and unrelated parties, including General De Relojeria, S.A. (“General De Relojeria”), the Company’s joint venture partner. Pursuant to the Framework Agreement, Fossil Spain was granted the right to acquire the outstanding 50% of its shares owned by General De Relojeria upon the expiration of the joint venture agreement on December 31, 2015. The Company plans to complete the acquisition of these shares in the second quarter of fiscal year 2016 at which time Fossil Spain will become a wholly-owned subsidiary of the Company. As of January 1, 2013, pursuant to the Framework Agreement, the Company assumed control over the board of directors and the day-to-day management of Fossil Spain, and began consolidating Fossil Spain, instead of treating it as an equity method investment.    
The purchase price for the shares has a fixed and variable component which will be settled in the second quarter of fiscal year 2016. The fixed portion was based on 50% of the net book value of Fossil Spain as of December 31, 2012. The present value of the remaining fixed portion was measured at 4.3 million euros (approximately $4.9 million) as of April 2, 2016. The present value of the remaining variable component was based on Fossil Spain’s earnings for fiscal year 2015 and was measured at 3.5 million euros (approximately $4.0 million) as of April 2, 2016. Both the fixed and variable component of the remaining consideration were recorded in accrued expenses-other, in the consolidated balance sheets at April 2, 2016. See Note 11—Fair Value Measurements for additional information about the contingent consideration liability for Fossil Spain.

7



Misfit, Inc. Acquisition. On December 22, 2015, the Company acquired Misfit, Inc. ("Misfit"), an innovator and distributor of wearable technology and stylish connected devices. Misfit was a U.S.-based, privately held company. The primary purpose of the acquisition was to acquire a scalable technology platform that can be integrated across the Company's multi-brand portfolio, a native wearable technology brand and a pipeline of innovative products. Misfit’s position in the wearable technology space combined with their software and hardware engineering teams enables the Company to expand its addressable market with new distribution channels, products, brands and enterprise partnerships.
The purchase price was $215.4 million in cash, net of cash acquired and subject to working capital adjustments, and $1.7 million in replacement awards attributable to precombination service. To fund the cash purchase price, the Company utilized cash on hand and approximately $60 million of availability under its $1.05 billion revolving line of credit. The results of Misfit's operations have been included in the Company’s consolidated financial statements since December 22, 2015.
Assets acquired and liabilities assumed in the transaction were recorded at their acquisition date fair values, while transaction costs of $8.4 million associated with the acquisition were expensed as incurred during the fourth quarter of fiscal year 2015. Because the total purchase price exceeded the fair values of the tangible and intangible assets acquired, goodwill was recorded equal to the difference. The element of goodwill that is not separable into identifiable intangible assets represents expected synergies. The following table summarizes the allocation of the purchase price to the preliminary estimated fair value of the assets acquired and the liabilities assumed as of December 22, 2015, the effective date of the acquisition (in thousands):
Cash paid, net of cash acquired
 
$
215,370

Replacement awards attributable to precombination service
 
1,709

Total transaction consideration
 
$
217,079

 
 
 
Inventories
 
$
13,565

Prepaid expenses and other current assets
 
25

Property, plant and equipment and other long-term assets
 
1,190

Goodwill
 
164,866

Amortizing Intangibles:
Useful Lives
 
  Trade name
6 yrs.
15,700

  Customer lists
5 yrs.
10,800

  Developed technology
7 yrs.
36,100

  Noncompete agreements
3 yrs.
700

Current liabilities
 
(14,019
)
Long-term liabilities
 
(11,848
)
 Total net assets acquired
 
$
217,079

The amounts shown above may change in the near term as management continues to assess the fair value of acquired assets and liabilities. A change in this valuation may also impact the income tax related accounts and goodwill. The goodwill recognized from the acquisition has an indefinite useful life and will be included in the Company’s annual impairment testing.
Goodwill. The changes in the carrying amount of goodwill were as follows (in thousands):
 
Americas
 
Europe
 
Asia
 
Total
Balance at January 2, 2016
$
283,598

 
$
63,981

 
$
11,815

 
$
359,394

Segment allocation and acquisition adjustments (1)
(79,816
)
 
48,826

 
31,451

 
461

Currency
(3
)
 
2,782

 
23

 
2,802

Balance at April 2, 2016
$
203,779

 
$
115,589

 
$
43,289

 
$
362,657

__________________________________________________________________________________
(1) All goodwill resulting from the Misfit acquisition was recorded in the Americas segment as of January 2, 2016, on a preliminary basis. This line item includes an allocation of the goodwill across reporting segments and also purchase accounting adjustments made during the First Quarter.

8





3. INVENTORIES
Inventories consisted of the following (in thousands):
 
April 2, 2016
 
January 2, 2016
Components and parts
$
60,129

 
$
49,539

Work-in-process
9,757

 
12,213

Finished goods
560,118

 
563,592

Inventories
$
630,004

 
$
625,344


4. WARRANTY LIABILITIES
The Company’s warranty liability is recorded in accrued expenses-other in the Company’s condensed consolidated balance sheets. Warranty liability activity consisted of the following (in thousands):
 
For the 13 Weeks Ended April 2, 2016
 
For the 13 Weeks Ended April 4, 2015
Beginning balance
$
13,669

 
$
13,500

Settlements in cash or kind
(2,743
)
 
(2,102
)
Warranties issued and adjustments to preexisting warranties (1)
2,462

 
2,016

Liabilities assumed in acquisition

 
44

Ending balance
$
13,388

 
$
13,458

_______________________________________________
(1) Changes in cost estimates related to preexisting warranties are aggregated with accruals for new standard warranties issued and foreign currency changes.
 
5. INCOME TAXES
The Company’s income tax expense and related effective rate were as follows (in thousands, except percentage data):
 
For the 13 Weeks Ended April 2, 2016
 
For the 13 Weeks Ended April 4, 2015
Income tax expense
$
3,279

 
$
18,524

Income tax rate
30.7
%
 
31.3
%
 
The lower effective tax rate in the First Quarter, as compared to the Prior Year Quarter, was primarily due to a higher portion of income derived from foreign sources taxed at lower effective tax rates.
As of April 2, 2016, the total amount of unrecognized tax benefits, excluding interest and penalties, was $22.8 million, of which $19.8 million would favorably impact the effective tax rate in future periods, if recognized. The Company is subject to examinations in various state and foreign jurisdictions for its 2009-2014 tax years, none of which the Company believes are significant, individually or in the aggregate. Tax audit outcomes and timing of tax audit settlements are subject to significant uncertainty.
The Company has classified uncertain tax positions as long-term income taxes payable, unless such amounts are expected to be paid within twelve months of the condensed consolidated balance sheet date. As of April 2, 2016, the Company had recorded $0.8 million of unrecognized tax benefits, excluding interest and penalties, for positions that are expected to be settled within the next twelve months. Consistent with its past practice, the Company recognizes interest and/or penalties related to income tax overpayments and income tax underpayments in income tax expense and income taxes receivable/payable. At April 2, 2016, the total amount of accrued income tax-related interest and penalties included in the condensed consolidated

9



balance sheet was $2.3 million and $1.8 million, respectively. For the First Quarter, the Company accrued income tax-related interest expense of $0.2 million.

