Fossil Group Inc (FOSL) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the first-quarter 2009 conference call on the 12th of May 2009. Throughout today's recorded presentation all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. (Operator Instructions). I will now hand the conference over to Ms. Allison Malkin. Please go ahead, Madame.

Thank you, good morning. Before we begin you should be aware that during this conference call certain discussions will contain forward-looking information. Actual results could differ materially from those that will be projected during these discussions. Fossil's policy on forward-looking statements, and additional information concerning a number of factors that could cause actual results to differ materially from such statements, is readily available in our form 10-K and 10-Q reports filed with the SEC.

In addition, Fossil undertakes no obligation to publicly update or revise any forward-looking 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 under the investor relations heading on Fossil's website.

Please note that this call is being webcast live on Fossil's website. It will remain 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. Please go ahead.

Thanks, Allison. Good morning, everyone, and thanks for joining us. With us today are Mike Barnes, our President and COO; Mike Kovar, the CFO; Mark Quick, our Vice Chairman; and Jennifer Pritchard, our President of Retail. For today's call we will provide an overview of our first-quarter 2009 results and update you as to our outlook for the second quarter and the full year. We will then welcome your questions.

As we announced this morning, our first-quarter net sales were $323 million representing a decline of 2.1% in constant dollars. Diluted earnings per share were $0.26, down from $0.43 in the first quarter last year but well ahead of our original guidance. Better-than-expected performance from our direct-to-consumer businesses, our Asia-Pac region and in the mass-market watches, along with foreign currency rates that were a bit more favorable than originally projected, allowed us to easily surpass our previous guidance.

As compared to last year, our performance was challenged by headwinds stemming from difficult currency comparisons and a wholesale customer base that was focused on reducing inventory. In addition, we also experienced lower shipments in markets where we operate through distributors mainly driven by the economic and currency impact on these operators.

This was reflected in our international base sales in general as well as in certain brands that are more heavily weighted towards distributor markets. The good news is that having just returned from our New York market week, we heard pretty consistently that our domestic wholesale customers are sensing that the bottom has occurred and some stability is returning to their businesses and our distributor markets are beginning to show some signs of relief as well.

During the quarter we continued to advance our strategic goals. Some notable highlights of the quarter included -- a 5.1% increase in global comp store sales demonstrating the increasing importance and the strong demand for our Fossil watch and accessory offerings, with each major product category contributing to the comp increase. We also experienced robust gains in the leather category, especially in our international base stores which continue to drive comp sales in Europe and Asia ahead of the United States. Leather goods also represent a strong growth opportunity for us within international wholesale.

The Fossil brand continues to be a huge long-term global opportunity for the Company. The brand is uniquely positioned to provide great design and innovation as well as value to customers around the globe. The Company gained global watch market share driven by our compelling portfolio of brands, strong design and value proposition. Specifically the Fossil brand grew 1.6% globally in constant currency and Michael Kors, Marc by Marc and Burberry all posted solid increases in sales and constant currency during the quarter.

Our Asia-Pac wholesale sales increased 7.1% in constant currency and Michele, which is in the opening price point of the luxury channel, is outpacing the sales performance of other luxury offerings within the space. Importantly, as retailers look for ways to increase their connection to the value conscious consumer, they are increasing the business they do with us. They are focused on concentrating their sales with strong performing brands such as ours and their increased emphasis on value bodes well for continued growth within our portfolio of watch and accessory brands.

In addition, we are continuing to plant seeds for growth in the future. Our new introductions including DKNY jewelry and men's footwear are performing well. While small today, we are excited about the long-term potential. We are also being presented with many opportunities to open new points-of-sale in many of our brands and categories. Our continuing success will stem from maximizing such opportunities in the current environment while continuing to invest in profitable growth drivers.

Our focus continues to be on -- first, utilizing the great value proposition that all of our brands and categories offer as a means to gain further market share as consumers continue to shop for quality and value. We have strengthened our opening price point offerings and this appears to be resonating with the consumer in all of our wholesale partners.

Second, controlling SG&A. During Q1 on a constant dollar basis, and excluding costs associated with the new retail door expansion, we actually achieved a slight reduction in SG&A in comparison to last year. Additionally, as you will recall, we announced cost-saving measures, including a reduction of workforce, during our call in February which will save us approximately $16 million annually, the impact of which will not become apparent until the second quarter.

And third, we are focused on managing down inventory levels and improving turns while utilizing our supply chain advantages of shorter lead times and owned assembly facilities to quickly respond to changing trends.

While our Q1 inventory was slightly up compared to last year, we came in slightly lower than plan. By the end of the second quarter we are anticipating inventory growth to be equal to or less than sales growth.

As we begin our second quarter, we expect the environment to remain challenging; we will continue to emphasize our key objectives for this year. We do believe we are seeing signs of stabilization, with several of our retail customers in the United States feeling incrementally better. We also believe that the height of the destocking effort is now past.

