Fossil Group Inc (FOSL) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Fossil 2006 first-quarter earnings conference call. At this time, all participants are 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 today, Tuesday, May 16th of 2006. I would now like to turn the conference over Allison Malkin of Integrated Corporate Relations. Please go ahead, ma'am.

Thank you. 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. Fossil's policy on forward-looking statements and additional information concerning a number of factors that could cause actual results to differ materially from such statements is readily available in our Form 10-K and 10-Q reports filed with the SEC. In addition, Fossil undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

If any non-GAAP financial measure is used on this call, a presentation of the most directly comparable GAAP financial measure and a reconciliation of the non-GAAP financial measure to GAAP will be provided as supplemental financial information to this release under the Earnings Release section of the Investor Relations heading on our website.

Please note that this call is being webcast live on Fossil's website. It will be available for replay on the website under the Investor Relations heading after the conclusion of this call. And now, I would like to turn the call over to Fossil Chairman, Tom Kartsotis.

Good morning and thank you for joining us to discuss our first-quarter fiscal 2006 results. Joining me are President and CEO. Kosta Kartsotis, our CFO, Mike Kovar.

I'd like to start off this morning by providing an overview of our 2006 first-quarter results. Then Kosta will review our first-quarter sales highlights and current initiatives, followed by Mike, who will review our financials and update our earnings guidance. At the conclusion of our update, we will open the call for any questions you may have for us this morning.

Our first-quarter results were ahead of our expectations, with sales increasing by 13.6% from $233 million to $264 million, a 17% increase, excluding currency. The first quarter this year included one additional week versus last year, which we believe added approximately $16 million to net sales for the quarter. We also incurred approximately $5 million in incremental expenses, a majority of this payroll-related due to the extra week.

During the quarter, strong sales internationally for our Fossil and license branded watches and jewelry businesses, combined with the continued strength of domestic accessories and company-owned retail store expansion, offset a decline in our domestic Fossil watch business.

First-quarter diluted earnings per share totaled $0.14, including a $0.01 per share for stock option expense, exceeding our previous guidance of $0.12 per diluted share. This, however, was below last year's earnings of $0.19 per diluted share, or $0.32 including the $10 million tax benefit related to the 2004 Jobs Creation Act.

The lower earnings principally resulted from a lower gross profit margin, prior payroll and company-owned retail expenses, as well as a shift of about $4 million in trade-show-related expenses, typically incurred in the second quarter of each year.

As Mike will point out later in the call, our full-year earnings guidance continues to be projected nicely above 2005 levels, exclusive of the tax benefits we realized last year. To that end, during the first quarter we continued to progress toward attaining our key strategic goals.

Notably, one, we launched our new licensed adidas watches. While we are confident that this brand will have more than $30 million in sales during 2006, first-quarter sales fell below our original expectations due to third-party factory production delays on certain styles.

We continue to gain market share for our Fossil brand. Our worldwide sales of Fossil branded products, inclusive of watches, accessories, jewelry and retail store businesses, increased 11% on a quarter-over-quarter comparison, demonstrating the ongoing strength of the brand.

Three, we continue to diversify globally as our international segment sales increased 16.4%, or 23.9% excluding currency. Four, we recorded growth of 21% in Fossil branded watch sales outside the United States. And five, we delivered new styles and fresh ideas to the market globally, receiving positive reception of both the Basel Watch Fair in Switzerland and the recent accessory market in New York.

Going forward, our priorities continue to be one, to continue our focus on watch innovation and brand building. Two, to reduce expense growth to match our lower sales growth targets. Three, to focus on reducing inventory levels. Four, to ensure successful first-year launch for adidas watches. And five, to capitalize on the strength of our global distribution model.

And now I'd like to turn the call over to Kosta to review our sales performance in more detail.

Thanks, Tom. Our first-quarter sales came in at plus 13.6%, up 17% including currency. The key drivers were the international business, our accessory businesses and our own retail store growth. In the domestic (technical difficulty) by 7.1%.

