Fossil Group Inc (FOSL) 2006 Q4 法說會逐字稿

Good morning ladies and gentlemen, and thank you for standing by. Welcome to the Fossil 2006 fourth quarter preliminary earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (OPERATOR INSTRUCTIONS). This conference is being recorded Tuesday, February 20, 2007. I would now like to turn the call over to Allison Malkin, of Integrated Corporate Relations. Please go ahead, Ms. Belkin.

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 the company's 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 through this release under the earnings release section of the Investor Relations heading on Fossil's 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.

Before I turn the call over to management I would like to remind participants on the call that as previously announced on November 14, 2006 certain independent members of Fossil's Board of Directors formed a special committee to commence a review of the company's equity granting practices. This voluntary review is being conducted with the assistance of independent legal counsel retained by the special committee. At this time management will not be able to comment on any aspect of the review or possible outcome, and there can be no assurance that Fossil will not have to restate its prior financial statements or adjust certain financial information discussed within this call until after the committee completes its review. Accordingly, the company is not republishing or making reference to any financial results prior to 2006 with the exception of historical period revenue and gross profit and selected balance sheet information.

Additionally, any financial disclosures relating to the operating expenses, taxes, net income and net income per share amounts discussed in this call should be considered preliminary and subject to restatement pending the results of the special committee's review. The timing of the Company's filing of its third quarter form 10-Q for the period ended October 7, 2006 and its report on form 10-K for the year ended January 6, 2007 and the date of its annual meeting of shareholders are uncertain pending the completion of the special committee review.

And now I would like to turn the call over to Fossil's CEO, Kosta Kartsotis.

Thanks, Allison. Good morning, and thank you for joining us to discuss our preliminary fourth quarter 2006 results. Joining me today is Mike Barnes who was recently named President and COO and Mike Kovar, our CFO. I will start off this morning by providing an overview of our results for the quarter. Following this, Mike Barnes will review our performance in each of our businesses and update you on our most recent initiatives. Mike Kovar will then provide details of our preliminary financial results and update our revenue and gross profit guidance. At the conclusion of our prepared remarks we will open the call for questions.

Fourth quarter net sales rose 20.5% to $390 million, 17% excluding currency. Sales results reflected balanced growth across most of our product lines channels of distribution and geographies. Operating income totaled $57.6 million, which was 14.7% of net sales and reflected gross margin improvement, operating expense leverage and currency gains associated with a weaker U.S. dollar in comparison to last year's fourth quarter.

Excluding net currency gains associated with the translation of foreign currency sales and expenses, operating profit totaled approximately $50 million. Fourth quarter diluted EPS was $0.55. The fourth quarter was another highly productive period for Fossil as we continue to advance our key operating and financial goals. Specifically we expanded our global watch business, recording a 22% increase in total watch sales for the fourth quarter. As I mentioned, this growth was well-balanced with the majority of our brands contributing solidly to this gain. We also recorded a 17% increase in the global sales of Fossil watches, demonstrating that the product innovation along with our brand building activities are working. Our retail store growth and strong comps contributed significantly to the overall performance in the Fossil watch business.

Additionally the brand also reported strong double-digit growth internationally and performed well in the domestic wholesale market recording a 7.3% increase over last year. Consumers seem to be responding to the newness and differentiation in our watch styles.

Our retail store concepts continue to expand and gain in profitability; our retail segment reported an 8.8% increase in comp store sales during the fourth quarter, a testament to the strength of the Fossil brand and the vitality of our retail concept. We ended the year with 200 stores worldwide with 37 new stores opened during the year and eight stores closed. Our plans are to add between 50 and 60 stores in 2007 assuming the locations and economics meet our criteria. Our focus will be on the growth of our full price accessory concept in U.S., Europe and to a lesser extent the Asia-Pacific region. With the trailing 12 months, [four wall] pretax contribution in excess of 20% in the existing locations, we are excited about the long-term growth opportunity and margin contribution associated with this concept.

We successfully capitalized on our operating platform by extending our company reach in existing product categories. To this end our jewelry initiative remains a significant opportunity for us. In total, jewelry sales rose 41% in the quarter led by our Fossil brand. Our combined proprietary and licensure resale surged to $89 million for the year reflecting a 47% growth rate. New watch licenses added almost $30 million to our annual sales.

