Fossil Group Inc (FOSL) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the FOSSIL fourth-quarter earnings conference call. (OPERATOR INSTRUCTIONS) At this time, I would like to turn the presentation over to Allison Malkin. Please go ahead, ma'am.

Thank you. I hope each of you has received a copy of our earnings release. If for any reason you did not, you may download it from FOSSIL's website on FOSSIL.com by clicking on Investor Relations on the home page index and then on earnings releases. At the onset of this call, we hope to provide each of you with some additional insight into the specifics surrounding our operating results and financial position at the conclusion of our fourth quarter and fiscal year ended January 1, 2005.

Before we begin, you should be aware that during this conference call certain discussions will contain forward-looking information. Actual results could differ materially from those that will be projected during these discussions. Additional information concerning a number of factors that could cause actual results to differ materially from the information that will be discussed is readily available in our report on Form 10-K for the fiscal year ended January 4th, 2004 and on Form 8-K filed September 15th, 2004.

Now I will turn the call over to FOSSIL Chairman Tom Kartsotis.

Good morning and thank you for joining us to discuss our fourth-quarter and fiscal year 2004 results. Joining me are Kosta Kartsotis, our President and CEO; Mike Kovar, CFO, and our EVP Randy Kercho. I would like to start off this morning highlighting our fiscal 2004 achievements and progress on our most recent initiatives. Kosta will then provide you with an overview of our fourth-quarter performance by business, and Mike will provide you with an overview of our fourth-quarter financial results in addition to our earnings guidance. Following our prepared remarks, I will open the call up for any questions you may have for us this morning.

We are pleased to report record fourth-quarter and full-year results, especially given the impact of higher spending to support our brands and product line. We achieved double-digit gains in sales and net income and increased market share worldwide. At the same time, we launched new license brands, we strengthened our infrastructure and we assessed our internal controls across our significant operation.

Briefly touching on the numbers, for the fourth quarter, we reported consolidated net sales growth of 19 percent, excluding currency gains and a 28 percent increase in diluted earnings per share of 50 cents versus 39 cents last year. For the year, excluding currency gains worldwide sales rose by 19 percent and diluted earnings per share increased by 34 percent to $1.25.

Equally as important, we achieved our fourth-quarter financial results with significant contributions from both existing and new businesses and from all geographic regions. In domestic watches, we increased sales by 14 percent with each of our brands contributing to this gain. In the accessories category we increased sales by 32 percent with significant contributions from our handbag and sunglasses collection. In Europe sales growth rebounded significantly from the third quarter, achieving a 23 percent growth. Other international sales, which consists primarily of sales to the Asia-Pacific region, Canada and our U.S. export sales to distributors, grew by 34 percent. While our capabilities to manufacture Swiss-made watches helped to drive this growth, FOSSIL, along with our non-Swiss license brands, also grew strongly, thereby demonstrating once again the effectiveness of our portfolio approach.

In early January of 2005 we acquired two of our distributors, one in Sweden and one in Taiwan, which we expect will add incremental revenue of approximately $10 million during 2005. And over the long term, we expect these two markets to provide additional sales growth to our already strong international base.

We also expanded our own retail distribution, allowing us to enhance the image of the FOSSIL brand and showcasing our full range of products. During the quarter, sales within our Company-owned stores rose 24 percent.

On the strategic front, we were also pleased to secure new businesses that will add to our growth. We believe MICHELE watches, which we acquired in April, is poised to effectively compete in the fashion luxury category. It also provides us a vehicle which we believe can be translated overseas and into additional core categories such as accessories and jewelry in the next few years. We also opened the mass-market channel of distribution for our Company with a new watch and accessory product offering. In 2005 we expect our mass-market business to reach $30 million in sales with room to grow even beyond that with the fact that the total mass-market watch business is estimated to exceed $2 billion.

Regarding new licenses, we signed to begin shipping watches under the Michael Kors label in the second half of the year, and we will begin to ship watches under the Marc Jacobs label later this year and Adidas watches will launch in early 2006.

In total we're pleased with our financial performance of 2004 which once again validates the success of our operating model. As we look ahead, our priorities are focused on furthering our leadership position in the global watch industry while capitalizing on the success and expanding our scope within our accessory and jewelry businesses.

And now I would like to turn the call over to Kosta who will review our fourth-quarter sales highlights.

Thanks, Tom. Starting with our FOSSIL watch business, in total FOSSIL watch sales worldwide were essentially flat with the fourth quarter last year. This result was expected given that we were up against a tough comparison in FOSSIL's largest markets, the United States and Germany. Specifically FOSSIL watches in the U.S. market rose by 20 percent in the fourth quarter of 2003, which was unusual in that we would normally expect mid to high single digit gains in our more mature geographic markets.

Comp declines in the United States were fully offset by gains in other markets. For example, in Germany sales rose by 11 percent, excluding currency, which was aided by increased advertising spends in that region.

In other markets where FOSSIL’s penetration is lower, we achieved strong growth as we expanded our penetration to existing locations, opened new doors and increased advertising to expand recognition of the brand. For example, our FOSSIL sales in Italy were up 59 percent in local currency and in Asia were up over 20 percent.

As a leader in the fashion watch area, it is our intention to deliver increased newness into the FOSSIL brand to reinvigorate its U.S. growth. The bulk of our newness will be introduced to consumers during the Company's second quarter.

We have a number of terrific new initiatives for this year that have received a very strong reception from our retail partners, and we feel optimistic about our business in the United States.

At the same time, we will continue our international expansion of FOSSIL watches and are extremely pleased with the growing loyalty and brand recognition of FOSSIL in Europe and now in Asia. We remain enthusiastic that our efforts will lead to market share gains going forward.

Turning to our licensed fashion watches, total sales here rose by 11.8 percent excluding currency gains. This growth was driven by strong gains in our Burberry, Diesel and DKNY brands. As the numbers show, we continue to be successful in capitalizing on the increased demand for global brands. This places us in a great position to execute our licensed watch strategies in 2005, as well as to add new brands to our fold when opportunities present themselves. For example, we will launch our Marc Jacobs collection in the second half of this year and adidas in 2006.