6. STOCKHOLDERS’ EQUITY
Common Stock Repurchase Programs. Purchases of the Company’s common stock are made from time to time pursuant to its repurchase programs, subject to market conditions and at prevailing market prices, through the open market. Repurchased shares of common stock are recorded at cost and become authorized but unissued shares which may be issued in the future for general corporate or other purposes. The Company may terminate or limit its stock repurchase program at any time. In the event the repurchased shares are canceled, the Company accounts for retirements by allocating the repurchase price to common stock, additional paid-in capital and retained earnings. The repurchase price allocation is based upon the equity contribution associated with historical issuances. The repurchase programs are conducted pursuant to Rule 10b-18 of the Securities Exchange Act of 1934.
During the First Quarter, the Company effectively retired 0.1 million shares of common stock repurchased under its repurchase programs. The effective retirement of repurchased common stock decreased common stock by approximately $0.9 thousand, additional paid-in capital by $0.2 million, retained earnings by $4.2 million and treasury stock by $4.4 million. At January 2, 2016 and April 2, 2016, all treasury stock had been effectively retired. As of April 2, 2016, the Company had $825.0 million of repurchase authorizations remaining under its combined repurchase programs.
The following tables reflect the Company’s common stock repurchase activity for the periods indicated (in millions):
 
 
 
 
 
For the 13 Weeks Ended April 2, 2016
 
For the 13 Weeks Ended April 4, 2015
Fiscal Year
Authorized
Dollar Value
Authorized
 
Termination Date
 
Number of
Shares
Repurchased
 
Dollar Value
Repurchased
 
Number of
Shares
Repurchased
 
Dollar Value
Repurchased
2014
$
1,000.0

 
December 2018
 
0.1

 
$
4.4

 
1.0

 
$
85.7

2012
$
1,000.0

 
December 2016 (1)
 

 
$

 
0.3

 
$
28.8

2010
$
30.0

 
None
 

 
$

 

 
$

__________________________________________________________________________________
(1) In the first quarter of fiscal year 2015, the Company completed this repurchase plan.
Controlling and Noncontrolling Interest. The following tables summarize the changes in equity attributable to controlling and noncontrolling interest (in thousands):
 
Fossil Group, Inc.
Stockholders’
Equity
 
Noncontrolling
Interest
 
Total
Stockholders’
Equity
Balance at January 2, 2016
$
921,388

 
$
11,155

 
$
932,543

Net income
5,793

 
1,603

 
7,396

Currency translation adjustment
17,221

 

 
17,221

Cash flow hedges - net change
(10,432
)
 

 
(10,432
)
Pension plan activity
1,714

 

 
1,714

Common stock issued upon exercise of stock options
57

 

 
57

Tax expense derived from stock-based compensation
(1,271
)
 

 
(1,271
)
Distribution of noncontrolling interest earnings

 
(4,544
)
 
(4,544
)
Acquisition of common stock
(5,548
)
 

 
(5,548
)
Stock-based compensation expense
7,297

 

 
7,297

Balance at April 2, 2016
$
936,219

 
$
8,214

 
$
944,433


10



 
Fossil Group, Inc.
Stockholders’
Equity
 
Noncontrolling
Interest
 
Total
Stockholders’
Equity
Balance at January 3, 2015
$
977,860

 
$
5,941

 
$
983,801

Net income
38,070

 
2,568

 
40,638

Currency translation adjustment
(33,506
)
 

 
(33,506
)
Cash flow hedges - net change
61

 

 
61

Common stock issued upon exercise of stock options
444

 

 
444

Tax expense derived from stock-based compensation
(306
)
 

 
(306
)
Distribution of noncontrolling interest earnings and other

 
(5,056
)
 
(5,056
)
Business acquisition

 
5,886

 
5,886

Acquisition of common stock
(116,047
)
 

 
(116,047
)
Stock-based compensation expense
4,346

 

 
4,346

Balance at April 4, 2015
$
870,922

 
$
9,339

 
$
880,261

 
7. EMPLOYEE BENEFIT PLANS
Stock-Based Compensation Plans. The following table summarizes stock options and stock appreciation rights activity during the First Quarter:
Stock Options and Stock Appreciation Rights
 
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
 
 
(in Thousands)
 
 
 
(in Years)
 
(in Thousands)
Outstanding at January 2, 2016
 
2,028

 
$
52.80

 
8.7
 
$
2,095

Granted
 
226

 
46.90

 
 
 
 

Exercised
 
(9
)
 
26.35

 
 
 
181

Forfeited or expired
 
(31
)
 
87.62

 
 
 
 

Outstanding at April 2, 2016
 
2,214

 
51.82

 
6.9
 
10,828

Exercisable at April 2, 2016
 
545

 
$
84.57

 
4.6
 
$
2,193

 
The aggregate intrinsic value shown in the table above is before income taxes and is based on (i) the exercise price for outstanding and exercisable options/rights at April 2, 2016 and (ii) the fair market value of the Company’s common stock on the exercise date for options/rights that were exercised during the First Quarter.
Stock Options and Stock Appreciation Rights Outstanding and Exercisable. The following tables summarize information with respect to stock options and stock appreciation rights outstanding and exercisable at April 2, 2016:
Stock Options Outstanding
 
Stock Options Exercisable
Range of
Exercise Prices
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
 
(in Thousands)
 
 
 
(in Years)
 
(in Thousands)
 
 
$13.65 - $29.78
 
41

 
$
14.40

 
2.9
 
41

 
$
14.40

$30.71 - $47.99
 
91

 
36.29

 
2.8
 
91

 
36.29

$55.04 - $83.83
 
93

 
80.81

 
5.0
 
93

 
80.81

$95.91 - $131.46
 
150

 
127.97

 
5.7
 
150

 
127.97

Total
 
375

 
$
81.65

 
4.5
 
375

 
$
81.65



11



Stock Appreciation Rights Outstanding
 
Stock Appreciation Rights Exercisable
Range of
Exercise Prices
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
 
(in Thousands)
 
 
 
(in Years)
 
(in Thousands)
 
 
$13.65 - $29.78
 
26

 
$
21.97

 
4.5
 
13

 
$
13.65

$30.71 - $47.99
 
1,560

 
38.27

 
7.7
 
9

 
38.40

$55.04 - $83.83
 
143

 
79.05

 
6.4
 
62

 
80.44

$95.91 - $131.46
 
110

 
114.31

 
5.2
 
86

 
115.42

Total
 
1,839

 
$
45.75

 
7.4
 
170

 
$
90.99

 
Restricted Stock, Restricted Stock Units and Performance Restricted Stock Units. The following table summarizes restricted stock, restricted stock unit and performance restricted stock unit activity during the First Quarter:
Restricted Stock, Restricted Stock Units
and Performance Restricted Stock Units
 
Number of Shares
 
Weighted-Average
Grant Date Fair
Value Per Share
 
 
(in Thousands)
 
 
Nonvested at January 2, 2016
 
1,208

 
$
53.87

Granted
 
15

 
31.68

Vested
 
(135
)
 
93.51

Forfeited
 
(25
)
 
74.31

Nonvested at April 2, 2016
 
1,063

 
$
47.98

 
The total fair value of restricted stock and restricted stock units vested during the First Quarter was approximately $6.4 million. Vesting of performance restricted stock units is based on achievement of sales growth and operating margin targets in relation to the performance of a certain identified peer group.
 