Domestic watch sales declined by 8%, due mostly to the U.S. Fossil watch performance, which was down approximately 16%. This decline was partially offset by solid growth in Armani, Burberry, Michael Kors and Relic. Internationally, sales were much stronger, increasing 16.4%, or 23.9% excluding currency, a significant improvement over fourth-quarter trends. In Europe, sales increased 23.4%, or 34% excluding currency, with solid gains in the Fossil and licensed watch businesses and large gains in our jewelry businesses.

As we've stated before, we believe the jewelry category represents a huge opportunity for us to leverage our distribution network around the world. During the first quarter, we continued to experience exceptional growth in our Fossil jewelry business in Europe. We also have strong growth in our Emporio Armani jewelry businesses and also launched Diesel jewelry into a small number of doors. We also launched Michele jewelry into five doors at Neiman Marcus, and the early selling results have been encouraging.

Our Zodiac brand also continued its strong performance in the first quarter, with sales rising 20%, as we leverage the momentum of this brand with key retail accounts in the United States.

Burberry experienced mix results, with solid growth in the United States offsetting a slight sales decline internationally. We feel very positive about the opportunities for this brand and are seeing some very strong results in certain stores and certain markets. Our strategy is to expand this success around the world.

In the mass-market channel, we have been successful in gaining a larger percentage of the replenishment program business versus primarily relying on seasonal promotional programs. As mass retailers have began reducing their promotional programs in favor of more predictable everyday business, our ability to capture their replenishment business volume has significantly strengthened our partnership with the retailers. At Wal-Mart, for example, we have increased our replenishment business in addition to capturing a greater share of the remaining promotional watch business over the balance of the year.

Our accessories businesses continued its great performance from last year, posting a 25% sales increase in the first quarter. We experienced strong increases in most categories and continue to gain market share in the handbag business, both in Fossil and Relic. As we've stated previously, the accessories category in the U.S. department stores is much larger than that of the watch department. With our penetration level in these businesses currently well below that of our watch business, we expect to see further sales increases in the accessory segment of our business. We are also continuing to expand these businesses to some of our international subsidiaries around the world.

As to our new initiatives, we launched the adidas brand in the UK and Germany during the first quarter. While original expectations were for a much broader launch in the first quarter, we did experience some production delays, primarily related to some of the digital watches in the line. With that said, we are confident that we will reach the target sales goal of 30 million for the year.

On the retail front, the first-quarter company-owned retail store sales rose 28% and the comps were flat to last year. We opened eight stores during the quarter and will open 25 to 30 more during the balance of the year. We ended the quarter with 177 stores, including 103 full-price stores, 37 of which are outside of the United States, and with 74 outlet locations. This total compares to 137 stores at the end of the first quarter in 2005.

As it relates to our initiative to increase our presence outside the United States, we will open 12 to 18 Fossil stores outside the U.S. this year. We opened stores in London, Hamburg, Berlin, Taiwan, and two stores in Hong Kong during the first quarter, and the early results are meeting our expectations. Not only do we expect these stores to add sales and profit, but they are a great way to expand the presence of the Fossil brand around the world. We feel this is a large, long-term opportunity for the Company.

We also recently opened a new store at the NorthPark Center in Dallas, which is somewhat of a flagship for us and incorporates our latest thoughts on the new positioning of the Fossil branch. The store looks terrific and is off to a very good start.

Another major component of our branding effort in the U.S. for Fossil is our new catalog initiative. We shipped 1 million catalogs during the first quarter and plan to distribute an additional 3.2 million during the balance of the year. This vehicle strongly communicates the positioning and lifestyle of the Fossil brand and has shown to be very successful driving traffic to the website and to our stores.

We are also focused on continuing to reduce inventory levels by purchasing product based on trailing sales trends and improving our planning and supply chain processes. We expect our inventory level comparisons to continue to show improvement each quarter, with the goal to end the 2006 at inventory levels flat against 2005.

We have spent in excess of $80 million over the last two quarters in purchasing more than 4 million shares of our common stock. Although recent financial results have been below our historical performance, we remain confident with our business model over the long-term. We will continue to explore opportunities for utilizing our cash balances and the amounts available under our revolving credit lines.

