Fossil Group Inc (FOSL) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Fossil second-quarter earnings conference call. At this time, all participants' lines have been placed in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Tuesday, August 9, 2005. At this time, I'd like to turn our presentation over to Allison Malkin of Integrated Corporate Relations.

Good morning. I hope each of you received a copy of our earnings release. If for any reason you did not, you may download it from Fossil's website at Fossil.com by clicking on Investor Relations on the homepage 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 the Company's second quarter ended July 2, 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 1, 2005 and on form 8-K filed September 15, 2004. Now I will turn the call over to Fossil Chairman, Tom Kartsotis.

Good morning. Thank you for joining us to discuss our second-quarter fiscal 2005 results. Joining me are President and CEO, Kosta Kartsotis and Senior Vice President and CFO, Mike Kovar. I would like to start off this morning by providing an overview of our second-quarter results then Kosta will review our sales by major brand and category and also provide an update as to our current initiatives. Mike will then review our second-quarter financials and outlook in more detail. At the conclusion of our prepared remarks we will then open the call up for any questions you may have for us this morning.

Based on the unfavorable sales trends that developed during the latter part of the first quarter, we discussed with you that achieving our originally anticipated second-quarter results would be challenging and we reduced our expectations accordingly when we announced our first-quarter results back in May. At that time, we immediately looked into reducing our overall expenses while aggressively setting action plans to reinvigorate sales growth with expectations of positioning the Company to report improving trends for the holiday season.

While our second-quarter sales were lower than we had projected as Kosta will touch upon later in this call, we experienced an improved trend in our Fossil branded watch business. Also our operating expense reductions helped soften the bottom line impact of lower than anticipated sales. Specifically for the second quarter, net sales rose by 9.8% and while we met our operating earnings goal for the quarter, net earnings per share of $0.13 fell $0.01 short of consensus analyst estimates due to foreign currency losses that flowed through our non operating expenses.

During the quarter we implemented several initiatives to reinvigorate sales and earnings. This included infusing new styles into our watch assortments to generate excitement and an upward sales trend ahead of the more dominant second half of the year. To make room for these new styles at retail as well as to clear out our warehouse of slow-moving styles, we discontinued a greater volume of watches than we typically do during the second quarter. As a result, we moved more product through third parties versus our outlet stores which placed some additional pressure on our consolidated margin. Over the balance of the year, while we may still need to take a more aggressive approach than in previous years in rebalancing our assortment, we believe the largest impact to our margins is now behind us.

Second, although not implemented until mid quarter, our cost-cutting initiatives resulted in a reduction of planned operating expenses that allowed us to meet our operating income target even though sales were below internal plans. We expect these initiatives will result in operating leverage in the second half of the year with these savings expected to be more pronounced in the fourth quarter.

Third, we continue to provide for our future growth with new initiatives in our core watches and jewelry businesses. The Marc Jacobs Collection line will launch later this year and we are on schedule to ship our most recent licensed division, Adidas in January of 2006. Our mass-market business continues to perform well and we believe this can be a sizable opportunity in the future at operating margins consistent with our overall business. We're also confident that we can add new brands to our global portfolio.

Lastly, we reviewed opportunities for expanding our accessories footprint including the Michele brand while continuing to take advantage of the strength of this category with our core Fossil and Relic offerings. Now I'll turn the call over to Kosta to update you on the quarter's performance and our current initiatives.

Thanks, Tom. The second quarter was a rather mixed bag of results in that some areas did very well and others did not. In the United States, our sales rose by 6.5%. Watches declined slightly by 1% primarily due to sales declines in our Michele and Fossil watch brands. In Michele, we were up against some tough comparisons for last year. As you may recall, we acquired Michele at the beginning of the second quarter last year and opened up a lot of new doors with a significant customer.

In Fossil, our sales declined by 2% which was an improvement over the trends for the last few quarters. As Tom mentioned, we have significantly expanded the amount of newness in our line and we're putting some great new products and new marketing ideas into the marketplace over the next several weeks. We're being very aggressive changing as much as we can in this business in an effort to get the business moving in the right direction. We believe that Fossil watches is a 6% to 8% grower over the long-term.

In accessories, sales again were terrific increasing by 19%. This was driven by handbags, small leathergoods and sunglasses. Our handbags business is particularly interesting in that we are gaining marketshare rapidly in a growing category and we still have a lot of growth ahead of us in that we're still a small share of the total business. Of course the handbag market is several times the size of the watch business in the United States. We feel we're in a great position for strong growth here over the next several years.

In our international markets, total sales increased 9.8%, 6.6% including currency gains. Excluding currency, we posted a 2.5% increase in Europe compared to a -5.5% decline in the first quarter with solid contributions from Fossil watches and jewelry and from D. K. N. Y. and Zodiac watches. We were pleased to see improving trends in Europe with expectations that are upcoming deliveries and marketing efforts will result in further gains in the second half of the year.

In other international sales, which include the Asia-Pacific region, Canada and our distributor business, those continue to be an area of strength for us. Our portfolio brands are gaining awareness in these markets which is leading to increased penetration and door growth. We have begun to explore new opportunities for developing distribution into China and India and believe we will see these initiatives added to our planned growth in the next two to three years.

Our Fossil retail stores performed well posting a 20% increase in total sales with comp store sales of 1.8% positive. We were up against an 11.5% comp increase in the second quarter last year. We did experience a softness toward the end of the quarter which we have seen continue into the third quarter primarily related to our full price accessory stores as we comp against big increases in some of our larger resort stores. That said, we remain confident that our retail segment represents a solid growth opportunity in the future.

We ended the quarter with 146 stores, including 59 accessory, 25 of those are outside the United States, 64 outlet stores and 23 jeanswear locations. This compares to 124 stores of the end of the prior year quarter. That included 49 accessory stores, 23 of those outside the United States, 57 outlet stores and 18 jeanswear locations. We closed one store during the second quarter. We expect to end the year with a total of 163 stores which is 65 accessory, 69 outlets and 29 jeanswear stores.

Turning to our new business initiatives, our sales in our mass-market business contributed 3.3 million during the quarter. The watches are performing well at retail and we continue to expect the mass-market volumes to reach 30 million this year which gives is ample room to expand both doors and penetration in the future. Our Zodiac brand contributed nicely again this quarter. As we mentioned last quarter, Zodiac, which is the Swiss brand that we own, has been in the incubator stage for a couple of years. The brand is building momentum at retail and is starting to get some buzz in the marketplace around the world. We launched Zodiac in both Neimans and Nordstroms during the second quarter. We also saw Burberry continue to perform well during the quarter increasing at a strong rate, especially in Europe and Asia.

