Fossil Group Inc (FOSL) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen; thank you for standing by. Welcome to the Fossil 2007 second-quarter 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). As a reminder, this conference is being recorded today, August 14, 2007. I would now like to turn the conference over to Allison Malkin with ICR. 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 report filed with the SEC.

In addition, Fossil undertakes no obligation to publicly update or revise any forward-looking statements 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 the call. And now I'd 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 this call today are 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 second-quarter highlights plus some additional insight into our reported results and recent initiatives. At the conclusion of our prepared remarks we will welcome your questions.

With the review of our equity granting practices behind us, as well as the closing of the SEC's informal inquiry, we have recently brought our financial filings up to date and are back to a normal operating reporting timetable. We appreciate everyone's patience during the last several months. For Q2 we continued our strong sales and earnings momentum (technical difficulty) Q1 and are reporting an 18% increase in net sales and a 31% increase in net income.

On an adjusted basis, excluding costs associated with our equity granting practice review, diluted EPS for the second quarter and the first six months of 2007 increased by 63% and 116%, respectively. We feel these results show the strength and the diversification of our business model.

Our Fossil brand watch business also reported another strong quarter, as you know, we experienced a challenging year in 2006 related to this business and have focused on re-energizing the brand and reinventing the productline. These initiatives are just starting to pay off and during the second quarter net sales from our Fossil watch businesses worldwide increased 16% excluding currency impact. And in the domestic market, inclusive of all full price distribution channels including our own, we delivered a solid comp growth of 6.3%.

The quarter also contained some good news on several other fronts. We had solid gains in market share globally in watches with a 26% increase in sales. We experienced growth in all our major watch brands in each reportable segment of our business. We had very strong growth again in our jewelry business internationally fueled by increases in our Fossil and Emporio Armani brands.

Additionally, the newly introduced Fossil jewelry line in our domestic retail stores performed well during the quarter. And within the last couple of weeks we have shipped this assortment into 319 U.S. department store doors and anticipate shipping to another 229 doors during the balance of the year.

We also reported strong sales growth and increasing profitability from our direct to consumer segment. On a worldwide basis our direct sales increased 18% including retail store comp increases of 4.9%. Our Web and catalog business was also up 23% for the quarter. We remain on track to open approximately 55 company-owned stores this year focusing on our full price accessory concept in the U.S. and Europe and to a lesser extent the Asia-Pac region.

One area of weakness for the Company in Q2 was our women's leather accessory business. Although the overall handbag category remains quite healthy in the United States, our women's handbag line, as well as our small leather goods and belt businesses, did not perform up to our expectations. This was mostly due to some product misses and we expect to be back on track in 2008.

In The New York market last week we had a strong reception to our new offerings for the next year and the stores are excited about the new brand positioning that we are undertaking for Fossil. They think our new direction in product and branding will be very successful in their stores.

We also have made a lot of progress on the operating side of the business to where we were able to deliver significant increases in operating income and net income. We had a 43% increase in operating income for the quarter and also reduced inventory by 10%. As a result we were able to significantly increase our cash flow and ended the quarter with approximately $178 million in cash and cash equivalents representing more than double what we had a year ago.

Overall we are very pleased with our progress during the second quarter and for the first half of the year. We reported solid sales growth and even strong earnings growth while advancing our long-term strategic goals. We continue to increase our global watch market share and expand the presence of our brands. And we continue to broaden the footprint of our direct to consumer segment which is making the Fossil brand stronger.

When we look at the strength of our existing brands and businesses and potential new initiatives we see a roadmap of long-term growth. The Company is in a unique position. In the near-term we are also focused on increasing our product margins. We have restructured the Company with regards to expense and inventory management. We feel we're in a position now for strong growth in sales and even stronger growth in earnings. As a result of this we are introducing guidance for fiscal 2007 of $1.72 per diluted share excluding costs associated with our equity granting practice review. And now I'd like to turn the call over to Mike Barnes.

Thank you, Kosta. Good morning, everyone. I'll begin with a review of our domestic business. Wholesale watch shipments increased by 11.9% or 14.8% excluding discontinued product sales from the current and prior year quarter. This performance was primarily the result of sales growth in our licensed, mass-market and Fossil watch business. Sales of licensed watches rose by 42% driven by sales increases in Emporio Armani and DKNY as a result of fresh, innovative styles introduced into the market.