In total, while our first-quarter results exceeded our original earnings guidance, they are clearly not up to our standards. We have many competitive and strategic advantages, and we are focused on putting these to work in our favor and improving our overall results. Mike?

Thanks, Kosta. First, I'd like to once again summarize the results of our first quarter in comparison to the prior-year quarter. Net sales increased 13.6% to $264.2 million, compared to $232.5 million. Gross profit grew 9.8% to $133 million, or 50.3% of net sales, compared to $121.2 million, or 52.1% of net sales. Operating income totaled $17 million, or 6.4 of net sales, compared to $24.5 million, or 10.5% of net sales. The current-year operating income was also negatively impacted by about $4.7 million as a result of translating foreign currency sales and expenses due to a stronger U.S. dollar.

Net income was $9.7 million compared to $23.9 million. And the prior-year quarter included a $10 million tax benefit -- for the whole year, the tax benefit was about $12 million. Diluted earnings per share were $0.14 inclusive of $0.01 per share relating to implementation of FAS 123(R) on 69 million shares outstanding. And this compared to $0.19, $0.32 including the benefit for income taxes, on 74.5 million shares outstanding.

The first-quarter sales mix breakdown was as follows -- 19.3% from domestic wholesale watch sales; 22.4% from domestic wholesale accessory sales; 13.4% from Fossil-owned retail store locations; and 44.9% from sales generated in over 90 countries outside the United States.

The 2006 fiscal year and first quarter includes one additional week of business in comparison to the prior year. Overall, the 13.6% sales growth for the quarter consisted of the following increases and decreases by category and geographic region, all of which include some relative benefit for the additional week.

Domestic watch sales decreased approximately 8% to $51 million, compared to $55.9 million in the prior-year quarter. Other domestic sales, which include our accessory and Sunglass businesses, grew 26% to $59.2 million, compared to $47 million in the prior-year quarter. Sales generated from European based wholesale operations increased 23%, 34% including currency, to $81.3 million, compared to $65.9 million in the prior-year quarter.

Other international sales, which primarily consist of export sales to distributors and sales from our Canada, Mexico and Asia-Pacific wholesale operations, increased 4%, 7% excluding currency impact, to $37.4 million, compared to $36.1 million in the prior-year quarter. And finally, sales from our own retail stores grew 28% to $35.3 million, compared to $27.6 million last year.

Gross profit margin of 50.3% was 180 basis points lower than the 52.1% reported in the prior-year period. Approximately 140 basis points can be attributed to the strengthening of the U.S. dollar in the first quarter compared to the prior-year quarter. As the U.S. dollar strengthens against other foreign currencies, this results in a negative impact on our reported net sales, as we translate these local currency amounts sold through our subsidiaries outside the United States. And since our cost of sales are in U.S. dollars or other currencies paid to the U.S. dollar, the lower translated net sales reduce reported gross profit margins.

Additionally, gross profit margin was further negatively impacted by approximately $3 million of discontinued product sales that produced minimal gross profits. Partially offsetting these declines was an increase in sales mix from our higher-margin international and company-owned retail store segments.

Operating expenses as a percentage of net sales were 43.9% in the first quarter, compared to 41.6% last year. Operating expense increases were mainly driven by increases and payroll, trade shows, depreciation and amortization and rent expense. Payroll expense increases included an approximately $3.5 million associated with the additional week in the first quarter, as well as approximately $1 million of compensation expense related to the implementation of FAS 123.

Trade-show expenses reflect approximately 4.5 million of costs associated with the Basel Watch Fair, which has historically occurred and been reported in our second quarter. Depreciation and amortization expense increases are primarily related to fixed asset additions subsequent to the first quarter of last year. These additions include new retail store openings, the acquisition of a new building and land for our corporate headquarters, additions to our central European warehouse and SAP implementation costs. Rent expense increases are primarily related to new retail store openings subsequent to the first quarter of last year.

Partially offsetting these increases was an approximate $3 million reduction in operating expenses related to the translation impact of foreign currency operating expenses into U.S. dollars, due to the strengthening of the U.S. dollar in comparison to the prior-year period.