Also positive is that our Fossil retail stores continued to post comp sales increases in April even after factoring out the benefit of the Easter shift. While we continue to experience softness within certain areas of Europe and within our distributor business, we remain confident that our diversified global operating model, along with a continued focus on inventory and expense discipline, will enable us to achieve our goals this year and position us for increased profitability and opportunity in the future. And now I'll turn the call over to Mike Barnes for further color.

Thanks, Costa; good morning, everyone. I will start with a review of our domestic business. While we saw sales decline 4% for the quarter with watches down 1% and non-watch categories down 6.7%, we're pleased with the results compared to the retail landscape in general. Our business in the United States was impacted by the overall economic environment which prompted retailers to trim their purchases in order to decrease inventories on the selling floor. Despite this destocking strategy, some of our watch brands and businesses experienced very nice growth.

Growth in our licensed watch category in the US was led by Michael Kors with additional contributions from Marc by Marc Jacobs, Adidas and the continued rollout of Armani Exchange. We continue to gain market share and add doors within these businesses. We increased market share in watches overall in the first quarter and we believe our portfolio management approach and our strong value proposition and great style innovations are really driving these results for us.

Increases from our licensed brands were partially offset by a decline in Fossil watch shipments. Fossil watch results are more in line with the department store comp results and were also impacted by retailer efforts to manage inventory stock levels down lower. But we have some great looking product in the pipeline and we're excited about the opportunities for the balance of the year.

Although Michele, our proprietary luxury watch brand, experienced a 5.8% decline in wholesale shipments for the quarter, the performance at retail was significantly better than the overall luxury channel and better than the overall watch category as well. We attribute this to Michele's continued great styling and the brand's comparative value in contrast to many other luxury offerings driving the ongoing appeal of the brand.

Our domestic accessory business experienced a 6.7% decline in wholesale shipments during the first quarter driven by declines in Fossil women's handbags, mainly attributed to rebalancing of the assortment as we shift our product focus to a more contemporary vintage viewpoint which we see performing very well in our own retail stores.

Additionally, the handbag category in department stores is underperforming relative to the overall comp performance of the stores themselves. The weakness in Fossil handbags was partially offset by strength in our Relic leather business. We believe that along with our value pricing and attractive styling we're benefiting from the consumer trading down into the Relic distribution channel.

Finally, on a very positive note, the Fossil accessory jewelry offering continued to perform exceptionally well with high double-digit increase for the quarter.

Now on to the international wholesale business segment. To keep things simple and on an apples-to-apples basis, all of my references to sales increases and decreases will be based upon constant dollars. International wholesale shipments decreased by roughly 9% during the first quarter. In Europe the wholesale shipments declined by 6.3% with growth from new and lesser penetrated offerings and geographies more than offset by declines in our more penetrated brands and markets.

Our overall watch business in Europe was impacted by a weakening economy. While we did experience declines in total licensed watch sales in Europe, we did see growth from Burberry and Michael Kors. Fossil watches, which has a higher penetration in our more mature markets, experienced a decline in shipments for the quarter. In Europe total jewelry sales declined by 12.4% as most of our distribution for this category is in our more penetrated markets.

Having said that, we're continuing to roll out our DKNY jewelry line that we launched in the back half of 2008 and the updated Diesel line. Notwithstanding the current environment we continue to foresee the jewelry category as one of our strongest growth opportunities globally.

In leather goods our expansion in Europe continued favorably and we're really excited about the long-term potential to expand this category throughout the continent. In total leather shipments rose by 37.5% during the quarter with strong gains across both women's and men's categories. We believe the growth of our Fossil store base in the region is continuing to improve brand awareness across categories and will lead to further opportunities for wholesale expansion of our leather groups.

Other international wholesale sales decreased by 14.3%, partially the result of decreased shipments to our third-party distribution markets and a reduction in shipments to our Spain joint venture.

In Asia-Pac our wholesale shipments in our subsidiary owned markets increased by 7.1% driven by market share expansion in a few of our established markets as well as growth in new markets including China, India and Korea. This is despite the fact that some of our established markets are experiencing record GDP decreases. All in all we still believe the Asia Pac region represents a continued large opportunity for growth.

Our direct-to-consumer segment delivered solid performance in the first quarter. This was the result of a 31.5% increase in the average number of company-owned stores opened during the first quarter, constant dollar comparable store sales gains of 5.1% and a 26.4% increase in e-commerce sales. Our growth engine in this segment, which is the Fossil accessory store concept, delivered global comp increases of 4.5% in 110 comp stores.

European accessory stores delivered a 15.2% comp performance increase and remain our target market for new store growth this year. We experienced a 4.3% comp decline in the US accessory stores during Q1 which was impacted by the Easter shift.

We continue to run a full price environment within our Fossil accessory stores and have intensified our opening price point assortment which has led to strong increases in unit sales. Our outlet stores also had a great quarter posting an 8.7% comparable store sales increase while maintaining our targeted margin. As you know, our outlet stores are a liquidation vehicle for our discontinued inventory and are instrumental to our overall inventory strategy.