Turning to our luxury business and starting with MICHELE, once again this brand's performance exceeded our expectations, and the sell-throughs in the fourth quarter were terrific. Sales in the fourth quarter totaled 11 million and 30.7 million for the nine months that they have been part of the FOSSIL group.

During the quarter, we launched MICHELE watches in a very small number of doors in the UK, Germany, Italy and Japan. We had good results, for example, in an exclusive program with Harrod's in London. As we look ahead, we will continue to support the success and creativity of MICHELE in the United States while elevating the status overseas.

Turning to Burberry, this brand enjoyed strong growth in the fourth quarter with sales rising by 19 percent, excluding currency with particularly robust gains recorded in the United States and in Asia. For the year, Burberry sales totaled 15.8 million, which was slightly ahead of our expectations. It is rewarding to see our efforts prove successful, and we expect similar performance from Burberry in 2005.

In RELIC watches, we experienced sales growth of 26 percent during the quarter, continuing its momentum from the first nine months of the year. RELIC has become a top brand in the mid-tier category in the United States and has given us additional growth opportunities.

In accessories, this business continues strongly with across the board strength recorded for both our FOSSIL and our RELIC brands. This led to a 32 percent increase in sales during the quarter. The FOSSIL leather business in women's and men's, as well as the eyewear business, showed very strong results as the brand continued to gain importance in the stores.

Our FOSSIL handbags business was once again terrific, and we are gaining market share in a category that has been one of the fastest-growing businesses in the stores this year. We feel we are in a position to continue this trend as we are gaining momentum and getting very strong sell-throughs at retail.

In the jewelry category, we reported strong gains and continue to believe that jewelry represents a significant growth vehicle for the Company long-term. This jewelry flows to our global infrastructure since we sell through mostly watch and jewelry stores outside the United States. It gives us a lot of opportunity for leverage as well as growth.

In total jewelry sales rose by 47 percent with particular strength recorded in the FOSSIL brand. Armani jewelry also posted a double-digit sales increase. We continue to expand our presence concentrated on the markets of Europe, Asia and the United States.

Turning to FOSSIL retail, we continued the positive momentum from the first nine months of the year, posting a 24 percent increase in fourth-quarter sales and a comp sales increase of 7 percent. This was especially strong considering that last year's comp was plus 15.

For the full-year 2004, our comps were plus 11.8 percent, and this is on top of a 10.6 percent comp for the prior year.

This performance is due to three things: great products from our design team, increasing brand strength and a great performance by our retail operations group. We ended the year with 136 stores worldwide, having opened eight stores during the fourth quarter, including two outlet and six full-price locations including our first Modern Watch store. 136 stores at the end of the year included 60 outlet stores and 76 full-price stores, including 23 stores internationally. This compares with a total of 119 stores at the end of the prior year with 53 outlets and 56 full-price stores, including 22 internationally.

For 2005 our plans include the opening of 10 to 12 outlet locations, 16 to 18 full-price Fossil locations and two to four Modern Watch stores. We expect to end the year operating about 165 stores.

Our retail organization has made considerable progress over the last few years. We believe this development will further enhance our long-term growth and give us a vehicle to build our brand globally, as well as to enhance our long-term return on invested capital.

As our results demonstrate, the fourth quarter and fiscal 2004 proved highly rewarding and productive for FOSSIL. We executed on our growth initiatives while entering new lines of business to enable us to sustain our momentum. We invested a lot of energy and a lot of resources into building our scalable global platform. The strength of our brands and management team, along with support from our vast infrastructure and our commitment to design excellence, has led to the results we have achieved to date and put us in a great position for future growth in sales and earnings.

And now I would like to turn the call over to Mike to provide some more detail on the financials.

Thanks, Kosta. First, I would like to once again summarize the results of the fourth quarter. Net sales increased 22.8 percent to 318.4 million compared to 259.2 million in 2003. Gross profit grew 29.8 percent to 175.9 million or 55.2 percent of net sales compared to 135.5 million or 52.3 percent of net sales in 2003. Operating income rose 22.7 percent to 56.9 million or 17.9 percent of net sales compared to 46.3 million or 17.9 percent of net sales in 2003. Net income increased 29.6 percent to 37.6 million compared to 29 million last year, and diluted earnings per share rose 28 percent to 50 cents a share on 74.7 million weighted average shares outstanding compared to 39 cents a share on 73.5 million weighted average shares in '03.

The fourth-quarter sales mix breakdown was as follows. 38.5 percent from domestic wholesale sales and 14.5 percent from FOSSIL-owned retail store locations and 47 percent from sales generated in over 90 countries outside the United States. As you can see, we continue to experience a slightly higher percentage of sales from our international retail store segment.

The 22.8 percent fourth-quarter sales growth consisted of the following increases by category and geographic regions. Domestic watch sales increased approximately 14 percent to 80.5 million compared to 70.7 million in the prior year quarter. New initiatives including MICHELE, mass-market and Michael Kors plus continued increases from our RELIC watch line more than offset the decline in the FOSSIL brand. Other domestic sales, which include our accessories and sunglass businesses, grew 32 percent to $42 million compared to 32 million in the prior year quarter. We experienced strong gains in all categories with particular strength in women's handbags as Kosta alluded to earlier.

Sales generated from European-based wholesale operations grew 23 percent, 13 percent excluding currency gains to 114 million compared to 93 million in the prior year quarter. Growth in this segment was mainly attributable to sales volume growth in FOSSIL watches and jewelry.

Other international sales, which typically consists of export sales to distributors and sales from our Canada and Asia-Pacific wholesale operations, increased 34 percent, again 32 percent excluding currency gains to 36 million compared to 27 million in the prior year quarter, and we experienced solid growth across all our brands and geographical areas.

Finally, sales from our own retail stores grew 24 percent to 46 million as a result of comp store sales increases of 7 percent in the quarter and 13 percent growth in the average number of doors opened during the fourth quarter.

Finally, gross profit margins. Gross profit margins expanded by 290 basis points to 55.2 percent in the fourth quarter compared to 52.3 percent in the prior year quarter. This increase is mainly attributable to stronger foreign currencies, increased gross profit margins for the FOSSIL domestic watch business, and growth in our higher margin producing international retail store segment as a percentage of consolidated net sales.