As we look to the balance of the year, we are intently focused on improving our performance in the fashion watch category and capitalizing on the many opportunities that our global watch model affords us. There are four big things that we're working on. In watches, we will emphasize new styles in our fashion watch segment to stay on the forefront of design and fashion. Our watch design area has been restructured and we have added a lot of design talent over the last twelve months. We're in a great position to continue our leadership in this business.

Secondly, we will continue to expand our presence by increasing sales in complementary businesses such as accessories and jewelry. Our creative design teams and our sourcing relationships inherent in these businesses combined with the relationships in our premium brands position us to build upon the success of our core Fossil and Relic accessory businesses. We're also continuing to develop the infrastructure to support an expanding jewelry business.

Third, we will closely watch expense growth to ensure that the investments we make are generating appropriate returns. And fourth, finally, we will place a greater emphasis on improving inventory turns. While the quality of our inventory is very good, we will focus continuing on improving our stock to sales ratio.

Relative to recent results, we have reduced our sales guidance for the balance of the year to be more consistent with our experience in the second quarter. Notwithstanding this, we continue to believe that a 15 to 20% sales growth target is appropriate for our business over the next two to three years. We believe we're poised to achieve this range given the strength in our business model and the opportunities that lay in front of us. Mike.

Thanks, Kosta. First, I'd like to once again summarize the results of our 2005 second quarter compared to the second quarter of 2004. Net sales increased 9.8% to 226.2 million compared to 206.1 million. Gross profit grew 7.8% to 117.3 million, or 51.8% of sales, compared to 108.8 million or 52.8% of sales. Operating income was 16.3 million, or 7.2% of net sales, compared to 24 million or 11.7% of net sales. Net income totaled 9.7 million, or $0.13 per diluted share, compared to 15.8 million or $0.21 per diluted share.

The second-quarter sales mix breakdown was as follows; 42% from domestic wholesale sales, 14.9% from Fossil and retail store locations worldwide, and 43.1% from sales generated in over 90 countries outside the US. The 9.8% sales growth for the quarter consisted of the following increases and decreases by category and geographic region. Domestic watch sales, as Kosta mentioned, decreased approximately 1% to $55 million compared to $55.5 million in the prior year quarter. Again, Michele and Fossil decreases were partially offset by sales volume growth from our mass-market and Zodiac watch businesses. Other domestic sales, which include our accessory and sunglass businesses, grew 19% to 40.1 million compared to 33.7 million in the prior year quarter.

We experienced strong gains in Fossil men's and women's leather products and Relic sunglasses. Sales generated from European based operations increased 6.2%, 2.5% excluding currency gains to 65.1 million compared to 61.3 million in the prior year quarter primarily resulting from sales volume growth in Fossil and Zodiac watches and Fossil jewelry partially offset by a decline in Emporio Armani watches.

Other international sales increased 17.7%, 15.7% excluding currency gains to 32.3 million compared to 27.5 million in the prior year quarter. This increase was principally related to sales volume growth in licensed brands and Fossil watches and Emporio Armani jewelry.

Finally, sales from our own retail stores grew 19.8% to 33.7 million compared to 28.1 million in the prior year quarter. As a result, comp store increases of 1.8% and 16% growth in the average number of doors opened during the second quarter. Gross profit margin decreased by 100 basis points to 51.8% in the second quarter compared to 52.8% in the prior year period. As Tom mentioned earlier, a more aggressive discontinuance of watch styles resulted in some downward pressure on our gross profit margins as we moved an increased percentage of these goods through third parties thereby capturing a smaller gross profit on the sales than going through our own outlet stores.

Additionally, gross profit margin further declined as a result of a higher sales mix from domestic accessory and mass-market watch businesses that generally produce gross profit margins lower than our consolidated average. Partially offsetting these declines were currency translation gains as a result of a weaker U.S. dollar average rate for the quarter compared to the prior year quarter. This resulted in approximately 2.9 million of additional sales from translation which benefited comparable gross profit margin by approximately 60 basis points during the quarter.

Operating expenses as a percentage of net sales increased to 44.6% in the second quarter compared to 41.1% in the comparable prior year period. Included in second-quarter operating expenses is approximately 1.4 million in additional costs related to translation impacts from stronger foreign currencies in the US dollars and 2.2 million in additional advertising expense compared to the prior year quarter. Excluding the impact of currency and advertising, operating expenses were primarily driven from three areas; payroll costs, rent expense and depreciation and amortization expense.

Payroll cost increases were primarily due to infrastructure additions, new businesses and new store openings. Increases in rent expense were primarily related to new store openings while depreciation and amortization expense increases were related to our SAP software implementation as well as capital additions made during the last 12 months. The SAP implementation in Europe over the last 12 months have added approximately $1 million a quarter to our operating expense base and we will start to anniversary the German rollout in the third quarter of this year.

Advertising costs as a percentage of net sales increased slightly to 8.2% of net sales in the second quarter compared to 8% of net sales in the prior year quarter. Second-quarter operating profit margin decreased to 7.2% of net sales compared to 11.7% in the prior year quarter as a result of the decline in gross profit margins and increases in operating expenses. Second-quarter operating income included approximately 1.5 million of net currency gains related to the translation of foreign sales and expenses into U.S. dollars. Other income and expense increased unfavorably by $3.4 million when compared to the prior year quarter principally related to approximately $1.7 million of currency losses as the U.S. dollar strengthened compared to our other major balance sheet related currency since the end of the first quarter.

During the same period of 2004, we recorded exchange gains of approximately $1 million. Additionally, minority interest expense and equity and losses of our joint venture in Spain increased approximately $600,000 over the prior year period. Our effective income tax rate for the second quarter decreased to 30.5% compared to 37% in the prior year quarter. The reduce (ph) of the effective tax rate is primarily related to further reduction of tax expense for subsidiary earnings not considered indefinitely invested. This reduction resulted from published guidance from the IRS that resolved previous ambiguities concerning the calculation of tax under the dividend repatriation provisions of the American Jobs Creation Act of 2004.

