Fossil Group Inc (FOSL) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Fossil first-quarter fiscal 2007 preliminary results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for your questions. (OPERATOR INSTRUCTIONS) This conference is being recorded today, Tuesday, May 15, 2007. I would now like to turn our conference over to Allison Malkin of ICR. Please go ahead.

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 Fossil'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 to 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 May 7, 2007, a Special Committee made up of independent outside directors of the Board of the Directors of the Company presented its final report on the voluntary review of the Company's historical equity granting practices to the Board of Directors on May 4, 2007. As a result of the findings related to this review, the Company is currently working to revise the measurement dates of its certain equity grants since 1993.

As a result of revising such measurement dates, the Company anticipates restating previously-issued consolidated financial statements for fiscal years 2004 and 2005, for all fiscal quarters of 2005, and the first two quarters of fiscal 2006. Accordingly, the Company's report on its 2007 first-quarter operating results and financial condition will be limited to a discussion of net sales, gross margin, and selected balance sheet information.

Although we expect this information will not be impacted by the results of the anticipated restatement, there can be no assurance that such information disclosed in this call will not change as a result of the anticipated restatement. 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 today. Joining me on the call is Mike Barnes, President and Chief Operating Officer, and Mike Kovar, our CFO. This morning we would like to provide you with an overview of our first-quarter highlights, plus some additional insight into our reported results and recent initiatives. At the conclusion of our prepared remarks, we would welcome your questions.

While this morning's remarks will be limited in the financial area, the good news is that our Special Committee's review of our equity granting practices is completed. We are working diligently to make any necessary changes to our previously-filed financial statements with the SEC, as well as getting current on financial filings. We are anxious as you are to quickly return to a more normal environment as it relates to sharing the results and direction of our business with you each quarter. We appreciate your patience and support during the past few months.

A significant highlight of our first quarter was the continuation of the sales momentum we experienced in the fourth quarter of last year. First-quarter net sales increased 15% to $305 million, primarily as a result of business increases in our watch and jewelry sales internationally, combined with a strong performance in our direct businesses. We're especially pleased with the strong sales growth given the quarter only contains 13 weeks of sales, compared to 14 weeks in the previous year.

As for our gross profit margins, although we met our targeted levels, we are focusing on opportunities to drive increasing margins in the second half of the year.

Some specific first-quarter highlights included -- increasing our global market share in watches by posting an 18% increase in watch sales. Excluding the impact of currency, worldwide sales of FOSSIL brand watches rose by 10%, inclusive of strong double-digit growth in our Europe and Asia markets, and both volume and comp growth through our own Company-owned retail stores.

Sales growth from our domestic accessory business was about 4% for the quarter, despite the impact of a shift in wholesale shipments between the first and second quarter. FOSSIL's average unit retails increased in both watches and accessories. Consumers are responding to our higher price point offerings, which has led to the introduction of certain brand extensions.

Jewelry sales remained robust and were fueled by increases in both FOSSIL and Armani. Additionally, the newly introduced jewelry line in our domestic retail stores performed well, and we will be launching into 400 wholesale doors in the fall, which is well above our original plan.

Our direct business has continued to expand and gain in profitability. Our Company-owned retail stores recorded a 22.7% increase in sales with comp store sales rising 12% on a comparable 13-week to 13-week basis. On a trailing 12-month basis, we reached a 24% four-wall pre-tax contribution margin from our domestic full-price accessory stores. The stores in Europe's contribution was even higher. We remain on track to open about between 50 and 60 store locations this year.

We're focusing on the growth of our full-price accessory concept both in the United States and internationally. In addition, we continue to expand our catalog initiative, having mailed approximately 750,000 catalogs during Q1, an increase of about 300,000 from last year's first quarter. As we have mentioned before, the catalog is a great way to create additional awareness and is helping us in our repositioning efforts for the FOSSIL brand. The catalog obviously is also driving traffic to the retail store channel, as well as to our website.

Finally, we are pleased to report continued progress on our balance sheet objectives. Our inventory balances at quarter end dropped by more than 7% from last year's levels, despite an increase in the number of Company-owned retail stores and a 15.4% sales increase for the quarter. We also ended the quarter with cash, cash equivalent, and short-term investment balances of approximately $148 million, more than double the balance at the end of the prior-year quarter.