8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables illustrate changes in the balances of each component of accumulated other comprehensive income (loss), net of taxes (in thousands):
 
For the 13 Weeks Ended April 2, 2016
 
Currency
Translation
Adjustments
 
Cash Flow Hedges
 
 
 
 
 
 
Forward
Contracts
 
Interest
Rate Swaps
 
Pension
Plan
 
Total
Beginning balance
$
(81,707
)
 
$
8,114

 
$
(693
)
 
$
(6,220
)
 
$
(80,506
)
Other comprehensive income (loss) before reclassifications
17,221

 
(9,997
)
 
(1,669
)
 
2,010

 
7,565

Tax (expense) benefit

 
4,614

 
608

 
(296
)
 
4,926

Amounts reclassed from accumulated other comprehensive income

 
6,339

 
(467
)
 

 
5,872

Tax (expense) benefit

 
(2,054
)
 
170

 

 
(1,884
)
Total other comprehensive income (loss)
17,221

 
(9,668
)
 
(764
)
 
1,714

 
8,503

Ending balance
$
(64,486
)
 
$
(1,554
)
 
$
(1,457
)
 
$
(4,506
)
 
$
(72,003
)
 

12



 
For the 13 Weeks Ended April 4, 2015
 
Currency
Translation
Adjustments
 
Cash Flow Hedges
 
 
 
 
 
 
Forward
Contracts
 
Interest
Rate Swap
 
Pension
Plan
 
Total
Beginning balance
$
(27,241
)
 
$
14,980

 
$
(502
)
 
$
(3,647
)
 
$
(16,410
)
Other comprehensive income (loss) before reclassifications
(33,506
)
 
18,760

 
(7,406
)
 

 
(22,152
)
Tax (expense) benefit

 
(6,217
)
 
2,699

 

 
(3,518
)
Amounts reclassed from accumulated other comprehensive income

 
12,439

 
(681
)
 

 
11,758

Tax (expense) benefit

 
(4,231
)
 
248

 

 
(3,983
)
Total other comprehensive income (loss)
(33,506
)
 
4,335

 
(4,274
)
 

 
(33,445
)
Ending balance
$
(60,747
)
 
$
19,315

 
$
(4,776
)
 
$
(3,647
)
 
$
(49,855
)
 
See “Note 10—Derivatives and Risk Management” for additional disclosures about the Company’s use of derivatives.

9. SEGMENT INFORMATION
The Company reports segment information based on the “management approach”. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments.
The Company manages its business primarily on a geographic basis. The Company’s reportable operating segments are comprised of (i) Americas, (ii) Europe and (iii) Asia. Each reportable operating segment includes sales to wholesale and distributor customers, and sales through Company-owned retail stores and e-commerce activities based on the location of the selling entity. The Americas segment primarily includes sales to customers based in Canada, Latin America and the United States. The Europe segment primarily includes sales to customers based in European countries, the Middle East and Africa. The Asia segment primarily includes sales to customers based in Australia, China, India, Indonesia, Japan, Malaysia, New Zealand, Singapore, South Korea, Taiwan and Thailand. Each reportable operating segment provides similar products and services.
The Company evaluates the performance of its reportable segments based on net sales and operating income. Net sales for geographic segments are based on the location of the selling entity. Operating income for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. Global strategic initiatives such as brand building and omni channel activities and general corporate expenses, including certain administrative, legal, accounting, technology support costs, equity compensation costs, payroll costs attributable to executive management, brand management, product development, art, creative/product design, marketing, strategy, compliance and back office supply chain expenses are not allocated to the various segments because they are managed at the corporate level internally. The Company does not include intercompany transfers between segments for management reporting purposes.
Summary information by operating segment was as follows (in thousands):
 
For the 13 Weeks Ended April 2, 2016
 
For the 13 Weeks Ended April 4, 2015
 
Net Sales
 
Operating Income
 
Net Sales
 
Operating Income
Americas
$
335,809

 
$
59,597

 
$
366,596

 
$
76,722

Europe
210,001

 
28,511

 
234,256

 
33,302

Asia
114,037

 
17,928

 
124,233

 
24,308

Corporate
 

 
(91,632
)
 
 

 
(78,178
)
Consolidated
$
659,847

 
$
14,404

 
$
725,085

 
$
56,154



13



The following tables reflect net sales for each class of similar products in the periods presented (in thousands, except percentage data):
 
For the 13 Weeks Ended April 2, 2016
 
For the 13 Weeks Ended April 4, 2015
 
Net Sales
 
Percentage of Total
 
Net Sales
 
Percentage of Total
Watches
$
496,483

 
75.2
%
 
$
551,857

 
76.1
%
Leathers
92,505

 
14.0

 
92,926

 
12.8

Jewelry
54,721

 
8.3

 
62,987

 
8.7

Other
16,138

 
2.5

 
17,315

 
2.4

Total
$
659,847

 
100.0
%
 
$
725,085

 
100.0
%
 
10. DERIVATIVES AND RISK MANAGEMENT
Cash Flow Hedges. The primary risks managed by using derivative instruments are the fluctuations in global currencies that will ultimately be used by non-U.S. dollar functional currency subsidiaries to settle future payments of intercompany inventory transactions denominated in U.S. dollars. Specifically, the Company projects future intercompany purchases by its non-U.S. dollar functional currency subsidiaries generally over a period of up to 24 months. The Company enters into forward contracts, generally for up to 85% of the forecasted purchases, to manage fluctuations in global currencies that will ultimately be used to settle such U.S. dollar denominated inventory purchases. Additionally, during the First Quarter, the Company entered into forward contracts to manage fluctuations in Japanese yen exchange rates that will be used to settle future third-party inventory component purchases by a U.S. dollar functional currency subsidiary. Forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon settlement date and exchange rate. These forward contracts are designated as single cash flow hedges. Fluctuations in exchange rates will either increase or decrease the Company’s U.S. dollar equivalent cash flows from these inventory transactions, which will affect the Company’s U.S. dollar earnings. Gains or losses on the forward contracts are expected to offset these fluctuations to the extent the cash flows are hedged by the forward contracts.
These forward contracts meet the criteria for hedge accounting, which requires that they represent foreign currency-denominated forecasted transactions in which (i) the operating unit that has the foreign currency exposure is a party to the hedging instrument and (ii) the hedged transaction is denominated in a currency other than the hedging unit’s functional currency.
At the inception of each forward contract designated as a cash flow hedge, the hedging relationship is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk. The Company assesses hedge effectiveness under the critical terms matched method at inception and at least quarterly throughout the life of the hedging relationship. If the critical terms (i.e., amounts, currencies and settlement dates) of the forward contract match the terms of the forecasted transaction, the Company concludes that the hedge is effective.
For a derivative instrument that is designated and qualifies as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss), net of taxes and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, the Company’s hedges resulted in no ineffectiveness in the condensed consolidated statements of income and comprehensive income, and there were no components excluded from the assessment of hedge effectiveness for the First Quarter or Prior Year Quarter.
All derivative instruments are recognized as either assets or liabilities at fair value in the condensed consolidated balance sheets. Derivatives designated as cash flow hedges are recorded at fair value at each balance sheet date and the change in fair value is recorded to accumulated other comprehensive income (loss) within the equity section of the Company’s condensed consolidated balance sheet until such derivative’s gains or losses become realized or the cash flow hedge relationship is terminated. If the cash flow hedge relationship is terminated, the derivative’s gains or losses that are recorded in accumulated other comprehensive income (loss) will be recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are terminated because the forecasted transaction is not expected to occur in the original specified time period, the derivative’s gains or losses are immediately recognized in earnings. There were no gains or losses reclassified into earnings as a result of the discontinuance of cash flow hedges in the First Quarter or Prior Year Quarter. Hedge accounting is discontinued if it is determined that the derivative is not highly effective. The Company records all forward contract hedge assets and liabilities