With a continued eye towards strict inventory management and a quicker supply chain we were able to more quickly respond to consumer style preferences and therefore keep our inventories fresh at retail and relevant to the consumer. Additionally, Burberry and Michael Kors brand watch sales more than doubled during the second quarter. Our department store presence for these brands continued to increase and we expect strong sales growth for these brands over the balance of the year. We received additional positive sales impact from the continued rollout of Marc by Marc Jacobs which was launched in the fourth quarter last year.

Our mass-market business posted a 72% increase in sales during the second quarter which brings it to 25% year-to-date; the second-quarter increase partly reflects the shift in Wal-Mart's buying patterns which moved some deliveries from Q1 into Q2 this year. We continue to see a significant opportunity to expand both the number of doors and the level of penetration within this channel.

Fossil watches reported a 4.7% increase in domestic wholesale shipments excluding the off-price sales. We experienced solid sell through rates in the department and specialty retail store environment which we believe reflects the improved innovation and modern vintage design in our current assortment.

On the MICHELE front we continue to introduce updated styling to this upscale watch collection. As a result retail sales in the luxury department store sector posted strong double-digit comp gains. However, in order to place a greater percentage of the new styling into retail, we increased our product return rate resulting in our net wholesale shipments declining during the second quarter but leaving us well positioned for fall.

Regarding accessories, as Kosta already mentioned, our domestic accessory business declined about 11% during the quarter. While our men's business continued to experience year-over-year growth, our women's handbag small leather goods and belt business experienced sales volume declines. We believe we've identified and corrected the fashion miss in our women's handbag and small leather goods line and we're working to have newer assortments into the stores for the holiday season. Nevertheless, we're not expecting this category to demonstrate growth during the back half of 2007.

Our new Fifty*Four line by Fossil handbags with retail prices up to $450 has begun shipping to approximately 150 department store doors and it's also available in our retail stores and on our website at Fossil.com. While still very early the buzz is great and we're excited about the opportunity this new price point adds to our accessory category.

Now a little color on the international front. We had a terrific performance for the quarter; net sales increased 32.6% or 27% excluding currency. In Europe sales rose 28.9% or 20.8% ex currency with contributions across all markets. We experienced strong growth from our Fossil and our licensed watch brands as well as our Fossil and Emporio Armani jewelry business with all of our major markets in Europe achieving double-digit sales increases. Consumers have definitely responded favorably to our new watch and jewelry styles delivered into the market.

Additionally, our branding efforts in Europe, including the expansion of our retail stores, are also assisting us to grow. Germany, the location of our largest subsidiary in Europe, is experiencing a stronger economy in comparison to last year and reports are that consumer confidence in Germany is at the highest level in 27 years. We will continue to expand our branding efforts by launching our first international eCommerce site in Germany in the early fall and we remain very excited about our overall European business for the remainder of 2007.

Other international sales, which include our wholesale operations in the Asia-Pacific region, Canada, Mexico and our U.S. export business rose by 40% or 39.5% ex currency. We experienced strong double-digit growth across all of our major owned and licensed watch and jewelry brands in the segment. Our shop in shop concepts in the Asia-Pacific region continue to build awareness for our offerings and are 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 in the future.

Our China distribution business, which we launched in the fourth quarter last year, generated about $1 million in sales during the second quarter. While this represents an insignificant piece of our consolidated revenues, we're optimistic about the long-term potential of our brands in this market.

Currently our Asia-Pac revenues represent about 10% of the consolidated company, but this part of our business is growing rapidly at a nice double-digit pace and providing yet another solid growth platform for our products.

Our Mexico subsidiary, acquired in February of 2006, continues to outperform our expectations. During the second quarter we achieved a net sales increase of 69% in this market and we're broadening the presence of our brands within the marketplace. We're currently reviewing opportunities for our first full price Fossil store in Mexico and we'll keep you updated on this effort as it progresses.