FOSSIL watch margin increases were a result of higher sales mix of metal bracelet styles versus leather strap styles that generally result in higher average unit retails and higher margins. Gross profit margin increases were partially offset by an increase in sales mix related to lower margin mass-market watch and accessory sales.

Operating expenses as a percentage of net sales increased to 37.4 percent in the fourth quarter compared to 34.4 percent in the comparable prior year period. Overall operating expenses increased 30 million to 119 million compared to 89 million in the prior year period. Included in fourth-quarter operating expenses is approximately 3.4 million in additional costs related to the translation impact of stronger foreign currencies into U.S. dollars and 4.7 million of operating expenses associated with new initiatives including MICHELE, mass-market and Michael Kors watches. Excluding these items, operating expense increases were mainly driven by increased advertising expense, payroll and consulting costs.

Advertising increased approximately 12.9 million to 11.6 percent of net sales compared to 8.6 percent of net sales in the fourth quarter '03. This increase was primarily due to increased cooperative advertising with customers related to the FOSSIL brand in the U.S., increased media, outdoor and point-of-sale activities for FOSSIL and licensed brands in Europe, and new fixture rollouts for certain other watch brands. Increased payroll and consulting costs were related to supporting new initiatives such as Swiss-made watches and jewelry, the SAP implementation rollout, as well as continued production support, and costs related to our Sarbanes-Oxley compliance project and European consolidation effort.

Improved gross profit margins were offset by increased operating expenses as a percentage of sales which resulted in our fourth-quarter operating profit margin remaining unchanged at 17.9 percent of sales when compared to the prior year quarter. Operating income for the fourth quarter included approximately $9 million in additional income as a result of the effects of stronger foreign currencies.

For the year, operating profit margin increased to 15.2 percent of net sales compared to 14.1 percent in 2003. Our effective income tax rate decreased to 34 percent and 35.8 percent during the fourth quarter and full-year respectively compared to 36.9 percent and 37.6 percent respectively in the prior year comparable period. This decrease was primarily related to a higher percentage of income generated from countries whose statutory income tax rates are lower than the Company's historical average income tax rates.

Now turning our attention to the balance sheet. We ended the year with a cash position of 192 million compared to 164 million in the prior year, and working capital rose to 366 million, an increase of 52 million or 17 percent over working capital in the prior year. Accounts Receivable increased 29.6 percent to 155 million at quarter-end compared to 120 million at the end of the prior year. Days sales outstanding increased to 44 days for the fourth quarter compared to 42 days in the prior year period.

Inventory at year-end was 179 million or 41 percent above the prior year inventory level of 127 million. As we have indicated previously, we don't feel the 2004 inventory level is comparable to fiscal 2003 given that we ended fiscal 2003 with an unusually low inventory level. In fact, inventories at the end of 2003 rose by only 4.1 percent as compared to 2002, while net sales grew 17.8 percent.

For comparative purposes, we believe a better indication of our current inventory position will be based upon a two-year assessment of the inventory growth and relationship to sales growth. From 2002 to 2004, sales have grown 45 percent, while our inventories have increased by 47 percent during that same period.

Also, you may have noticed we had approximately 27 million of outstanding short-term debt at year-end. This includes approximately 3 million associated with the revolving line for our Japanese subsidiary which has been outstanding now for a couple of quarters. The additional 24 million reflects amounts drawn against our U.S. credit facility late in December in order to settle certain inter-company balances between our U.S. business and foreign subsidiaries. And this outstanding revolver amount was subsequently repaid in early January of '05.

Capital expenditures for the full year were approximately 27 million. We are expecting 2005 capital expenditures of approximately 30 million. Amortization and depreciation expense for the full year was approximately 23 million, and we are estimating 2005 depreciation and amortization expense in the $28 million range.

As it relates to 2005 guidance, our sales guidance for fiscal 2005 is for sales growth in the range of 15 to 17 percent, which is in line with our long-term targets of 15 to 20 percent. We don't anticipate any one quarter's sales growth to be significantly outside of this range. Our guidance assumes that the yearly U.S. dollar conversion rate stays near its current levels.

It is also important to note that while we expect gross margins to increase slightly due to continued growth in our international and retail segments as a percentage of total sales, we are not currently forecasting any increase in our operating margins. Offsetting the increase in gross profit margin are costs associated with developing our new initiatives including Swiss-made watches, jewelry and new license brands, as well as increased marketing to build brand awareness and increased depreciation expenses related to our infrastructure enhancements.

As we continue to grow in the watch, jewelry and retail store segments, we will continue to experience a greater percentage of our yearly profits in the back half of the year. As a percentage of sales, costs will be more significant in the first half of the year when due to seasonality our sales volumes are lower while our carrying costs of stores, personnel and infrastructure costs incurred in the back half of the prior year carry into the new year. Without taking into consideration accounting matters, which I will address shortly, we have provided full-year guidance for diluted earnings per share in the range of $1.44 to $1.48, which at the midpoint represents growth of approximately 17 percent over fiscal 2004 diluted earnings per share of a $1.25. For the first quarter, we estimate diluted earnings per share of approximately 24 cents as compared to actual first quarter '04 results of 22 cents.

Regarding recent accounting and legislative changes, during 2005 pursuant to the American Jobs Creation Act of 2004 we expect to repatriate subsidiary earnings which were not considered indefinitely invested. As a result, we expect to receive an 85 percent dividend received deduction for eligible dividends, resulting in a lower effective tax rate for 2005. The repatriation is expected to reduce our 2005 effective tax rate to approximately 32 percent, which amounts to an approximate onetime benefit of 9 cents per share fully diluted for the year, which includes an estimated 2 cent benefit for the first quarter. We will use these funds on qualified expenditures in the United States in accordance with our approved domestic reinvestment plan.

It should be noted that our initial guidance for 2005 does not include the effect of expensing stock options as required under new accounting rules which we will implement during the third quarter of fiscal 2005.