The decrease in gross profit margin combined with increased operating expenses caused our first-quarter operating profit margin to decline to 6.4% of net sales compared to 10.5% of net sales in 2005. On purely a foreign currency translation basis, operating income was negatively impacted by $4.7 million as a result of translation of sales and operating expenses.

Interest expense of $569,000 during the first quarter compares to approximately $60,000 in the prior-year quarter. This increase is primarily related to outstanding borrowings under our revolving line, principally used to fund common stock repurchases and capital expenditures during the first quarter.

First-quarter other income and expense decreased favorably by approximately $1.6 million when compared to the prior-year quarter. This favorable decrease is primarily related to a reduction in currency losses from revaluation of open foreign currency account balances in comparison to last year's quarter.

As the rate of exchange between the U.S. dollar and foreign currencies in countries where we operate remains relatively unchanged from that experienced at the end of 2005, we recorded minimal currency losses during the first quarter. In comparison, during the prior-year first quarter, we recorded currency losses of approximately $2.1 million.

Our effective tax rate in the first quarter was 37.3%, and during the comparable prior-year period, as I mentioned earlier, we recorded a $10 million tax benefit pursuant to the American Jobs Creation Act of 2004, resulting in an overall tax credit in last year's first quarter.

Now turning our attention to the balance sheet. Common stock repurchases in the last two quarters of approximately $80 million and capital expenditures of $16 million in the first quarter reduced our cash and working capital levels while increasing our short-term debt. In particular, we ended the quarter with $68 million in cash and short-term marketable securities and no long-term debt. Amounts outstanding under our short-term revolving line totaled approximately $47 million. Working capital of $303.6 million compared to working capital of $362.5 million at the end of the prior-year quarter.

Accounts receivable decreased 5.7% to $122.8 million at quarter end, compared to $130.3 million at the end of the prior-year quarter. Days sales outstanding decreased to 42 days for the first quarter compared to 51 days in the prior-year period.

Inventory at quarter end was $254 million, an increase of 29.8% compared to the prior-year inventory of $195.6 million. This was slightly better than the 35% increase we experienced in the fourth quarter of last year and slightly better than our original guidance for the first quarter. As mentioned earlier in the call, we are focused on managing our inventory levels down to last year's level by the end of the year.

Capital expenditures for the first quarter of approximately $16 million included over $7 million related to new offices for our UK subsidiary, $2.5 million related to retail store openings during the first quarter, $1.5 million in new corporate office buildout, and $1.5 million related to SAP implementations. We are expecting full-year 2006 capital expenditures of approximately $45 million to $50 million.

In addition to the $16 million spent in the first quarter, the balance of the year includes an estimated $12 million associated with new retail stores, $5 million associated with ongoing SAP implementations, $million of automation enhancements to our distribution centers, as well as other general maintenance CapEx. Amortization and depreciation expense for the first quarter was approximately $8 million, and we are estimating full-year 2006 amortization and depreciation in the $33 million range.

As it relates to 2006 guidance, we estimate second-quarter 2006 diluted earnings per share will approximate 12% -- or $0.12 a share, inclusive of a $0.01 charge associated with FAS 123(R). This compares to actual diluted earnings per share of $0.13 last year, $0.12 excluding tax benefits.

We estimate full-year diluted earnings per share of approximately $1.07. This full-year guidance includes approximately $0.04 of a negative impact from FAS 123(R), as well as a $0.06 benefit from a lower share count as a result of common stock repurchases. This compares to our previous guidance of $10.5 per share and fiscal 2005 earnings of $0.90 per share diluted, $1.07 per share diluted including tax benefits.

We are expecting sales growth of approximately 10% for the balance of the year. Our guidance reflects a slightly stronger U.S. dollar in comparison to the current spot rate of other foreign currencies, primarily the euro and pound. Tom?

Thanks, Mike. In conclusion, although we outperformed our original expectations during the first quarter, we understand that our more recent results have not compared favorably to the historical levels of sales and earnings we have delivered over our (indiscernible) business. However, as a management team, we are committed to returning the Company to those historical standards. We are confident that the ability of our employees, the business model we have developed and the competitive advantage of our offerings will result in long-term rewards for our shareholders. And we thank you for your continued support.