Regarding the Adidas brand, for the first six months of this year sales are flat when compared to the prior year period, which is when we launched the brand into Europe. Rather than expanding our distribution at this point our current focus is to ensure that we're offering at retail the correct styling, attributes and image that fit the consumers' expectations of the Adidas brand.

As we mentioned in the past, the launch of Adidas was the largest of any licensed brand we have experienced to date, and because the business was previously established by a prior licensee we have a lot of work to do in cleaning up the distribution and the direction of the assortment. So we see the remainder of 2007 as a transition period for the brand and we believe that in 2008 we can proceed with growing the presence of this brand globally.

Now looking at our retail business, on a global basis we experienced solid contributions from our direct to consumer segment during the second quarter. Sales rose 18.2% or 16.8% ex currency as a result of a 12% increase from door growth and a 4.9% sales increase in 169 comp stores. Sales from eCommerce posted a 23.3% increase during the quarter. Comp store sales from our full price Fossil accessory concept increased 5.6% domestically and 18.4% in our international region, even with an unfavorable shift related to the Easter weekend.

On the other hand, our outlet store comps were up 5.7%, but the gross margins increased by 290 basis points. This increase reflects better inventory management in our wholesale businesses which resulted in lower levels of deeply discounted sales when compared to the prior year quarter.

Globally we ended the quarter with 202 stores including 126 full price stores, 45 of those are outside the U.S., and 76 outlet locations including four outside the U.S. This compares to 181 stores at the end of last year's quarter including 109 full price stores, 36 of which were outside the U.S., and 72 outlet locations with one outside the U.S. During the quarter we opened five new stores and we closed two.

At this time I'm going to turn the call over to Mike Kovar to discuss our second-quarter financial results. Mike?

Thanks, Mike. First I would like to once again summarize the results of our second quarter in comparison to the prior year quarter. Net sales increased 18.2% to $306.5 million compared to $259.2 million. Gross profit grew 18.5% to $150.5 million or 49.1% of net sales compared to $127 million or 49% of net sales. Operating income increased 42.7% to $23.1 million inclusive of $4.4 million of expenses related to our historical equity granting practices review, which I'll refer to here on out as the grant review, and this compares to $16.2 million of operating income last year.

Net income rose 30.6% to $14.7 million inclusive of $3.3 million of grant review related expenses and this compares to net income of $11.2 million in the prior year. Diluted earnings per share increased 31.3% to $0.21 inclusive of $0.05 per diluted share of grant review related expenses compared to $0.16 per diluted share. And finally, diluted weighted average common shares increased by 2.1% to 69.7 million compared to 68.3 million shares last year.

The second-quarter sales mix breakdown was as follows -- 18.1% from domestic wholesale watch sales; 13.5% from domestic wholesale accessory sales; 18.1% from worldwide direct to consumer businesses; 32.5% from European wholesale sales; and 17.8% from wholesale sales in other international locations.

The 18.2% sales growth for the quarter consisted of the following increases and decreases by category and geographic region -- domestic watch sales increased by 11.9% to $55.5 million compared to $49.6 million in the prior year quarter. Other domestic sales, which include our leather and sunglass businesses, decreased 11% to $41.4 million compared to $46.5 million in the prior year quarter.

Sales generated from European based wholesale operations increased 29% to $99.7 million compared to $77.3 million in the prior year quarter. Other international sales increased 40% to $54.6 million compared to $39 million in the prior year quarter. And finally, sales from our worldwide direct to consumer business grew 18.2% to $55.3 million compared to $46.8 million in the prior year quarter and, as Mike mentioned, this is a result of 12% growth in the average number of doors open during the second quarter, comp store sales increases of 4.9% and a 23.3% increase from our eCommerce based activities.

Second-quarter gross profit increased by $23.5 million to $150.5 million compared to $127 million in the prior year quarter. Gross profit margin increased to 49.1% in the second quarter compared to 49% in the prior year quarter. The higher percentage of sales derived from our international wholesale business segments as we experienced during the second quarter would have normally increased our reported gross profit margin.

As we stated previously, our international segment gross profit margins are generally higher than our historical consolidated gross profit margins. However, we were unable to reflect this positive mix shift in our reported gross profit margin due to weaker gross profit margins related to certain new watch styles.