We had some initial problems with our Adidas launch but it was still the largest first year for a brand in our history and we remain excited about the long-term potential of the brand. We are also encouraged by the response we received to the Marc By Marc line and the continued strength of the Michael Kors launched in 2005. We believe our new licensed product initiatives present an opportunity to add significant sales and earnings growth to our global distribution network.

Internationally our fourth quarter sales grew at a strong double-digit pace. During Q4 we began distribution in China with good initial results and anticipate increasing our distribution in India sometime in 2007. As we stated before we believe these two markets offer significant long-term growth for the company.

Finally, we are pleased to have made a lot of progress on our balance sheet initiatives. Our inventory balances at year end dropped by more than 5% from last year's level during the quarter which posted a 20.5% sales increase, and the composition of the inventory is more current. Additionally we eliminated all outstanding borrowings from our U.S. line of credit during Q4 and ended the year with a cash balance in excess of $140 million, more than double that of last year. All in all a lot of improvement was seen during the quarter. Now I will turn the call over to Mike Barnes to update our fourth quarter performance by business area.

Thank you, Kosta. Good morning, everyone. Let me begin with an overview of our fourth quarter sales results. In the United States total watch sales rose by 10.4%; as Kosta mentioned Fossil watches reported a 7.3% increase in fourth quarter wholesale shipments domestically, which led to a successful holiday season for the brand. We were especially pleased with this result given the impact from the consolidation of Federated May that reduced the total doors we distribute through. Our sell through rates at department stores were strong in the fourth quarter which we attribute to innovation and differentiation in our assortments.

Consumers have also gravitated towards our higher price point style which has increased our average unit retail by about 10%. We expect Fossil's positive performance to continue given the solid acceptance of our styles at retail and the talent and innovation within our design teams. Domestically we reported double-digit growth in sales from our licensed fashion brands led by DKNY and Michael Kors. We attribute much of the strength to the sponsorship of Federated, which has led to an expanded presentation of our license brand in the acquired May locations. Further on the domestic front we've continued to launch our Marc By Marc brand during the fourth quarter and we are very excited about consumer response to the assortment during the holiday season.

On reviewing some of our other premium license brands we've seen that new product development in both Emporio Armani and Burberry continue to fuel the growth of these brands domestically as well as internationally. Sales of our Michele brand were down slightly in the quarter. During 2006 we have gone through a very positive restructure of the brand. During the year we will relocated the back office functions from Miami to Dallas, and we also added new management, as well as additional resources to the team. Having completed this now we are clearly focused on the future and expect a stronger performance from the brand in 2007.

Our mass-market business also continued its strong performance during the fourth quarter, and we believe we are well positioned for further growth in this channel. Sales rose by 27% which is highly attributable to our successful partnership with Wal-Mart. On that note, we have been recognized as Wal-Mart's vendor of the year for 2006 in the jewelry, watch and accessory division. We anticipate continued growth based on the success of our offering and the significant opportunities that exist to expand both the number of doors and the level of penetration within this channel.

In addition, we introduced Adidas watches to the U.S. department stores in the fourth quarter with a 67 door launch into Federated and Dillard's. Although it is too early to judge the success of the launch, we are encouraged by the sponsorship afforded to the brand. As we've discussed before, we believe Adidas complements our existing portfolio of watches by providing us with a strong performance sports brand.

Our domestic accessories business achieved a sales growth of 5.7% in the quarter primarily on the strength of our women's and men's handbags and small leather goods. We were pleased with this result given that we were anniversarying strong double-digit gains in our leather goods categories over the last two years. We are also operating in fewer doors given the consolidation of Federated May. Despite this our business continues to be very healthy on a comp door basis and we are gaining market share in this space. We are continuing to drive higher average unit retails in our handbag business by introducing new fabrics and leather as well as very unique treatments to our product assortment. Also fueling our increase in average unit retail has been the successful introduction of our men's bag business to the line this year.