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

Thank you. (OPERATOR INSTRUCTIONS) Barbara Wyckoff with Buckingham Research.

Hi, everyone. Can you hear me?

Yes, Barbara.

Hi. I have a couple of questions. Mike, could you go over the -- maybe I'll give you all the questions and then you can answer them. Could you give us the components of the inventory? How much was related to adidas of the excess? How much was for Lux? How much was sort of excess that was unsold goods, etc.?

Second question will be when are we going to be likely to see the impact of the revised method of inventory forecasting? When will it have some impact on the inventory levels?

And then I guess for Kosta, can you give us some additional color on the strength in Europe, what was it? Because it's quite a dramatic turnaround from the fourth quarter trend.

And then I guess more color on the slow delivery of adidas -- what happened there, when it's going to be back up -- when it's going to be up to where you need it to be? And could you talk about the launch of adidas in the United States?

Okay, Barbara. I'll know out the couple of inventory questions first. Really, if you look at the reasons we gave for the increase in the fourth quarter last year, we haven't seen a significant amount of change from that. We still have higher levels of luxury watch inventories in our first-quarter ending inventory balance. We still have certain levels of Basel watch inventories. Obviously, higher than the sales trend recently, which as you know has been down for the last year or so.

In addition to that, adidas did add to the inventory balance. I don't have the specific inventory balance for adidas in front of me. Also, we acquired our Mexico distributor in the first quarter, so we obviously had to show those inventories on our balance sheet. And other than that, we're still seeing higher levels of inventories, primarily in our Asia-Pacific operations.

As it relates to the balance of the year and what our expectations are, we're expecting that Q2 will come somewhere near what we reported for Q1, maybe slightly down, but something hopefully in the 25 to 30% range. And then we will start to see better improvement towards the back half of the year with expectations that inventories at year end 2006 will be no greater than the inventories at year end 2005.

As far as your question about Europe, we did see, as you can tell from the results, a much improved situation there. And it was really across the board in all the watch brands. And also, as we said earlier, very much so in jewelry; we had a very strong increase in jewelry over there and started to get some good penetration. So we are very pleased with that.

As you know, we had seen, going back 18 months to 12 months ago, somewhat of that headwind over in Europe that we had perceived in the United States, and it looks like at least for now it has abated somewhat. So we are very pleased to see that and we are starting to get good penetration over there; we are or very excited about the prospects of that.

We also had, as I mentioned, opened three stores in Europe. We got a very strong response over there. And as we've said before, the stores over there that we do have in Europe are very profitable. We are excited about the prospects of retail and the brand building efforts that it makes. And our continuing penetration of the Fossil brand in Europe we think can be very strong, especially when we're seeing very strong results in Fossil jewelry there as well. And we're looking forward to putting more accessories over there, leather goods and sunglasses. So it's a very strong European situation for us.

As far as adidas, we did have some very technical digital watches that actually took longer for us to develop than we thought, and it caused some delays in our rolling out. We actually are rolling out in the United States starting in May, so it will really be the back half of the year that will see that. We shipped a very small amount in the United States -- I think just a few of the adidas stores in the United States -- so it was not really an impact here.

But we do think that it's going to be -- our original expectations of about 30 million will be easy for us to hit, and we're looking forward to that business becoming much larger over the next several years.

Okay. How about maybe the plans to distribute the jewelry in the United States. And then the stores that you opened in Europe, Kosta, are they multi-brand or Fossil-owned stores -- only Fossil stores?

Well, we're launching jewelry to our own stores in the United States in the third quarter this year. So what we've done is basically take the European jewelry assortment and tailored it to the U.S. market. So it's going to be in our own stores in the U.S. And also, our Asian stores will get it as well. And then we're planning on expanding that to department stores, probably first or second quarter of next year in the United States.

As far as the stores in Europe, those are Fossil stores, so they are smaller. I think the average of the stores we opened so far this year is probably 800 to 1000 square feet -- smaller than the ones in the United States. Mostly watches, but they do carry accessories in there. So we are in a process of opening an additional maybe six to 10 stores in Europe this year. At least some of those will be larger, maybe up to 1400 square feet, but we plan on putting more leather goods and more accessories in those stores to help us penetrate those businesses.