In summary, as we continue to build on our global market share, our brands are increasing in awareness and creating additional growth opportunities for the Company. This year, we will be focusing on continuing that trend through increased wholesale sales, product extensions, and through our own Company retail expansion. Now I would like to turn the call over to Mike Barnes for further information.

Thanks, Kosta. Good morning, everybody. Before I begin with the overview of our first-quarter sales results, I would like to discuss certain anomalies occurring in the comparison of our 2007 first quarter to the prior-year quarter, primarily related to our domestic businesses.

As Kosta mentioned earlier, we're up against an extra week in the comparative prior-year quarter which by our estimates added approximately $16 million in sales to the prior-year first quarter. It would be difficult to identify what portion of this relates directly to any one brand or category. However, we do believe it had the effect of reducing our 2007 first-quarter net sales increases, principally related to our domestic business, by approximately 5% to 6%.

Additionally, our 2007 first-quarter wholesale shipments in the US were negatively impacted by a shift in the receipt plans of some of our major customers. The end result of this shift is that certain customer orders typically falling into our first quarter are now being moved into our second quarter.

I would now like to review the performance of our businesses during the first quarter. Now, keeping in mind the additional week that we just discussed and the shift in our customer receipt plans, our domestic wholesale watch shipments declined by about 3.9%; or 1% if you excluding discounted product sales from the current and prior-year quarter. On the same basis, FOSSIL watches reported a 1.3% increase in domestic wholesale shipments.

Importantly, our sellthrough rates at the department stores remained solid, reflecting the strength in our current offers for FOSSIL as well as our license brand businesses. As a result, we're gaining market share in the department stores. We also continued to experience higher average unit retail prices for FOSSIL, and we are in good inventory position within the stores.

Domestic sales of our licensed fashion watches rose by 10%, led by our Michael Kors brand and the continued rollout of Marc By Marc, which was launched in the fourth quarter of last year. As we discussed in the past, the Federated-May merger is having a positive impact on our licensed watch businesses, as we're gaining doors that weren't previously available to us within the old May Company environment.

On the luxury side, Burberry continues to expand its presence in this channel, reflected by a 58% increase in wholesale shipments during the first quarter, albeit on a relatively small base at this time. We are encouraged by the consumer response to the brand, though, and we look forward to continue grow.

On the MICHELE front, our business reported a single-digit net sales decline in the quarter, primarily impacted by higher levels of product returns, which we did anticipate. On a positive note, we are experiencing an improved performance at retail as we work to reassort certain doors with newness. In fact, we're seeing comp sales growth at retail in the teens for certain key accounts. Overall, we expect the end result of the strategy to be positive for the brand.

Our mass-market business posted a sales decline during the quarter due to a shift in Wal-Mart buying patterns, again, tied to a change in their receipt plans during the quarter. On a more positive note, though, through the first six weeks of the second quarter, we have made up for this shortfall already and expect this business to show solid increases over the full year. We remain confident that we have a significant opportunity to expand both the number of doors and the level of penetration within this channel.

Turning now to accessories, our domestic accessories business achieved sales growth of 3.9% in the quarter, principally due to a 34% sales volume increase in RELIC women's leather and sunglass businesses. We continue to experience solid consumer response and excellent sponsorship for our offerings in both Penney's and Kohl's.

FOSSIL accessory wholesale shipments declined approximately 8% in the quarter, due primarily to the shift in department store orders and the impact of comping against that additional week in the prior-year quarter. The brand remains in high demand in our key accounts, and we are excited by the potential to extend the handbag business to higher price points.

To that point, last week during the Accessory Market, we unveiled a new line of FOSSIL handbags called [FOSSIL 54] with retail prices up to $450. The response to this offering at Market was very positive, and we expect to launch into 150 doors this fall.

On the international front, we had a terrific performance for the quarter. Net sales increased 27.1%, or 20.8% excluding currency. In Europe, sales rose 23.7% -- 14.7% ex-currency -- with contribution across all markets. Helping drive this performance was a double-digit sales volume growth from FOSSIL watches and jewelry. Our branding efforts in Europe continue to strengthen our position in each of our markets, and the product looks great. It is obviously being well received.

On the licensing front, we experienced robust sales volume growth from EMPORIO ARMANI watches and jewelry, as well as DKNY watches.

