Fossil Group Inc (FOSL) 2009 Q2 法說會逐字稿

Welcome to the Fossil Q2 2009 earnings conference call on the August 11, 2009. Throughout the day'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 Allison Malkin. Please go ahead.

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 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, everyone, and thanks for joining us. With us today are Mike Barnes, our President and COO; Mike Kovar, our CFO; Mark Quick, our Vice Chairman; and Jennifer Pritchard, our President of Retail. We will first give an overview of the quarter and then welcome your questions.

We are pleased to announce earnings per share for the second quarter of $0.25, surpassing the earlier guidance of $0.18 to $0.20 a share. Positive gains in our direct-to-consumer channel, stringent expense management and more favorable foreign currency rates than previously anticipated all factored into our bottom-line performance.

In constant currency the quarter included a 4.8% increase in global comp store sales fueled by the Fossil brand and by design innovation across watches, accessories and jewelry. Also included a 170 basis point increase in global gross margin rates and also a $14 million reduction in wholesale operating expenses as compared to the second quarter last year.

This is especially significant since we were able to spend less but still move forward with our strategy to build the business. We still invested in new stores, new businesses, new technology and other initiatives that will improve our position long term.

Our net sales for the quarter were $316 million. On a constant dollar basis worldwide net sales during the second quarter decreased 4.8% primarily driven by an 11% decline in the net sales of the Company's wholesale businesses which was partially offset by a 21% increase in our direct-to-consumer businesses.

In the global wholesale channel our customers continued to order conservatively, choosing to reduce their inventory levels in a challenging selling environment. Several of our overseas subsidiaries faced difficult conditions as well as many of these countries started the recession cycle later than the United States.

In addition, our non-owned distributors around the world continue to feel the pinch of the economic environment. On the retail side our owned stores had a more consistent flow of inventory and, as a result, had a solid comp performance. It is especially remarkable since we've been at regular price in a very promotional environment.

The Fossil brand is better than ever and you can see it clearly in our direct channels. We encourage you to go to our stores and see the difference for yourself. Also, go to Fossil.com and see the branding and assortments. There's a lot there to see -- videos, animation, our most recent catalog and terrific innovative merchandise.

The repositioning of the brand the last few years has been a very successful move for us. Fossil is an aspirational, affordable brand rooted in vintage and authenticity and focused on innovation. This plays very well around the world today and is a long-term massive opportunity for the Company.

On the balance sheet we ended the quarter with cash and equivalents up by $59 million to $272 million. Inventory was down 12.4%, surpassing our net sales decline, and represents a significant improvement from the previous quarter end.

Our inventories are in great shape and we are focusing on opportunities. Our short lead times will come in very handy when the sales trends start to change.

In closing, we feel we are in a very strong position and we are focused on the significant opportunities ahead of us. There are a lot of exciting things going on in the Company, even in this tough environment. We have a resilient global business model, a strong financial position, significant design resources and some of the best brands in the world.

When the economic crisis hit we focused on getting as efficient as possible on expenses and on inventories. On the product side we focused on value and more innovation rather than less. We have a very experienced excellent global management team that did a world-class job on all these issues during these difficult times. Because of this responsiveness we are in a great position to perform very well over the long term. Now I'll turn the call over to Mike for more details.

Thanks, Kosta. Good morning, everyone. I'll start with a review of our domestic business where we saw sales decline 3.2% for the quarter with watches down 3.5% and non-watch categories down 2.6%. Let's begin with some color on our domestic watch business.

During our last call we indicated we felt some stability was returning to the retail marketplace. Since that call de-stocking initiatives at retail have eased, but there was no catalyst to encourage retailers to be anything but conservative with their inventory management throughout the second quarter, as it still remains in the historically slower first half of the year.

Despite the current economic conditions several of our brands and businesses reported solid growth driven by the delivery of new product. Michael Kors and Burberry are two great examples that delivered double-digit increases during the second quarter as these businesses continued to gain market share and add doors. And while our Fossil wholesale watch shipments were down in the second quarter, the positive consumer reaction to new innovations tested in our own retail stores gives us encouragement that we're poised to take advantage of any uptick in consumer spending.