Now turning our attention to the balance sheet. We ended the year with a cash position of $133 million compared to 142 million at the end of the prior year quarter. Working capital rose to 354 million, an increase of 44 million, over working capital at the end of the prior year quarter. Inventory at quarter end was 218 million, an increase of approximately 35% compared to the prior year, inventory of 162 million. Falling short of our second-quarter sales plans accounted for approximately 5 million of this increase. Moreover, higher levels of inventory in our luxury division stemming from longer lead times and aggressive buying resulted in approximately 15 million of additional inventory. Higher retail inventories stemming from both additional store openings over the past year and higher levels of inventory at our outlet stores accounted for approximately 10 million of the increase. Finally, higher inventories in Europe, primarily a safety stock in the event of any problems with our recent SAP implementation in France, added approximately 7 million to the increase.

As Kosta mentioned, we will place a greater emphasis on improving inventory turns in the back half of this year. Accordingly, we anticipate our inventory to be more in balance by year end excluding the impact of new store openings and delivery of Adidas stock that is scheduled to launch in January 2006. Accounts receivable increased to 118 million at quarter end compared to 105 million at the end of the prior year quarter. Days sales outstanding increased to 47 days in the second quarter compared to 46 days last year. Capital expenditures for the first six months of the year were approximately $18 million. We are expecting full year 2005 capital expenditures of approximately $45 million. This represents an approximate $15 million increase from our prior estimate of 30 million for the full year. The difference is primarily related to the acquisition of additional office space near our corporate offices which we expect will satisfy our growth needs for the next five years.

Additional capital expenditures in the second half of year will include approximately 8 million related to the expansion of our European distribution center and approximately 7 million related to new store openings. Amortization and depreciation expenses per six months was approximately 12.8 million compared to approximately 10.7 million in the prior year period and we're estimating full year depreciation and amortization of 28 to 30 million.

Since the beginning of the year, we have acquired approximately 600,000 shares under our buyback programs including 402,000 during the second quarter for a total cost of approximately $14 million. We currently have approximately 780,000 shares available for repurchase at this time. Prior to discussing our earnings guidance, we thought it would be appropriate to provide a reconciliation of our second-quarter reported diluted earnings per share of $0.13 against our original guidance.

During our May conference call, we guided towards fully diluted earnings per share of $0.14. This guidance, as always, is predicated on then prevailing currency rates. Although average currency rates for April and May were in line with our guidance, the U.S. dollar strengthened appreciably in June resulting in a rate of 1.195 at the end of the quarter and a much lower average rate for the June months than included in our original guidance. Accordingly, the 1.5 million of net currency gains included in operating income from the quarter were less than we had planned. Nevertheless, we were able to reach our operating earnings target for the second quarter of $0.14. However, due to the quarter ending U.S. dollar spot rate declining significantly in comparison to the spot rate at the end of the first quarter, we were impacted with losses upon revaluation of our foreign subsidiary open payable receivable balances. This $1.7 million loss resulted in approximately $0.02 earnings per share during the quarter. The impact of this unplanned loss was mitigated by an approximate $0.01 diluted earnings per share benefit from a lower effective tax rate. Thus resulting in fully diluted earnings per share of $0.13 for the quarter.

As it relates to third and fourth quarter guidance, we are expecting third-quarter fully diluted earnings per share of approximately $0.28 compared to $0.31 fully diluted earnings per share in the prior year quarter. We are expecting fourth-quarter fully diluted earnings per share of $0.57 compared to $0.47 fully diluted earnings per share in the prior year quarter. Our revised guidance of $0.85 for the second half of the year represents a decrease of $0.17 per share from our previous guidance of $1.02. Of this decrease, approximately $0.06 per share is related to reducing the U.S. dollar exchange rate from 128 to the euro and 189 to the pound included in our previous guidance to 1.23 to the euro and 1.77 to the pound in the second half of the year which reflects the current approximate spot rate.

The remaining reduction in earnings from our previous guidance is related to reducing our sales growth forecast from 14% to 16% range to 10% to 12% for the second half the year and reducing gross profit margins primarily due to higher anticipated sales mix from lower margin mass-market watch and domestic accessory sales. Tom.

As we look ahead, we continue to be enthusiastic regarding our outlook. We are experiencing encouraging sell through rates on a number of new watch styles and our accessory business continues to outperform our expectations. We have seen improving trends in Europe and our Asia-Pacific group continues to report a solid result. Lastly, our retail stores continue to serve as a valuable marketing channel and testing ground for new products while also providing a solid growth opportunity. Fossil has a number of strengths; a portfolio premiere global brand, a strong design and distribution infrastructure and a team that is committed to maintaining our leading position in the watch and accessory market. We believe our expense management initiative along with the greater controls of the needs for our businesses will enable us to bring back the predictability and consistency to our business resulting in increase shareholder value.

In total, while we are disappointed to reduce our second half expectations, we believe the strategies that we have in place currently will allow us to improve results as we enter the holiday season and into 2006. And now I would like to turn the call over to the operator to begin the Q&A session.

(OPERATOR INSTRUCTIONS). Noelle Grainger with JP Morgan.

I wonder if you can talk a little bit more about your comments on the clearance of the discontinued products to third parties. Can you quantify that for us either in dollar terms or as a percentage maybe relative to previous period and how you are planning it for the back half of the year?

Sure. Generally we try and stay out of those channels obviously with our product and use our outlet stores to discontinue styles that we are taking out of the assortment. If you look at the impact that sales had on the second quarter, represented about 1.5% of sales and even though it was done at a profitable margin, it was obviously a lot lower than our typical outlet margins.

And normally that would be close to zero?

I would say severely less than that in any one quarter based on our history.

And does it continue for the rest of the year to kind of run at that 1.5% rate?

I think, as Tom mentioned on the call, we expect that to be reduced in the back half of the year to a more normal level as we think we have cleaned up a big part of the styles that were out there that will not be going forward with. Additionally, that will reduce some of the pressure on our receipt plans for our outlet stores to allow us to bring in more consistent margins in the outlets as well over the balance of the year. We're not expecting that type of discontinuance to occur in the back half of year.

Okay. And I guess related to that in terms of -- in terms of inventory overall and I apologize. I've been hopping between two different calls but Mike, can you -- obviously you didn't meet your targets in terms of inventory growth rates moderating closer to your sales growth rate. So can you talk about the biggest surprises relative to your plan and then how you get there in the back half of the year?