In the development of these styles that were ultimately sold in the second quarter we experienced slightly higher manufacturing costs that we did not pass on to our customer. And as Kosta mentioned earlier, we're addressing this issue and are confident that we will have initiatives in place to correct this. We believe our consolidated gross profit margin will show improvement in comparison to the prior year period and the second quarter during the second half of fiscal year 2007 as a result of these initiatives being implemented.

Additionally, our second-quarter gross profit margin reflects an approximate 30 basis points increase in comparison to the prior year as a result of the continued weakening of the U.S. dollar and as Mike discussed in his portion of this call, we also experienced the benefit in consolidated gross profit margin from our outlet stores as a result of reduced sales of deeply discounted watches in comparison to the prior year period. These increases in gross profit margin were partially offset by increased markdowns and lower margin off-price liquidation sales related to our domestic accessories business and a higher sales mix of lower margin mass-market sales.

Our second-quarter results also include significant progress in the area of expense management. Operating expenses as a percentage of net sales decreased to 41.6% in the second quarter compared to 42.8% in the prior year quarter. Second-quarter operating expenses include an unfavorable $1.5 million shift in expenses related to the Basel Watch Fair which occurred during the first quarter of fiscal year 2006 and also include $4.4 million in expenses related to the grant review.

Excluding the impact of these two items, second-quarter operating expenses decreased -- or I'm sorry, increased 10.7% -- or $10.7 million or 9.7% and as a percentage of sales decreased to 39.6%. This $10.7 million increase is primarily related to increased payroll costs and approximately $2.7 million related to the translation impact of international expenses due to the weakening of the U.S. dollar.

The payroll cost increase is primarily related to an increase in company-owned retail store locations since the end of the prior year quarter; increased commissions resulting from increased net sales; and additional payroll costs associated with the expansion of our shop-in-shop programs internationally. The increase in gross profit margin and leverage in operating expenses resulted in our operating profit increasing 42.7% and 67.7% during the second quarter and the six-month period, respectively as compared to the respective prior year period.

Our second-quarter and six-month period operating income included approximately $1.8 million and $5.4 million of net currency gains related to the translation of foreign sales and expenses into U.S. dollars.

Interest expense decreased to $218,000 in the second quarter compared to $951,000 during the prior year quarter and is primarily the result of the reduction of all previously outstanding borrowings under our U.S. based revolving line of credit at the end of fiscal year 2006. As you may recall, these borrowings were principally related to the common stock repurchases made during the end of fiscal 2005 and the early period of fiscal 2006.

Second-quarter income tax expense was $8.6 million resulting in an effective tax rate of 36.9% compared to the prior year income tax expense of $4.4 million that resulted in an effective tax rate of 28%. The lower effective tax rate for the prior year is a result of the release of certain income tax contingency reserves. We estimate our effective tax rate for the second half of fiscal year 2007 to be in a range of 37 to 38% excluding any discrete items that may impact us. We anticipate the third-quarter effective tax rate to be slightly above the high end of this range and the fourth-quarter effective tax range to be at the lower end of the range.

Now turning to the balance sheet. We ended the quarter with cash, cash equivalents and securities available for sale of $178 million compared to $78.3 million at the end of the prior year quarter. At quarter end we had approximately $9.5 million in short-term borrowings compared to $52.1 million at the end of the prior year period. Working capital at quarter end was $431.9 million, an increase of 37% over the $314.4 million balance in the prior year.

Accounts receivable at the end of the second quarter increased by 17.8% to $151.3 million compared to $128.5 million at the end of the prior year quarter. Days sales outstanding remained unchanged at 45 days in comparison to the prior year period.

Inventory at quarter end was $237.8 million, a decrease of 10.1% compared to the prior year quarter inventory of $264.6 million. We will continue to manage our inventory with the intent of reporting year-over-year declines over the balance of the year. To date capital expenditures totaled approximately $12 million; we are expecting 2007 full-year capital expenditures of approximately $40 million to $45 million. This includes anticipated retail store growth; the purchase of the building housing our European headquarters; additional building improvements to our Richardson corporate offices; as well as normal maintenance CapEx.