Now I would like to address our international markets where we experienced double-digit sales growth during the quarter. In total sales outside the United States increased 26.8% or 19.6% excluding currency. In Europe sales rose by 20.8% or 11.5% ex currency, reflecting solid sales volume growth from Fossil and license watch brand as well as the contribution from the continued Adidas rollout.

Additionally, Fossil jewelry continues to expand in Germany and is gaining distribution in other parts of Europe. Other international sales, which include the Asia-Pacific region, Canada and Mexico and our U.S. export business rose by 43.5% or 41.8% excluding currency. The acquisition of our Mexico distributor earlier this year contributed approximately $5.8 million to our sales growth in this segment during the quarter. Our Asia-Pacific businesses experienced solid growth across all major watch brands. This segment continues to represent a sizable opportunity for expanding our global distribution footprint and growing our owned and license watch brand.

As we've previously mentioned, we continue to see China and India as large growth opportunities for our business model and we are excited about the prospects of our current brands within these markets. Our Shanghai office was open late in the third quarter and appears to be off to a good start contributing modestly to fourth quarter sales. We are just beginning our marketing efforts and planning our distribution strategy in this region and as Kosta mentioned, we expect to expand our penetration into India within 2007, as well.

Now turning to retail, as mentioned earlier on a global basis we experienced solid contributions from our worldwide retail operations during the fourth quarter. Sales rose 32.4% or 30.5% excluding currency as a result of a 19.8% increase from door growth and an 8.8% increase in comparable store sales. We ended the year with 200 stores, including 124 full price stores, 45 of which were outside the United States and 76 outlet locations, including two outside the U.S. This compares to 171 stores at the end of the prior year that included 99 full price stores, 31 being outside the U.S. and 72 outlet locations with only one outside the U.S.

Finally, we are very pleased with the results of our holiday catalog. During the fourth quarter we mailed approximately 2.5 million catalogs, and the response to this initiative has been strong. Evidenced by a 29% increase in our Web sales in the fourth quarter and strong comp increases in our U.S.-based retail stores. We believe the catalog is a major catalyst for growing sales by introducing the Fossil brand to more customers. Our plans are to expand our catalog mailing in 2007, and we believe that by using the Web, our retail stores and the catalog to present the Fossil brand to the consumer, we have a powerful marketing approach that will support the ongoing growth of the brand.

At this time I will turn the call over to Mike Kovar to discuss our preliminary fourth quarter financial results.

Thanks, Mike. Before summarizing the results of our fourth quarter I would like to once again remind you that certain information disclosed within these financial results should be viewed as preliminary, pending the completion of the review of our equity granting practices by the special committee. We don't expect completion of this review will impact our reported net sales and gross profit results. However, amounts associated with operating expenses, operating income, income tax expense, net income and diluted earnings per share should be considered preliminary and subject to restatement pending the results of the special committee's review.

And now I will get on with our preliminary fourth quarter results. Net sales increased 20.5% to $390.8 million compared to $324.2 million in the prior year quarter. Gross profit grew 25.1% to $200.8 million or 51.4% of net sales compared to $160.5 million or 49.5% of net sales in the prior year quarter. Operating income totaled $57.6 million or 14.7% of net sales, and net income totaled $38.2 million or $0.55 per diluted share on approximately 69.2 million shares outstanding.

The fourth quarter sales mix breakdown with comparison to the prior year quarter is as follows: 21.8% versus 23.9% from domestic wholesale watch activities, 13.7% versus 15.6% from domestic wholesale accessory sales, 18.4% versus 16.8% from Fossil owned retail store locations and 46.1% versus 43.7% from sales generated in over 90 countries outside the United States. The 20.5% sales growth for the quarter consisted of the following increases by category and geographic region.

Domestic watch sales increased 10.4% to $85.2 million compared to $77.2 million in the prior year quarter. Other domestic sales, which include our accessory and eyewear offerings, grew 5.7% to $53.6 million compared to $50.7 million in the prior year quarter. Sales generated from our European-based wholesale operations increased 20.8%, 11.5% ex currency to $125.9 million compared to $104.2 million in the prior year. Other international sales which consist of export sales to distributors and sales from our Canada, Mexico and Asia-Pacific wholesale operations increased 43.5%, 41.8% ex currency to $54.1 million compared to $37.7 million in the prior quarter. And finally sales from our own retail stores grew 32.4% to $72 million compared to $54.4 million in the prior year quarter and as Mike mentioned was a result of a 19.8% growth in average number of doors open during the fourth quarter and comp store sales increases of 8.8%.