Our e-com business continues to show strong growth. As we discussed previously, we upgraded our US site in Q3 last year which we believe has been instrumental to our positive performance given the difficult US environment. Sales from our international sites in Germany and the recent launches in the UK, Singapore and Australia continue to grow as well and we anticipate expanding our footprint into other countries over time.

Globally we ended the year with 325 stores. This included 195 full price accessory stores with 107, or more than half, located outside the US, and 80 outlet locations including nine outside the US. Additionally, we ended the quarter with 33 apparel stores and 17 multi-brand stores. This compares to 250 stores at the end of the first quarter last year including 118 full price accessory stores with 60 outside the US and 81 outlet stores including six outside the US, plus 33 apparel stores and 18 multi-branded stores.

During Q1 we opened seven new doors and closed six. During fiscal 2009 we continue to expect to open between 40 and 50 new doors with the majority of these doors to be opened outside the US. This expansion will continue to be concentrated on the full price accessory concept. Now I'll turn the call over to Mike Kovar.

Thanks, Mike; good morning, everyone. I'll start off by summarizing our first-quarter results from this morning's press release. Net sales increased 9.3% to $323 million compared to $356.2 million -- that was decreased 9.3%. The stronger US (inaudible) negatively impacted comparable sales by more than $25 million in the quarter. Gross profit margin fell 12.8% and gross profit of 169.4%(Sic-see press release) or 52.4% of net sales was down compared to $194.3 million or 54.5% of net sales in the prior quarter.

Operating income decreased 51.5% to $23.8 million, or 7.4% of net sales, compared to $49.1 million, or 13.8% of net sales. Net income fell 42.7% to $17.3 million compared to $30.2 million last year, and diluted earnings per share decreased 39.5% to $0.26 a share on 66.7 million shares compared to $0.43 a share on 69.8 million shares.

Our sales mix breakdown for the first quarter was as follows -- 15.2% from domestic wholesale watch sales; 16% from other domestic wholesale businesses; 20.6% from worldwide direct-to-consumer businesses; 32% from European wholesale sales; and 16.2% from wholesale sales in other international locations. The 9.3% decline in net sales for the quarter consisted of the following increases and decreases by category and geographic region and these are on a reported basis.

Domestic watch sales decreased 1% to $49.1 million compared to $49.6 million in the prior year quarter. Other domestic sales, which include our leather, sunglass and jewelry businesses, decreased 6.7% to $51.6 million compared to $55.3 million in the prior year quarter. Sales generated from European-based wholesale operations decreased 20.5% to $103.4 million compared to $130.1 million.

Other international sales, which consist of export sales to distributors and sales from our Canada, Mexico and Asia Pacific wholesale operations decreased 20.2% to $52.4 million which was compared to $65.7 million in the prior year quarter. And finally, sales from our worldwide direct-to-consumer businesses grew 19.8% to $66.5 million compared to $55.5 million.

Gross profit margin decreased 210 basis points to 52.4% in the first quarter compared to 54.5% in the prior year quarter. This decrease in grist profit margin was primarily driven by a stronger US dollar which impacted gross profit margin unfavorably by over 300 basis points and also an increase in low margin sales throughout price liquidation channels. Partially offsetting these decreases in margin was an increase in the sales mix of our higher-margin direct-to-consumer segment sales and a reduction in sales mix of low-margin shipments to third-party distributors.

During the first quarter, as I mentioned earlier, direct-to-consumer sales increased to 20.6% of consolidated net sales in the first quarter. This compares to 15.5% of consolidated net sales in the prior year quarter.

Total operating expenses of $145.6 million are relatively flat in comparison to the prior year quarter and, as a percentage of net sales, increased to 45.1% compared to 40.7% in the prior year quarter. First-quarter operating expenses included a $9.6 million favorable impact from the translation of foreign-based expenses as a result of the stronger US dollar and $1.5 million of nonrecurring severance charges stemming from various cost cutting measures initiated during the first quarter.

On a constant dollar basis of the increase in operating expenses was principally driven by an $11.4 million increase from our direct-to-consumer segment as a result of our store growth in 2008. Excluding currency impact, the severance charges and expenses related to the direct-to-consumer segment, operating expenses decreased by approximately $3 million compared to the first quarter last year.

Operating income decreased to 7.4% of net sales in the first quarter compared to 13.8% of net sales last year as a result of a decline in net sales, contraction in our gross profit margin and higher operating expenses as a percentage of sales. During the first quarter operating income was negatively impacted by approximately $14.5 million as a result of the translation of foreign-based sales and expenses into US dollars as the US dollar strengthened significantly in comparison to the prior year quarter.

Other income and expense increased favorably by $4.4 million during the first quarter in comparison to the prior year quarter. This increase was primarily driven by foreign currency transaction gains compared to currency losses last year and these gains were generated as a result of settling inventory purchases during the quarter through forward contracts at rates in excess of the prevailing spot rate. Partially offsetting these currency gains was a reduction in interest income as a result of lower average levels of invested cash and reduced yields.