Having brought our inventories into line with current sales levels and with some great newness in the pipeline we feel we are well-positioned to improve the trend in our shipments for most all of our brands in the back half of the year should the economy permit.

Within the mass-market channel we continued to achieve strong growth with wholesale shipments increasing by 40%. We believe this is indicative of the current trend to trade down by the consumer, continued great product development, as well as the result of great support provided by our customers in this channel.

Michele, our proprietary luxury brand, continues to exceed the performance of the overall luxury channel and overall watch category experiencing only a 2.9% year-over-year decline in wholesale shipments for the quarter. This represented a solid sequential improvement over the 5.8% decline we experienced in the first quarter. Michele's continued great styling combined with the brands comparative value in contrast to many other luxury offerings drives great consumer support of the brand.

As for our domestic accessory business, wholesale shipments declined 2.6% during the second quarter showing and improved performance compared to the 6.7% decline we had in the first quarter. A significant part of this rebound was in handbags which were down only 6.8% versus the 18% decline in the first quarter. And this is in light of what we believe to be double-digit comp declines in the overall handbag category in department stores.

In addition, our domestic Fossil jewelry offering continued to perform exceptionally well with wholesale shipments up 84% for the quarter due to both positive comps and continued door roll out.

Now I'll move on to our international wholesale business segment. As always, in order 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.

As Kosta mentioned, our international sales were negatively impacted by worsening economic conditions impacting both our wholesale customers and our third-party distributors. International wholesale shipments decreased by roughly 15.3% during the second quarter. In Europe the wholesale shipments declined by 12.1% with our distributors at a minus 20.3% showing a higher decline than most other countries.

Similar to our discussions regarding our domestic business last quarter, we feel that things are beginning to stabilize in the region including our base of distributors. As previously mentioned, we felt that Europe came into this tough economic period after the US and would lag on the exit as well.

So while we do not expect to see significant improvement for the time being, we also do not foresee any significant worsening based on the current environment. Again, things are feeling a bit more stabilized going into the third quarter; we will continue to plan our sales and expenses to trend, but we are, again, well-prepared to take advantage of any economic betterment and we continue to go after market share growth aggressively.

Growth in watch sales from Burberry, adidas and Michael Kors were more than offset by declines in DKNY, Emporio Armani and Diesel. DKNY and Emporio Armani sales declines were magnified by the fact that they represent two significant brands within our distributor base countries. In addition, our reluctance to ship product to credit challenged customers and working through the bankruptcy filing and reemergence of one of our principle customers in Germany added to our sales declines during the quarter.

Total European-based jewelry sales declined by 18.5% as most of our distribution for this category is in our more penetrated markets. We're currently working diligently to focus more on best-selling price points and we're driving our product groups toward continued innovation for our leading brand, Fossil. We're also continuing to roll out our DKNY jewelry line that we launched in the back half of 2008 and the updated Diesel line, both of which posted a strong increase over the prior year. Notwithstanding the current environment, we continue to foresee the jewelry category as one of our strongest growth opportunities globally.

Leather goods shipments in Europe declined 7.8% for the quarter. Despite the decline in the quarter, with the growth in Fossil retail stores in Europe awareness for this category is strong and getting stronger and we're seeing some great opportunities to expand our wholesale presence. We saw solid growth in women's small leather goods such as wallets and women's belts and men's leathers as well.

In fact, excluding the German market where we've maintained a leather business for many years now, European-based leather shipments rose 80% during Q2. Much of the miss in Germany was timing related as the goods continue to perform well at retail. Given the performance of leathers in Europe we still believe that we will end the year with positive growth in the category.

Other international wholesale sales decreased by 20.5%, primarily the result of decreased shipments to our third-party distribution markets and to our Spain joint venture. In Asia Pacific our wholesale shipments and owned subsidiaries actually increased by 5.4% driven by expansion into the newer markets including China, India and Korea which continue to represent a significant growth opportunity and a pretty solid performance by some of our more mature subs as well.

We're aggressively adding shop and shop programs in these countries which is increasing the real estate we occupy in our customer stores and growing market share. We believe this investment will pay dividends in market share gains once the economy normalizes.