The gross profit increased by 25.1% to $200.8 million compared to the prior year gross profit of $160.5 million. Gross profit margin increased 51.4% or increased to 51.4% in the fourth quarter compared to 49.5% in the prior year quarter. A weaker U.S. dollar in the fourth quarter of 2006 contributed a favorable 150 basis point increase to gross profit margins in comparison to the prior year quarter. Additionally, gross profit margin increased due to a sales mix shift toward higher margin company-owned retail and international sales partially offset by increased sales of lower margin mass-market watches.

Operating expenses as a percentage of net sales was 36.6% in the fourth quarter. Total operating expenses of $143.2 million includes approximately $4.2 million and $1.2 million of expenses related to a weaker U.S. dollar and additional compensation expense related to the implementation of FAS 123(R), respectively.

Increased net sales along with gross margin expansion and operating expense leverage produced operating income of $57.6 million in the fourth quarter and operating margin of 14.7%. Fourth quarter operating income included approximately $7.2 million of net currency gains related to the translation of foreign sales and expenses into U.S. dollars.

Interest expense totaled approximately $1 million, primarily related to amounts outstanding under our U.S.-based revolving line of credit which was paid off in full by the end of the year.

Earnings before income taxes were $56.1 million with the provision for income taxes of $18 million resulting in an effective tax rate for the quarter of 32%. In comparison to our normalized effective tax rate of 37%, the reduction in the fourth quarter effective tax rate was primarily due to recognition of certain deferred tax assets not previously recorded, and a reduction in certain income tax contingency reserves.

We reported fourth quarter net income of $38.2 million or $0.55 per diluted share on approximately 69.2 million shares outstanding. Now I will turn my attention to the balance sheet. At the end of the quarter we had cash, cash equivalents and short-term investments of $140.2 million compared to $64 million at the end of the prior year. We have no long-term debt and approximately $11.3 million of short-term bank debt. And as Kosta mentioned earlier, we attained our objective of reducing inventory levels below the prior year reporting 228 [point] million of inventory at year end, a 5.3% decrease over the prior year inventory of $241 million.

Aided by strong fourth quarter retail and Web based sales, accounts receivables at the end of the year increased by only 9.3%, well below our net sales growth rate to $155.2 million compared to $142 million at the end of the prior year end. As a result, days sales outstanding decreased to 36 days from 40 days in the comparable prior year quarter.

For 2006 capital expenditures totaled approximately $51 million and amortization and depreciation expense for 2006 was approximately $32 million. As it relates to our 2007 guidance our estimate for net sales growth for fiscal year 2007 is in the lower double-digit range with continued gross margin improvement over 2006 levels. These estimates reflect the current prevailing spot rate of the U.S. dollar compared to other foreign currency primarily the euro and pound. Net sales growth for the first quarter of 2007 could be slightly lower than the annual estimate as the first quarter of fiscal 2006 included an additional week within the reporting period. If you recall as we reported our first quarter earnings conference call back in May of 2006 this extra week increased net sales and operating expenses by approximately $16 million and $5 million, respectively for the first quarter of 2006, generating an approximate $3 million in additional operating income.

Additionally, if we continue to grow in the watch, jewelry and retail store segments we believe we will continue to experience a greater percentage of our annual profits in the back half of the year as evidenced by our 2006 preliminary results. We look forward to providing full earnings estimates for future periods after the special committee completes its review of our equity granting practices. Kosta.

In summary, we ended the year strongly and believe we have solid momentum as we begin 2007. In reviewing the results of our fourth quarter we showed solid progress in reducing our inventory levels and increasing turns, as well as leveraging our operating expenses. We are focused on continuing progress in these areas in 2007. As we move forward, we also believe we have an opportunity to improve gross margins and have an initiative in place that we feel will allow us to report progress in this area during 2007.