One great thing about us being able to be this strong in accessories in the United States is we have this international store situation and we can expand accessories around the world for our own stores and set the market and then go into wholesale.

Okay, thanks.

John Rouleau with Wachovia Securities.

Hey, guys. A couple of questions. Kosta, when you look at the assortment, specifically I guess in the Fossil watches over in Europe and what is selling over there, and maybe what is not selling here in the U.S., is the assortment that much different? Are you doing anything different in Europe from a styling or pricing perspective? I guess I'm really trying to get at is it really just a U.S. chain phenomena that we're dealing with here on the Fossil side or are you seeing anything else?

Well, I think the European assortment is a little bit different, and that customers, as you know, are somewhat older. So it tends to be -- although it is mostly the same assortment, there tends to be less frivolous kind of younger fashion in Europe than there is here. And as we've said before, the part of the business in the United States that is weak is that younger, more frivolous fashion business.

So as we said last time, I think our strategy really to, in the United States, increase the quality and the detail in watches, averaging in retails are higher. They are really more a luxury derivative, a bit more aspirational. Some of the watches we're selling right now in the U.S. are $95 instead of $55. So the direction we're going in is really more consistent with what we've had in Europe for a long time.

So we think it's -- actually the markets are coming together. In the United States now, we are targeting with Fossil at 25 to 35-year-olds, which is more consistent with Europe. So on a global branding situation, it's going to be more consistent and the assortments will be so as well.

Okay. And then, Mike, you know, first-half guidance for sales growth for sale last time you reported in the fourth quarter was a little lower in the first half, a little more accelerated in the back half. Given your slightly better results in the first half, does that kind of mitigate what you are thinking for the second quarter, or how should we be thinking about the second quarter versus the first quarter, given the better results?

Yes, I think we'll see the second quarter, really based upon the guidance we've given, coming in a little bit higher than the first quarter, closer to that 10% amount we gave for the balance of the year. If you take out the impact of the first quarter including the additional week, sales growth in the first quarter would have been about 7%.

I think what we're seeing is a little bit of the shift from the adidas side of things, shift out of the first quarter into the second quarter, which will add some additional sales to the second quarter that weren't originally planned there. And with that, some additional expenses as well, as there's costs going out to support those launches.

Okay. And then regarding the margins, you made the comment that you are gaining more mass-market replenishment business as opposed to promotional business. Are the margins significantly different between those two categories of business? Is that helping your margins out a little bit?

No, not significantly different.

Okay, not really. Okay. And then I guess, last but not least, on the jewelry side, I don't recall whether you've kind of been quantifying that out for us lately. I know you're talking about accessories and breaking that out. But to the extent that you could quantify the jewelry business over in Europe between the different brands or any numbers at all to help us just put our arms around the size and the magnitude of that.

Yes, the jewelry business in total came in about $18 million for the first quarter this year, and well over 70% of that coming from our Fossil brand.

Okay. So it's Fossil. You've also got -- you recently launched Diesel. You just put a little bit of Michele into the U.S. And then I'm missing -- there's one other.

Yes, it's primarily Diesel -- or it's primarily Fossil and Armani --

Armani, right.

Both the Michele launch and the Diesel lunch were very minimal to the first quarter.

And the third-quarter launch of Fossil in the U.S. stores, will that be similar in scope? I know it's going to be a different assortment, it's going to be modified for the U.S. But will that be -- could we consider that an all-out, full launch in the third quarter or are you going to dribble that in?

It's going to go to most of our stores in the United States, and then it will go to department stores next year.

Right. But very limited quantities or kind of full quantities to your own stores in the third quarter?

Well, it's a full assortment to our stores.

Got it. Okay, thanks.

David Turner with BB&T Capital Markets.

Thanks, good morning. I was curious if there was any historical precedent for the European business being a leading indicator of fashion trends. I know you just went through the argument of the age difference. But is there any read you can take out of the accelerating European business and apply that here or does it does not wash because the markets are just so different?