Depreciation and amortization expense for the first six months of 2007 was approximately $16 million and we are estimating full-year 2007 depreciation and amortization expense of approximately $33 million.

As it relates to 2007 guidance, we currently estimate third-quarter and full-year 2007 diluted earnings per share will approximate $0.33 and $1.58 which includes the impact of expenses related to the grant review. Excluding these expenses we estimate third-quarter and full-year 2007 diluted earnings per share will approximate $0.37 and $1.72.

We reported 2006 third-quarter fully diluted earnings per share of $0.31 which included an effective income tax rate of 32.6%. Normalizing these earnings with an effective 37% rate in the prior year quarter would have resulted in fully diluted earnings per share of $0.29. We are estimating net sales growth in the low to mid double-digit range for both the third and fourth quarters of fiscal year 2007. This guidance is based upon the current spot rate of the U.S. dollar compared to other foreign currencies, primarily the euro and the pound.

In summary, we remain confident in executing our strategic business initiatives and are well-positioned for continued growth in the current year and beyond. We believe our diversified business model sets us apart from the competition and provides for consistent growth while reducing our risk to any one channel, brand or geography.

In the second quarter 50% of our wholesale sales were generated outside of the United States and we believe there remains strong potential to continue developing existing and new markets outside the U.S. Our international segments also represent our most profitable business segments which bodes well for future operating margin and earnings growth. We are also aggressively pursuing opportunities to expand our direct to consumer businesses which allows us to broaden the exposure to our Fossil brand in all distribution channels.

All in all we believe we are well-positioned for continued sales growth and expanded earnings over the long term. And now I'd like to turn the call over to the operator to begin the question-and-answer portion of the call. Operator?

(OPERATOR INSTRUCTIONS). Brad Stephens, Morgan Keegan.

Good morning, guys. Congratulations. On the retail front, if you could give us some more color. I know in your 10-Q that you recently filed you broke out the eCommerce sales for Q1; can you do the same for Q2 for us?

For Q2 eCommerce sales represented about $4.5 million of the total direct to consumer.

Okay, if I assume -- I guess it's up 23% roughly. If you could walk us through then your square footage because I'm ending up with new store productivity numbers that are well over 100%. And if you could talk about the new formats, how they're performing and just how to model those going forward.

Brad, as we look at it, as we talked about before, we're looking at the kind of -- or not the 'kind of', but the trailing 12-month performance of our full price accessory concepts, which we think is a growth vehicle in the direct to consumer channel for us. And if you look at the performance of those stores over the last 12 months, they're throwing off about a 26% pretax four wall contribution; that's related our U.S. stores.

Our international stores are even higher than that (technical difficulty) prices are higher internationally and the footprint is a little bit smaller so the operating cost isn't significant. So that's basically how we would measure the performance and what we feel to be a big opportunity for us in retail going forward.

Do you have the ending square footage?

I don't have the ending square footage on me.

Then I guess as just a follow-up to that on the retail front, if you look out two or three years as you continue to expand this accessory concept, where can the profitability of the retail segment be? Can it be at double-digit operating margin in three or four years?

Yes, absolutely it can. If you look at -- what Mike said earlier is that the existing accessory stores in the U.S. are generating 26 and they're showing comp increases with numbers going higher. And outside the United States, in Europe we're getting much larger numbers than that and we opened a couple of stores in Hong Kong last year that started off slow but now they're starting to really crank and we're approaching similar numbers to that as well. So we do have a global footprint.

What it means basically is that we think that we can open, as we said in the last call, hundreds of stores. We're putting together a strategy for retail and it is all based around this accessory store. We have in the last several months hired a number of people including a couple of real estate people, a VP of stores. About a year ago we hired a president of retail that has a lot of experience in the retail specialty markets.

And we're putting ourselves in position to penetrate not just the U.S. but globally this accessory store and it's a big opportunity for the Company, it's a great use of capital, return on investment is very high and we're going to be laying out a strategy in the next several months about how we're going to do that.

Last question is on the inventory front. The last three quarters have seen nice improvements, where can that go to or what's your plan for the remainder of the year for inventory?