Income tax expense for the first quarter was $9.3 million resulting in an effective tax rate of 35% compared to 36.3% in the prior year. For fiscal 2009 we estimate our effective tax rate will approximate 37% to 38% excluding any discrete items. Net income for the first quarter decreased by 42.7% to $17.3 million or $0.26 per diluted share and included an unfavorable $0.07 impact as a result of the stronger US dollar.

Now turning to the balance sheet. We ended the first quarter with cash, cash equivalents and securities available for sale totaling $203 million compared to $205 million at the end of the prior year quarter and we had $9.3 million in total debt outstanding. Since the end of the first quarter last year we purchased 2.1 million shares of our common stock for about $53.5 million. We completed our repurchase plan in the fourth quarter of 2008 and currently have no open authorizations for future buybacks.

Turning to inventory, the inventory at quarter end was $285 million representing a 7.4% increase from the prior year quarter balance of $266 million and included approximately $4.5 million in inventory as a result of new store openings since the end of the prior year quarter. By the end of the second quarter we anticipate inventory growth to be in line with sales or less than sales growth.

Accounts receivable decreased by 22.7% to $158.4 million as compared to $204.8 million at the end of the prior year quarter. This decrease is principally due to a reduction in wholesale shipments during the first quarter versus the prior year as well as the impact of currency translation.

Days sales outstanding for our wholesale segment for the first quarter was 54 days which is significantly better than 61 days in the prior year quarter. This decrease is primarily due to a reduction in sales mix of internationally based sales and distributor based sales that generally result in longer collection cycles than those experienced in the US.

During the first quarter we had capital expenditures totaling $5.5 million and are expecting fiscal year 2009 capital expenditures of $35 million to $45 million. A majority of these expenditures will be related to new store openings and the addition of an SAP point-of-sale system for our stores, initially for our US, Canada, UK and Australia locations. First-quarter depreciation and amortization expense was $10 million and we estimate full-year D&A of about $40 million to $42 million as it relates to guidance for the second quarter and full year.

As we continue to grow our retail store base and e-commerce businesses our sales from the direct-to-consumer segment increase as a percentage of the total sales mix, generally benefiting our profitability in the fourth quarter, but unfortunately at the expense of the first and second quarter when, due to seasonality, it's more difficult to leverage direct to consumer expenses against direct to consumer sales.

Additionally, as we experienced in the first quarter, net sales and operating income for our second and third quarters are expected to be negatively impacted in comparison to the same periods of 2008 as the US dollar has strengthened against other major currency since September of 2008. As a result of this and what appears to be a stabilizing yet challenging global retail environment, we are currently estimating reported net sales for the second quarter of fiscal 2009 to decrease in a range of 8% to 10% with constant dollar sales in the range of flat to minus 2%.

Second-quarter reported diluted earnings per share is expected to be in a range of $0.18 to $0.20 and includes negative currency impact of approximately $0.13 per share related to the stronger US dollar in comparison to last year's second quarter.

For fiscal year 2009 we are currently estimating reported net sales to decrease in a range from 5% to 8% with constant dollar sales in a range from minus 3% to positive 1%. Fiscal year 2009 diluted earnings per share are expected to be in a range of $1.50 to $1.70 which reflects an increase to our previous guidance of $1.40 to $1.60 for the full year. This guidance is based upon a currency rate slightly below the current prevailing rates of the US dollar compared to other foreign currencies for countries in which we operate.

In summary, we are pleased with the start to the first quarter. We will continue to focus on controlling costs while capitalizing on the unique strengths of our business model such as our value positioning, owned global distribution and compelling brands. We believe we are well positioned to gain market share in this difficult environment and improve our profit potential as the economy improves in the future.

With that I'd like to turn the call over to the operator to begin the question-and-answer portion of the call.

(Operator Instructions). Neely Tamminga, Piper Jaffray.

Good morning, thank you it's actually Maria for Neely. I just want to say congratulations on an excellent quarter. My first question is actually relating to the stabilizing trends at retail. I'm wondering if you can provide a little more color on this. Is this across categories? And then I have just a couple of follow-up questions.

What we have heard -- good morning, by the way -- in what we heard from a lot of our customer base is the word that keeps coming out over and over again is some stability. And I think that as we went through the fourth quarter and to some degree the first quarter, there was so much emphasis on inventory and I think that put a lot of pressure on the business obviously.

And what we're hearing is that the dark days may be a little bit more behind now and we're hearing this on an across-the-board basis from pretty much all of the major customers that we do business with and most of the categories. Some of the categories are still a little tougher than others, but we feel like we're in a better way right now.

Great, thank you. I'm wondering if you can provide some color on insider trading we've seen recently and what is the status of the current 10b5 plan?

Maria, this is Mike Kovar. Kosta has completed his latest 10b5 plan and does not anticipate filing another plan in the near term. Obviously that is based upon prevailing market conditions that seem to be a little more positive than they were three months ago when he started that plan. Tom has approximately I think 600,000 shares outstanding under his last 10b5 plan and, based upon 144 restrictions, he should be through that plan in the next several weeks.