As Kosta mentioned, our worldwide direct-to-consumer segment delivered a solid performance for the second quarter. This was the result of a 27.5% increase in the average number of company-owned stores opened during the second quarter plus constant dollar comparable store sales gains of 4.9% globally, and a 7.2% increase in e-commerce sales in constant currency.

Our growth engine in this segment, which is the Fossil accessory store concept, delivered global comp increases of 1.8% in 121 comp stores. European accessory stores delivered an unbelievable 13.2% comp performance increase and remain our main target market for new store growth this year.

We experienced a 4.7% comp decline in US accessory stores during Q2 which, given the environment and the fact that we have a full-price strategy, compares favorably to the performance of other specialty retailers. In the US our AURs remained unchanged from last year even as we strengthened opening price point offerings in the $55 range, demonstrating the value of our product assortment across all price points.

Our outlet stores also had a great quarter posting a 9.9% comparable store sales increase while assisting in bringing our global inventories in line with sales. As you know, our outlet stores are a profitable liquidation vehicle for our discontinued inventory and are instrumental to our overall inventory strategy.

Our e-commerce business continues to show strong growth. As we've discussed previously, we upgraded our US site in Q3 last year and we believe that's led to our positive performance despite the difficult US environment. We're continuing to upgrade this site for the holiday season.

If you've been on the site lately you'll notice that we have product on models, a vintage campaign, and we've added a lot of really cool interactive moving parts and videos. We've also initiated implementation of our social network plan so you will now find Fossil on Facebook which is really great for our consumers.

Sales from our international sites in Germany and the recent launches in the UK, Singapore and Australia continue to grow and we anticipate expanding our footprint into other countries over time. Another exciting component of our direct consumer business continues to be our catalog offerings, they continue to just get better and better and we feel like we have one of the best looking catalogs in the industry.

We dropped the fall one catalog a few weeks ago and it may be the best one I've seen yet. I would encourage you to take a look at it if you're on the mailing list and, if not, feel free to view it online at Fossil.com.

Globally we ended Q2 of this year with 329 stores, this includes 198 full price accessory stores with 109 or more than half located outside the United States, and 81 outlet locations including 10 outside the US. Additionally, we ended the quarter with 33 apparel stores and 17 multi-brand stores. This compares to 263 stores at the end of the second quarter last year including 129 full price accessory stores with 66 outside the US and 83 outlet stores including seven outside the US, plus 33 apparel stores and 18 multi-brand stores.

During Q2 we opened four new stores and we closed nine. During fiscal 2009 week continue to expect or open between 40 and 50 new doors with the majority of these doors to be opened outside the United States and primarily in Europe. This expansion will continue to be concentrated on the full price accessory concepts. Now I'll turn the call over to Mike Kovar.

Thanks, Mike. Good morning, everyone. I'll start off by summarizing our second-quarter results from this morning's press release. Net sales decreased 10.6% to $315.9 million compared to $353.2 million. The stronger US dollar in comparison to the prior year quarter negatively impacted comparable sales by approximately $20 million. Excluding the impact of currency net sales declined 4.8% compared to Q2 last year.

Gross profit fell 12.1% to $167.2 million or 52.9% of net sales compared to $190.3 million or 53.9% of net sales last year. Operating income decreased 35.7% to $22.5 million or 7.1% of net sales compared to $35 million or 9.9% of net sales in Q2 last year. Net income fell 33.9% to $16.6 million compared to $25.1 million and diluted earnings per-share decreased 30.6% to $0.25 on 67.1 million shares compared to $0.36 per diluted share last year on 69 million shares.

With the double-digit growth in our direct-to-consumer segment combined with reduced wholesale shipments and negative currency comparisons we experienced a shift of 600 basis points in the mix of sales from our wholesale segments to our direct-to-consumer segment. As a result the sales mix breakdown for the second quarter was as follows -- 17.4% from domestic wholesale watch sales; 12.8% from other domestic wholesale businesses; 25.5% from worldwide direct-to-consumer businesses; 28% from European wholesale sales; and 16.3% from wholesale sales in other international locations.