Other international sales, which includes our wholesale operations in the Asia-Pacific region, Canada, Mexico, and our US export business, rose by 34.5%. We experienced strong double-digit growth across all of our owned and licensed watch and jewelry brands in this segment. Our shop-in-shop concepts in the Asia-Pacific region are building awareness for our offerings and allowing us to gain market share within the department store environment. We remain confident that this segment will represent a sizable opportunity for expanding our global distribution footprint into the future.

Our China distribution business, which we launched in Q4 of last year, continues to progress nicely. We expect to open distribution into India during this year as well. Although the initial impact of distribution into these two markets is not expected to be significant immediately, we are excited about the prospects of our current brands and businesses in these markets over the long term.

During the first quarter, we began to anniversary the launch of our Adidas licensed watch offering that commenced in Q1 last year. Although sales nearly doubled in comparison to last year's quarter, we still have some work to do in refining the assortment. We are encouraged by the progress we have made to date. We're giving strong support to the brand at retail and we remain confident that Adidas this will assist us in expanding our distribution reach.

Now turning to retail, as also mentioned earlier, on a global basis we experienced solid contributions from our worldwide retail operations during the first quarter. Sales rose 22.7%, or 21.6% excluding currency, as a result of a 25.6% increase from door growth and a 12% increase in comp store sales on a comparable 13-week basis. Both watch and non-watch categories delivered very solid growth during the quarter.

We ended the quarter with 201 stores. That includes 125 full-price stores, 45 of which are outside the US, and 76 outlet locations including three outside the US. This compares to 177 stores at the end of the prior-year quarter that included 103 full-price stores, with 36 being outside the US, and 74 outlet locations including one outside the US. During the quarter, we opened five new stores and we closed four.

All in all, the Company posted solid growth for the quarter across most brands, categories, and regions. At this time, I will turn the call back over to Mike Kovar to discuss our preliminary fourth-quarter financial results.

Thanks, Mike. Before summarizing the preliminary results of our first quarter, I would like to once again remind you that due to the pending restatement of certain previously-filed consolidated financial statements with the SEC, I will be limiting my discussion to net sales and gross profit and certain selected balance sheet information. Although we expect this information will not be impacted by the result of our restatements, there can be no assurance that such amounts will not change as a result of the restatements.

Now I will share with you our selected preliminary first-quarter results. Net sales increased 15.4% to $304.8 million compared to $264.2 million in the prior-year quarter. Gross profit increased 17.4% to $156.1 million or 51.2% of net sales, compared to $133 million or 50.3% of net sales in the prior year's quarter.

The first-quarter sales mix breakdown, with comparisons to the prior-year quarter, was as follows. 16.1% versus 19.3% from domestic wholesale watch sales; 20.2% versus 22.4% from domestic wholesale accessory sales; 14.2% versus 13.4% from Fossil-owned retail store locations; and 49.5% versus 44.9% from sales generated in over 90 countries outside of the United States.

The 15.4% sales growth for the quarter consisted of the following increases and decreases by category and geographic region. Domestic watch sales decreased 3.8% to $49.1 million, compared to $51 million in the prior-year quarter. Other domestic sales, which include our leather and eyewear businesses, grew 3.9% to $61.5 million, compared to $59.2 million in the prior-year quarter. Sales generated from European-based wholesale operations increased 23.7% -- 14.7% excluding currency -- to $100.6 million, compared to $81.3 million in the prior-year quarter.

Other international sales, which consists of export sales to distributors and sales from our Canada, Mexico, and Asia-Pacific wholesale operations, increased 34.5% -- 34.1% excluding currency -- to $50.3 million compared to $37.4 million in the prior-year quarter. Finally, sales from our own retail stores grew 22.7% to $43.3 million compared to $35.3 million from the prior-year quarter.

Gross profit of $156.1 million or 51.2% of net sales represents an increase of 17.4% over the prior-year quarter, or 50.3% of prior year's net sales. The gross profit margin increase of 90 basis points reflects 130 basis point improvement due to favorable currency rates. A shift in sales mix toward our higher-margin international and Company-owned retail store sales further benefited our reported gross margin for the first quarter.

Additionally, a lower percentage of discontinued product sales in comparison to the prior-year quarter also favorably impacted our gross profit margins.

These increases were partially offset by increased RELIC accessory sales and increased export sales to distributors from our US operations, both of which carry lower gross profit margins than our historical consolidated gross profit margins.