I would say the biggest surprises are probably those that we outlined as having the most to do with the $50 million increase over the prior year quarter end. We feel good that even though we have elevated inventory levels, that it is on current inventory so we don't have any concern with regard to further margin reduction from any of those areas that we have seen the increase. You know, with regard to our luxury division, we saw a pretty significant increase there relative to last year and that is primarily related to the fact that it takes a little bit longer from a supply chain perspective to plan those inventories and we were probably a little more enthusiastic about the sales results for the second half than actually came in for some of those businesses.

On the outlet side, which was also a large piece of that, again, discontinuing a number of styles in the second quarter through a third party channel will benefit us by not having to bring those pieces through the outlet stores to put the additional pressure on our outlet margins. We think from that perspective we will see a better balance of our retail inventories at the end of the year compared to where we were in the second quarter. We do expect that our luxury inventory will still be somewhat elevated at the end of the year compared to last year but more in line with our expectations for sales growth in the 2006 than we are right now.

Did you give a target for year end relative to sales growth in retail?

Our comments on the call -- we basically focus on bringing that increase into better balance with our sales growth over the back half of the year. I don't think that you'll see our inventory growth in line with our sales growth of 10 to 12%. It will be somewhat still elevated over that simply because we do have some luxury division inventory to get through over the next 6 to 12 months and we will have some pressure from the increase in the number of stores and the Adidas stock we're going to have to have on hand to launch in '06 for that brand.

One last question maybe for Kosta, on the Fossil watch business down 2% in the quarter in the U.S., you know a slight sequential improvement. But you know your comparisons are starting to get easier as well. So can you just elaborate a little bit in terms of what you see going on in the marketplace, the overall kind of fashion watch business? Do you think you're losing share at this point? Maybe just a little more color there.

The watch business in the United States continues to be somewhat tough. A lot of that is caused by our not doing very well honestly because we are a big part of the business. What we're seeing out there is through the first half of the year I think is an unusual situation and we are being very aggressive with the business and we have got a lot of new things hitting the marketplace. Our Big Tic launch is starting actually this week. If you go on Herald Square this weekend, I think Friday they're going to have -- the entire store is going to be Fossil and Big Tic. The entire Broadway windows are all Big Tic and we have our big six-foot robots and everything in the windows and throughout the entire store, there are banners throughout. So there is a big launch going on there.

We also just recently launched our new catalog. This was a catalog that we did in-house. There is 500,000 pieces that we distributed to some of our Web customers and through some different mail lists. It's a 32 page catalog communicating the Fossil brand and really kind of repositioning it. We also have seen increase traffic on our website, pretty dramatic increase in both traffic and sales there. We also have a lot of new things going on in terms of point-of-sale. We have our new plasma screens going into a number of stores in the third quarter and also some new (indiscernible) they are going to be testing at the end of the third quarter. A lot of things going on there we think that are going to move the needle. So we definitely think that we're going to show improvement there especially since we're up against some tougher numbers.

As far as losing marketshare, we probably in the last ten months or so have lost marketshare in Fossil. But totally in the United States, I think our sales in watches were minus one and I think that is pretty much the same thing that total market in the United States was -- was probably around that minus one. So I think on an aggregate basis, we're probably just maintaining total marketshare.

I'll let someone else jump in. Thanks a lot.

John Rouleau with Wachovia Securities.

Good morning, guys. Kosta, I guess I just wanted to follow up on a comment that you just made in terms of kind of repositioning the Fossil brand a bit. Maybe you could just go into that in a few more details. In a perfect world, how would you like to reposition that brand and are you going a little bit older, are you going a little bit more expensive, a little bit more luxury? I mean what are the attributes that go into that?

The best way I would describe it is you can actually go on our website and see the catalog online. You can turn the pages and everything. Just look through it and see. It is really -- basically what we're doing is focusing it more. Because we sell a wide range of customers from young specialty stores such as the Buckle all the way to department stores, we have a very wide range of products that hit different age targets. What we're really trying to do is be more focused in what we present to the customer.

Our Fossil customer is more young attitude, more aspirational, vintage inspired, very creative, sometimes some of the merchandise we make to be competitive and some of the distribution we're in is not what we would want to be in our core target customer. So the catalog and the website really are more focused as are our retail stores. We're really focusing more on that customer.

Just as an example of what we're doing is in our own specialty stores, the Fossil accessory stores, we did mention that we have seen some comps there that were not the greatest and part of the reason is we've taken some categories out of those stores that we thought were not necessarily the best direction for us. For example, hats and T-shirts, there's a very, very young customer that by having too much of those categories in our accessory stores, we feel like we were missing an opportunity to sell handbags, $150 handbags, to a more fashion customer that is really more our target customer. So we have taken some of those categories out and we haven't yet seen the lift in the handbag category in our own stores but we think long-term, it is a great strategy for us.

What we want to be is the accessory department for this aspirational younger attitude fashion customer in the mall. We want to be a big handbag player in addition to all of our other accessories. We think by putting this catalog in place and focusing the customer and showing who the customer is with models, etc. and how the merchandise was put together, we think we have a huge opportunity in the United States and that is really what we're trying to do.

So just as a kind of follow-on to that, as far as the watch SKUs are concerned, I know you're adding some newness, some new stock to the line. It also sounds like you are taking out some more basic type stuff. Are the SKUs relatively remaining the same, are they down, are they up? With your focus on turns, maybe you could just comment on the SKUs?

Well, the SKU count is actually going up. We have been going through a situation where quick response has become a smaller part of our business. It has been up as high as 60% at some point a couple of years ago to now maybe in the 30% range. So we're putting a lot of newness in the market in an effort to change the direction of the trend and there is a lot of we think great, exciting, new ideas and products that we've got in our pipeline. As we said earlier, we have got a new, expanded design team there that is putting a lot of great stuff out. So it is causing more styles to be out there. Fortunately we are able to be very opportunistic and move a large quantity of watches outside of our system which will enable us to move additional quantities through our own outlets organization. It's a great weapon we have. It's the ability to move significant quantities through our outlet stores and enable us to be more aggressive in the marketplace with newness, etc. and really somewhat overwhelm our competition.