14



on a gross basis as they do not meet the balance sheet netting criteria because the Company does not have master netting agreements established with the derivative counterparties that would allow for net settlement.
As of April 2, 2016, the Company had the following outstanding forward contracts designated as cash flow hedges that were entered into to hedge the future payments of inventory transactions (in millions):
Functional Currency
 
Contract Currency
Type
 
Amount
 
Type
 
Amount
Euro
 
236.4

 
U.S. dollar
 
267.0

British pound
 
48.3

 
U.S. dollar
 
72.9

Canadian dollar
 
75.0

 
U.S. dollar
 
56.5

Japanese yen
 
3,796.4

 
U.S. dollar
 
32.3

Mexican peso
 
305.9

 
U.S. dollar
 
17.3

Australian dollar
 
18.0

 
U.S. dollar
 
13.0

U.S. dollar
 
20.4

 
Japanese yen
 
2,267

The Company is also exposed to interest rate risk related to its outstanding debt. To manage the interest rate risk related to its $231.3 million U.S.-based term loan (as amended and restated on March 9, 2015 the "Term Loan”), the Company entered into an interest rate swap agreement on July 26, 2013 with a term of approximately five years. The objective of this hedge is to offset the variability of future payments associated with interest rates on the Term Loan. The interest rate swap agreement hedges the 1-month London Interbank Offer Rate ("LIBOR") based variable rate debt obligations under the Term Loan. Under the terms of the swap, the Company pays a fixed interest rate of 1.288% per annum to the swap counterparty plus the LIBOR rate applicable margin (which varies based upon the Company’s consolidated leverage ratio (the “Ratio”) from 1.25% if the Ratio is less than 1.00 to 1.00, to 2.00% if the Ratio is greater than or equal to 2.00 to 1.00). The notional amount amortizes over the remaining life of the Term Loan to coincide with repayments on the underlying loan. The Company receives interest from the swap counterparty at a variable rate based on 1-month LIBOR. This hedge is designated as a cash flow hedge.
Additionally, to manage interest rate risk related to forecasted debt issuances, the Company entered into a forward starting interest rate swap agreement on March 20, 2015 with a term of approximately 10 years. The objective of this hedge was to offset the variability of future interest payments associated with forecasted debt issuances. The forecasted debt issuances did not occur, and in the second quarter of fiscal year 2015, the Company entered into an agreement to offset and unwind the forward starting interest rate swap.
Net Investment Hedges. The Company is also exposed to risk that adverse changes in foreign currency exchange rates could impact its net investment in foreign operations. During the First Quarter, the Company entered into a forward contract designated as a net investment hedge to reduce exposure to changes in currency exchange rates on 45.0 million euros of its total investment in a wholly-owned, euro-denominated foreign subsidiary.
The effective portion of derivatives designated as net investment hedges are recorded at fair value at each balance sheet date and the change in fair value is recorded in the cumulative translation adjustment component of other comprehensive income (loss) in the Company’s condensed consolidated statements of income and comprehensive income. The Company uses the hypothetical derivative method to assess the ineffectiveness of net investment hedges. Should any portion of a net investment hedge become ineffective, the ineffective portion will be reclassified to other income (expense)-net on the Company’s condensed consolidated statements of income and comprehensive income. Gains and losses reported in accumulated other comprehensive income (loss) will not be reclassified into earnings until the Company’s underlying investment is liquidated or dissolved.
Non-designated Hedges. The Company also periodically enters into forward contracts to manage exchange rate risks associated with certain intercompany transactions and for which the Company does not elect hedge accounting treatment. As of April 2, 2016, the Company had non-designated forward contracts of approximately $2.2 million on 35.0 million rand associated with a South African rand-denominated foreign subsidiary. Changes in the fair value of derivatives, not designated as hedging instruments, are recognized in earnings when they occur.
As of January 2, 2016, the Company had non-designated forward contracts of approximately $2.0 million on 2.0 million Swiss francs and $4.5 million on 3.0 million British pounds associated with foreign subsidiaries denominated in Swiss francs and British pounds, respectively. These non-designated hedges were settled in the First Quarter resulting in a loss of approximately $64,000 that was recognized in earnings.

15



The effective portion of gains and losses on cash flow hedges that were recognized in other comprehensive income (loss), net of taxes during the First Quarter and Prior Year Quarter are set forth below (in thousands):
 
For the 13 Weeks Ended April 2, 2016
 
For the 13 Weeks Ended April 4, 2015
Cash flow hedges:
 

 
 

Forward contracts
$
(5,383
)
 
$
12,543

Interest rate swaps
(1,061
)
 
(4,707
)
Total gain (loss) recognized in other comprehensive income (loss), net of taxes
$
(6,444
)
 
$
7,836

The following table illustrates the effective portion of gains and losses on derivative instruments recorded in other comprehensive income (loss), net of taxes during the term of the hedging relationship and reclassified into earnings, and gains and losses on derivatives not designated as hedging instruments recorded directly to earnings during the First Quarter and Prior Year Quarter (in thousands):
Derivative Instruments
 
Condensed Consolidated
Statements of Income
and Comprehensive
Income Location
 
Effect of Derivative
Instruments
 
For the 13 Weeks Ended April 2, 2016
 
For the 13 Weeks Ended April 4, 2015
Forward contracts designated as cash flow hedging instruments
 
Other income (expense)-net
 
Total gain (loss) reclassified from other comprehensive income (loss)
 
$
4,285

 
$
8,208

Forward contracts not designated as hedging instruments
 
Other income (expense)-net
 
Total gain (loss) recognized in income
 
$
(231
)
 
$
89

Interest rate swap designated as a cash flow hedging instrument
 
Interest expense
 
Total gain (loss) reclassified from other comprehensive income (loss)
 
$
(297
)
 
$
(433
)
The following table discloses the fair value amounts for the Company’s derivative instruments as separate asset and liability values, presents the fair value of derivative instruments on a gross basis, and identifies the line items in the condensed consolidated balance sheets in which the fair value amounts for these categories of derivative instruments are included (in thousands):
 