The 10.6% decline in net sales, or 4.8% in constant dollar terms, consisted of the following increases and decreases by category and geographic region. Domestic watch sales decreased 3.5% to $54.8 million compared to $56.8 million in the prior year quarter. Other domestic sales, which primarily include our leather, sunglass and jewelry businesses, decreased 2.6% to $40.5 million compared to $41.6 million in Q2 last year.

Sales generated from European-based wholesale operations decreased 24.1% to $88.3 million compared to $116.4 million in the prior year quarter. Excluding currency that impacted sales by $13.9 million in comparison to Q2 last year, European wholesale sales declined by 12.1%.

Other international sales, which consist of export sales to distributors and sales from our Canada, Mexico and Asia Pacific wholesale operations, decreased 25.5% to $51.7 million compared to $69.4 million in the prior year quarter. Excluding currency that impacted sales by $3.4 million in comparison to Q2 last year, other international wholesale sales declined by 20.5%, primarily the result of reduced shipments to third-party distributors.

Finally, sales from our worldwide direct-to-consumer businesses grew 16.8% to $80.6 million compared to $69 million in the prior year quarter. Gross profit dropped by 12.1% to $167.2 million in the second quarter compared to $190.3 million in the prior year quarter. Gross profit margin decreased by 100 basis points to 52.9% compared to 53.9% in Q2 last year.

The decrease in gross profit margin was primarily driven by a stronger US dollar which impacted the current quarter margin unfavorably by about 270 basis points and an increase in the mix of lower margin sales to the off-price channels. On a constant dollar basis Q2 margins improved by 170 basis points in comparison to last year's quarter as a result of a higher margin direct-to-consumer segment sales and a reduction in the sales mix of lower margin shipments to third-party distributors.

During the second quarter direct-to-consumer sales increased to 25.5% of consolidated net sales in comparison to 19.5% of consolidated net sales in the prior year quarter, which benefited comparable margins by approximately 60 basis points.

Second-quarter operating expenses of $144.7 million represent a $10.7 million decrease in comparison to $155.4 million last year. As a percentage of net sales, operating expenses increased 180 basis points to 45.8% versus 44% in the prior year quarter. In comparison to last year second-quarter operating expenses include a reduction of $8.1 million related to the translation of foreign-based expenses as a result of the stronger US dollar.

Excluding the impact of currency translation operating expenses decreased approximately $2.6 million. This was principally driven by a $13.8 million reduction in expenses related to our wholesale operations and corporate overhead area which was partially offset by an increase of $11.2 million in our direct-to-consumer segment.

The decrease in operating expenses in our wholesale operations and our corporate overhead areas are a result of reductions in certain payroll-related expenses including a reduction in work force during the first quarter of 2009, reductions in marketing and other controllable expenses, as well as lower variable cost associated with reduced sales. The increase in operating expenses in our direct-to-consumer segment was principally due to an increase in four wall expenses as a result of the increase in the number of retail stores we opened over the last 12 months.

Operating income decreased to 7.1% of sales compared to 9.9% of net sales in Q2 last year as a result of a decline in net sales, decreased gross profit margin and higher operating expenses as a percentage of sales. In comparison to the prior year quarter, Q2 operating income was negatively impacted by approximately $11.6 million as a result of the translation of foreign-based sales and expenses into US dollars.

Other income and expense increased favorably by $6.7 million during the second quarter. This increase was primarily driven by increased foreign currency transaction gains. As the US dollar weakened during the second quarter in comparison to the first quarter of 2009 we recognized currency gains from marking to market our international subsidiaries foreign-currency payable balances denominated in US dollars.

As we hedged a portion of our currency risk through forward contracts we also experienced a slight gain on these hedges as our contract rates were slightly above the prevailing rates of their respective currencies at the time of settlement during the second quarter. Offsetting the currency gains in Q2 was a decrease in interest income as a result of reduced yields earned on invested cash balances.

Our income tax expense for the second quarter was $9.6 million resulting in an effective income tax rate of 36.6% compared to a prior quarter rate of 21.4%. If you recall, the lower effective tax rate for Q2 last year was a result of a reduction in certain income tax liabilities resulting from completed audits. Excluding any discrete events we estimate that our 2009 third- and fourth-quarter tax rate will approximate 37%.