Related to longer-term expectations, reaching a 17 percent operating margin remains our goal, and we still remain confident that we can achieve that level of operating efficiency. However, based upon the marketing and infrastructure expenditures targeted for 2005, it is likely that our goal of reaching a 17 percent operating margin will extend into 2007.

At this point, I will turn it over to Tom to conclude.

Thanks, Mike. In summary we are pleased with our performance in 2004 and are equally enthusiastic about the future. We report the six drivers of our growth. One, FOSSIL worldwide is continuing to expand our global distribution of the brand. Two, licensed watches with strong gains expected from existing and new license brands. Three, our new initiatives such as MICHELE and our mass-market business. Four, our Swiss initiative and in particular Burberry. Five, accessories such as handbags and jewelry. Six, company-owned retail. We also expect our higher margin business segments to grow at a faster rate, which bodes well for increased gross margin. This, along with the sales growth that is planned, places us in a great position to meet our growth objectives.

And now I would like to turn the call over to the operator to begin the question-and-answer portion of the call.

(OPERATOR INSTRUCTIONS). Barbara Wyckoff, Buckingham Research.

Could you detail the components of the inventory? How much of spending was used to fund new initiatives such as MICHELE and Michael Kors, etc.? Could you talk about your efforts in entering the jewelry business? Where are you in this process? When do you expect to have some jewelry outside of the FOSSIL and the Emporio Armani?

I will touch on the inventory question, and then I will let Kosta respond to the jewelry question. Related to the inventory increase between the Kors launch and the inventory to support that and where we ended the year with the MICHELE watches, we saw about 6 million in additional inventory for those two businesses.

And mass-market, Mike?

Mass-market was just over $1 million. Again, a lot of that is obviously drop shipped right out of our factories under a domestic import program, so we don't ever see that inventory in our system, which is why the number is so small for the mass-market.

Okay.

As far as jewelry goes, we are still continuing to build infrastructure, design sourcing and execution for that category with FOSSIL and Armani. And while we are doing that, we are also looking at future opportunities. There is nothing really that is firm in the works yet, except that we are working on just a study in process of what MICHELE jewelry might look like, and we do expect that we would add additional brands in the next couple of years or so.

Noelle Grainger, J.P. Morgan Chase.

A few things. First on inventories, Mike, when -- I have not had time to go back and look at each quarter -- but when do you feel you get to kind of a normalized comparison, meaning obviously you pointed out last year's fourth quarter you were up only 4 percent. Do we get to a normalized inventory comparison in Q1 or Q2? And kind of how do you look go-forward at inventory levels in terms of expectations given your new businesses? Do you think it will continue to outpace your sales growth rate? And then I have another question.

On the expectations as to when the inventory growth will be more in line with the sales growth, what we are looking at right now is probably in Q2 of next year. If you look at Q1 '04, the inventory was up about 16 percent, which was slightly lower than our sales increase for Q1 last year. But again that was coming off only a 4 percent increase in the fourth quarter in the prior year. So we are estimating right now that we will see inventories back in line in the second quarter of '05.

As it relates to our long-term planning for inventories, as we have always contended, other than the blip that some new businesses may cause on the inventory growth, we expect to keep our inventories growing in line with our sales expectations. So on a full-year basis for 2005 with 15 to 17 percent type of guidance for the top line, we would expect our inventories once we get into 2005 second quarter to be in line with that. The only thing that could cause a distortion in that is obviously the adidas launch that is scheduled for January of '06 will obviously have to have inventories in place at the end of the year to support the launch of that business.

Great. My second question around the ad spend in the quarter, it came in really higher than I had expected. Did you end up spending kind of as you moved through the quarter more than you had planned? Can you give us a full-year number and a better sense, Mike, of what you expect to spend in '05?

Yes, I would not say that we spent more than we planned to spend. I would mention one thing. If you look back in the third quarter, our advertising spend as a percentage of sales was actually slightly down from the prior year. And if you recall, we indicated in the Q3 call in November that we expected higher percentages of advertising spend in the fourth quarter. So I think based upon the fact that we were trying to obviously support a lot of our businesses outside the United States including FOSSIL, the 11.6 percent was planned.

If you look at it on a full-year basis, due to the fact that most of the increasing in the spend occurred in the fourth quarter, on the full-year basis, advertising as a percentage of sales went from 7.1 percent in '03 to 7.7 percent in '04. And our expectations for 2005 and our guidance that we have given is that that will continue to grow about 50 basis points relative to sales.

Okay. Thanks very much.

Dororthy Lakner, CIBC World Markets.

Another question on the advertising spending. Would you expect in '05 that there also it will be back-end loaded? And also just related to the guidance on sales growth, I'm just curious, the assumption would be that if you're spending more on marketing your brands, eventually you expect to get a payback in the form of sales. And so I'm sort of wondering how you reconcile somewhat lower sales growth than I would have been looking for overall.

You know you talked about 15 to 20, now you're saying 15 to 17. If you are spending more on advertising, I'm just a little bit confused about how that reconciles.

And then second question related to the FOSSIL brand, just a little bit more clarity on where you are seeing the higher margins on the FOSSIL brand given the decline in sales that we are seeing domestically. Thanks.

I will take the first question on the advertising. The guidance for 2005 includes the advertising growing in line quarter-over-quarter. So we would expect that each quarter you should see the advertising spend up near the 50 basis points that I talked about earlier.

With regard to the sales growth at 15 to 17 percent, you know we consider that still a pretty significant number, and it is within the range of the 15 to 20 percent. I think if you look at 2004’s guidance last year, we had suggested growth in the 15 to 18 percent range on a full-year basis.

One of the things that we don't have at our back right now is obviously the benefit of the Euro built into our model because we're basically providing for a Euro at its current level and won't see the significant gains that we saw in 2004. Kosta, do you want a take on the FOSSIL brand?

I think what we saw during the year, and I think we mentioned this early in the year, is that we were going to be testing some slightly higher prices on FOSSIL. If you look at the marketplace in general, the better merchandise was selling better, and increasingly during the year, we saw that. In fact, towards the end of the year, we saw some of our highest priced watches turning the fastest. So this is an ongoing process where what we did is put some more expensive details, more expensive treatments, multifunctions, etc. into the product, and some of that gave us higher retail prices. Some of it we were able to benefit in our margins, and we do see that as part of the strategy going forward. The customer obviously is reacting to more better merchandise, stuff that has more details on it, more trims, and they are willing to pay a slightly higher price for product that they want.