We have recently experienced some pressure on our gross profit margins as a result of certain new styles added to our global watch assortment, which are generating slightly lower gross profit margins than our historical average for this category. However, we have an initiative in place that we believe will result in recapturing this margin, as well as further increasing our margins across all of our various product lines. We expect the results of this initiative will further improve our overall gross profit margin beginning in the second half of fiscal 2007.

Although we are limited to discussing sales and margin information, we would like to point out that, as disclosed last year, the prior-year first quarter operating expenses included additional expenses related to two areas. One, a shift in the Basel Fair date to Q1 last year; historically, as is the case this year, the Basel Fair occurs during our second quarter. This added approximately $4 million to last year's first-quarter expenses. Secondly, the extra week, as we discussed, that increased sales by $16 million in the first quarter also had the impact of increasing operating expenses in the first quarter last year to the tune of about $5 million.

Since the Special Committee began its review of our equity granting practices in November 2006, through the end of the first quarter 2007, we have incurred approximately $5.3 million in legal and accounting fees related to this review. Approximately $5.1 million of the total amount spent to date was incurred during our first quarter of fiscal 2007.

Now turning our attention to the balance sheet. At the end of the quarter, we had cash, cash equivalents, and short-term investments of $148.7 million compared to $68 million at the end of the prior-year quarter. We have no long-term debt outstanding and approximately $11.5 million of short-term bank debt.

As mentioned earlier, we continued to reduce inventory levels, reporting quarter-end inventories of $235.6 million, a 7.2% decline from the $254 million reported at the end of the prior-year quarter. This reduction was achieved despite the fact that we have added a net of 24 new retail store locations since the end of last year's first quarter, and reported a 15.4% net sales increase during the quarter.

Accounts Receivable increased 23.7% to $151.9 million at the end of the first quarter, compared to $122.8 million at the end of the prior-year quarter. Days Sales Outstanding increased to 45 days at quarter end compared to 42 days for the prior-year quarter. The increase in Days Sales Outstanding is primarily related to a slight increase in our collection cycle, mostly related to the higher mix of international sales and to a lesser extent the weakening of the US dollar.

For the first quarter, capital expenditures were approximately $6 million. We expect total capital expenditures for the full fiscal year of approximately 40 to $50 million, with the majority of this activity related to new store openings.

As it relates to guidance for the remainder of fiscal 2007, we continue to estimate net sales growth in the lower double-digit range for the remainder of fiscal 2007 and expect continued gross margin improvement on a year-over-year basis. We don't foresee net sales growth for any prospective quarter to be significantly higher or lower than this lower double-digit range. These estimates incorporate the current prevailing spot rate of the US dollar compared to other foreign currencies, primarily the euro and the pound. Kosta?

In summary, our sales and gross profit grew strongly in the first quarter, as we capitalized on the strength of our business model. We're pleased to start off the year on a very positive note. Our business remains strong at retail and we have many initiatives in place to advance our growth. We will remain disciplined with regard to inventory and expense management and look forward to a successful balance of the year.

I would like to add, before we turn the call over to the operator to begin the question-and-answer portion of the call, we would like to mention at the request of counsel we will not be able to respond to any questions related to the Special Committee's review or the results thereof. Operator?

(OPERATOR INSTRUCTIONS) John Rouleau from Wachovia Securities.

Good quarter. So, in kind of getting to the gross margin, you had mentioned that some of the newer, more popular styles, global styles, watch styles, maybe the gross margin wasn't quite what you had hoped or maybe slightly below plan; and you have got an initiative in place. Is that from a componentry standpoint or inefficiency on the sourcing side? Maybe you could just give us a little bit of color maybe why those are slightly below and what you're doing to improve that.

Sure, John. We would be happy to. You know, over the years, we have consistently put a lot of product into our watches, and we have improved our quality, we have improved our styling, we have put a lot of features into the watches.

Recently, we began some margin initiatives. Our goal is to work very diligently on supplier management. We're looking at value engineering initiatives and how it all works together with our product development design. We have historically been known as a great design and development Company. We are now going to marry that even more so with the engineering prospect of working with our vendors more closely and working on value engineering perspectives in the future, which we feel like will add to our gross margin.

In addition to that, we are working on our pricing models on a global basis. We're doing a lot of -- putting a lot of study into that to make sure that we are priced correctly in each market around the globe and that we are getting the margins out of that that we need to.