Great, thank you. And then I have just one additional question. Can you provide an update on the women's footwear launch, is that still set to go for fall?

The women's footwear lunch is still scheduled to go in fall. As you know, our practice with new launches is to take them very cautiously, of course correct product assortments as we go and we are very much on track to do that.

Thank you.

Robin Murchison, SunTrust.

Thank you very much. Good morning. I have several questions here, so let me start first on Michele. I wanted to ask you about the handbag and eyewear effort. It looked like the website had quite a bit of product on sale. What are you -- how is that handbag effort going especially and what do you see there, please?

Well, let's start with the handbag effort. I would say to you that the first launch of handbags we were probably at a price point that was a little higher than we should have been. So what we're now seeing performance on is our second delivery, sweet spots in average retail, 495, 595. And the early performance on that second delivery, it's been out in the stores for about the last two to three weeks, Robin, we're seeing in the neighborhood of 7% sell throughs on the total new collection with some of the stronger styles ranging up into double digit performance. So we're very pleased with the slight repositioning we've done in pricing and the reaction we've had at the customer level.

Okay. And sunglasses, sort of a similar thing?

Exactly a similar thing. There was a very significant repositioning in terms of pricing. So what you might have seen on the website would have been first delivery that required repricing, we are through all of that goods now. The new sweet spot on sunglasses would be in the $150-$250 range. And similarly, in what is a difficult product category across the board right now, we are experiencing very solid sell throughs.

Good, sounds like a good place to be. Also as long as I'm on product, can you elaborate a little bit on your men's -- your testing of men's shoes, what you saw, what you learned in the spring?

Yes, we also were I'd say fairly satisfied with the performance of our men's footwear assortment. Once again, in a relatively small number of doors, sell-throughs on a weekly basis ranged, depending on the corporate group, anywhere from mid 3's to 6% to 7% a week. If there's a learning from it I think our price point strategy is largely correct, but on a go-forward basis we will continue to emphasize the casual component of it rather than the dressier component of it as that's where we've had the greatest success and our retail partners feel the greatest opportunity for expansion is.

Okay. Mike Kovar, for you, the language in the press release about the effective tax rate for the balance of the year 37% to 38% excluding any discrete events. Just wondering if you would elaborate on what constitutes a discrete event. And maybe that includes some of this proposed Obama -- whatever Obama is going to do with tax rates on the multi-nationals, how you guys are dealing with or thinking about that.

I think we're probably a little bit too early to discern anything out of the administration's perspective on what's happening with multi-nationals and corporate tax rates. That is not included in our effective guidance for the balance of this year. What a discrete event basically is, Robin, is that the tax provision is done based upon the actual results for the completed period plus a forecast of the remainder of the year results to come up with a provision based upon the income coming from a number of different jurisdictions that have different effective tax rates. A discrete event would be anything that wasn't contemplated in that calculation of the provision and it would generally have to do with settlements of open audits.

Okay. And then lastly, I just wanted to see if you would speak to the difference in performance, Fossil brand versus Relic brand. We're hearing -- there's a lot of talk, chatter in the discretionary markets these days about the trade down. And while your Fossil brand is not -- I state it this way -- your Fossil brand is actually -- it's very competitively priced. Just wondering if you guys feel like you're seeing some sort of trade down effect from Fossil to Relic?

Yes, I don't think there's a trade down to Relic. Relic's performance is based on a couple things. That channel is doing pretty well and also the product is exceptionally good right now, especially in the handbag side. So I think we're doing well because of the product issue. There is obviously a big push toward value. In this kind of turbulent market Fossil is somewhat of a strong backbone to a lot of stores' business. And we actually are seeing increasing distribution of Fossil.

For example, Fossil watches has been out of Nordstrom pretty much for the last several years as they move towards our more expensive brands, Michele, Kors, Diesel, DKNY, Zodiac, etc. It kind of moved Fossil out of the back -- out to the back and out the door, quite honestly. And they've just recently put it back in and it's doing very well, and actually they've added Fossil jewelry that's doing very well in their store. And we also are going to have leather goods in there, have some now and more coming that we've never had leather goods in Nordstrom before.

So this kind of focus on value really bodes well I think across the globe for Fossil, it's kind of a safe haven for sales. And now that the brand is getting stronger, you can tell from our comps and our global business, now that the brand is getting stronger and efficient in this modern vintage more lifestyle arena, we're getting more opportunities to go into places like Nordstrom, etc., with not only better product, great value but a better brand positioning also. I think that's helping us quite a bit and it's going to be a huge opportunity long term.

Excellent execution, guys. Thank you very much.

Anna Andreeva, JPMorgan.

Thanks so much, good morning. I was wondering if you guys could talk about European wholesale results. I understand the currency impact but organically it looks like things slowed from what, up 3% in the fourth quarter to down 6%. So any color you could give us there, maybe what's going on in your more mature markets? I recall Germany was already challenging last quarter, so did that further slow? How was the UK business for you and what is embedded in your guidance for Europe wholesale for the rest of the year? That's my first question.