This is somewhat different than what we have seen in the past, and probably was somewhat -- probably the result of that is our weak sales during the year. I think the consumer somewhat wanted to buy better watches. We did have some information not only selling faster turns on our higher price merchandise, but also consumers coming in and looking for better merchandise in our own stores. So part of our strategy going forward is to do that across the board in the FOSSIL line is to put better merchandise in every category, slightly higher retail, and we do think that we can have some ongoing benefit to our margins in that regard.

And also possibly the sales, since the prices are higher, we should see that at least over the next three quarters?

Clearly I think that is one of the opportunities we have, that we can sell (technical difficulty)--. If we can target to sell 5 percent or 10 percent more units in the United States with a higher retail, that would be a great result.

John Rouleau, Wachovia Securities.

My first question really has to do with expenses and the infrastructure build and your operating margin target that you put out there. What has changed on the expense or infrastructure side to have you push that out a little bit in terms of the build in the expenses?

A couple of things, John, that I would point to. One is that we gave guidance at 30 million and increased capital expenditures in 2005. We will continue to roll out SAP in Europe, and as those operations come online, obviously we will have to carry the additional depreciation. That in itself was kind of always known in the guidance.

What we are doing is we are actually expanding SAP in a couple of other areas as well that will affect it partially in 2005 as it relates to a new HR system, and as well as looking at a new merchandising system for our retail stores.

On top of that, what we are finding is in areas such as our Swiss watch businesses and specifically jewelry, we're having to continue to add infrastructure to put ourselves in a situation where we build a solid platform to be able to take on additional brands in those categories without obviously affecting the infrastructure. So we are still looking for production and sourcing opportunities. We're looking for design and development talent, and we will be growing those pieces of the infrastructure throughout 2005. And even though we expect significant gains to continue in our jewelry business, we feel that the spending pace will outpace those specific businesses during the '05 period.

And as a follow-up to that, the jewelry side, that has been doing well and growing nicely for sometime, but is that now at the level where you feel like you really need to step it up? Again, I'm just trying to go back to deciphering what has changed there because I know it has been growing nicely, but my sense is now that you're maybe stepping up the commitment even higher to it, or can you just further talk about that?

Yes. In fact, we do have additional expenditures in our budget this year for more infrastructure. We're trying to build a platform of infrastructure that can do the design and sourcing because we already have this big distribution network out there waiting for it and we have access to brands. I mean it is a big looming opportunity that will flow through our system, and we have to get the first piece of it done, which is the infrastructure for design and sourcing.

Okay.

I think we also talked about where we talked about acquisitions that the one area that we have been looking in acquisitions for over the last two to three years is maybe a small jewelry business that really had a lot of its infrastructure built out. And over the last two to three years, we just have not found anything out there to support that. So I think it is a commitment on our part to go ahead and develop that type of infrastructure internally to take advantage of potentially extending the brands to other licensed businesses or extending the category to other licensed brands and owned brands that we have.

Okay and maybe just one more and then I will hop back in the queue. But Armani I don't think you talked specifically to that. You mentioned MICHELE and Burberry and RELIC and DKNY. Can you just talk -- I know there was some relatively high expectations for Armani in the quarter?

For the full-year, Armani continued to grow at a double-digit pace. In the fourth quarter specifically, the business was up about 10 percent. So a little bit less than its run-rate, but still performing nicely. We're seeing nice gains in Asia-Pacific with the brand as it means more towards more of a luxury customer in that environment, and we expect that in 2005 we will continue to see nice increases in Armani.

Monica Brisnehan, RBC Capital Markets.

After the third-quarter call, you had mentioned expectations that FOSSIL brand watches in the U.S. would probably continue to be soft in the fourth quarter, which we saw, and then you expected that to rebound somewhat in the first quarter. I was just looking to see if that is still on track and what you're doing to make that happen.

Well, obviously we are not giving guidance for our shipments so far in the first quarter. But what we do expect is that our positioning in the marketplace and our design strength and our distribution and our marketing efforts will put us in the position that we're going to be able to gain market share again in the United States.

What we have done basically is we have restructured our entire FOSSIL business, our design, our marketing and our sales force and our management there is all restructured and different. We also have dramatically ramped up our product development path, and we've got a number of new initiatives in the marketplace that we think are pretty exciting -- some of the best stuff we've put out in a number of years, including a big relaunch of our Big Tick line, which is something that we have a patent on and we have an exclusive for worldwide. We have a big relaunch going out at mid-year, and it's got (technical difficulty)-- some new marketing ideas in it, and we think it's going to be terrific. We have shown it to a few people and we have got a great response to it. But we are basically bringing all of our resources to bear against our competitors to put this situation into a positive mode in the United States and around the world. We think that it is going to happen because of our resources and our design strength.

Can you also characterize sort of how you feel the domestic watch market is looking, what is going on in the U.S. overall in the watch market?

Well, what we saw last year in the United States is that the watch business was pretty flat. In fact, you might say department stores for full-year were down. And I think there is a couple reasons for that. One is that I think the customer was trading up to a certain degree, and we benefited from that in our higher price lines such as MICHELE and Burberry and Armani. So I think that impacted it.

Also, I think last year was sort of the year of the handbag. There was a huge amount of increases in sales across the board in department stores for handbags. And that is actually handbags is a much larger business than watches. So the amount of open to buy resources salespeople that went into that category in the stores probably took a little bit out of the troubled watch business. So the total watch business was somewhat soft in the United States, especially in the fashion area where we are, and that is part of I think what happened to us.

Oz Tangun, Southwest Securities.

Can you guys talk about the Modern Watch Company? And I guess you only opened one. I guess the plans are to open for four. But just in general Modern Watch Company what do you expect? What do you see and then your retail growth? Obviously you're going to be opening more stores next year. But on a longer-term basis, where do you think you can see the number of stores five years, seven years from now?