Last question for Mike regarding gross margins. Without maybe quantifying it, how should we kind of be thinking about gross margins because there is obviously a lot of moving parts there with mass-market coming online, retail taking on a larger percentage, you have got some price raises in there, so -- kind of going forward, should we think of that as relatively flattish or should we still be planning that up slightly?

I think, as I mentioned in the guidance section, we expect some pressure on gross margins in the back half of the year. I would say the margin pressure will be less in the third quarter than in the fourth quarter primarily due to the impact of currency. On a whole, in the third quarter of last year, the average euro rate was about 123. That's kind of where we have our forecast today. But if you look at the fourth quarter, we got a huge jump in the strength of the dollar or the strength in the euro in the fourth quarter that took the average rate up to 129. So there will be a little more pressure on margins in the fourth quarter of the year. For the balance of the third and fourth quarter, we will see a little bit pressure, as I mentioned in the guidance section, from a higher or a faster growing mix of our mass-market and accessories business that typically have a lower gross margins than our consolidated operations.

Barbara Wyckoff with Buckingham Research.

A couple of questions. Kosta, every few years a product gets stale and you have to hustle to push newness on the line. What are you doing to sort of improve the discipline to ensure a steady flow of newness onto the line even if the trend is hot? And I know you talk about putting in design talent but is there anything operationally you're doing to just make sure this doesn't happen because I can think of other times it has happened. And then you had talked, Kosta, about building the accessory distribution. What exactly does that mean? What channels are you talking about and would the international channels figure into this? And would that require additional infrastructure, salespeople, etc.? And then I have a question for Mike.

Well, on the first part, it is just getting back to our roots which is developing product constantly, putting it in the marketplace, testing it at our own stores and other stores in the United States and around the world and then getting it back into place. One of the things that happened over, I think, the last couple of years is the scale of the Company; the size of it has really somewhat maybe slowed down our processes a bit. So we have some major initiatives in place to tighten the supply chain even more and get quicker and get stuff to market faster. I think that is one of the things we're doing. But basically, it gets back to the fundamentals. We have the brand, the product, the new initiatives, marketing ideas and just diligent scientific execution. It really gets back to our roots and that is what we're focusing on.

On the accessory side, we are, as we said before, we're testing some of our leathergoods around the world. We do have a leathergoods business in Germany that our biggest market obviously that has been ongoing for sometime, still small, but we think it has opportunity. We're testing some of the other international markets this fall, just certain places around the world to see what the potential is for us expanding that. We think there could be a good opportunity there. And there is, as we have talked about before, is our accessories division, the leathergoods, etc., is becoming somewhat of another significant core business with a lot of advantages in design sourcing, execution, etc. that potentially could be where Fossil -- where watches was maybe seven or eight years ago when we started to do additional business in the United States, different license, etc. So potentially you could see additional names. We obviously are working on Michele handbags, jewelry and sunglasses that will be in the market at some point.

The other brand that we own, Zodiac, could potentially factor into this somewhere. So we are working on some of these things. We do think we can expand the leathergoods and accessory business over the next several years though.

Do these get sold internationally in specialty stores or department stores or duty-free or what?

It's a combination of all of that. There's actually different markets are testing different vendors. For example, our Italian sub is actually going to be selling some small leathergoods into watch and jewelry stores where there could be a potential automatic business there and leverage our distribution channel. Whereas in some other markets that do have department stores such as Germany, they are doing some business in department stores and of then course duty-free and then we will have some specialty stores that we sell to in different places as well. So it's a combination of all that.

Thank you. And then Mike, a question for you. About the inventory levels in Europe, at what point will the duplicate inventories cease to exist? I heard something about seven different warehouses. Where are you on this and what are you doing about it going forward?

As we talked about we just implemented SAP in France in May of this quarter. So with that, we have shut down the distribution facility in France and moved that production into Germany. That still leaves us basically with Italy, U.K., Switzerland and our recent addition of our Swedish distributor. We think that over the next, I would say, probably two to three years, we will look at implementing the SAP system into those areas as well and when we have SAP up and running in each of those countries that will afford us the opportunity to shut down the distribution there and move that product into our consolidated warehouse in Germany.

Elizabeth Montgomery with SG Cowen.

Hi guys. I apologize if I missed it but I wondered if you could maybe comment on your outlook for '06 at all?

At this time, Elizabeth, we have not given any guidance toward '06. I think the only thing Kosta mentioned in his section of the call is notwithstanding the first half this year and our expectations for the back half of this year, we feel confident that over the next two to three years this business is still a 15 to 20% top line opportunity for us.

Also I had a question about the Armani trends in Europe. Did either of you give any indication of -- is there some problem going on with that brand or was it a distribution channel issue?

We saw pockets of weakness with Armani in Europe and again that business continued to grow quite significantly. And doors were opening new distribution but in some of the more mature markets that we have there. Armani has been around now for seven, eight years within the Fossil group. So I think it is more of just a timing in some countries as to Q2 versus Q3 and also somewhat of a slowdown as expected as that business continues to get more mature.

So that is the largest of your current watch licenses, correct?

That's correct.

Should we still be thinking that there is mid to high single digit grow in that license going forward?

I think we have always said double-digit growth for Armani and that is still our expectation. Every quarter you're going to have periods where some of this growth is elevated in one quarter against maybe a prior year period just based upon how the shipment sell out.

The other thing about the Armani business is long-term, if you look of what is going on with emerging markets; Eastern Europe, Russia, China, India, Armani is already making inroads into a lot of those markets, putting stores there, etc. So there is a huge long-term growth track for Armani. It is still one of the largest, most successful, powerful brands in the world and it is going to get stronger as time goes on as these more emerging markets become more consumed for society. This is a big, long-term process and jewelry is an add-on to that that could continue to grow for a long period of time also. So we would expect these businesses to get much larger.

We shouldn't assume that it is flat in Europe going forward or down?

No, that is not in the program. We will definitely have growth in Europe.

My last question is on the jeanswear stores, I guess with all the different initiatives that you guys have going on right now, how do you decide that that's an area that you still want to be expanding and what do the returns on those stores look like relative to your accessory stores?