 
Asset Derivatives
 
Liability Derivatives
 
 
April 2, 2016
 
January 2, 2016
 
April 2, 2016
 
January 2, 2016
Derivative Instruments
 
Condensed
Consolidated
Balance Sheets
Location
 
Fair
Value
 
Condensed
Consolidated
Balance Sheets
Location
 
Fair
Value
 
Condensed
Consolidated
Balance Sheets
Location
 
Fair
Value
 
Condensed
Consolidated
Balance Sheets
Location
 
Fair
Value
Forward contracts designated as cash flow hedging instruments
 
Prepaid expenses and other current assets
 
$
4,827

 
Prepaid expenses and other current assets
 
$
13,184

 
Accrued expenses- other
 
$
7,770

 
Accrued expenses- other
 
$
477

Forward contracts not designated as cash flow hedging instruments
 
Prepaid expenses and other current assets
 

 
Prepaid expenses and other current assets
 
167

 
Accrued expenses- other
 
158

 
Accrued expenses- other
 
71

Forward contracts designated as net investment hedges
 
Prepaid expenses and other current assets
 
7

 
Prepaid expenses and other current assets
 

 
Accrued expenses- other
 

 
Accrued expenses- other
 

Interest rate swap designated as a cash flow hedging instrument
 
Prepaid expenses and other current assets
 

 
Prepaid expenses and other current assets
 

 
Accrued expenses- other
 
1,443

 
Accrued expenses- other
 
1,273

Forward contracts designated as cash flow hedging instruments
 
Intangible and other assets-net
 
974

 
Intangible and other assets-net
 
2,785

 
Other long-term liabilities
 
2,973

 
Other long-term liabilities
 
250

Interest rate swap designated as a cash flow hedging instrument
 
Intangible and other assets-net
 

 
Intangible and other assets-net
 
311

 
Other long-term liabilities
 
849

 
Other long-term liabilities
 
128

Total
 
 
 
$
5,808

 
 
 
$
16,447

 
 
 
$
13,193

 
 
 
$
2,199

 
At the end of the First Quarter, the Company had forward contracts designated as cash flow hedges with maturities extending through March 2018. As of April 2, 2016, an estimated net loss of $2.0 million is expected to be reclassified into earnings within the next twelve months at prevailing foreign currency exchange rates. See “Note 1—Financial Statement Policies” for additional disclosures on foreign currency hedging instruments.


16



11. FAIR VALUE MEASUREMENTS
The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
Accounting Standards Codification ("ASC") 820, Fair Value Measurement and Disclosures (“ASC 820”), establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
Level 3 — Unobservable inputs based on the Company’s assumptions.
ASC 820 requires the use of observable market data if such data is available without undue cost and effort.
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of April 2, 2016 (in thousands):
 
Fair Value at April 2, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Forward contracts
$

 
$
5,801

 
$

 
$
5,801

Deferred compensation plan assets:
 

 
 

 
 

 
 

Investment in publicly traded mutual funds
2,288

 

 

 
2,288

Net investment hedges

 
7

 

 
7

Total
$
2,288

 
$
5,808

 
$

 
$
8,096

Liabilities:
 

 
 

 
 

 
 

Contingent consideration
$

 
$

 
$
3,985

 
$
3,985

Forward contracts

 
10,901

 

 
10,901

Interest rate swap

 
2,292

 

 
2,292

Total
$

 
$
13,193

 
$
3,985

 
$
17,178

The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of January 2, 2016 (in thousands):
 
Fair Value at January 2, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Forward contracts
$

 
$
16,136

 
$

 
$
16,136

Deferred compensation plan assets:
 

 
 

 
 

 
 

Investment in publicly traded mutual funds
2,406

 

 

 
2,406

Interest rate swap

 
311

 

 
311

Total
$
2,406

 
$
16,447

 
$

 
$
18,853

Liabilities:
 

 
 

 
 

 
 

Contingent consideration
$

 
$

 
$
3,643

 
$
3,643

Forward contracts

 
798

 

 
798

Interest rate swap

 
1,401

 

 
1,401

Total
$

 
$
2,199

 
$
3,643

 
$
5,842

The fair values of the Company’s deferred compensation plan assets are based on quoted prices. The deferred compensation plan assets are recorded in intangible and other assets-net in the Company’s condensed consolidated balance sheets. The fair values of the Company’s forward contracts are based on published quotations of spot currency rates and forward points, which are converted into implied forward currency rates. The fair values of the interest rate swap assets and

17



liabilities are determined using valuation models based on market observable inputs, including forward curves, mid market price and volatility levels. See “Note 10—Derivatives and Risk Management” for additional disclosures about the interest rate swaps and forward contracts.
The Company has evaluated its short-term and long-term debt as of April 2, 2016 and January 2, 2016 and believes, based on the interest rates, related terms and maturities, that the fair values of such instruments approximated their carrying amounts. As of April 2, 2016 and January 2, 2016, the carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximated their fair values due to the short-term maturities of these accounts.
The fair value of the contingent consideration liability related to the acquisition of the Fossil Spain was determined using Level 3 inputs. See "Note 2—Acquisitions and Goodwill" for additional disclosures about the acquisition. The contingent consideration recorded as of April 2, 2016 is based on Fossil Spain’s earnings for fiscal year 2015. The contingent consideration for calendar year 2015 will be paid upon the execution of the purchase agreement during the second quarter of fiscal year 2016. The contingent consideration liability for calendar year 2015 is valued at the maximum annual variable price of 3.5 million euros (approximately $4.0 million).
 
12. INTANGIBLE AND OTHER ASSETS
 
The following table summarizes intangible and other assets (in thousands):
 
 
 
 
April 2, 2016
 
January 2, 2016
 
 
Useful
 
Gross
 
Accumulated
 
Gross
 
Accumulated
At Fiscal Year End
 
Lives
 
Amount
 
Amortization
 
Amount
 
Amortization
Intangibles-subject to amortization:
 
 
 
 

 
 

 
 

 
 

Trademarks
 
10 yrs.
 
$
4,175

 
$
3,255

 
$
4,175

 
$
3,195

Customer lists
 
5-10 yrs.
 
54,383

 
22,785

 
53,825

 
21,001

Patents
 
3-20 yrs.
 
2,273

 
2,073

 
2,273

 
2,064

Noncompete agreement
 
3-6 yrs.
 
2,533

 
1,280

 
2,515

 
1,134

Developed technology
 
7 yrs.
 
36,100

 
1,289

 
36,100

 

Trade name
 
6 yrs.
 
15,700

 
654

 
15,700

 

Other
 
7-20 yrs.
 
267

 
214

 
256

 
206

Total intangibles-subject to amortization
 
 
 
115,431

 
31,550

 
114,844

 
27,600

Intangibles-not subject to amortization:
 
 
 
 

 
 

 
 

 
 

Trade names
 
 
 
74,510

 
 

 
74,493

 
 

Other assets:
 
 
 
 

 
 

 
 

 
 

Key money deposits
 
 
 
29,554

 
20,255

 
29,357

 
19,805

Other deposits
 
 
 
22,085

 
 

 
21,684

 
 

Deferred compensation plan assets
 
 
 
2,288

 
 

 
2,406

 
 

Deferred tax asset-net
 
 
 
21,483

 
 

 
18,602

 
 

Restricted cash
 
 
 
537

 
 

 
512

 
 

Shop-in-shop
 
 
 
10,043

 
8,280

 
9,985

 
8,262

Interest rate swap
 
 
 

 
 

 
311

 
 

Forward contracts
 
 
 
974

 
 

 
2,785

 
 

Investments
 
 
 
2,397

 
 
 
2,396

 
 
Other
 
 
 
5,521

 
 

 
5,519

 
 

Total other assets
 
 
 
94,882

 
28,535

 
93,557

 
28,067

Total intangible and other assets
 
 
 
$
284,823

 
$
60,085

 
$
282,894

 
$
55,667

Total intangible and other assets-net
 
 
 
 

 
$
224,738

 
 

 
$
227,227

 
Key money is the amount of funds paid to a landlord or tenant to acquire the rights of tenancy under a commercial property lease for a certain property. Key money represents the “right to lease” with an automatic right of renewal. This right

18



can be subsequently sold by the Company or can be recovered should the landlord refuse to allow the automatic right of renewal to be exercised. Key money is amortized over the initial lease term, which ranges from approximately four to 18 years.
Amortization expense for intangible assets was approximately $3.7 million and $1.2 million for the First Quarter and Prior Year Quarter, respectively. Estimated aggregate future amortization expense by fiscal year for intangible assets is as follows (in thousands):
Fiscal Year
 
Amortization
Expense
2016 (remaining)
 
$
11,239

2017
 
$
14,729

2018
 
$
14,373

2019
 
$
14,044

2020
 
$
13,523

2021
 
$
9,694

 
13. COMMITMENTS AND CONTINGENCIES
Litigation. The Company is occasionally subject to litigation or other legal proceedings in the normal course of its business. The Company does not believe that the outcome of any currently pending legal matters, individually or collectively, will have a material effect on the business or financial condition of the Company.
 