Overall our brands remain vibrant and the opportunities are abundant. To further our global expansion in watches while continuing to grow our retail, accessory and jewelry businesses we believe that fiscal 2007 will represent a year of significant accomplishments for the company. Before I turn the call over to the operator I would like to remind you that due to the special committee's pending review of our options practices we will not be able to comment on any aspect of the review or possible outcome. Operator, please open the call for questions.

(OPERATOR INSTRUCTIONS) Elizabeth Montgomery, Cowen & Company.

Congratulations on a good quarter. I have two questions, I apologize if I missed something more specific about this, but could you describe what you were referring to when you just mentioned the gross margin initiatives that should show contraction in '07? And then could you also talk about what you think the operating margin of the company should be on a more normalized basis over the next two or three years?

First of all, as you know we have a rather complicated business model, a lot of moving parts and a lot of intra company charges, etc. Sometimes it is very difficult and complicated to get the right margin and the right prices on the products globally. And also relative to demand which means that some countries outside the United States we can, and we do, we charge higher prices than we do inside, so basically we've got initiative in place that is global. It is one of the biggest initiatives in the company this year to look at all those areas very closely and make sure that we are optimizing gross margins globally, keeping in mind these price situations, all the intercompany things that go on, and in addition to that the currency advantages we have in place. So we feel we are going to make progress on that.

As far as the operating income percentage we had always talked about a target of 17%, but through the last couple years it would be rather presumptuous for us to talk about that as we are trying to get past eleven. But we do feel that based on the platform we've built, the investments we've made and all the leveraging that will go on that we will improve. So that is our focus for right now. We do think long-term that we do have a higher number that will stabilize that, but I think for right now it would be presumptuous for us to state that number.

And the growth margin initiative, does that involve any incremental costs in the system or personnel or anything like that?

Not really, it is basically a task force among some of our most senior executives and it filters down to most of the employees in the company. It is just a focus and a different way of looking at things; and there are some technology things that we are doing in-house to be able to do this but we do think it is not going to cost any money.

Thanks a lot, and good job.

Barbara Wyckoff, Buckingham Research.

Great quarter. Talk about -- you just touched on this but the quality of the inventory content -- percentage of age product on hand this year versus last year -- did you have a selloff, it appears not. Have you moved through most of the distressed goods? And then could you talk a little bit also about jewelry, the new jewelry and domestically within your own stores are you planning on wholesaling that domestically? And presume the jewelry still in Europe is the sterling silver product versus the costume product that is domestic?

Barbara, I will answer your first question relative to the inventory composition. As Kosta mentioned, the composition is much more current than the assortment of the product. As you know, over the last three quarters excluding the fourth quarter of 2006, we had some sizable off-price sales that impacted our margins. In Q4 specifically the off-price activity was pretty normalized and at about the same level we saw in Q4 last year, and we really didn't begin the aggressive approach to reducing inventories through the off-price channel until the first quarter of 2006.

As we mentioned the inventories are done year-over-year by 5.3%, and that number still includes significant growth obviously from our retail stores that probably just with the new store growth added another 3% to 4% of inventory growth. Our Fossil watch business is probably about half last year's level and we are comfortable that it's more current. The focus is on inventory turns and we are continuing the whole initiative behind our inventory reduction plans into 2007 as well.

I will tackle the jewelry questions that you had. First off in Europe we had an excellent quarter in jewelry growth in Europe. As far as our double-digit growth overall in Europe jewelry was one of the biggest leaders of that growth experience that we had there. On the U.S. side we have had a good launch of the U.S.-based jewelry into our own stores here. We do have intentions of taking that out into the wholesale world, and we should be launching somewhere in the neighborhood around 400 doors during 2007. With about -- we are targeting a 7/25 launch date.

Okay, so for fall, and the product is different in each market, correct?

There are some product differences between Europe and the U.S. The European customer has a different I guess case level as far as the materials and style of the product. And even within Europe some of the product differs from some southern Europe such as Italy and northern Europe in the Germanic and Scandinavian type countries. Europe is more of a stainless-steel based and some sterling silver product, and the U.S. is more fashionable.