Okay, Mike, was there any other surprises or any other impacts on the gross margin in the first quarter that maybe were slightly different from what you thought? Other than maybe just some of the newer designs that we just spoke about.

I would say no, I think we have disclosed all those factors within the prepared remarks that impacted the overall gross margin.

Okay, great.

I would say what we basically saw was the benefit of the mix was probably somewhat offset by the fact that we do have certain new styles that are commanding margins that are slightly less than our historical margins.

My guess is that those certain new styles, the sellthrough rates of a lot of those certain new styles is probably higher than the older styles because that is really what is working.

I don't think I would make that jump across the board.

Okay. Kosta, moving on a little bit. Given the shifts in timing at the wholesale level, the US wholesale level, and then the one extra week, you have got kind of a lot of moving parts there. So I am wondering, do you have any sort of sellthrough data or kind of comp growth data of the department stores that you could share with us, to probably paint a more accurate picture on what is going on there?

Or even if you take a step back and kind of take a look at that business, what is your perspective on the health of that business, outside of the timing shifts?

Well if you look at the two impacts we have, the first one is our 13 weeks this year to 14 last year. And then if you look at certain customers, certain large customers had changed their shipping patterns, as you heard from some other companies, that impacted us to a certain degree also. So on balance, what that means is that our comp store sales in department stores this year were good, better than what the shipping was.

Good? Do you have any sort of a number? Kind of mid to high single-digit type good? Or can you quantify?

I mean, it is really hard to say. I mean, if you can imagine that we are looking at 13 weeks versus 14, and we are looking at that shipping at the end of the quarter, it is hard to say exactly across all our categories, et cetera. Except to say that it was better than our shipping.

Okay. Then, I know you can't really comment on expenses. I'm just wondering as a general rule, big picture, are you managing expenses to basically be kind of in line with sales growth, slightly below, slightly above? What has been the stated target previously, big-picture expense-wise?

John, again, we are limited to discussions to net sales and gross margins at this time. So we prefer not to answer that question.

All right. Can't hurt me for trying. All right, thanks, guys.

Neely Tamminga of Piper Jaffray.

Maybe Kosta or Mike, you can speak a little bit as to the retail store expansion strategy. Clearly that is part of what you guys are looking at for this year. Can you give us a sense, in terms of productivity trends at the store level, whether we are looking at the 2006 [cost] stores or 2005, what that looks like from a four-wall contribution point of view? In terms of the trends would be helpful.

Then just again, the size. Have you changed the size, the format? I know there has been a lot of work going on in the retail store strategy. Just want to get a little bit more platform for that.

And just a quick little clarification on the MICHELE watch brand. Is the -- I think you were talking about you had some product returns from customers. Is that tied to the Macy's conversion, particularly on the Marshall Fields doors? Or is there something else going on there? What are you looking for, for product extensions out of MICHELE going forward, to maybe help offset that? Thanks.

Okay. On the stores front, as we said, we're going to open between 50 to 60 stores this year. It is mostly focused on that accessory store. As we have talked about in the past, in the United States, we are getting a 24% four-wall contribution in the United States. In Europe, the number is actually higher than that.

We actually this year will probably open very few outlet stores. I think we are actually going to close three and open three, something like that. The [Jean] stores are pretty neutral as well. So we are focused on this accessory store because it is so successful and because it is helping us penetrate these foreign markets.

We're generating, right now, very high sales per foot relative to malls in the US and to street locations et cetera in Europe. The store we are looking in the US right now is about 1,300 to 1,500 square feet. These comp increases we are showing obviously are increasing the profitability of those stores. We are able to -- if you see these stores and the positioning of them, they are very consistent with the catalog and the website; and thus repositioning and targeting this more aspirational 25- to 35-year-old customer.

In foreign markets it is helping us penetrate new markets there, which we think is very, very beneficial to us and to wholesale growth as well. So on balance it is a very, very successful and looks like a very big opportunity for us. We would like to see us open potentially double the number of stores in '08 that we're going to open this year; and we're trying to get ourselves in a position to do that.

We're also making some headway on the reducing the buildout expense, including using our Asian operations potentially to help us source some fixturing et cetera. So we're making a lot of progress. We're a very excited about the future, and we think it is a big long-term opportunity.

Kosta, just real quick on that. Longer-term potential for the stores, what do you think it can be? Is it a 500 number? Is it bigger than that? Just wondering where that kind of settles out for you guys, just globally and worldwide.