Well, the way we look at those stores is really still in an incubator stage. We have a very small group of people doing it, the same group of people who have been doing it for a while. And as you know, the initial stores we opened, most of them were too large. We're in the process really, over time, of closing some of those opportunistically like we disclosed one recently in Seattle. It was too large and had negative cash flow in it. We're opening a number of other stores that are smaller and showing stronger profits. Basically, we're in the process of converting it from some larger, unprofitable stores into some smaller profitable stores trying to get the entire organization to acceptable profitability basically. So it's really kind of an ongoing process still in the incubator. The stores that we're closing are -- we're being opportunistic. The stores we're opening are meeting the performance and doing very well on a profitability basis. The organization is moving toward acceptable profitability and then we'll decide what to do from that point. It is basically still in the incubator stage.

Robin Murchison with Robinson Humphrey.

I have got about five questions here so cut me off if you need to. First of all, I wanted to ask about Michele oversees. What efforts, what is going on there, if you could just talk about that? Secondly, on Zodiac, I have seen some of the new products. I think it looks really great. If you can just give a little more color on that and what the opportunity for it going forward is. Strategy with apparel, I have noticed you all recently opened a store here in the market I am in. Definitely a move away from Ts and hats and if you could give a little more color on how apparel did. I would be curious, especially how the apparel did with the early back-to-school season. Just if there is any new initiatives on the jewelry. You were building the infrastructure there I think looking to make a couple of key hires and maybe even an acquisition in that regard, if there is any update on that. Then lastly, but maybe most importantly, this perhaps should be obvious, but if you could just prioritize. You have so many different things going on with the Company. If you could just prioritize sort of from top to bottom where your focus is in terms of trying to turn the ship and get sales back to that 15% to 20% rate. Thanks.

Well, first of all, talking about Michele, we had launched it in several international markets. We have had some good success in some of them. We actually slowed down the process a bit based on what the expenses might have been to open some of those markets, but overall I think we're doing pretty well and we're pretty excited about the long-term prospects of that, and we think we're going to have good success in the next several years. Zodiac is really, because of the unique product point of view and the way it looks and the position of it, we're getting a lot of buzz and had some pretty good sell-through response in stores around the world. And it looks like it could be a fairly significant business over time. So we're going to be pushing that pretty strongly, and we're putting some resources in place to enable us to grow it. But it could be a very strong long-term opportunity for us and could potentially -- we could add additional products under that name as well, so we're pretty excited about that.

Is it overseas yet? Have you relaunched it since it was a European brand?

Yes. It actually has been overseas in the incubator stage for a couple of years and had good response. So we are seeing good results around the world from that, so it is creating, we think, a pretty good template globally to have some growth off of over the next several years, so it's in pretty good shape. The jewelry business continues to be a big opportunity, and we are continuing to add infrastructure and add people and put things in place. We had, as you mentioned, been looking to see if there was potential acquisitions out there that could accelerate the process, and have not obviously done anything at this point. But we still think jewelry is a big, long-term opportunity for us based on the opportunity to leverage our existing distribution structure around the world, and also obviously our access to brands gives us a huge opportunity there.

The apparel business, as I mentioned, is really still in an incubator stage and doing very well. The store in your market has done exceptionally well. It is, we think, a good opportunity to communicate this reposition of the brand image that we're trying to get across, and really we're trying to make Fossil a stronger, more powerful, aspirational, more focused emotional attachment to a customer. The jean stores, I think, are helping in that regard, creating a bigger, long-term brand image for us. So it is, we think, a strong thing and we are watching it very closely.

Again, you asked the question about how do we prioritize what we're doing. Basically, it is getting back to our roots, is looking at how the business is built. It's basically designed in execution, spending as much time as we can being as fast as we can on all these issues. The way we look at the Company is our biggest, obviously, businesses. Our core business watches, it is a huge long-term global opportunity. We have very significant competitive advantages. We're in a unique position in that half our business is already outside the United States. It's an inherently profitable business, and as we get scale we have more opportunity. So we're really just in the process of looking at all the opportunities we have to take advantage of the position we are in.

Then we have a jewelry add-on to that business which is, we think, a long-term opportunity that gives additional scale to the Company and gives us the ability to grow for a longer period of time. We have an emerging core business of accessories and leathergoods where we're getting very strong and have the potential to leverage that and get larger. Then we have this big looming retail opportunity long-term where we can add to our distribution channel around the world by building out our own distribution network of stores and adding to it some brand building with our website and the catalog business.

So we think we're in a great position long-term. We're just in the process of really getting back to our roots, getting quicker and faster and just continue to plug along, and we will be in good shape.

Just regarding your apparel, if I can get one more question in here, are you finding that it is high school or college? It definitely looks more sophisticated to me. It looks to me like it would pull from more of an Abercrombie type customer base.

Actually, it has moved up in age since we opened. We were concerned that it was a little bit too young, so we are actually trying to target a slightly older maybe college age to slightly out of college customer, and that is really where we're targeting the entire Fossil brand.

Thank you very much and good luck.

Dorothy Lakner with CIBC World Markets.

Just wanted to follow up on the retail business. If you could give us an update on the moderate watch stores and what you think the opportunity is there and how soon you might make some decision on that. And then just also what are you seeing in the luxury goods business? You talked about having built up inventory a little bit too quickly. I just want to get a better sense of what is going on there. And then looking into the second half of the year, you have talked about the repositioning of the Fossil brand and really getting a lot more newness into the product. I just wondered if you could give us any sense of how much new product or new SKUs we would see or the customer will be seeing in the second half of the year.

As far as the luxury business goes, basically what we have done is, as Mike mentioned earlier, the lead times on that product are longer, actually a lot longer than some of our fashion product which is -- one of our long-term goals, by the way, is to get the lead time shorter. But in any case, we have seen some indications that the growth in our luxury business from what we saw earlier in the year was going to be very significant, and since that time it has moderated. So during that time period of having longer lead times, the inventories are going to be higher the end of this year than what we originally planned. But fortunately in those businesses is that styles don't change as often. In fact, a lot of the inventory we have is actually in components, which we -- in Michele, for example, you have very small number of styles that can be configured a number of different ways, and we're really in the position where we have a lot of flexibility on the inventory that we haven't placed. So we don't think it's a long-term risk. We just think it is an inventory issue until we work through that.

And you don't see anything in the moderation of the growth rate that concerns you, or do you think it's just a shifting issue because of the different seasons in Europe versus here?

