Fossil Group Inc (FOSL) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by, and welcome to the Fossil, Inc. third-quarter earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Tuesday, November 10, 2009. I would now like to turn the conference over to our host, Miss Allison Malkin of ICR. Go ahead, ma'am.

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 CEO; 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 report third-quarter results that exceeded our expectations with $381 million in net sales, generating earnings per share of $0.52, (inaudible) ahead of the guidance range of $0.38 to $0.42 per share. During the quarter retailers continued their conservative approach to inventory investment, but we experienced improving sales trends within certain categories and markets and through our own stores.

Revenue growth in our direct-to-consumer channel increased 22%, growing to 24% of net sales in comparison to 18% last year. Growth in retail locations and global comp store sales of 6.4% were the drivers of this result. Our growth in Europe continued at a rapid pace, reporting a comp increase of 10.7%. We are also pleased to see strong double-digit growth in our wholesale leather business in Europe which continues to gain exposure through our growing network of Fossil stores.

Europe and a number of our international distributor markets continue to lag the US in an economic recovery resulting in an overall negative effect on sales in those regions. That weakness resulted in a decline in our global watch sales of 5% in constant currency. Domestically however we are beginning to see improvement with a 2.7% increase in watch sales following a drop of 3.5% in the second quarter.

Interestingly, the consumer is chasing fashion and is willing to pay higher prices for it. This trend is notable in several areas, including the Michele watch brand that experienced strong double-digit growth and in our licensed watch brand Michael, by Michael Kors and in our Fossil brand where our top sellers are in the $85 fashion forward styles versus our entry price point levels of $55.

Fortunately, we spotted this trend early and have a lot of this type of product flowing to the stores right now. We feel our assortments at retail are in very good shape and are poised for a good holiday season. Keep in mind that 45% of the watch sales for the year will happen in the next 10 weeks.

As previously mentioned, our leather offerings did extremely well internationally. Domestically our leather sales were up double digits in our own stores but were down double digits at wholesale as retailers ordered very conservatively. We believe the 17% decline in accessory shipments during the third quarter represents a rather inconsistent order pattern that we have experienced during the first nine months of the year as our department store customers were trying to bring inventories in line with selling trends. We believe the 9.6% decline year to date in our wholesale shipments better represents the performance of this business.

We are also up against door growth from last year in both jewelry and cold weather gear that makes this comparison more difficult. Going forward, we feel confident that as some of the newness in accessories that has been performing well in our stores begins to penetrate the wholesale accounts, we will see the sales momentum pick up again.

As we have mentioned on previous calls, 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 significant opportunity for the Company.

We are focused on driving this branded message in a big way for holiday. We are expanding our catalog distribution, increasing our investment in online search and advertising and continuing to open new Fossil stores. We would encourage you to see the Fossil brand positioning by looking at our most recent catalog which can be viewed on Fossil.com. This catalog dropped last week and has been driving substantial sales increases.

All in all we feel we're in a very strong position for the future. We have seen during the past year the entire company get more focused and more efficient. Our business model is diversified across multiple distribution channels, geographies and product categories and is shown to be very resilient. Our design and sourcing teams are focused more than ever on innovation, execution and developing our great brands worldwide.

There are a lot of exciting things going on in the Company, even in this relatively tough environment. With several significant drivers of near and long-term growth, a strong balance sheet and increased efficiencies we are confident in our ability to achieve our 2009 goals and to deliver even greater rates of profitability and growth as the economy improves. Now I'll turn it over to Mike for more details.

Thanks, Kosta. Good morning, everybody. I'll start with a review of our domestic business where we saw sales decline 6.9% for the quarter with watches up 2.7% and non-watch categories down 17.1%. But I would like to reiterate, as Kosta mentioned, we feel that somewhat inconsistent order patterns contributed to this decline and that the high single-digit year-to-date decline is more representative of this business. So let's kick this off with some additional color on our domestic watch business.

During our last call we indicated that while we were seeing stability return to the retail marketplace there really was no catalyst to encourage retailers to increase their purchases prior to when the product was needed ahead of holiday.

While this continued in the third quarter, we did see an improved and positive trend in our domestic watch shipments versus the second quarter. More encouraging is that retail selling has improved from the prior quarter, although it was still down to last year. However, we're seeing some great comp performances for specific brands.

In fact, several of our brands reported robust growth numbers domestically during Q3. Michael Kors and adidas experienced double-digit increases in wholesale shipments as both brands continue to add new doors. Michael Kors expanded to all doors in Macy's in October and adidas is launching a substantial number of new doors during November. The Michael Kors business was also up significantly on a comp basis.

Our Fossil wholesale watch shipments continued to decline in the third quarter which we believe partially reflects retailers' continued preference to manage their inventory conservatively. In addition, there appears to be more of a shift from core to fashion products within the watch category, which has a bigger effect on the more mature brands.

We've had great selling on the new Fossil styles introduced in October, and we believe the trend in Fossil watches will improve during the fourth quarter. Although there still seem to be some reluctance by some of our key customers to really start a major inventory build, we have landed additional goods in many of our best-selling key styles so that we can still deliver to the selling floor for holiday.