14. DEBT ACTIVITY
The Company made principal payments of $4.7 million under its Term Loan during the First Quarter. The Company had net borrowings of $19.6 million under its U.S. revolving line of credit (the "Revolving Credit Facility") during the First Quarter. Borrowings were primarily used to fund stock repurchases, capital expenditures and normal operating expenses. Amounts available under the Revolving Credit Facility are reduced by any amounts outstanding under standby letters of credit. As of April 2, 2016, the Company had available borrowing capacity of approximately $216.1 million under the Revolving Credit Facility, which was favorably impacted by a $208.5 million international cash balance. The Company incurred approximately $1.5 million of interest expense related to the Term Loan during the First Quarter, including the impact of the related interest rate swap. The Company incurred approximately $3.7 million of interest expense related to the Revolving Credit Facility during the First Quarter.


19



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 week period ended April 2, 2016 (the “First Quarter”) as compared to the thirteen week period ended April 4, 2015 (the “Prior Year Quarter”). 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 the 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 extensive 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.
Domestically, we sell our products through a diversified distribution network that includes department stores, specialty retail locations, specialty watch and jewelry stores, Company-owned retail and outlet stores, mass market stores and through our FOSSIL® website. Our wholesale customer base includes, among others, Amazon.com, Dillard’s, JCPenney, Kohl’s, Macy’s, Neiman Marcus, Nordstrom, Saks Fifth Avenue, Target and Wal-Mart. In the United States, our network of Company-owned stores included 97 retail stores located in premier retail sites and 139 outlet stores located in major outlet malls as of April 2, 2016. In addition, we offer an extensive collection of our FOSSIL brand products on our website, www.fossil.com, as well as proprietary and licensed watch and jewelry brands through other managed and affiliated websites.
Internationally, our products are sold to department stores, specialty retail stores and specialty watch and jewelry stores in approximately 150 countries worldwide through 23 Company-owned foreign sales subsidiaries and through a network of approximately 80 independent distributors. Internationally, our network of Company-owned stores included 246 retail stores and 130 outlet stores as of April 2, 2016. Our products are also sold through licensed and franchised FOSSIL retail stores, retail concessions operated by us and kiosks in certain international markets. In addition, we offer an extensive collection of our FOSSIL brand products on our websites in certain countries.
Our business is subject to economic cycles and retail industry conditions. Purchases of discretionary fashion accessories, such as our watches, handbags, sunglasses and other products, tend to decline during recessionary periods when disposable income is low and consumers are hesitant to use available credit. In addition, acts of terrorism, acts of war and military action both in the U.S. and abroad can have a significant effect on economic conditions and may negatively affect our ability to procure our products from manufacturers for sale to our customers. Any significant declines in general economic conditions, public safety concerns or uncertainties regarding future economic prospects that affect consumer spending habits could have a material adverse effect on consumer purchases of our products.
Our business is also 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 contract manufacturers’ control.
Future sales and earnings growth are also contingent upon our ability to anticipate and respond to changing fashion trends and consumer preferences in a timely manner while continuing to develop innovative products in the respective markets in which we compete. As is typical with new products, market acceptance of new designs and products that we may introduce is subject to uncertainty. In addition, we generally make decisions regarding product designs several months in advance of the time when consumer acceptance can be measured. We believe our historical sales growth is the result of our ability to design innovative watch products that not only differentiate us from our competition but also continue to provide a solid value proposition to consumers across all of our brands.
The majority of our products are sold at retail price points ranging from $85 to $600. We believe that the price/value relationship and the differentiation and innovation of our products, in comparison to those of our competitors, will allow us to maintain or grow our market share in those markets in which we compete. Historically, during recessionary periods, the strength of our balance sheet, our strong operating cash flow and the relative size of our business with our wholesale customers,

20



in comparison to that of our competitors, have allowed us to weather recessionary periods for longer periods of time and generally resulted in market share gains to us.
Our international operations are subject to many risks, including foreign currency fluctuations and risks related to the global economy. Generally, a strengthening of the U.S. dollar against currencies of other countries in which we operate will reduce the translated amounts of sales and operating expenses of our subsidiaries, which results in a reduction of our consolidated operating income. We manage these currency risks by using derivative instruments. The primary risks managed by using derivative instruments are the future payments by non-U.S. dollar functional currency subsidiaries of intercompany inventory transactions denominated in U.S. dollars. We enter into foreign exchange forward contracts ("forward contracts") to manage fluctuations in global currencies that will ultimately be used to settle such U.S. dollar denominated inventory purchases. We are also exposed to interest rate risk associated with our variable rate debt, which we manage with an interest rate swap.
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 for the fiscal year ended January 2, 2016.
Results of Operations
Executive Summary. During the First Quarter, net sales decreased 9% (7% in constant currency), as compared to the Prior Year Quarter. As we expected, First Quarter results trailed the Prior Year Quarter reflecting the challenging environment for the traditional watch category, foreign currency headwinds and the relatively strong performance in our multi-brand watch portfolio in the Prior Year Quarter. Pressure on the traditional watch category within our wholesale channel intensified during the First Quarter as indicated by a noticeable decrease in sales trends reported by our wholesale partners, both in the U.S. and Europe. We believe the pressure on the traditional watch category at wholesale led to conservative inventory management by our wholesale partners for the category in anticipation of technology product delivering later in fiscal 2016. Despite the challenging retail environment, we delivered positive comparable store sales in our full-price FOSSIL stores where we benefited from Fossil Q publicity and our marketing investments. Fossil Q launched in our owned-stores during the fourth quarter of fiscal year 2015 and was our best selling SKU within the channel during the First Quarter. In March, we announced the future launch of connected accessories in eight brands by holiday 2016. The challenging wholesale environment, which has not yet benefited from technology infused products, combined with the early success of Fossil Q in our owned-stores has reinforced our commitment to investing in the strategies we are pursuing that we believe will drive future growth. Brand building and innovation remain at the core of our business and we are focused on innovation in design, fashion and new styles, as well as introducing new technology and functionality into our accessories. As shopping patterns and preferences continue to change, we're continuing to advance our digital and omni-channel capabilities and enhance our Customer Resource Management ("CRM") initiatives to drive future growth. Despite a challenging retail environment, relative strength in FOSSIL and SKAGEN, particularly in our international markets, continues to give us confidence in our long-term strategy to grow our owned brands and leverage our competitive and strategic advantages to return growth to our licensed portfolio.
FOSSIL branded products decreased 2% (flat in constant currency), including growth in Europe and Asia and strength in women's leathers, a category we have improved by adding innovative designs, colors and unique assortments. Constant currency growth in our leathers category was offset by a decline in jewelry and a slight decline in watches in the Americas. Our SKAGEN® branded products increased 10% (12% in constant currency), representing growth across all major product categories led by watches. Growth in each of our three regions demonstrates the global appeal of the SKAGEN brand.
Our multi-brand global watch portfolio decreased 11% (8% in constant currency) during the First Quarter. While we continued to benefit from the addition of newer brands to the portfolio, the majority of the brands in the portfolio declined compared to last year and larger brands in the portfolio continued to be hindered by strong historical growth and significant headwinds in the watch category that has intensified in the wholesale channel.
Global comparable store sales decreased 3% during the First Quarter as strong positive comparable store sales in Europe were offset by declines in the Americas and Asia. Comparable store sales in our full-price concepts were positive in all regions and we experienced strong outlet performance in Europe, but could not overcome outlet store declines in the Americas.
During the First Quarter, gross profit decreased largely driven by lower sales given the challenging retail environment and pressure on the traditional watch category. The gross margin rate also declined as our pricing initiatives were more than offset by changes in foreign currency, higher markdowns and increased promotional activity in our European outlets, which successfully improved conversion rates. The sales and margin headwinds were partially offset by a decrease in expenses driven by the non-recurrence of prior year restructuring charges, partially offset by Misfit purchase accounting. Reductions in infrastructure offset additional expenses from Misfit and connected accessories. Additionally, we had fewer gains on foreign currency contracts during the First Quarter as compared to the Prior Year Quarter.