Okay and one follow-up question. Mike, could you talk about the increased gross margin rate and how we should be planning it going forward, how much should we be figuring in for mix shift for watches for currency and then from lower markdowns?

We haven't identified, Barbara, a specific number of basis points to expect in 2007. What we are saying, though, is we ought to continue to see the gross margin improvement and if you look at the sequential betterment from Q3 to Q4 that would be probably a pretty good indication of the trend we are looking to follow.

Okay, thanks.

Brad Stephens, Morgan Keegan.

Good morning, guys. Great quarter. Looking out retail here can you give us -- what was your CapEx and D&A forecast for next year?

We are probably going to be, including the 50 to 60 additional retail stores, somewhere in the $50 million range. Depreciation and amortization should be around mid $30 million range.

Okay and then on the breakout of the 50 to 60 stores U.S. versus international?

We're going to open probably -- just guessing right now -- I would say 20 to 25 of those stores will be outside the United States, focusing mostly on Europe were we've had an even higher success rate than we had in the U.S. or Asia. So we do feel like there is a rather large opportunity there. We also, as we mentioned before because we do have somewhat of an mover advantage, there's not a lot of U.S. companies building retail over there. And the market is ready for it and it seems like we've got a great opportunity to not only put stores over there for sales and operating income but also to penetrate the market even better with our brand. So it's a good way for us to get the Fossil message out. It's really more like advertising in some of these markets.

For example, we have five stores in the UK right now, and as you know most of our wholesale business for Fossil in Europe is in Germany. So we have a rather large wholesale opportunity in the UK by penetrating the market with stores first and then coming behind with the wholesale business, it could be a rather large opportunity for us. But long-term the Fossil brand globally in watches and retail and jewelry and the Web and catalog activity is going to continue to get larger. It's a very, very large opportunity and by penetrating these markets with retail first where we don't have a lot of wholesale business we think we can accelerate the process.

Looking at retail I think traditionally the first three quarters of the year has been kind of a flat contribution with it being substantially profitable in the fourth quarter. When will it get more profitable in the first three quarters? As you add stores for leverage? And then I guess that flows through to what are the quarterly earnings flow? Are we going to be a 50% fourth quarter type story longer-term?

I think if you look at the composition of the earnings, preliminary earnings for 2006 we reported I believe $0.86 in the back half of the year of the total $1.18. So that represents over 70% of the earnings contribution in the back half of the year. We think that will continue to some extent as we move forward with, as I mentioned earlier watches, jewelry and specifically retail stores being a bigger part of the growth. As you know, Brad, most of our products do well at holidays, so I would say in the period between Thanksgiving and December in our own stores, sales during that period probably represent close to 30 to 35% of the year.

And obviously your occupancy cost is the same during that period obviously driving the leverage through the fourth quarter. So I wouldn't say that you should see anything significantly different from the composition of the earnings by quarter as we move forward. Obviously as we continue to grow stores at a larger level there will be some opportunity to leverage some of the back office costs that will help build a little more profitability than the first half of the year but it shouldn't be dramatic.

Okay, and one last question on the inventory liquidation that you went through this year, can you kind of remind us what that added to this year's sales wise so we know what we are up against for next year? And then is there any way to break out how that impacted 4Q comps?

As far as the total year it was probably between 28 to $30 million. As it relates to Q4 comps our discontinued activity was flat to last year's activity so really no impact to the overall sales growth in Q4.

Great. Best of luck, guys.

Robert Samuels, JPMorgan.

Good morning. Can you comment on the sales breakdown of watches versus accessories in the retail stores? And then can you give us an update on the store profiles? You mentioned last call about changing the profile to be more accessories focused. What percent of the stores have you made the transition, and is there a difference in the performance of those stores?

On the growth from a total store's perspective of the 32.4%, if you break it out between watches and non watches, watches represented 38.9% of the growth, and non watch represented about 24%. Can you repeat your second question, Rob?

Yes, last call you mentioned changing the profile to be more accessories focused. What percent of stores have you made this type of transition, and is there a difference in the performance in those stores?