It is a very large number and we have 200 stores right now. We are looking at and working on a global strategy. But it is probably totally more than 500 globally long term. That is something that we're working on right now. We're going to have a report out probably in September that has a more sophisticated guess on how many stores we can long-term have. But we think it is a very large number.

Part of what we have been doing is -- as you know, in the new store we're focusing more on an accessory store. It is not a watch store. In the accessories business, handbags, small leather goods, belts, jewelry, et cetera, those businesses all are much larger than watches. So by repositioning the store towards more accessories and less watches enables us to have a large number of stores. So we're very excited about that.

We are aware actually very successful in all of our categories. We have seen very strong growth in leather goods in our stores in the first quarter. It is going to help us penetrate leather goods outside the United States. As you know, most of our leather goods business is in the United States. So we feel a great way to get more traction outside in the wholesale market in leather goods is by opening more of these stores.

On the MICHELE issue, we actually had restructured some of our product line last year. Some of these returns that we showed were somewhat expected; and we are in the process of repositioning the line quite a bit.

The retail sales in our customers actually are very strong and the brand is very, very healthy. In fact we think we are going to get growth through the balance of the year. We are adding new categories. Potentially we will have new jewelry assortments in the market late this year. We're working on eyewear. We have shown some of that to customers already, and they are very excited about it. So we think the MICHELE brand is going to continue to grow.

That's helpful. Just a real quick follow-up for Mike. In terms of timing, maybe I missed it. Do you guys have an expected timing of when you will be releasing your updated financials?

I think what we are looking at there, Neely, is to be in a position to return to normal reporting environment by our Q2 reporting deadlines; and then sometime before that have our restatements and delinquent filings up-to-date.

Great, thanks. Good luck, you guys.

(OPERATOR INSTRUCTIONS) Barbara Wyckoff.

I have a whole bunch of questions. First of all, long-term the goal was to open your own retail stores, presumably faster outside the United States than inside. What countries are you in currently? Where you going to be entering later this year, potentially? Where are you going to go going forward?

Then, are these stores all FOSSIL brand? We haven't heard a lot about the multibrand model for a while. What is going on with that? Then I have some follow-up questions.

Okay, well, it is a good question Barbara. Actually, we have been positioning ourselves for a global retail expansion. We do have a number of stores in the United States, FOSSIL accessory stores as well as outlets and Jean stores and the Modern Watch Co. store.

We also have a very strong position in Europe. I think we ended the year in the last year with 20; and potentially we're going to open 20 or more in Europe this year, based on how the performance has been there.

We also have retail operations in Asia. We have a number of stores in Australia, some very successful stores in Singapore. We opened two stores in Hong Kong last year, one in Taiwan, and there are some more in Taiwan opening this year. We are opening a couple stores in Malaysia. We recently just hired a gentleman with a lot of retail experience in Japan, and we are going to be doing a study. We are probably going to have a retail initiative in Japan within the next 12 months as well.

We also just recently invested in a large computer system. It is a global SAP retail platform that just went live in the last couple weeks that is going to enable us to scale this business faster.

But the success we are seeing globally on the brand and these stores -- and this is the accessory store -- is very exciting to us. We think there is a potential for a large number of stores.

As far as the Modern Watch Co. goes, the multibrand store, we do have five of those stores. We don't talk about them much, because they are not very successful. So we are in the process of doing some work on those. But we do think it is a long-term compelling idea.

As you know, we do have multibrand concessions in the UK and Asia, and they are very successful inside department stores. We just have had trouble getting our own stand-alone store to work very well.

So long-term, we think that the retail business is a big opportunity for us, not only in terms of sales and profit and growth, but also in just penetrating the FOSSIL brand globally. We really kind of opened our eyes quite a bit to what the long-term potential of the FOSSIL brand is, and it is huge. That is what we are trying to work on.

Okay, I guess next a couple questions for Mike Kovar. Do you expect to see any additional expense related to the options investigation second quarter onwards? How should we plan for that?

Then, outside of the $5.1 million, you mentioned $5.3 million. Is there more besides that [to point to]?

Then what percentage of the current inventory would be considered to be discontinued versus last year? Are you projecting any sell-off to third parties this year?

Then I guess could you remind us how much of the last year wholesale revenues were in the mass-market channel during first quarter and for the full year? Just sort of a rough idea of what they are, what they were.