21



During the First Quarter, we invested $4.4 million to repurchase 0.1 million shares of our common stock. Our financial performance, including the unfavorable impacts of currencies resulted in earnings of $0.12 per diluted share.
Quarterly Periods Ended April 2, 2016 and April 4, 2015
Consolidated Net Sales. Net sales decreased $65.3 million or 9.0% (7% in constant currency), for the First Quarter as compared to the Prior Year Quarter. Global watch sales decreased $55.4 million or 10.0% (8% in constant currency), while our leathers products decreased $0.4 million or 0.4% (increased 2% in constant currency) with increases in FOSSIL offset by declines in RELIC. During the First Quarter, our jewelry business decreased $8.3 million or 13.2% (11% in constant currency).
Net sales information by product category is summarized as follows (dollars in millions):
 
For the 13 Weeks Ended April 2, 2016
 
For the 13 Weeks Ended April 4, 2015
 
 
 
 
 
 
 
Growth (Decline)
 
Net Sales
 
Percentage
of Total
 
Net Sales
 
Percentage
of Total
 
Dollars
 
Percentage
Watches
$
496.5

 
75.2
%
 
$
551.9

 
76.1
%
 
$
(55.4
)
 
(10.0
)%
Leathers
92.5

 
14.0

 
92.9

 
12.8

 
(0.4
)
 
(0.4
)
Jewelry
54.7

 
8.3

 
63.0

 
8.7

 
(8.3
)
 
(13.2
)
Other
16.1

 
2.5

 
17.3

 
2.4

 
(1.2
)
 
(6.9
)
Total
$
659.8

 
100.0
%
 
$
725.1

 
100.0
%
 
$
(65.3
)
 
(9.0
)%
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. 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. In the First Quarter, the translation of foreign-based net sales into U.S. dollars decreased reported net sales by approximately $16.4 million, including unfavorable impacts of $6.2 million, $5.4 million and $4.8 million in our Europe, Asia and Americas segments, respectively, when compared to the Prior Year Quarter.
The following table sets forth consolidated net sales by segment (dollars in millions):
 
For the 13 Weeks Ended April 2, 2016
 
For the 13 Weeks Ended April 4, 2015
 
Growth (Decline)
 
Net Sales
 
Percentage
of Total
 
Net Sales
 
Percentage
of Total
 
Dollars
 
Percentage
Americas
$
335.8

 
50.9
%
 
$
366.6

 
50.6
%
 
$
(30.8
)
 
(8.4
)%
Europe
210.0

 
31.8

 
234.3

 
32.3

 
(24.3
)
 
(10.4
)
Asia
114.0

 
17.3

 
124.2

 
17.1

 
(10.2
)
 
(8.2
)
Total
$
659.8

 
100.0
%
 
$
725.1

 
100.0
%
 
$
(65.3
)
 
(9.0
)%
Americas Net Sales. Americas net sales decreased $30.8 million or 8.4% (7% in constant currency), led by watches with jewelry and leathers also contributing to the decline during the First Quarter in comparison to the Prior Year Quarter. During the First Quarter, our multi-brand watch portfolio decreased $22.6 million or 8.3% (7% in constant currency), while our jewelry business decreased $3.4 million or 13.5% (13% in constant currency) and our leathers category decreased $2.6 million or 4.2% (3% in constant currency). During the First Quarter, the continued benefit from the addition of KATE SPADE NEW YORK to our licensed watch portfolio in the Americas was offset by declines in nearly all of the brands in the portfolio. On a constant currency basis, growth in Canada and Mexico was offset by a decline in the United States. Constant dollar wholesale sales declined during the First Quarter largely driven by further pressure on the watch category in United States department stores. After three consecutive quarters of fairly stable watch sell-through headwinds, we observed a significant step-down in that trend that remained throughout the First Quarter, affecting most of our portfolio brands. Our travel retail business in Latin America also softened in the First Quarter. As a result of these sales trends, an increased amount of sales were shifted to off-price partners in the First Quarter as compared to the Prior Year Quarter. Within the region, our full-price stores performed well and delivered positive comparable store sales, with strong performances in wearables and women's handbags. This strong performance was more than offset with weaker outlet sales, where traffic continues to be down.
Europe Net Sales. Europe net sales decreased $24.3 million or 10.4% (8% in constant currency), with a decline in watches and jewelry partially offset by an increase in leathers during the First Quarter in comparison to the Prior Year Quarter. Our multi-brand watch portfolio decreased $22.6 million or 13.0% (10% in constant currency), while our jewelry category

22



decreased $4.4 million or 12.1% (10% in constant currency) and our leathers business increased $2.0 million or 10.8% (16% in constant currency) in the First Quarter. Within the region, growth in FOSSIL and SKAGEN was offset by a decline in the licensed portfolio. By country, modest constant currency growth in France and Germany was offset by a decline in the United Kingdom and in our distributor markets, which includes the Middle East and Russia. Growth in the retail channel across the region was offset by declines in the wholesale business. Similar to what we experienced in the United States, the data we received from many of our wholesale partners in Europe showed a significant decline in sell-through. The retail channel grew in the First Quarter supported by a strong comparable store sales increase with promotional activity in outlet stores driving improved conversion, despite ongoing traffic declines. Full-price stores also delivered positive comparable store sales in the First Quarter.
Asia Net Sales. Net sales in Asia decreased $10.2 million or 8.2% (4% in constant currency). The decrease was driven by watches and jewelry, partially offset by modest growth in leathers. In constant currency, solid growth in India was offset by declines in most markets in the region, particularly Hong Kong and China, where our business continues to be challenging. During the First Quarter as compared to the Prior Year Quarter, our watch category decreased $10.2 million or 9.6% (6% in constant currency), while jewelry decreased $0.5 million or 27.4% (9% in constant currency), partially offset by increases in leathers of $0.2 million or 1.5% (7% in constant currency). Growth in FOSSIL and SKAGEN and the addition of KATE SPADE NEW YORK were offset by declines in most of the other brands in the portfolio. Comparable store sales in the region decreased slightly in our owned retail stores.
The following table sets forth the number of stores by concept on the dates indicated below:
 