Hi, Anna, this is Mike. We obviously saw things slow down in Europe continue to slow down during the first quarter. The more mature markets were the toughest ones, clearly. And I think as we mentioned in our prepared remarks that the distribution markets were especially tough for us.

The third-party distributors that we do business with, fortunately much less business than a lot of our competitors do, was really tough out there. These guys are generally -- they don't have the strong balance sheets, they're generally smaller companies doing distribution. And when times get tough and they get over inventoried their business gets really tough and they have to shut off the receipts and get things back in line before they can continue moving again.

So the third-party distribution was the slowest part of our business, the more mature markets were next and then, of course, the less mature markets weren't hit quite as hard. There was also a lot of our business in the southern part of Europe seemed to be a little bit weaker. For whatever reason, the Spanish market economically probably took a much tougher brunt of the bad economy than most of the other Western European markets did. So that business was tough as well.

On a positive note, I have gotten a lot of color from the markets from our managing directors and our senior management over there, and they're starting to see things turn around a little bit. I've had some positive responses from the UK on how things are looking there right now. And as well, I've seen that even though they expected to continue to have declines in Germany, that it hasn't been as bad as perhaps they thought it might get. So whether that holds or not we'll see. But that's kind of the situation as we see it in Europe right now.

Okay, got you. So what should we expect for Europe, at least organically, in your guidance for the rest of the year?

I think we said, Anna, in February, we're not expecting any significant growth in our wholesale businesses around the world given the prevailing environment. We think there's obviously some opportunity in Q4 based upon the fact that we're going to anniversary when all of this mess started. But we're still planning our wholesale businesses down.

I would say the one exception to that is our subsidiary markets in Asia-Pacific, which we saw a little over a 7% increase in Q1, are still performing quite nicely and we've got some new businesses that are helping the growth there in the form of China, India and Korea and a number of other markets in that region were still not up to the penetration levels that we have in Europe and in the US.

However, if you look at our distributor markets, as Mike talked about, that business represents roughly 13% of our total sales. And during the first quarter it was down about $13 million. So it was a pretty significant chunk of the sales decline as it relates to our international wholesale operations, and we only expect that to improve slightly as we go into the balance of -- or as we move into Q2 and hopefully by the time we get to the back half of the year their inventories will be much better aligned for taking on some new receipt flow.

Okay, got you. So on the other international bucket, you mentioned Asia-Pac was better. So the down 14 organically sounds like things could be a little better as we get through the year?

Yes, maybe slightly better. The only -- we've had some challenges in Mexico recently with everything going on with the H1 virus. As you know, Mexico shut its own self down for a week right before Mother's Day which obviously will impact our second quarter. We expect things will stabilize there over time as well as we get through this. But that's our outlook on it right now.

Okay, great, got you. And your direct-to-consumer segment, obviously you guys are out comping most retailers out there. Can you talk about what are you assuming for comps for the second quarter and the rest of '09 hopefully globally and also in the US? And I think you mentioned second quarter started off strong. Any more color there?

Yes, for second quarter we anticipate that our comps will be -- right now global comps on a constant dollar basis will be flat to last year. And obviously by the comments that Kosta made in his remarks, we've seen a high single digit comp trend come out of the month of April globally. For the year we anticipate on a constant dollar basis about a 2.2% comp store growth.

Okay. And finally, just given the strong cash position, any thoughts on a buyback?

As we said in the prepared remarks, we've currently exhausted all open buybacks but we'll obviously review our cash for any opportunities that are out there as we move forward, but have not committed at this point any future buybacks.

Okay. Congrats, thanks so much, good luck, guys.

Ronald Bookbinder, Global Hunter.

First of all, congratulations on a strong quarter given the environment. I was wondering given your improving performance and the stability that you're beginning to see in the environment and the strength of your balance sheet, have you considered taking advantage of the real estate market and revisit your store growth plans going forward.

We've been watching that environment very closely and, as you know, we're opening most of our stores this year in Europe because we see favorable locations and deals there. What we are sensing in the United States is that the market for real estate here maybe is not as realistic yet as it might be later and so we're taking advantage of that. We don't need to necessarily open stores in the United States and push it; we can move to other places and be opportunistic. So our sense is that potentially we might be in a better position and little later and we're taking that approach.

And what sort of difference in rents are you seeing in stores now compared to a year or so ago?

Well, we're obviously seeing -- in the United States we're seeing them get more realistic, we just don't know if they're realistic enough yet. And having that situation plus the economic environment in the United States, less traffic, etc., we're just taking a wait-and-see approach. We have a big opportunity in the United States in the stores we've opened here in the last 18 months or so to make them better, stronger, and that's what we're focused on right now.

We're making some progress on that and when that occurs that's going to be a big plus for us. And then as you see, we're getting a very strong response in comps in Europe. Our retail business there is very, very strong, it's a big opportunity and in this environment, even though it's somewhat more difficult in Europe, our predictability over there in some of the markets or all of the markets is very, very strong and we're pushing that market.