Second-quarter net income decreased by 33.9% to $16.6 million or $0.25 per share on 67.1 million weighted average shares outstanding compared to $0.36 per diluted share on 69 million weighted shares outstanding during the prior year quarter. Second-quarter net income included an unfavorable $0.04 per diluted share impact related to a stronger US dollar. This $0.04 impact from currency is comprised of a negative $0.11 related to the translation impact of foreign-based sales and expenses into US dollars included in operating income, partially offset by a $0.07 transaction gain included in other income and expense.

Turning to the balance sheet -- we ended the first quarter(Sic-see press release) with cash, cash equivalents and securities available for sale totaling $272.1 million compared to $212.8 million at the end of the prior year quarter and we have about $8 million in total debt. During the first half of 2009 we generated $92 million in cash flow compared to $11 million in the comparable prior year period once you exclude the prior year stock repurchases.

Inventory at quarter end was $250.1 million representing a decrease of 12.4% from the prior year's second-quarter balance of $285.4 million. Our composition of inventory is very healthy as we enter the second half of fiscal 2009.

Accounts receivable decreased by 20.8% to $139.2 million as compared to $175.8 million at the end of the prior year quarter. This decrease is principally due to a reduction in wholesale shipments during the second quarter versus last year's Q2. Days sales outstanding for our wholesale segment for the second quarter was 52 days which decreased from 55 days in the prior quarter. This decrease is primarily due to a reduction in the sales mix of international-based sales that generally result in longer collection cycles than those experienced in the US.

Through the first half of fiscal 2009 we had capital expenditures totaling $17 million and are expecting full-year 2009 CapEx of $35 million to $45 million. The majority of these expenditures will be related to new store openings and the addition of a global SAP point of sales system for the stores. Depreciation and amortization expense for the first half of fiscal 2009 totaled $20 million and we estimate full-year 2009 depreciation and amortization of $40 million to $42 million as it relates to guidance for the third and fourth quarters of fiscal 2009.

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

We are currently estimating reported net sales for the third quarter of fiscal 2009 to decrease in a range of negative 6% to negative 9%. Third-quarter reported diluted earnings per share is expected to be in a range of $0.38 to $0.42 and includes the negative currency impact of approximately $0.05 related to the stronger US dollar in comparison to the prior year quarter.

For the fourth quarter of 2009, we are currently estimating reported net sales to be in a range of flat to positive 3% in comparison to Q4 last year with diluted earnings per share in a range of $0.74 to $0.80. Constant dollar sales increases for both the third and fourth quarters are expected to be in a range from negative 3% to negative 6%, following the current trend of negative 4.8% experienced during our second quarter.

This guidance is based upon the current prevailing rate of the US dollar compared to other foreign currencies for countries in which we operate and assumes no significant changes in our business from the current trend.

In closing, we believe we remain well-positioned to navigate through this turbulent economy and attain our annual goals and expect the efficiencies we have implemented to our business practices will enable us to improve our long-term profit potential. We possess a strong business model with several unique advantages such as short lead times, low product obsolescence and strong margins.

In addition, the majority of our international business is operated through our own subsidiaries which provides us with much more control and the continuous ability to service our retail partners in this tough economy. In contrast, many of our competitors have a high dependence upon third-party distributors.

And finally, we offer some of the most sought after brands in the world, each of which is positioned as the opening price point within its distribution channel representing tremendous value to consumers and, again, well aligned with the mindset of consumers today. We remain confident in our strategies and excited about our business prospects in both the near and the long-term.

And now I'd like to turn the call over to the operator to begin the Q&A portion of the call.

(Operator Instructions). Anna Andreeva, JPMorgan.

Good morning, thanks so much. I am trying to reconcile the third-quarter guidance a little more, essentially on similar sales ex-currency. You guys are guiding for bigger operating margin deterioration, yet your gross margins in the second quarter were a little better, SG&A in much better shape. So couldn't SG&A dollars be down in a similar 7% range for the back half? Or is it now the translation expense is moving the other way for you guys and we should think about a $2 million to $3 million decline in SG&A dollars for the back half? That's my first question.