If I can remember all of those, I will give you answers on them. As it relates to any compensation expense or any other adjustment stemming from the options review, we're not able to comment on that at this time. As we said, we are diligently working on that which is necessary to determine what impact that will have to the -- not only the years we will have to restate, but also to our go-forward model.

As it relates to the investigation costs, we said to date since we started or the Special Committee started its review back in November last year, we spent about $5.3 million. We expect somewhere around about another $1 million to be spent as it relates to legal and accounting fees to wrap that up.

I think your third question was associated with the mass-market business. Last year -- again, it is what small in the US. Last year I think it was about $4.4 million in net sales. As we mentioned, it was slightly down this year DUE to a shift in Wal-Mart's receipt patterns. On a full-year basis, it was between 25 and $30 million in 2006. As we said we expect to see continued growth from that segment, even though the first quarter was a little bit less than we expected.

What was your next question?

Just the percentage of inventory that is discontinued currently versus last year? Do you project having any kind of sell-off this year?

I would say as we mentioned on the call, we're in a much better position as far as the composition of the inventory. We had significantly lower levels of discontinued product sales during the first quarter. That was directly related to the fact that our composition of inventory entering the quarter was a lot better than the prior year. So we don't expect discontinued product sales to have any type of significant impact on our margins as we saw last year.

Okay, thanks. Then just are you still projecting production based on trailing 12 months?

We actually are doing our forecasting like trailing 12 weeks. So we are looking at trend (inaudible) like current trend, and basing inventory based on that.

But as you know and we mentioned before, we had a big speed initiative in place last year that enabled us to shorten our lead-times quite a bit. We are still doing some work on that regard, by the way, including some new technology.

We also invested in a new 3D design system both in Dallas and in Hong Kong that has enabled us to continue to make lead-times shorter. So we are in pretty good shape of the inventory side.

Great, thank you. Good luck.

Cliff Greenberg from Baron Capital.

Congratulations on a good quarter. Can you lay out where we stand as far as taking our brands into China, India, and some of the Russian-type markets, as far as continuing to expand distribution? Thank you.

Sure, we would be glad to. First off, the Asian region is our least-developed region of the world, so as you can see from today's prepared comments, that is where our largest growth is as a percentage of our business.

We did open China in the fourth quarter last year and it is going as expected. We think there is a big opportunity there. It is not going to be huge volumes initially, but we're making great progress. We think there is a very big future for many of our brands in that market going forward.

Mike, tell me if you can, just in China which brands are we there with, and how are we going to market?

Well, the way that we're marketing in China -- we are there with most of our fashion brands as well as our luxury brands right now. They are in various stages of development. Some brands have a bigger brand awareness in the market in China than other brands.

I will give you an example. For example, Adidas has a huge brand awareness in China, so we think there is great opportunity for that brand in the market. We also think that there is always a great opportunity for our FOSSIL brand. Is a great fashion, you know, value-driven, consumer piece is there.

The way that we are marketing there is we have our own office based in Shanghai. We have a wonderful group of people that we have put into place over the last six months. We are working diligently, directly to the retail customers, as well as through some regional distribution partners, because it is a very regional business in the China market. It is not as simple as the United States, whereby you can just ship to any retailer directly.

So we have various ways of approaching that market, and we think it's going to be a successful approach for us.

India is another very exciting market for us. We expect, as I mentioned earlier, to be doing direct distribution in India sometime this year. We do have some distribution partners there and have had for several years now. But we're expecting to be going direct in India this year. We also think that that is going to be a great growth prospect for us over the years to come.

Some of the other markets you may have heard Kosta mention, like in Malaysia for instance, we are even opening stores. Taiwan we are opening stores. We're seeing great growth for the FOSSIL brand throughout Asia as well as parts of Europe. So we just think that there is a wonderful opportunity for us to continue to grow the international business at a faster pace than our domestic business is growing right now.

The same story is going on in Europe. I think you mentioned Russia. We do have a relatively small distribution business in Russia. But we see a very large opportunity in a lot of the up-and-coming distribution markets in Europe. A lot of the Eastern countries -- the Czech Republic, Poland, et cetera -- we see big growth prospects there, and continued growth within our more penetrated markets in Europe as well. Because as we have said, they're still a lot less penetrated than our domestic market here in the United States. So we think that is going to be a big opportunity to continue for us over the coming years, international growth.