It is a very significant long-term opportunity for the Company to be pushing in Europe and building a brand the way we are and getting the kind of brand penetration in all of our categories given us opportunities to, as we said in the prepared remarks, to push international -- our leather goods into the wholesale market in Europe as well. So we're making a very strong foothold in Europe that's going to pay off dividends for a long time to come.

Okay. And you talked about a reduction in shipments to third-party distributors that generate lower gross profit margins. Was that planned and should we expect benefits from that to continue going forward?

Well, obviously we didn't plan to have reduced shipments to our distributors; we would have liked to have had a better business there. But it's just the toughest part of the business right now. When things change so quickly -- they had the same situation that a lot of our retail partners had where they over inventoried, they over bought, they tend to buy -- distributors tend to buy more in chunks than they do on a constant flow basis. And so once they bought the inventory they had to work through the fourth quarter and the first quarter to get things back in line. I think regarding how it affects our margins, Mike, do you want to speak to that?

Yes, our margins with our distributor partners are well below our consolidated margins. We generally average in the 35% to 40% range selling to a third-party distributor. And that varies across each of our brands. But to Mike's point, we do it expect that business to improve from the performance we saw in the second or in the first quarter that business, just to give you a data point, Ron, was actually down about 30% year over year and we feel like they've had a chance to get through some of the inventory that was ordered in advance of this whole environment changing around them.

The other thing is in some of these markets with the US dollar strengthening it's raised the cost of purchasing for them as well which is part of the problem.

So when you look across your customers, who do you feel is in a better position inventory wise, the department stores or your distributors?

I'll let somebody else answer that question, but I will call out that the distributor markets only represent about 11% of our global sales. So 89% of our business is still done through our own distribution channels. I think as far as the inventory position of our retail partners and our distributors, everybody got themselves really into the same situation ourselves included.

As you recall, we had a double-digit increase in inventory at the end of the year last year and as we said we would get down to a single high single digits and we got a little bit below that at the end of the first quarter. And by the end of the second quarter that we're halfway through now we feel like we will be completely in position so that our inventories will be at or below the sales growth or decline.

But I think that most of the people that I've talked to from retail partners, as well as talking to our distribution partners, everybody had the same situation. And I would say it's kind of an across the board situation that most people feel like the inventories are pretty much in line now with the sales or pretty close to it. So I think that the worst part of the destocking effort that was kind of a global thing is pretty much over and I think that people are buying in line with trend right now and that we should not see significant destocking going forward.

Now I don't expect for them to significantly increase their inventories during the second quarter either because it's just not one of the strongest quarters for our business. And the second half bodes for a much better opportunity for increased sales and increased inventories going forward.

There is one structural difference in that a retailer has to have a certain amount of inventory on their shelves available for sale. A distributor theoretically can get their inventory down to zero and they can send us an order, we can ship it to them and they can ship it to their customer, they don't need to carry inventory necessarily.

Okay. You talked about strengthening opening price points. What exactly did you mean by that? Are you taking price points lower and how does that impact gross margin?

As we mentioned in the case of Michele, even the luxury channel is looking at price points differently. They've lowered their opening price in a lot of categories. So it's a couple of things, one is that in some categories like a Michele and other businesses we've actually made the opening price lower. So if you look at all our business globally potentially there could be some opening prices that move down.

And additionally to that, there are some businesses where what we've done is just focused on that opening price. Like for in Armani for example, we have a group of watches that are very, very strong that are $175. So potentially what we've done is strengthened that, put more of those in the stores, put signs in the cases and really just identified clearly to the customer that we have this great price point. So it's a combination of two things.

Ron, on the margin question, we've had very little repricing of existing inventory. Most of the stuff that we're looking at strengthening the opening price points has been engineered for a normal margin.

Okay.

I would add to that comment because sometimes there's a misconception here. The way we engineer our product our margins are pretty consistent from opening price point all the way up. We don't take a lower margin on our opening price point products.

Okay, great. Thank you very much and continued success.

[Kelly Duvall], BB&T Capital Markets. (Operator Instructions). Barbara Wyckoff, [Gorilla] Capital Management.

Good job in a tough environment. I have a couple of questions. Could you talk about the size of the jewelry opportunity worldwide say over the next five years? And then the second question, a question for Jennifer I guess and Mike together, comment on the four-wall run rate of the new stores. What's that been for the stores that have been open one year versus expectations? And then I guess for Kosta, in first quarter it was better than expected, but what could you have done better in retrospect? Were there missed opportunities?

I'll take the four-wall run rate question. As we talked about earlier, Barbara, there's a reason we're looking at expanding our footprint outside the United States, specifically in Europe, a lot faster than in the US. And that's because the performance we're seeing in those stores are outperforming our expectations.

As we've talked about, our year one four-wall pretax contribution has to clear a 15% target threshold and we're finding that to be the case in Europe. As we stated in the past couple of calls we are announcing that level of performance in our US-based stores, Jennifer and her team have a great operational strategy within the door environment and have proved that performance over time. You want to add something, Jennifer? Go ahead.

And that initiative seems to be working well; we've improved the running rate.