As mentioned on the call, our focus is to continue to manage those inventories below the prior year levels. And we have an internal target to be near $200 million at the end of the year which would be significantly below I think the $228 million we reported in the prior year.

So for 200 at the end of the year, then going forward from there everything is cleaned up at that point and we should continue to at that point to see growth going into next year on the inventory front?

I would say that our efforts will still maintain that we can grow our inventories at a rate lower than our sales as we continue to look at quickening our supply chain. So yes, I think at some point we're going to get down to a level where we've reduced the inventory as much as we can from a health perspective. But there will be some pressure on inventory growth as we accelerate the opening of our retail store concepts.

All right, great. Congratulations.

John Rouleau, Wachovia Securities.

Nice quarter. I want to focus a little bit on the gross margins. Out of the three things that are offsetting or kind of a drag on gross margins, just want to get a better understanding of maybe which of the three are a little bit bigger. Obviously the percentage mix towards mass market, that's probably not going to change a whole lot. That's been a very successful business. And I think if memory serves, that's actually a higher operating margin but maybe a lower gross margin.

But out of the other two, the markdowns and the off-price sales in the quarter and then the lower -- the higher cost of goods sold with the new watches, can you give us an idea of which of those was a bigger drag and, when you start to turn those around, what sort of an impact we can be looking for?

Yes, we can do that. I would say in the order of impact upon gross margins compared to prior periods, the largest impact was due to the reduction in the margins associated with a lot of the newness that we sold during the second quarter. The next largest impact on our margins was the impact of the markdowns and the liquidation sales coming out of our domestic accessory category. And then thirdly would be the mass market sales growing as a percentage increase of the total company. And that was not that significant, maybe 10 to 15 basis points.

Okay. And if I'm hearing you correct it sounds like the initiative to improve the margins on the newer watch stuff, you should start to recognize some of that in the back half of the year. And then the mark down off-price stuff, maybe that lingers for the rest of this year or into the third and maybe early into the fourth, is that an accurate way to look at it?

Yes, I think if you remember, John, in the first quarter we discussed the pressure we felt like we would see on our margins in the second quarter and partly in the third quarter resulting from some of the lower (inaudible) margins coming in on the newness. So we've been working on obviously correcting that issue and we believe that we'll see that turn itself around in the performance of margin toward the back half of Q3 and then entirely in Q4. Sorry, your other question was?

Well, then it was regarding the higher markdowns in off-price sales in the handbags. Are we to assume that some of that continues into the third quarter and maybe a little bit into the fourth until you kind of get that corrected from a styling standpoint?

That would be correct.

And if I could, Kosta, what was the styling miss there? Just the wrong styles, maybe not enough leather, what was the feedback coming back out of that line?

I think if you look at what we're trying to do is basically -- and our own stores have more of this new aspirational Fossil design look and we had in department stores I think somewhat more of the older stuff and the seasonal stuff that we had in the stores was probably a little younger than our current positioning and didn't sell through as well.

And one of the things that we did last week in the New York market is we showed all the department stores basically pictures of our stores, the new trend, the new direction for Fossil, our kind of repositioning of the brand that we're doing through our Web stores and catalog is more contemporary, it's still vintage but it's contemporary, we call it modern vintage. When we showed the stores that and the assortment in the stores they said that's what we want and so that's what we're in the process of doing.

So the whole idea of this raising our brand image, making it more aspirational is working now because it's going back to our existing channels and enabling us to do that. So we're very optimistic about that.

Yes, it makes sense. And that brings me I guess to one follow-up. The catalog looks quite a bit more sophisticated than it has in a while and there's quite a bit of apparel that's sprinkled into the new catalog and it looks great. Is that basically just for the catalog purposes or does that represent a bit of a change in strategy in how you're dealing and working with apparel?

Actually the apparel that we have in the 33 stores that we have is actually undergoing the same kind of restructuring in terms of positioning that the rest of the Company is. It happens to be mostly focused on the catalog and the brand image, so it's very helpful to be able to show models in the book and have the apparel in there because, as you can imagine, the Web is our number one location. So it's all part of the same positioning.