April 2, 2016
 
April 4, 2015
 
Americas
 
Europe
 
Asia
 
Total
 
Americas
 
Europe
 
Asia
 
Total
Full price accessory
126

 
124

 
69

 
319

 
146

 
126

 
60

 
332

Outlets
153

 
71

 
45

 
269

 
144

 
64

 
42

 
250

Full priced multi-brand

 
7

 
17

 
24

 
4

 
6

 
22

 
32

Total stores
279

 
202

 
131

 
612

 
294

 
196

 
124

 
614

During the First Quarter, we opened two new stores and closed nine stores. For the remainder of fiscal year 2016, we anticipate opening approximately 24 additional retail stores and closing approximately 15 retail stores globally.
A store is included in comparable store 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 store sales base, but are included in total sales. These stores are returned to the comparable store sales base in the thirteenth month following the expansion and/or relocation. Comparable store sales also exclude the effects of foreign currency fluctuations.
Gross Profit. Gross profit of $348.3 million in the First Quarter decreased 13.1% in comparison to $400.7 million in the Prior Year Quarter as a result of decreased sales and changes in foreign currencies. Gross profit margin rate decreased 250 basis points to 52.8% in the First Quarter compared to 55.3% in the Prior Year Quarter, including an unfavorable currency impact of approximately 160 basis points. The gross profit margin rate was negatively impacted by increased markdowns and promotional activities in our European outlet stores, a higher level of off-price sales and improved performance in leathers, a lower margin product category, partially offset by the favorable impact of our pricing initiatives.
Operating Expenses. Total operating expenses in the First Quarter decreased by $10.6 million or 3.1% to $333.9 million compared to $344.6 million in the Prior Year Quarter. The translation of foreign-denominated expenses during the First Quarter decreased operating expenses by approximately $6.7 million as a result of the stronger U.S. dollar. Excluding the favorable impact of foreign currencies and the $12.1 million in restructuring costs that occurred in the Prior Year Quarter, expenses increased 2.4% during the First Quarter. A reduction in infrastructure costs and lower store expenses were offset by an increase in expenses associated with Misfit, including approximately $6.5 million in purchase accounting related costs, and strategic investments. As a percentage of net sales, operating expenses increased 310 basis points to 50.6% in the First Quarter as compared to 47.5% in the Prior Year Quarter given the impact of fixed expenses on lower sales.
Consolidated Operating Income. Operating income decreased to $14.4 million in the First Quarter as compared to $56.2 million in the Prior Year Quarter driven by lower sales and gross margin, a $12.9 million unfavorable impact from changes in foreign currencies and increased investment in strategic initiatives including expenses associated with Misfit, partially offset by the benefit of lower infrastructure and store expenses. As a percentage of net sales, operating margin decreased to 2.2% in the

23



First Quarter compared to 7.7% in the Prior Year Quarter and included a negative impact of approximately 180 basis points due to changes in foreign currencies.
Sales and gross margins were negatively impacted by currencies in all regional segments during the First Quarter as compared to the Prior Year Quarter. On a constant currency basis, sales and gross profit decreased across all geographies. Gross profit margin in all regions was negatively impacted a shift in sales mix toward leathers, a lower margin category. Additionally, the Americas region was unfavorably impacted by increased off-price sales and Europe was negatively impacted by promotional activity in our outlets to improve conversion rates. These negative impacts to gross profit margin were partially offset by a favorable impact from our pricing initiatives in all regions. Operating expenses decreased and were favorably impacted by foreign currency changes in all three geographic regions, Americas, Europe and Asia, but increased in our corporate cost area during the First Quarter as compared to the Prior Year Quarter. Operating expense comparisons in the Americas and Europe regions were also favorably impacted by restructuring charges incurred in the Prior Year Quarter. Increases in the corporate cost area were primarily driven by increased investment in strategic initiatives including expenses associated with Misfit, partially offset by restructuring charges incurred in the Prior Year Quarter.
Operating income by segment is summarized as follows (dollars in millions):
 
For the 13 Weeks Ended April 2, 2016
 
For the 13 Weeks Ended April 4, 2015
 
Growth (Decline)
 
Operating Margin %
 
 
 
Dollars
 
Percentage
 
2016
 
2015
Americas
$
59.6

 
$
76.8

 
$
(17.2
)
 
(22.4
)%
 
17.7
%
 
20.9
%
Europe
28.5

 
33.3

 
(4.8
)
 
(14.4
)
 
13.6

 
14.2

Asia
17.9

 
24.3

 
(6.4
)
 
(26.3
)
 
15.7

 
19.6

Corporate
(91.6
)
 
(78.2
)
 
(13.4
)
 
17.1

 
 
 
 
Total operating income
$
14.4

 
$
56.2

 
$
(41.8
)
 
(74.4
)%
 
2.2
%
 
7.7
%
Interest Expense. Interest expense increased by $1.8 million during the First Quarter as a result of increased debt levels in comparison to the Prior Year Quarter.
Other Income (Expense)-Net. During the First Quarter, other income (expense)-net decreased by $4.9 million to $2.3 million in comparison to the Prior Year Quarter. This change was primarily driven by less net foreign currency gains resulting from mark-to-market hedging and other transactional activities as compared to the Prior Year Quarter.
Provision for Income Taxes. Income tax expense for the First Quarter was $3.3 million, resulting in an effective income tax rate of 30.7%. For the Prior Year Quarter, income tax expense was $18.5 million, resulting in an effective income tax rate of 31.3%. The lower effective tax rate in the First Quarter as compared to the Prior Year Quarter was primarily due to a higher portion of income derived from foreign sources taxed at lower effective tax rates.
Net Income Attributable to Fossil Group, Inc. First Quarter net income attributable to Fossil Group, Inc. decreased to $5.8 million, or $0.12 per diluted share, in comparison to $38.1 million, or $0.75 per diluted share, in the Prior Year Quarter. Diluted earnings per share in the First Quarter included an $0.08 per diluted share decrease related to foreign currency changes. The favorable impacts of the Prior Year Quarter restructuring charges, a lower effective tax rate and a lower share base due to our share repurchase program were more than offset by a decline in sales and operating income, including an unfavorable impact from Misfit purchase accounting costs, and less net foreign currency gains resulting from mark-to-market hedging and other transactional activities during the First Quarter compared to the Prior Year Quarter.
Liquidity and Capital Resources
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 the number of new stores we open, other capital expenditures and strategic investments such as acquisitions and stock repurchases. Our cash and cash equivalents balance at the end of the First Quarter was $306.8 million, including $301.9 million held in banks outside the U.S., in comparison to cash and cash equivalents of $236.8 million at the end of the Prior Year Quarter and $289.3 million&#