So given that we're not seeing the same types of deals, as Kosta mentioned, in the US for great real estate as we are in Europe and the fact that our stores in the US that we've opened in the last 12 to 18 months haven't been as profitable as those in Europe, we'll continue to look outside the United States for expansion but continue to work on bettering the performance of our US doors.

Okay. The jewelry question?

(multiple speakers). Yes, the jewelry business, as you know we've been in there about five years starting with Fossil in Europe, very successful, grew very fast. As we always talked about, it's an add-on to our watch business globally. It's basically sold to the same channels, the same kind of branded situation, same characteristics for profitability and supply chain. And it leverages all of our infrastructure including our brands.

So as you know, we've done very well with Fossil, added on Armani, Diesel is doing well, DKNY in Europe is off to a good start and there potentially long-term could be additional brands. We also have been successful bringing that jewelry to the United States, the accessory Fossil jewelry and that's doing very well. So we think long-term it's part of an add-on to our watch business, it's just going to continue to grow.

The other thing that we've talked about in the past is that increasingly the global watch, global jewelry business, there's a demand for brands in that business. And I think that's going to bode well for our future in jewelry as well. So we are continuing to think that that's a big opportunity long-term for us.

In terms of your question of what we could have done better. That's a very good question; we could have done a lot of things better. We do see a lot of opportunities out there. The one thing I would say is the Company did, I think, a fantastic job responding to the environment when we saw it happening. Across the entire company globally everyone pretty much jumped very quickly, cut expenses, got as efficient as possible, really trying to ride out this environment and put ourselves in a position where we have a big opportunity.

What we're seeing I think is as this environment stabilizes a bit, we're seeing opportunities for the Company in many different areas and we think that as the environment changes and consumers start to go back to the stores and there's going to be some capacity taken out of the market, I think, which is going to be to our benefit, we are going to do very well.

It's interesting also that some of our competitors are having a hard time, some of them, in fact one in the United States, one of our watch competitors, their response to the environment was to cut their entire design team.

Well, we're focused on a more innovation, more product, more design, more strong branding, we really through this environment have not changed our business model, we're continuing to invest in the future, we're building stores in Europe, we're continuing to work on the brand, we're getting even more aggressive with Web activity and pushing that across the globe and continuing to just push our business model as fast as we can and be very aggressive on the environment while getting as efficient as we can. So we think long-term we're in a great position.

Thank you.

[Kelly Duvall]. (Operator Instructions). [Richard Greenblatt], [America Capital]. Mr. Greenblatt has now withdrawn his question. (Operator Instructions). Ronald Bookbinder, Global Hunter.

Could you just talk a bit about the global e-commerce? You had talked in the fall about ramping up the German website. How is that going? Are you expanding to more countries? If you could just give us some color, please?

The performance out of the German website has been exceptionally strong. It has grown to a percent to total of about a quarter of what the US website is currently doing, but we're seeing very strong double-digit increases and we expect an improvement of that platform as we update the US site as well. Other international sites have had smaller volume contribution, but we're starting to see some fairly good growth rates coming out of them.

We want to, in typical Fossil fashion, get those up and running at their healthiest before we continue to expand international sites. But the next one we do have on board would be Canada; we think that's a logical addition for us where our brand is well-known and we expect good performance out of that additional site.

Ron, one thing you might know is that several years ago, I guess, we invested in a very expensive global Web platform that was going to enable us to take these websites, e-commerce sites global and to handle multiple currencies and multiple languages. And so it was a very big initial investment and it's put us in a position where we're going to be able to penetrate these markets pretty well.

We also, I think, have a huge opportunity to move forward in the United States; in fact, we're going to be installing the latest 3.0 this year which will make our site even more dynamic and that will very quickly go to the rest of the world as well. So we think it's a big long-term opportunity for us, not only in sales but in marketing. We get -- it's our biggest marketing vehicle, we do more on-line customer acquisition than we do in any other form and that's going to be a big continuing process.

So we have a situation where penetrating the world of stores, adding on websites, potentially catalogs going outside the United States, we have kind of a three-pronged vehicle of brand building across the world that is also a profitable business as well. So we think we're in a great position on that.

Okay, thank you.

Thank you. There appear to be no further questions. Please continue with the next further points you which wish to raise.

Thank you, Donny. Should you want to replay this conference call it has been recorded and will be available from 10 a.m. Central Time today until 12 midnight Central Time tomorrow by calling either 303-590-3030 or 1-800-406-7325 and entering reservation number 406-2328 followed by the pound sign. (Operator Instructions).

This conference call has also been recorded by Street Events and may be accessed through Street Events' website at www.streetevents.com or directly through our website at Fossil.com by clicking on investor relations on our homepage and then on webcast.

Finally, should you have been questions that did not get addressed today, please give myself or Mike Barnes a call. Thanks again for joining us today. Our next scheduled conference call will be in August for the release of our 2009 second-quarter operating results.

Ladies and gentlemen, this concludes the first-quarter 2009 conference call. Thank you for participating and you may now disconnect.