Right. But my question is the fact that you're showing more apparel in the catalog and repositioning that piece, does that mean that you're going to be opening up more stores with apparel in it or is your strategy still basically the same?

No. Actually, John, there's probably not more apparel than we've had in the past; it's just the models in the book. And we're not opening apparel stores right now. I think we opened one and closed one this year. It's kind of still an incubator, we're still studying it. I think we mentioned last year that in 2006 that organization, including corporate expenses, was profitable.

So it still -- what it is is an incubator; it provides apparel for the catalog, which is very helpful, and also for our photo shoots are enabling us to liven up our website, etc. So it is what it is and it's an incubator and we're studying it. What we're pushing in a large way is this accessory store. We opened up 55 stores this year globally and next year we're targeting 100. And we are putting ourselves in a position to do that so we're very excited about that.

Well, the new product looks great, looking forward to the analyst day.

Thank you very much.

Elizabeth Montgomery, Cowen & Co.

Congratulations on a good quarter. I had just kind of two follow-up questions. Could you talk about the higher priced handbag line and where that's going to be distributed and maybe what you're thinking for it in terms of ultimate size? Would it be in stand-alone stores, etc.? And then on the Adidas license, I guess understanding that there was a prior licensee and that you have to do a little bit more work maybe to fix the business, do you have a sense of why it might have been slightly disappointing so far?

With regards to the Fifty*Four label, it says Fossil, it's Fossil Fifty*Four, it's kind of a new area we're going into. As you know, the handbag market, especially in the United States, has been very, very important to consumers and we have put -- this line in the market is actually very expensive Italian leather, very nice construction, equivalent to some of the higher end handbags that are out there. As we mentioned earlier, it's up to $450. I think it probably starts at $225 or so. But it's very, very comparable to some of the product out there at much higher prices.

So we basically, as an aspirational part of our business, it's in our catalog and our Website, it's in our stores and we also were able to penetrate a small number of doors in both Dillard's and Macy's. And that product is out in the market right now and I think if you look at it you'll see that it's a great product and the prices are still advantageous to the market. As far as the Adidas goes --.

I'll take the Adidas question. Basically when we went into the Adidas license business we knew that there was a prior licensee obviously and we knew that there was going to be a lot of cleanup in many markets. So we looked at this as a very long-term business strategy for us and a global business strategy. So we have spent a lot of time and effort in cleaning up the marketplace including taking back a lot of old styles and doing liquidations, etc.

On the other side of it, as we mentioned earlier, it was the largest launch that we ever did. Now what that means is that we came out with all brand new styles and basically we had the largest test we've ever had is what it amounts to. And so because of the size of the launch and the prior cleanup exercise we have spent -- last year was our launch year. We basically got it into the marketplace. This year we were reading the results of that launch and really figuring out where the consumer was voting, what type of styling and attributes that they were looking for.

And so we see this as kind of a transition year where we get the styling more perfected so to speak, and then next year we feel like that's a growth opportunity for us. We've already got the footprint in the markets now and we're getting the styling where it needs to be. And we think that next year can be a big growth opportunity for us.

So we kind of realized that we were going into something that was going to take a few years. Any time we launch any new brand there's always an exercise for the first two to three seasons which includes up to 12 to 18 months of measuring what the consumer wants in that brand and where that brand stands and then rolling it out in a big way.

Because of the fact that we went larger to begin with since it was already in the marketplace, that just -- it kind of exasperated that entire exercise for us. And it's going to take this year to finish the transition I believe and then next year I believe will be the beginning of a big growth opportunity for us.

Okay. Just one more follow-up on the jewelry business, too. I know Liz had said that they lost some counter space in the department stores as a result of Macy's expanding its private-label. And it doesn't seem like your jewelry business has been hurt by that. But I wondered if you could give us an update on Fossil jewelry and how many doors it's in now, what the plan is for that over the next year and whether or not you think there's the potential to actually gain some space in department stores?

As you know, this year as a company we'll do I think over $100 million total in jewelry. Most of that's been [Shaqua] jewelry in Europe. What we've done is basically fine tuned that product for the U.S. market. And I think we went into 319 stores just recently. We just started getting some selling yesterday actually; nothing conclusive yet, but right out of the box we did get a lot of stuff selling. And we're expanded now to 229 doors.