Yes, Anna. Currency is obviously moving in the other direction on us. If you look at where we sit today I think the prevailing Euro rate is right around $1.42 which is about the rate we entered the third quarter into and that compares to I think last year the average currency rate for the euro was around $1.50 for the quarter. So the spread between the current year quarter and last year's quarter is a little narrower than it obviously was in Q1 and Q2 this year. So we're not expecting the benefit of the same level of expense translation as we saw in Q2.

You are correct in that we do and expect our gross margins to hold up on a sequential basis. But as far as the operating expenses, we're not going to get the same type of benefit we got from currency in the first half of the year. Notwithstanding that we're still obviously maintaining -- managing our expense base to lower levels and we're going to try and hit targets that we achieved last year without any impact.

Yes, we're going to stay very, very aggressive about managing our expenses. As we've said, anything that doesn't have a fixed run rate attached to it, we're watching that on a daily basis trying to figure out and continue to move forward in our expense savings.

Okay. So for the expense savings the $16 million that you guys have talked about previously, should we expect excluding the translation a maybe $2 million to $3 million decline in SG&A dollars per quarter in the back half, is that a rough estimate?

I think if you recall, Anna, the $16 million specifically related to the annualized savings from the reduction in work force and other compensation adjustments we made in the first quarter; we've always said we're going to continue to manage anything that doesn't have a run rate attached to it, hopefully to a lower level than prior year given the current sales trends.

So that's kind of our position right now. We should see an additional $3 million to $4 million in savings on compensation alone for the third and fourth quarter of this year and we're going to continue to manage other experiences -- other expenses that are controllable to hopefully lower levels. But as Mike mentioned, obviously with the retail store base continuing to increase we've got run rates on rents and depreciation, etc., that we really can't impact.

Okay, got you. And just sticking to currency, looking at the other income bucket, you guys had a bigger benefit in the second quarter. So should we now expect an operating expense in the third quarter and I guess the fourth quarter also based on your forward contracts given the euro now at $1.41, $1.42?

Well as you know, Anna, that's a very dynamic situation and no one can peg the currency rate at the time of settlement of those US dollar denominated payables, nor can we peg the currency rate at the end of the quarter when we do the mark to market analysis.

What I would say is that if you look at our euro contracts for the balance of this year they are currently slightly below the prevailing rate of the euro against the US dollar. So from that we would obviously expect to record some minor other expense in that other income and expense category and we would have to mark down those payables to a lower contract rate than the prevailing rate.

Okay, got you. That makes sense. And also just a follow-up on the fourth-quarter guidance; it looks like you guys are not expecting a lot of improvement in sales ex-currency. So the operating margin improvement -- is that mostly a reflection of a currency headwind that you're lapping from last year and also retail becoming a bigger piece?

There are a lot of moving parts in Q4, as you know. Operating profitability should be impacted favorably by a greater mix of retail in a quarter where we make a lot of money historically in retail due to the seasonality of the sales.

As it relates to the overall earnings for Q4, you have to remember that we did have a very low effective tax rate last year. We also had impairment charges that totaled about $0.09 a share. And while we do expect that the current prevailing rates to have some benefits from currency in the fourth quarter there is a lot of different moving parts to assess that against.

Also from a sales perspective, we have very clean inventory now. As you recall, we had a lot of discontinued sales in the fourth quarter last year, so there's going to be less of that this year. One thing I would say about the fourth quarter also is I know a lot of people are talking about expecting big increases in the fourth quarter, an easy comparable quarter and all that stuff.

But as we've stated all along, we're going to continue to follow the trend. And until we see a major change in the trend we're not going to step out on a limb and say, hey, we're expecting all of this big increase to happen. Hopefully the economy will be better and the comparables will be better and the fourth-quarter will be better. But we're just trying to be very prudent about how we're planning and how we're planning our inventories and our expenses and everything else against the trend.

Okay, got you. And on international wholesale, I was wondering if you could talk a little bit more on Europe? Are the mature markets, Germany, UK, getting weaker or is it the newer markets slowing or is it a combination of both. And what are you guys imbedding in your guidance for international wholesale through year end?

As you saw, Europe clearly got weaker in the second quarter from the first quarter and I think it's pretty clear they came into this recession later, as we said, and we're hearing similar things that we heard when we had the last call about the US feeling some stability.