I would also add in China, what we are seeing specifically there, a lot of our partners are making investments in their own boutique building awareness, like EMPORIO ARMANI. So we will use that to leverage, obviously launching our business in the categories that we carry [into] the market.

If I may, can I ask one more question? What is the status or are you guys continuing to look for additional licenses? Where do you stand or what is the likelihood that you will continue to add to your portfolio?

Well, we added quite a bit in the last several years. Looking at our business in total, as I mentioned earlier, we have a very large opportunity in FOSSIL. We also have come to recognize that the Armani business can be several times the size of what it is right now by just continuing to penetrate markets, and add additional categories within watches, et cetera.

The same thing is true if you look at the brand portfolio we have in place. It is really the biggest and the best global brands, DKNY, Diesel, Burberry, Marc Jacobs, Adidas, even RELIC in the United States. We are very strongly positioned, and we're focused on really making each of those larger.

Just as an example, the Armani watch business is very large and very successful; but it is mostly man's watches with leather straps. Well, we have got product initiatives in place to put sport watches in there and ladies bracelets, et cetera, that can potentially make the business much larger. Just in addition to just gaining additional points-of-sale around the world.

So we're really focused on our largest businesses and putting increases on them; and that is how we are getting these total Company organic sales increases. It has been very successful.

Thank you.

Steven Martin from Slater Capital.

Two things you touched on that, Kosta or Mike, I wish you could elaborate on. The Adidas rollout, you just mentioned it in China; but could you talk about where it stands in the US and globally?

Secondarily, you also touched on the SAP implementation. As I recall, in the latter phases of that you were going to close facilities in Europe and try to consolidate. Where does that stand?

Okay, Steve. To start with Adidas, you know, we feel pretty good about the Adidas brand. We have had our challenges with it during the first year. A launch year is always very difficult in the sense that you have to figure out exactly what the product assortment needs to look like and where the customer is going to vote.

So being just barely over a year into the launch, I think that we have learned a tremendous amount. We have adjusted the line. We are continuing to adjust the line right now, and we feel like we're getting it pretty much to where it needs to be.

I think the remainder of this year is going to continue to be a transition year from reading the launch activities and figuring out exactly where to position the line, both price point-wise and style-wise. Then next year is going to bring us the biggest opportunity for super growth.

Having said that, we did double our quarter this year over last year, and we are making progress with Adidas in the United States market and overseas. Fortunately, it is absolute global brand. It is something that is recognized everywhere in the world, in every part of the globe. So it is something that we expect big things from in the future.

In the United States, we're doing -- we are continuing to do testing in the department stores as well as some sport stores right now. As we get those reads back, we're finding out what we need to do with the assortment. We are going to keep testing that throughout the next quarter or so until we feel like we are ready to expand it. Then we will work with our retail partners to do so.

We're staying in great communication on that, and our partners have really helped us a lot in that regard.

What is the door count, if I might ask? What does the door count look like in the US right now?

I would say it is very minimal, Steve. We are obviously presenting the line within the Adidas doors. Other than that, we're just testing in some other specialty sport shops and some of our department stores. But nothing significant at this time.

Okay, thanks.

I would say in the first quarter, less than 10% of the business was in the United States.

Got you. On the SAP implementation?

On the SAP implementation, we are pretty happy with our SAP rollout to date. As Kosta mention we just rollout SAP retail merchandising system that is going to help us grow our retail businesses globally.

As far as our AFS ERP solution that we have in the United States, Germany, France, we're going to be rolling that into additional countries starting in 2008. We are very happy with the way that that is going, and we see that continuing to rollout for us in the future.

Any opportunities for facilities consolidation?

We're always going to look at how we can consolidate ourselves as we continue to rollout SAP. I do think that we will see the ability to consolidate more of our back-office systems in some markets in the future.

All right, thank you very much.

Thank you. We have no further audio questions at this time. I would like to turn it back to management for concluding comments.

Thank you, operator. 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 11088965 (technical difficulty) the pound sign. Again, that number is 303-590-3000, reservation number 11088965, followed by the pound sign.

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, Mike Barnes, or myself a call. Thanks again for joining us today. Our next scheduled conference call will be in August for the release of our 2007 second-quarter operating results.

Thank you. Ladies and gentlemen, this does conclude the Fossil first-quarter fiscal 2007 preliminary results conference call. You may now disconnect. Thank you for your participation and please have a pleasant day.