But the line was built, as all our accessory lines are -- handbags, watches, etc.; the line is actually built, priced, merchandised as an all store distribution business and we're focused on that. And as you mentioned, there is some disruption in the market with other brands, etc., that may be losing some space which is creating an opening for us. But the positioning of the Fossil brands in department stores is very, very strong. And as the brand gets stronger as we build it and make it and kind of reposition it, we think it's going to even be stronger and we're very positive about this business.

Great. Thanks, guys, and congratulations.

(OPERATOR INSTRUCTIONS). Barbara Wyckoff, Buckingham Research.

Good job. Talk about the lead-times, Kosta. Specifically what are you doing to shorten the time to market? And then I'd like to ask some questions about accessories.

One of the advantages in our business model is we have a very high margin global business that happens to have a relatively short lead-time. Typically watches out of Asia are 75 days or something like that and of course we can air freight watches because it doesn't cost much, it's a small item and it's a very tight supply chain. So it's got a lot of advantages in it and we do feel like we have opportunities in the long-term to even get quicker on deliveries. And we have a team of people and some structure in place to actually reduce the lead-times even more which is going to make us even more competitive and inventory turns even faster. So we're very optimistic about that.

So from concept to in store would be 75 days (inaudible) in your warehouse?

This is the time for production once the order is placed. We actually -- also as part of our initiative for reducing lead-times have put some technology in place. There's some 3D CAD design computer technology we placed in both the Dallas design operation and also in our Hong Kong factory situation that has enabled us to bring things to market much quicker. So it's actually a whole soup to nuts process including design all the way to production and it has enabled us to get stuff to market much faster, probably twice as fast as we have in the past if you few consider all the design time and the back and forth we've been going through in the past.

Okay, thanks. Could you talk about accessories in Europe? Is it still confined to Germany mostly? And your own retail stores, their plans to expand accessories beyond that?

That brings up a very good point. We do have a relatively small accessories business in Germany, but really none in the other markets. We actually are going to end this year -- in Europe we'll have 44 stores at the end of the year and the stores are doing extremely well. We opened a new two-story kind of a flagship store in Cologne recently that the numbers are just really terrific.

And what we're finding out is that there's not a lot of distribution for leather goods in Europe like there is in watches. There are a lot of watch and jewelry stores that we're able to put these brands in, but as far as leather goods it's really not an existing channel. But when we open our own stores there with these products in there they do very well.

So what we're saying basically is we have a large accessory business in the United States and the way we're going to penetrate foreign markets is by building these stores around the world. And as Mike mentioned earlier, we're going to put a website in Germany which is going to accelerate the growth there. We're going to follow-up with that in other markets as well.

We did recently get some department stores in the UK to start buying some of our leather goods. Part of that is because we have built -- I think at this point we have six stores in the UK and just opened a couple more and the brand is starting to be built there is, not just for leather goods but for watches. But the way we're going to penetrate global markets with jewelry, watches and accessories, leather goods, sunglasses and help build the brand and also distribution is through our own stores.

Great, thanks. Just one last follow-up question if you don't mind. Can you talk about travel retail, how big is this segment? Is there a big opportunity here worldwide?

Our travel retail business continues to be very strong. It's probably in about the $30 million range right now, but it continues to grow for us. It is also a way that is helping us build our brand, it's part of our branding experience. The travel retail, particularly in the Asia-Pacific region, has really helped us in the luxury segment of our business. It's fantastic for Emporio Armani especially, the Burberry brand is doing really well in that segment and Fossil does very, very well in many areas of that as well, especially in the Caribbean area.

So it continues to be a growing part of our business and part of a branding experience in a sense the same way that our own stores are a branding experience.

Okay, thanks.

Sir, we have no further questions. You may continue.

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 1109-3813 followed by the pound sign. Again that's 303-590-3000, reservation 1109-3813 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 home page 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 November for the release of our 2007 third-quarter operating results.

Ladies and gentlemen, this concludes the Fossil 2007 second-quarter earnings conference call. Thank you for using AT&T teleconference. You may now disconnect. Have a pleasant day.