I think things are stabilizing somewhat in Europe, the decreases were pretty much across the board; the third-party distributors mostly had the largest decreases. And I had a lot of conversation with my management team there over the past week or so and what they feel like is that the distributors were continuing to de-stock their inventories. And as it took us to quarters to get our inventories back in shape perhaps that is what it took them as well. But now our inventory is in great shape, their inventories are in much better shape as well.

Going into the third quarter they feel much better about the third-party distribution business in Europe. And our own countries, our own subsidiaries, while we don't expect to see any great movement forward in terms of sales there, we do feel like it's more stable than it was during the second quarter.

If you look at Asia, just to cover that very quickly. Our own subsidiary companies have done pretty well in this environment over there having a 5.4% increase in the second quarter and most of the pain was the third-party distributors there. We have a couple of situations that, again, I can identify what's going on.

If you look at Korea, which has historically been our largest third-party distributor, we're going through a transition process there. As you know, we have opened our own office in Korea; we have been shifting that business over starting with the duty-free business and now going with the domestic wholesale business. And so while we're building up our company over there and adding locations, the third-party distributor, which has been our largest in Asia, is taking down their inventories.

So there's a transition going on there that affects a lot of that business. The other biggest part of the decline in third-party distribution in Asia have been countries that have had some pretty rough political times like Indonesia that's had all the bombing action and everything, that's really hurt their business there, and Thailand has been pretty tough as well.

The other third-party distribution markets I think will be coming back during the third and fourth quarter. But we'll continue to see some weakness in Korea and we'll have to see what the political situation holds for the other two countries I mentioned.

Another point on Europe is that, as you saw, our stores there are really bucking the trend in a tough environment.

Yes, that's great.

And we have -- we're -- obviously during this somewhat disruptive time period we've been very aggressive there building stores, they're doing very well relative to the environment, great comps, great performance, higher than our pro formas. We also have a significant number there. At the end of the year we're going to have over 100 stores.

And just to give you an indication, we are year to date running 85% increase in Europe in retail sales. So during this tough time we've put something over there that we think is going to be a game changer for the Company.

Okay, that's great. Okay, that's it for me. Thanks so much, guys, and good luck for the back half.

(Operator Instructions). Neely Tamminga, Piper Jaffray.

Great, just want to ask you guys a couple follow-up questions here. On the inventory, totally clean, very good and I know you guys have short lead times. But could you just walk us through the calendar in terms of how quickly you can flow product back into domestic as well as OUS? Do you see an uptick in trend? And then just related to that, what would you expect inventory, based on what you know today, to be at the end of Q3 and then at the end of Q4?

Well, let me answer the question first about the end of Q3. We expect to see the continued good management of our inventory. I would anticipate it would be down somewhere in the mid-teen level relative to last year. As you know, we have limited obsolescence so we can do that fairly inexpensively in terms of reduction, although the inventory at this point is really very clean.

On your question of lead times, that's something we have continued to challenge, and I would say with some success because of the difficulty of the worldwide economic situation. As a general rule -- and I can only give you a general rule because, as you know, we make a lot of different types, different categories of product with significantly differing lead times.

Probably the lowest would be costume jewelry which would run somewhere in the eight-week time period. But on average I'd say the number would hit somewhere around 90 days. We have been able to challenge that in some instances, but one of the things we've been doing in our reduced inventory has given us the ability to do is look ahead and predict as best we can based on current selling key items and key categories.

And we've taken a very, very strong position on what we believe will be the big ideas for third and fourth quarter. So we've taken advantage of the reduction in inventory to position ourselves in what we believe are going to be the big, important ideas for third and fourth quarter.

The other thing we've improved on quite a bit just in general is speed to market. Because of our retail position around the world and webs also we're able to do a lot of testing in our stores of a lot of new ideas and get them back into the wholesale market globally a lot quicker. And that's partly what we're seeing right now.

We've identified in handbags and watches and almost every category items that we tested in our stores in this market that did very well and we're showing those at wholesale and those will be in the wholesale market in the next several months. We think that that's going to give us an added benefit in addition to the short lead times.

You know, Mark gave you an average lead time of 90 days which is pretty much right on target. But on some of these items that we've already tested and already manufactured for reorders sometimes we can get as short as 60 days on some of our key categories like watches as well. So we can affect business still for the remainder of this year.

