A weak watch market — for both traditional styles and smartwatches — is putting the squeeze on Fossil Group Inc.
Debt watchdog Standard & Poor’s cut the company’s credit rating to “CCC-plus” from “B-minus,” citing “continuing sales declines, depressed profitability, and higher-than-expected cash burn, which has led to very high leverage.”
The outlook on the credit rating is negative.
Last month the watchmaker reported a 13 percent drop in second-quarter sales to $322 million with broad-based declines and adjusted losses before interest, taxes, depreciation and amortization of $15.4 million.
Fossil hired Alvarez & Marsal to work on a transformation plan that has the group working with a digital-first mindset in its operations, moving quickly and prioritizing shareholder value.
“Bloated retailer inventories in the U.S. 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 stop future development of smartwatches, which dropped more than 45 percent in the most recent quarter.”
All of that is expected to lead to continuing sales declines.
“We view the company’s capital structure as unsustainable, forecasting negative to minimal free cash flow generation,” the rating agency said.
“While we expect some improvement in margins over the next 12 months from Fossil’s transformation program, we do not anticipate these benefits will materialize until 2024, leading to constrained EBITDA generation through fiscal 2024,” S&P said. “As a result, we forecast negative free operating cash flow of about $50 million in fiscal 2023.”
Fossil ended its second quarter on July 1 with $132 million of cash and $73 million available under its revolving credit facility.
CCC-rated companies are deemed to be “currently vulnerable” and rely on favorable conditions to meet 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 does not stabilize or the company falters on its transformation plan, limiting prospects for sustained positive free cash flow generation,” S&P said.
Shares of Fossil were down 2.7 percent to $2.20 in midday trading on Friday, giving the company a market capitalization of about $115 million.