I don't think we had any history that has repeated itself. There's a lot of moving parts of the economies and the products and the stores and the distribution. I don't know that we can exactly take anything from it, except to say that we are very excited it is positive again and we're looking forward to expanding that international business, not just in Europe, but in Asia and Eastern Europe, and we're moving into China and some other places as well. So we are very excited about the long-term prospects of expanding the international business because we have this great platform built and we want to put it to use.

I think -- previous calls, you have talked about in some details some of the fashion initiatives, whether it was the launch of the Big Tic or the leather band. I guess is there anything in the pipeline? Other than the new licenses that you're launching in the jewelry, is there anything from a watch standpoint that is in the pipeline that may reinvigorate or inject some newness into the domestic --?

Actually, we see some opportunities United States. There has been a lot of press about young people not wearing watches. We think we have some stuff in the pipeline that will change their minds a bit, because I think people will always be predisposed to wearing accessories.

But there are some things that we're working on that the design teams around the world, not only in Europe and Asia, but the U.S., our design teams have been working overtime, trying to come up with new ideas and new techniques, and they've got some stuff that looks very interesting.

We do have some things in our stores right now that are doing very well, and we're moving in a direction I think that's going to show increased improvement throughout this year.

And is that a Q2 -- is that going to manifest in the stores in Q2 or is this a back half --?

As you saw in our numbers, we did have sequential quarter improvement from Q4 to Q1. And our inventories at retail actually in the United States and the stores that we sell to are very low relative to sales. So we're seeing improvement already. So we expect that to continue, especially as we continue to launch some of these new things in the marketplace that are rather unique and somewhat -- very interesting to us.

And I doubt I'll get much more color than what you already said, but is there any way or can you -- do you feel like quantifying how much of the 30% increase in inventory is carryover or stuff that you are going to be clearing?

We did not, as we haven't earlier, include any discontinued sales in the guidance. So that will only benefit the top line and should be neutral to earnings. We did move about 120 to 130,000 units of Fossil in the first quarter. And we expect there will be additional units we move through the balance of the year that will be assisting us in reducing our overall inventory growth.

Thank you.

(indiscernible) with CIBC World Markets.

Hi, I'm calling for Dorothy Lakner. I just have a couple of questions. Firstly, do you have a breakout of the penetration of non-watch sales for the quarter?

A break out?

Of what the percentage was of non-watch sales for the quarter?

Yes, we gave that number. It was -- we basically give that number in the U.S. because we don't have really a significant non-watch business outside of the United States. And as I flip through my notes here, 22.4% of our total sales came from the domestic wholesale and accessories sales.

And do you have any thoughts on why the Burberry brand is selling well in the U.S. and not performing as well in Europe?

Well, we've got a situation where we're getting very good results in the United Stores from department stores. And it has to do with the type of assortments and the execution of that. We're in the process of expanding that to other places in the world.

There are some situations, as in all our brands, where there is different markets, different brands are stronger than other places. So there are some areas where Burberry is weaker than we thought and we're in the process of moving stuff around in different countries and expanding and focusing more on some and less on others. Which is typical of the way these businesses usually work.

I mean, it is still in its infancy as a business and it takes time to sort out where it's going to be successful, what the best-selling styles are and how to execute it and how to grow it. We are kind of in that phase right now, where we're expanding good ideas around the world and we are continuing to grow it.

So it's a good long-term brand for us. We think it's going to be a powerhouse for us as time goes on. Huge potential not only in the existing markets where we are in the world, but in emerging markets, it's going to be a big, long-term thing for us. So we are very interested in its future.

And on the guidance, last question, I know you spoke about adidas, some sales falling into the second quarter. In the back half of the year, are you expecting similar types of increases in Europe to drive the business as well?

No, I think our overall guidance for the remainder of the year still reflects some level of lack of visibility as it relates to our global watch business. As Kosta mentioned, we're encouraged by our results in Europe during the second quarter, and we expect growth in that segment of our business. But overall, we're still being somewhat prudent at the 10% level for the balance of the year until we really can see a significant shift in the overall watch business.

[Andrew Dansig] with Praesidium Investment Management.