Well, the Modern Watch Company store we opened in Glendale, California opened actually about 10 days before Christmas. It was running late unfortunately. So we did not get the full benefit of seeing information for Christmas. And the store looks great. It is about 800 square feet. It has got all our brands in it. In addition to that, a few other brands, and we continue to think it's a big opportunity. It is still somewhat a work in process in that we have retooled a lot of the things, the assortments, the visuals, put in some new ID and stuff on the windows. And we are opening another store in the Aladdin shopping area in Las Vegas probably in about six or eight weeks or so. And then we've got scheduled another two to four stores. We really think that long-term this can be a great vehicle for us, not only in the United States but globally and give us additional distribution for our brands.

In addition to that, we did open four new FOSSIL stores that were somewhat smaller, say in the 1500 square foot range, and the same thing there. It opened late in the quarter, and we are doing a number of tweaks to that. But that model is something that we're rolling toward this year. There is something like 7 to 10 more of those stores, and we think that can be a big growth vehicle for us long-term as well.

But most of those issues I think are still in the incubator stage. We need to get them perfected. What we are trying to do is get to the point where we know that if we roll this out we are going to get a very high probability that we are going to get the returns that we want. And we're probably a year away from that. We are going to open about 30 stores this year, which is we think a strong number. We will make a lot of progress we think in getting these issues cleared up with how these stores look and the performance on them, and we do expect that long-term this can be a great opportunity for us. You might hear us say in a couple of years that we want to dramatically expand our retail organization, not only in the United States but around the world.

And what percentage of the inventory was related to leather strap watches? And if you guys maybe can share with us what percentage of revenues it accounted for in the fourth quarter just to give us a perspective?

I don't know that we want to drill down that far on any one brand. I would just say we have talked about the watch inventory and strap styles is in line with the selling that is going on, and it is obviously something that we brought down from where we were the previous year end. And it is probably in the 10 to 15 percent range of inventory and the 10 to 15 percent range in the FOSSIL sales.

One final question. You guys mentioned that handbags continues to be very strong and you expect that growth, the strength in 2005. Kosta, can you maybe comment or anyone else as to what will be driving the handbags business next year in your opinion?

Well, there is just a lot of interest in the category for one thing, and stores are giving it more open to buy and more space, and we are actually in a very good position that we are one of the top three or four brands in handbags and we may be the largest or second-largest branded company in leather handbags which is obviously at a higher price. So our positioning in handbags is actually somewhat better than the department stores at a slightly higher price, and we're benefiting from this whole trend of consumers wanting to spend a little bit more money for an item. And our trend is actually very positive relative to the stores (inaudible) that our momentum and our market share is increasing, and we showed increases in the fourth quarter. And we think that is going to continue and we will gain a bigger position and more space in the stores and continue to have growth. It is a big opportunity, but as I said earlier, the handbag business is several times the size of the watch business, so we are benefiting quite a bit from that.

Elizabeth Montgomery, SG Cowen.

I guess my first question is, I think, Kosta, at the beginning of the call you said you had a couple of initiative planned for Q2. I know you mentioned the relaunch of Big Tick. I wondered if you can give any color as to what the others are?

Well, we have a number of things out there that are somewhat directional towards our brand image, which is vintage '70s, and we've got a whole new set of details and treatments that are we're adding to the watches, more embellished styles, slightly higher prices. The looks are a little more contemporary, etc., which it is really an effort to upgrade the look and the styling and change the way that the products look as much as possible and put new products in the marketplace. This time of year is a very slow, relatively slow selling time of the year. Second quarter picks up quite a bit. We are going to be testing a lot of the things in our stores and the department stores and other stores in the United States and a lot of the stores around the world.

And the idea with our short leadtime is get these tests done in the second and third quarter and come back in the fourth quarter with a new array of best-selling styles. And we do think from some of the stuff that is coming out and the communications we are getting is that we could be in a good position to have good sales in the back half of the year from some of these new ideas.

I know you guys had some flat-screen TVs that you were testing at a couple of counters. Do you have any reads from those, or were they not in long enough as well?

Well, actually we just tested those flat-screen TVs. I'm surprised you saw them just in about three stores in the United States that we have in our department here in Dallas we have a group of people that does the animation and video lot for the website, etc., and they have done sort of a branded video and we have the capability of changing this frequently. So we can put these video streams in there, and when we launch Big Tick, for example, when you walk by the cases, you will see these animated TVs doing the presentations on Big Tick. We think it's a great vehicle for getting attention and communicating our brand image and something we are testing in a few stores right now. But we think it is going to be great for us.

Okay and then I apologize if you had talked about this already, but the Marc Jacobs watches, which are going to be in stores in the second half of the year, do you begin shipping those in Q2 or Q3?

I think, first of all, it’s the Marc Jacobs Collection line, which its retails are similar to MICHELE's, in the $900 range around there. It's a very, very small distribution, very elite distribution. So it is a relatively small business this year. The Marc Jacobs Collection line is probably going to ship I would expect in the third quarter. (indiscernible)

In 2006 we will do the Marc by Marc line, which will have a broader distribution and lower retail, say in the $150 price point, and we expect that that will be a larger launch because of the broader distribution and lower price points.

Susan Ng, Sidoti & Co.

I'm sorry if you have already commented on this, but if you have a breakdown of the FOSSIL brand watches within the inventory levels? And also there seems to have been improvement in international sales of FOSSIL watches. Can you identify some of the key issues of the differences between what you saw internationally and domestically? Was it the reception to the price points, the trends and transition away from leather cuffs, etc.?

When you ask about the breakdown in the FOSSIL brand watches and inventory, are you talking about what percentage of the increase they represented?

Yes. Thank you, yes.

Okay. Yes, for FOSSIL domestically, we saw an increase of right around 14 percent in the inventories, and internationally I would say our inventory increases for the FOSSIL brand were much more in line with the sales growth in those markets.

One thing I should mention about our inventories -- we have talked about this quite a bit -- is that the watch business is somewhat different than your typical merchandising businesses in that there is not a big weather-related component to it. There are not a lot of SKUs in there. Also, our leadtimes are short, 90 days. We also have our own outlet store organization that we send our liquidated product to.