Well, I think it was a situation where we saw some indications that we were going to have very, very significant growth and we wanted to capture it. We are in a situation where the risk reward on inventory is such that margins on these products are very high and there is very low risk, because they don't change very often. So you're in a position where you don't want to miss sales if they are out there. So when we saw communication that we were going to have very significant growth, we reacted to it, probably obviously stronger than what we should have because of the lead time being longer, but things did change in the meantime. But in any case, we learned something from it and we're probably going to be more conservative on an ongoing basis and just make sure that we monitor it and watch it closer, and we'd like to get our lead times to be less.

As far as your question on Fossil, obviously what we have been doing is since business has been more difficult is changing as much as we possibly can and putting as much newness into the stores as we can, changing the way the cases look, changing our marketing, changing as many different things as we can to try to move the needle in the right direction. So you are going to see in the back half of the year new categories, new directions, a lot of new product and we are putting a lot of things out there to try to get an indication of what direction we should go in to drive additional sales growth. Our resources are such, our design, our sourcing, our infrastructure, our marketing, the people we have in the stores, our merchandising teams, our resources are such that we have the opportunity to move the needle once we get something going. So we think we're in a pretty good position, especially since we're up against some relatively soft numbers from last year.

Oz Tangun with Southwest Securities.

Good afternoon. Kosta, on Michele, can you add some more flavor as to the performance. Was it down mid single digits or anything else you can share with us? Maybe talk a little bit about what the underlying reason may be for the change in that trend. Do you think that some competitors are mutating the look or is that a factor or any other things?

As we mentioned on the call, we were up against last year where we just acquired Michel at the beginning of the second quarter and almost immediately we began filling the pipeline and adding additional doors to one of our largest customers. We're up against some big numbers. We did show a decline in the quarter. But long-term and even in the back half of the year, we are seeing growth out there. So we think it's a short-term situation. We should also mention that in all these discussions, it is still the second quarter. Most of these businesses happen in the fourth quarter. We are kind of watching closely but we are not sure that the trend we're seeing in the second quarter is actually going to be the same in the fourth quarter. We're watching it closely and we'll try to give guidance based on what our experience is. But having said that, we really don't know.

How much should Michel grow this year on an ongoing basis over the next three to five years?

We're going to see growth this year and on an ongoing basis, we think it is going to have significant growth in that. We are going to continue to expand it outside the United States. We do think that there is additional opportunities in the United States for adding doors and we've put him some assets in place to do that. And we do feel that adding additional categories to it and making it somewhat more of a well rounded brand, a more of a lifestyle brand, we think that there is a big opportunity for us to do that and continue to grow this brand and make it -- it's very unique and very special and it has got some nuances to it that if communicated correctly, the consumer can just build over time and we're definitely focused on doing that.

Can you talk about the long-term strategy for Adidas?

Obviously Adidas is a huge opportunity for us. It's going to be very large in Europe next year, especially in Germany. The World Cup is going to be in Germany. I think it starts in the first quarter of next year. We are actually -- Adidas, as you know, is a sponsor of the World Cup. So it is going to have a pretty big start next year and long-term, we think that because of the strength of the brand and the different positioning of it, it has obviously heritage which is fashion and it has performance and it's got a high-tech component. It has the ability to hit a wide variety of distribution. For example, in the United States, it will very well fit into department stores as well as sports specialty and some other sports stores. So there is a wide variety of product and distribution for it. We think long-term, the business can be very significant around the world. It is obviously a very powerful brand and getting stronger as it looks right now. So we think it is a big long-term opportunity and it is a great thing for us because, as you know, we don't have anything in our portfolio that competes with it. So we think it is a good place for us right now.

Can you go after licenses -- when you acquire new license, would it makes sense for you to get the license both for the watches and accessories and do you have any licenses that you have for watches right now that doesn't do much in accessories or may have that license available over the next year or couple of years?

Obviously, in jewelry, we have the Armani and our other -- some of our other partners, such D.K.N.Y and Diesel, do not have jewelry licenses. So those are opportunities. As far as accessories goes, D.K.N.Y. has a handbag business obviously. So some of those are already in place. We do think long-term that there are additional opportunities, there's additional brands out there. There could be potential acquisitions that would be brands that could be used in accessories and in watches as well. We are, as we said, going to be adding handbags and accessories to the Michel brand. So I think there is a lot of opportunity for us going forward.

Brad Stephens with Morgan Keegan.

A question on the Fossil domestic business. You took prices up quite substantially. Could you break out maybe ticket versus units in relation to what (indiscernible) was this quarter?

We had probably during the quarter in retail a slightly higher average ticket. We had been, as you know, been increasing our average unit retail throughout this year and we have seen some of our -- basically, as we said earlier this year, I think we had -- we got a process of moving Fossil slightly higher than what we had in the past. We thought we might have been positioned a little bit too low last year in terms of price and also some of the fashion trends are ongoing right now which is all this embellishment and extra details and treatments really requires that the watches be higher and some of those watches are selling better than others. So we're moving our average unit retail up. Did that answer question?

Sure. I guess. I didn't know if you could actually quantify what unit was versus ticket.

Brad, I would say there is no significant difference between the unit volumes in the quarter versus the price increases as Kosta said. A lot of the units that we're delivering is where some of the price increases are coming from. So there is still a lot of core styles that have been out there over the year still selling at regular retail prices that they went out at years ago or a year ago. We think in the back half of the year, there's obviously some impact to drive a higher sales growth on a lesser unit volume as we continue to add units and in certain categories, elevate the average unit retail to those styles.

I guess to go a step further then, if units really aren't increasing and we're seeing staleness in some of the older brands, is there a necessity to focus more on the Swiss watch business? In the luxury business, it just seems like that the fashion watch business is very stale and not really a growth category going forward.

I don't think we said that at all. I think we still believe our licensed brands are a wonderful growth opportunity. We've got additional distribution available to us. Some of that will be coming in the next couple of years as we look to expand in the key markets in Eastern Europe, Russia, China, India where the global recognition of these brands could be powerful opportunities for us to take distribution from some lesser or local or regional brand there. During the quarter, Diesel and D.K.N.Y., we still saw grow double-digits. So we still think there is a lot of growth left in those brands as well, not only in new markets but in taking additional marketshare in the existing markets. As Kosta mentioned, we think our Fossil business, even domestically in a more normal year, is still a 6% to 8% growth opportunity for the Company. We do think there is marketshare out there to grab and we feel that as we increase our marketing and our design talent, we can go out there and become a pretty powerful brand and take marketshare away from some of the other lesser-known brands in that channel.