Okay, that's helpful. And then just a few words maybe from you guys on some of the new product launches you've had. I don't think I heard you guys touch on footwear. Just curious how that has gone for you and what maybe the prospects are for the balance of the test? Thanks.

I think that would divide itself into two answers. As you know, men's was our first footwear launch that launched in the spring season in a very limited number of doors as is our typical operating strategy. We had good performance on that, but we also had lessons learned in how to improve product. And I believe you will continue to see that product improvement in fall of this year, we're beginning to see sampling coming in on spring next year, I think the stuff looks even better.

Women's, as you know, launched within the last couple of weeks once again in a very limited number of wholesale doors and in our own catalog and online. I would say to you the reception to the women's line has been particularly strong at retail. We have just come back from a market where we were showing spring 2010 and had an equally strong result there in terms of reaction to the line. So I would expect for spring 2010, particularly in women's, you'll see a fairly significant door rollout.

Great, thank you and good luck, you guys.

Robyn Murchison, SunTrust.

Hey, guys, this is Brian in for Robyn. Just a follow-up question on the euro/US dollar. What was the hedge of for the second quarter? I think previously you guys had said $1.25 for the year?

Well, when we gave guidance back in May we said at prevailing rates at this time. I think the euro was trading around $1.35, $1.36.

Okay. So then for the second quarter it was -- the hit was what, $1.41?

The average?

Yes.

Probably slightly below that. [I actually] have that with me here.

Well no, I know the Euro; I think the average was like $1.40, $1.41. And what was the hedge that you guys had against that?

On euro-based contracts around $1.40.

Okay. And then what can we expect for the third and fourth quarter?

Well, we were primarily hedged to the level of the exposure for the balance of the year at about that average $1.40 rate on the euro.

Okay. All right, very good. And then just overall can you give us any commentary on what you're seeing domestic and internationally? I know that you guys -- I guess the de-stocking effort is continuing. What can we expect in the second half?

Well, I would say that -- and I'll take the domestic piece of it -- really feels like the de-stocking effort domestically, the retail partners have gotten their inventory levels where they want to be. And I think we will continue over the next couple of quarters to see possible very, very slight downward adjustments. But for the most part we are going to see two things happen -- a flow corresponding to their sales performance and then the traditional build for holiday during third quarter.

I think we even saw in the second quarter some betterment, although down for instance in the accessories, it was down 2.6% which was much improved from the first quarter. And I think the situation is the de-stocking is pretty much over. But now they're buying according to their sales trends and their sales continue to comp down month after month. So until that stops that's the way they're going to continue to buy.

Internationally I think the de-stocking was certainly still going on in the second quarter because they're lagging the US, as we mentioned. But as I said, I think we're starting to see some stability there in the European markets and even in the European distribution markets some stability with a little bit more weakness still in the Asia distribution markets because of the reasons I mentioned earlier.

I would also add from a historical perspective if you look at what we're comping up against in Q3 last year, we had almost an 8% increase in our domestic wholesale business in Q3 last year, so the comp gets a little bit tougher versus the 1.5% increase we had in Q2 last year. A lot of that is surrounding the fact that Michael Kors was adding doors, our 54 handbag category was performing very well and growing doors, Fossil jewelry, cold weather were all adding doors and were anniversarying some of that activity.

And even on the international wholesale side the comps still remained tough in Q3 and don't get any easier until Q4. And anniversarying the DKNY launch that went on during Q3 in that market last year is something we have to get beyond in Q3.

Okay, excellent. And then what is embedded in your overall sales guidance direct-to-consumer comps? Can you give that?

Our expectations for Q3 and Q4 are consistent with the performance we achieved in the first half of the year.

Okay, excellent. Thank you guys very much and good luck.

(Operator Instructions). There appear to be no further questions. Please continue with any other points you wish to raise.

Thanks, operator. 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 Time tomorrow by calling 303-590-3030 or 1-800-406-7325 and entering reservation number 411-8249. (Operator Instructions).

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

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

This concludes the Fossil Q2 2009 earnings conference call. Thank you for participating. You may now disconnect.