And the other thing is that our inventory turns already are (technical difficulty) our competition turning three or four times a year with the other public companies in the watch business that turn much slower than that. So it is a little bit confusing about when you look at how much your inventory rises relative to sales.

I think your other question was asking about how the difference between our international business and our U.S. business and the type of products we are selling, is that correct?

Yes, and if there is a difference -- noticeably if there is a difference in the improvement in international sales out of FOSSIL watches versus domestic. Can you comment on some of the consumer trends that might have been affecting it? Maybe the reception to price points or any other key issues like that?

Well, it is interesting that the issue of price in watches really in the United States has been much more competitive in the last five years in the watch business, and we are starting to see that ease up in terms of price. We have not really had any price resistance at all outside the United States, and our prices are higher and our gross profits are higher obviously. We are starting to see the same kind of thing happening in the United States where we can expand our price points and put better merchandise in there.

But we do have because we are still relatively small, FOSSIL is globally, we have a huge opportunity. We have got some new people working on our international FOSSIL business, and we are putting a lot more emphasis on it and we have done more advertising and we are doing some testing on it.

We are really putting ourselves in a position where we can have a dramatic growth there. We do still believe that the business -- the total FOSSIL watch business -- can double in the next several years, and we are putting all our resources in a way that will enable us to do that because it's a big opportunity for us.

But we do see some slight tweaks in what we sell in different markets. The Big Tick thing is big globally because it is a big business outside the United States, and it is probably what we are most known for, and that is why we are putting so much emphasis on it in the middle of the year. We think it's going to really boost our business globally in the United States as well. So I think it's a great thing for us.

Robin Murchison, Jefferies & Co.

Just from the backseat, when you look out you guys have grown worldwide over the years quite substantially. And now you have got this huge sort of portfolio of watch brands, licenses, in addition to your own proprietary brands. And I just wondered if you could comment on what the two, maybe was it two or however many biggest sort of hurdles there are in trying to manage this company given that it is such a larger entity than it was three or four years ago?

One of the biggest issues we have is that we are -- we have this huge opportunity, and we are doing two things at one time. We're growing our business and we are building these brands, but we are also building an infrastructure that can handle the much larger business. That is somewhat of a struggle for us as we look at (technical difficulty)-- and IT and additional management and all that and really trying to do it in a balanced way where we can still show significant growth in sales and earnings and still build this platform that is going to enable us to have a much larger business.

We put a number of large expenses out there through SAP that enabled us to a certain extent simplify our business. We can replicate it easier and use all the same systems globally, manage inventories much more efficiently. Basically building what is a global consumer products company that is scalable and keep it as simple as possible and enable us to grow it long-term. Those expenses that were put in through SAP and the consulting fees and all the implementation of it are a huge amount of money. We also had some very large expenses related to Sarbanes-Oxley and all that.

So we are basically building a big platform of infrastructure and it is very expensive. At the same time, we are growing the business and putting additional brands in the marketplace and building management and still reporting a pretty good growth in earnings. And so that is really the struggle, is trying to keep it balanced and keep it ongoing.

But the big thing overall is that if you look at the amount of gross profit we added to the company, like $110 million, all the moving parts we have and all the infrastructure and the management we have done, we can continue to add huge amounts of sales and growth and growth in the gross profit. And at some point, this thing is going to be leveraging to a strong degree and that is what we're focused on. It is going to happen and we are working towards it, and it is going to be very scalable at a very strong operating income percent.

Did your Sarb-Ox expenses come in on plan, or where they higher than you estimated?

They were higher, a little bit higher than we had originally estimated.

Okay.

Both from the documentation side internally, as well as from the audit side. We probably spent totally in '05 around $3 million on the Sarb-Ox effort.

Barbara Wyckoff, Buckingham Research.

Can you talk about the trends in watches? I guess it is supposed to -- it seems that there’s a shifting back to classics. In the fourth quarter, what percentage does this classification represent, just a total (ph)? I guess maybe isolated to FOSSIL versus last year, and then maybe leather bands as a separate kind of comparison? And then could you comment on the importance of color as a trend? Is it continuing? Where do you see it going? And then I guess comment -- I know it is still early -- on the results of the watch floor in your own retail stores. I have seen that department stores I think are putting it into department stores (inaudible)? And can you comment on any results from that?

You know, the amount of classic sales I think we had in the fourth quarter was probably more than we expected, but it is always a big number, December, because that is when there are more consumers out there, a more broader base of consumers, and we tend to sell somewhat of a distorted amount of classic during that time period anyway.

The color issue I think was something that started off very strong early in the year with us selling a lot of pink watches, and part of the negative sales we had was that we accelerated (technical difficulty)-- to the marketplace based on the first quarter sales, and we added more colors to it. It really did not sell through as well as we expected. And what we saw towards the back half of the year was more black and browns and tan filling, and I think that is the same thing that is going on in the marketplace right now. There is more color selling I think in the first quarter than there will be in the back-half of the year.

So in any case we're still moving forward with small amounts of color, not larger amounts like we did in the past year. And the Watch Bar as you know had sold really well in our stores from day one when we shipped it in August last year. You know for those of you who don't know, this is a watch line where someone can build their own watch at the point-of-sale. We also do it on our website. You can pick your watch and pick your straps, and it enables the customer really to personalize what they want. It has done very well, and we are expanding it into department stores right now. It is just now rolling out, but we expect it is going to be a good thing.

It is also good because it makes the cases look different. When somebody walks by the cases in our store in the department stores, there is this new thing out there where it's kind of mix and match, put your own watch together. But we think it is a good thing for the watch business.

Noelle Grainger, J.P. Morgan Chase.

Two things. First, on the gross margin increase in the quarter, can you tell us how much came from FX and then maybe how much came from the FOSSIL ASPs versus mix? And then I have a second question.

For the quarter, the currency increase was just over 200 basis points of the total of 290, and I would say FOSSIL -- I don't have that information at hand. I would say FOSSIL would be the next largest part of the increase, along with the increase in retail and international as a total percentage of the business.