My brief in store (ph) shops, I've seen Nordstroms pulling Fossil watches altogether and I've seen many company doors taking out D.K.N.Y. and replacing that with Fossil products. Is that a trend that we're seeing or are these only specific doors?

We had a -- in Nordstrom, what is going on really is we have put so many brands in that environment, we have so much opportunity there that we have looked at certain doors there and for example, we have taken Fossil out of a few doors and replaced it with Zodiac and maybe give some additional space to Michele. So on balance what we have done is move some of our merchandise around and put brands in there that would do more per foot. So on balance, we're going to have growth with Nordstrom which has taken Fossil out of a few of the doors that were not as successful and put stuff in there that would probably do a lot more sales.

One of the things about Michele is that the sales it does per linear foot or per case are very, very significant and much, much higher than Fossil or anything else we have seen. So anytime we do that and I think Zodiac is the same situation. So the average unit retail is higher and the turn can be as fast or even faster in some cases with those brands than Fossil that sometimes when we make a switch like that it does generate a lot more sales for the Company. Having said that, it is a very small number of doors and we are watching it very closely to make sure that we're not doing something that is detrimental to the brand. So as far as D.K.N.Y., D.K.N.Y. is in, I don't know the exact number of doors in the United States, it's 300 or 400 or so, and we have seen over time that some stores would slow down in that brand and others would pick up. So sometimes there are some doors that move around. So if you're in a store, you might see it here one year and not the next. But it is probably going to additional doors somewhere else.

What was advertising spend on the back half going to be?

Our advertising spend on the back half of the year will be down on a percentage of sales basis from what we saw last year. What we expect to see if you look at the third and fourth quarter specifically, last year in the third quarter we shifted a lot of our advertising out of the third quarter into Q4 to try to make a bigger impact during obviously the more seasonal part of the year. I think this year you'll see a shift in advertising as a percentage of sales being much higher in the third quarter albeit on a much lower absolute dollar base and can come down against the fourth quarter. I would say probably a 200 basis points increase in Q3 and at least a 200 basis points decrease of sales in Q4.

Great. Good luck, guys.

Andy Graves with Pacific Growth Equities.

Any guidance in '06 you can give us on in terms of rate. I know you haven't given much guidance but given the sort of the big moving parts here for tax rate this year it would be good to know whether we are going to see some normalization for '06?

I think, Andy, with all that has gone on this year with some of the new legislation that has gone through Congress with regard to the repatriation opportunity and foreign earnings, we should see our effective tax rate more normalized at historical levels for 2006 somewhere in the 37% range probably. There are some things we're looking at from a strategic standpoint that we think long-term could avail the Company to lower effective tax rate but we would have to put those strategies into place to affect something significantly lower than that.

We have spoken for the past three quarters, if I recall correctly, about trying to work these inventory levels down more appropriate to either total sales or total sales growth and we haven't seen that much progress. What are you going to do specifically in the second half to move those inventory levels down given the fact that you are now expecting top line growth to be between 10% and 12% suggesting year-over-year revenue growth of 55 to 65 million which again suggests that if you produce almost no additional inventory, you would bring your inventory back into line but I can't imagine you would do that.

Well obviously, the back half of the year is when most of the sales happen and our receipts will be moderated for the back half of the year relative to what they have been in years past. As we mentioned before, the luxury products that we have in place, some of that is going to take some time to work through. So we're going to have a slightly higher level at the end of the year and our outlet stores which have another large amount will work through it we think through the balance of the year. So basically it is going to be a slower receipt flow through the next six months or so.

As you slow your receipt growth or potentially slow your production, should we see some deleveraging out of some of the plants in which you are taking product from?

I would not expect that to be the case, Andy, only because the cost of our actual assembly operations is a nominal cost relative to the total wholesale value of the product.

What do you do? Do you actually just go on fewer shifts in some of those plants?

Well the labor $1.02 landed cost in the U.S. is extremely low compared to the component value of the inventory that the hands, the movements, the dials, etc.

And will you continue using third party or off-price sources to rid yourself of inventory in both Q3 and Q4?

As we mentioned earlier, we don't expect to see the level that we saw in the second quarter as we think we've been able to cleanup some of the pockets of discontinued styles out of our inventories. We think the back half of the year will be more of a normalized flow of inventory of discontinued products through our own outlet styles. Again, generally, when we're discontinued product to a third party, we are generally deep in that style and we don't want to try to push it through our outlet stores and not create that demand or the average unit retail that exists there right now. So we think, from that perspective, the second half of the year is --we're in a much better position with our BLMs to not have to take discontinued product outside of our normal channel.

What is different today than say six months ago when you had the same refrain that you wanted to move inventory levels back in line? What gives you more confidence today than say two or three quarters ago?

Well, a big thing is that we're getting to the busy time of year when there is a lot more activity both incoming and outgoing and it is a bigger time period and makes it easier for us to monitor and manage the whole situation.

Any other reasons?

Andy, I think if you look at it, we identified three specific areas that were the problem at the end of the second quarter. I think we feel pretty comfortable that we have plans in place to focus on reducing our exposure in those areas. And as Kosta mentioned, the luxury division inventories are going to take a little bit longer to get through relative to our expectations for sales growth in the next 6 to 12 months. In areas that we have focused on like our domestic watch business, our domestic accessories business, our inventories are well in line there and it's just these three areas that we need to focus on in the back half of the year. That is why we mentioned earlier we don't feel that based upon a 10% to 12% earnings -- our sales growth forecast, as you're going to see, earnings growth back at 10% to 12%. We're saying it is going to be a little elevated in the back half of the year as well with pressure from the luxury division as well as some pressure from new doors that we're opening and obviously having to have Adidas inventories in place to affect the January launch.

At this time, we have come to the conclusion of our question-and-answer session. I'd like to turn the presentation back over to management for any closing remarks.

Thank you. Should you want to replay this conference call, it has been recorded and will be available today from 10 AM Central time until 5 PM Central time tomorrow by calling 303-590-3000 and entering reservation number 11031695. Again, that number is 303-590-3000, reservation number 11031695. This conference call has also been recorded by street events and may be accessed through Street Events' website at www.streetevents.com or directly through our website at Fossil.com by clicking on Investor Relations on our homepage 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 November for the release of our third-quarter 2005 operating results.

Ladies and gentlemen, at this time, you may now disconnect and please have a pleasant day.