Hey, guys. I was wondering if you had a breakout for the intergeographic sales by U.S., Europe and Far East?

Can you repeat that? I'm sorry -- I didn't catch that.

I was wondering if you had a breakout for the intergeographic sales by U.S., Far East and Europe?

The intergeographic sales?

Yes.

That is just our related party, our related company sales.

Right. I was wondering if you have those numbers?

No, that information is generally included in the segment information in the Q, and I don't have that with me. But our Q will be filed on Thursday, so you'll have those then.

Okay. And what was the $3 million AND cost of goods sold that was written down, what type of inventory was that in relation to?

There wasn't a $3 million write-down in cost of goods sold. What we did say is there was a $3 million sales impact from selling discontinued product, which was basically done at cost, delivering no real gross margin.

Got you. And for the rest of the year, I guess, what are your plans as far as what steps you are going to take to reduce the inventory levels?

As we've said, we are in the process now of a couple of things. One is that we're buying inventory more to trend than we were to forecast. As you know, the Company was growing pretty dramatically over a long number of years, and we got in a mode of buying inventory forecast -- did very well with it, actually.

And we hit a state of disruption where the predictability we have is not that great. So we are really being more conservative on our inventory. We also have a major initiative in place to shorten our leadtimes, which is going to make some impact over the next couple of years or so, that we think that will help as well. But it's really just being more conservative and watching the inventories closer.

Okay. All right. Thanks a lot, guys.

Barbara Wyckoff.

Hi, a couple of other questions. Mike, could you talk about Basel expenses, last year versus the $4.5 million this year. Second question would be where are you in the SAP implementation and rollout?

And then just some more detail on the other sales. The sales outside of Europe were kind of weak. What was the primary factor here? Was there more than one factor?

I'll take those in order. The Basel Watch Fair expenses of about $4.5 million this year compares to the same level that we spent last year. What we did have is, obviously, some additional costs associated with some of the newer brands that were showing at that fair. But we did reduce cost of some of the more mature brands that have been in that fair for a while.

As it relates to the other international sales, our Asia-Pacific sales performed very well. We were up 17% without currency impact there, which we believe is still less than what our opportunities are in that part of the region as we continue to look into China distribution and even India. Where we really saw some level of shortfall in the other international category, our sales in Canada were down slightly. That is primarily due to the fact that a majority of the business that we do there is watches, and we're having some of the same challenges in that market as we are in the U.S.

Additionally, our export business out of the U.S. was down slightly against last year, and that is primarily related to timing of when these distributors basically send in their orders.

And you had a third question -- SAP. The SAP implementation, as I mentioned, we spent about $1.5 million in the first quarter and we will spend an additional -- expected about $5 million in the balance of the year. That is primarily related to the SAP merchandising system that we're installing for our retail stores, that will give us a better opportunity for planning those stores and ultimately be a platform which we can expand globally as well.

In addition to that, later in the year, we expect to look to bring on a couple of our Italian offices, or at least begin implementation potentially in a couple of our European offices, Italy and the UK. But those implementations probably will not be completed until the end of 2007.

Okay. And then at that point, will Europe be completely on SAP?

Europe, other than a small distribution business that we have in Scandinavia and a small distribution business that we have in Switzerland, will be the only two markets left that we will not have SAP running.

Okay. And those will be rolled out next year or never?

We will look at that. Again, SAP is a pretty complex piece of software and we don't want to obviously add operating expenses in markets to run it that don't have the level of sales to support it. But we will continue to review the opportunities as those businesses grow into the future.

Okay, thanks.

Management, there are no further questions. I will turn the conference back to you for any closing comments you may have.

Thank you. Should you want to replay this conference call, it has been recorded and will be available from 10 AM Central time today until 5 PM Central time tomorrow by calling 303-590-30000 and entering reservation number 11059144. Again, that is 303-590-3000, reservation number 11059144.

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 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 August for the release of our second-quarter 2006 operating results.

Thank you. Ladies and gentlemen, that concludes the Fossil 2006 first-quarter earnings conference call. Thank you again for your participation, and at this time you may disconnect.