Okay, and then actually I guess I have two other questions. The second is just to clarify on your outlook, in your press release I think it indicated that you expect gross margin to increase slightly over '04, but that you expect '05 operating expenses, the operating expense ratio to remain flat. That sounds kind of different from what you talked about on the call relative to operating margins coming in flat. Can you just reconcile that?

Yes. Our expectations are that we are planning for operating margins for the full year to remain somewhat flat against 2004, and that any increase we may see in gross margins increasing will be offset by slightly higher expense ratios for the full year.

Okay. And then just lastly, I think you indicated to a previous question that the U.S. FOSSIL watch inventory was up 14 percent. Is that across channels, or is that just for wholesale?

And I guess if you indicated that the leather strap business is about 10 to 15 percent of both inventory and sales, I mean can you help us get comfortable with why that is up 14 percent, but your sales are down 16 percent?

The 14 percent was -- yes, it was a wholesale increase. And your second question was what, why that inventory is up?

Yes, you are saying (multiple speakers), you're saying basically you don't have excess inventory in leather strap watches. But still the U.S. FOSSIL watch inventory is up 14 percent and your revenue is down 16. So --?

I would say that would be more of a function as to prior year inventories being below the sales growth level for FOSSIL in the fourth quarter as well. If you look at it relative to 2002 base, our FOSSIL inventories are in line with expectations going forward. Again, you know the relative change in any one quarter's inventory as it relates to sales, it is sometimes gets distorted as you are planning for that future quarter business.

So I would say that from a FOSSIL perspective we are comfortable with the inventory levels being where they are. We will work through them as we talked about to get them back in line with the level of sales increases by the second quarter. But you know, we have no concern as to any exposure we have with reduction in overall margins for that business based upon where the inventories sit today.

Dororthy Lakner, CIBC World Markets.

Going back to the retail stores a second, could you just remind us what the average size of the typical FOSSIL store is right now compared to the smaller ones that you are opening? And then I have a follow-up.

Well, the average (inaudible) store that we have open right now is about 2000 square feet, and the new ones we are opening are 1400 square feet.

Okay, great.

And we do have -- the stores we have outside the United States in Europe and Asia are average probably 500 square feet. They are much smaller, and they are actually showing a higher profitability.

Right. Okay. And then just in terms of the FOSSIL business itself, I mean the FOSSIL brand wholesale was down 16 percent in this quarter, but clearly your retail stores are doing better with the brand than the department stores are. I just wondered if you could talk through the differences in assortment and why the stores are doing so much better?

You know that is a good question. We have done -- we've talked about many times we've done a great job over the last couple of years in improving our whole retail organization with the visual, the execution, and the sales staff, etc. It's just a very good organization, and we are seeing honestly the same thing in our own stores to a certain extent is that the handbag business has seen big growth and the watch business is not seeing big growth. So it is kind of a microcosm of what is going on in department stores. But you know there is somewhat of a younger customer in our mall stores than there would have been in the department stores, and that may have some impact on it as well.

Does that answer your question today, ma'am?

Yes, thank you.

John Rouleau, Wachovia Securities.

Mike, I just wanted to circle back to the tax rate issue. So will that tax rate theoretically pop back up then in the '06 year? I know it is coming down in general because of the mix shift, but it will hit 32 percent next year. Will it pop back up to some higher rate, although probably lower than what you had been running but some higher rate, or does it remain 32 kind of going forward?

No, it would pop back up because the Homeland Investment Act is allowing U.S. companies to repatriate earnings as a onetime opportunity in 2005. So for 2006 projecting purposes we would expect that our tax rate should look a little more like 2004. However, we are looking at opportunities from a strategic standpoint to continue assessing whether or not we can bring that effective rate down by doing some effective tax planning long-term.

Right and overall it is coming down because of the mix shift, correct?

Correct.

And then, Kosta, maybe you could touch upon a little bit comps in the full-price stores versus comps in the outlet. Maybe you don't want to quantify it, but just full-price versus outlet channel because the outlets I know were very strong towards the end of the year. And then maybe you know again on a monthly sequential basis how October, November versus December kind of shaped up without telling us too much or giving us numbers?

Well, all of our concepts had comp increases for the quarter and for the year, and we saw it shifted from quarter to quarter month-to-month, which (inaudible) was doing the math, but we thought good strong comp increases in all the different businesses. It is very encouraging to us, and we continue to think that we are going to have the same kind of increases.

So full price was up in the quarter. And then I'm assuming December was much better than November and October, or I mean how did December -- how did the year end up in December?

I would say December, if you looked at how the comps just kind of fell, December ended up being in line with what we saw for the October/November period. Probably a little more -- a little higher comps toward after the Christmas season simply because I think there is a higher percentage of people out there that are buying with gift cards, and like any other retailer, we are affected by that as well.

Okay. And then last but not least, another housekeeping item, the comparisons in the U.S. FOSSIL watch category, the wholesale side, correct me if I'm wrong, but that was down 5.4 percent in the first quarter last year. I think it was up slightly in the second quarter, and I don't have that number. Maybe you could provide it to us. And then again going back to the third quarter, it was down 10.9. So these comparisons start to get much easier starting in the first quarter.

That is correct. It was -- your numbers were correct. Second quarter I think it was actually up 1.5 percent.

Elizabeth Montgomery, SG Cowen.

Actually all of my questions have been answered.

At this time, we appear to have no additional questions. Please continue with any further statements you wish to raise.

Thank you. Should you want to replay this conference call, it has been recorded and will be available today from 10:00 AM Central time until 5:00 PM Central time tomorrow by dialing 303-590-3000 and entering reservation number 11020018. (Repeats numbers.) The conference call has also been recorded by StreetEvents and may be accessed through StreetEvents' website at www.streetevents.com or directly through our website at FOSSIL.com by clicking on Investor Relations on our home page and then on Webcast.

Finally, should you have any questions that did not get addressed today, please give Kosta or myself a call. Thanks again for joining us today. Our next scheduled conference call will be in May for the release of our first-quarter 2005 operating results.

Thank you, management. Ladies and gentlemen, at this time we will conclude today's teleconference presentation. We thank you for your participation. Please have a pleasant day.