All the new stores that we opened last year have that newer look, which is more focused on accessories. It doesn't look as much like a watch store basically. And we actually also went back and remodeled I think two stores in the U.S. and three in Europe. So we are in the process of doing that around the world, as well. So it is an ongoing process of opening new stores plus remodels and we have a number of those scheduled for this year as well. But it actually proved to be a very beneficial thing for us and we do think it gives us a much bigger opportunity long-term as we continue to penetrate more in accessories which is obviously a much bigger total market than watches.

Great. And one last question. Can you just quickly comment on the overall watch environment here in the U.S.? You have mentioned in the past seeing some slowing sales due to cellphones, iPod, etc.? Do you feel like those types of declines are behind you like that we've reached the bottom with regards to that?

There's a lot of speculation as to what actually caused the headwind that we went through for a couple years there, whether it was cellphones etc. they've been around for 15 years. Or whether it was just our own product initiatives and what we've done in the last year or so it's really accelerated the differentiation and the design process. And putting stuff in the market that is very different that what consumers had before. And what we found out is if they don't -- they responded to it. The fact that we had sold huge quantities of somewhat predictable items for several years and had rather large growth during that time, some of our customers had several watches that look similar. So by us accelerating the process and putting different looks, more expensive watches, more detail, more aspirational and communicating that more strongly in a more emotionally branded way in our stores and our Web and our catalog, we think it was paying off. And we think it was basically the design process, differentiation and branding.

Thanks very much.

(OPERATOR INSTRUCTIONS) Adam Comora, EnTrust Capital.

I was just curious how should we be thinking about SG&A as we move into '07 versus '06 as retail becomes a larger portion and we continue with some new licenses? Should we expect SG&A to be flat year-over-year as a percentage or maybe you can help us think about it for next year and longer-term.

I think, Adam, the expectations are to continue to leverage our SG&A costs as we move into 2007, to obviously generate the operating leverage back to levels that we've been able to report historically. Some of the new launches that occurred in 2006 we've already absorbed some of the front end costs of those which would include new point-of-sale material, getting fixtures out in the market, hiring brand reps, brand managers, etc. so as it relates to Adidas, Marc and Michael Kors to a lesser extent. Some of those costs have already been absorbed in 2006 so we would expect to see the SG&A costs on a full-year basis continue to show some leverage into 2007.

Okay, and any way to ballpark that or?

We are not identifying to what degree at this point; we are just saying we feel like the opportunity is there for us to report that type of improvement as we move forward.

Fair enough. And my next question is store count here in the U.S., what is the ultimate number that you guys are trying to get to? Is there a certain point where some of your wholesale customers are going to start pushing back?

We are not identifying that right now, and we may have more information later in the year on that, but we do feel like based on the growth of retail and the specialty stores and the malls and all the new centers that are opening up that the store count for Fossil accessory stores in the United States is in the hundreds. And we are looking at how we would optimize that; where do we go and how we would organize it structurally with our people here in Dallas to get it executed. But we do feel that based on the size of the opportunity, the different markets we are in and the fact that we are moving more towards accessories and not focusing on watches means that there is a much larger opportunity.

As far as our customers go I think there is, if you look at the total growth in these categories, if you look at the growth in specialty stores of the J. Crew and Abercrombie, Anthropologie, etc. there is huge real estate growth in those areas for apparel. But accessories is still somewhat underserved relative to the rest of the markets, and we think there's a larger opportunity there, and our customers from Federated, etc., we still are showing strong growth there as well. So we think we can do both at the same time.

Okay, thanks.

Gentlemen, at this time I am showing no additional questions in the queue. Please continue with your presentation.

Should you want to replay this conference call it has been recorded and will be available today from 10 AM Central time until 12 midnight Central time tomorrow by calling 303-590-3000 and entering reservation number 11081803 followed by the #. Again that number is 303-590-3000 reservation number 11081803 #. 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 the Investor Relations section and then on our homepage and then on webcast.

Finally, should you have any questions that did not get addressed today, please give Kosta, Mike Barnes or myself a call. Thanks again for joining us today. Our next scheduled conference call will be in May for the release of our 2007 first quarter operating results.

Ladies and gentlemen, this does conclude the Fossil 2006 fourth quarter preliminary earnings conference call. You may now disconnect. We thank you for using AT&T Executive Teleconferencing.