Within the mass-market channel we continue to achieve solid growth with wholesale shipments increasing by 7.5%. We believe this is somewhat indicative of the current trend of trade down by the consumer, continued great product development as well as the result of great support provided by our largest customer in the channel.

Michele watches, our proprietary fashion luxury brand, performed very well in the quarter with wholesale shipments up 18.4% and remains the best selling affordable luxury brand within its distribution channel. It continues to outperform both the store and category performance of the luxury channel. Michele's continued great styling and comparative value in contrast to many other luxury offerings out there is driving great consumer support of the brand.

For our domestic accessory business wholesale shipments declined 17.1% during the third quarter reflecting a tougher comparison from last year when we were up 9% comp in Q3. It also included several product introductions and door expansions related to our accessory jewelry, Fossil cold weather gear and Fossil Fifty*Four handbags.

In addition, we selectively deemphasized our holiday gift program this year which impacted sales for the category by approximately $1.8 million in comparison to Q3 of last year. However, based upon the selling results we're seeing for both men's and women's leather products in our own stores, we're very encouraged about the opportunity Q4 provides. Our comps are a little easier for the holiday quarter, and we don't expect that we'll experience the same level of promotional activity as in Q4 last year that increased our markdown contributions and thus lowered our sales.

To update you on footwear during the third quarter, we launched women's footwear in approximately 100 doors, and while the results are early, the response has been positive. In addition, we continue to react and build on our men's footwear line launched back in the spring. We continue to be encouraged by selling results on the Web as well for our shoe category where we're driving awareness for this product through our Fossil catalog and search terms. The business is in its infancy, but we continue to see footwear as a solid long-term growth opportunity for the Company.

Now I'll move on to our international wholesale business segment. As always, in order to keep things simple and apples to apples, all of my references to sales increases and decreases will be based upon constant dollars. Our international sales were negatively impacted by tough economic conditions and difficult comparisons to last year when we experienced constant dollar sales growth of double-digit 12.1% in Q3 last year.

In total our international wholesale shipments decreased by 14.5% during the third quarter, with shipments to third-party distributors and our Spain joint venture down $19.4 million or 38.7% compared to last year. In Europe our wholesale shipments declined by 14.3%, 11.1% excluding the third-party distribution business. These results are similar to the trend we saw in the second quarter of this year.

As previously mentioned, Europe came into this tough economic period after the United States and as such we would expect the region to lag on the exit as well. That said, we do see opportunity to slightly improve the trend in our fourth-quarter shipments. We're well prepared to take advantage of further strengthening in the trend and we'll also remain focused on gaining more market share.

From a product perspective we saw growth in watch sales from Burberry, Marc by Marc Jacobs and Michael Kors, but these gains were more than offset by declines in our much larger Fossil, DKNY, Emporio Armani and Diesel watch businesses. Total European-based jewelry sales declined by 23.9% as most of our distribution for this category is in our more penetrated markets. Additionally, we're comping the rollout of DKNY jewelry in Q3 last year which generated $2.3 million in sales.

We are 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. Notwithstanding the current environment, we continue to foresee the jewelry category as one of our strongest growth opportunities globally going forward.

Leather goods shipments in Europe increased 34.6% for the quarter with fantastic sales growth reported in Germany, the United Kingdom and Italy. This is off of a fairly small base as we're just beginning to penetrate this category in many markets. However, the awareness for this category is strong as a result of our continued retail store growth within the region, as well as the success of these categories within those stores.

We're seeing some great opportunities based on our great styling, quality and value. We're also finding limited competition relative to the materials and price points we offer. During the quarter we experienced strong double-digit growth in both women's and men's leather goods, a trend we do expect to continue.

Other international wholesale sales decreased by 14.8%, primarily the result of decreased shipments to our third-party distribution partners and to our Spain joint venture. We were also up against the difficult comparison to last year where we experienced a 20.1% increase from third-quarter shipments.

However, wholesale shipments, excluding third-party distributors from our Asia-Pac subsidiaries, actually increased by 15.5%, driven by expansion into the newer markets as well as solid contributions from newer businesses, including leather goods, Michael Kors and Marc by Marc Jacobs watches.

The Asia market is our largest market for concessions, and we continue to aggressively add to this base which is increasing the real estate we occupy in our customer stores and growing our market share. This is also benefiting our margin performance as we gain the full value of the retail sale.

As Kosta mentioned earlier, our worldwide direct-to-consumer segment delivered a solid performance in third quarter. This was the result of a 21.8% increase in the average number of company-owned stores open during the third quarter, plus constant dollar comp store sales gains of 6.4% globally and a 7% increase in e-commerce sales.

Our growth engine in this segment, which is the Fossil accessories store concept, delivered global comp increases of 2% in 144 comp stores. Our European accessory stores continued their very strong trend, delivering a 9.5% comp increase, and this remains our main target market for new store growth in the near term.

We experienced a 3% comp decline in US accessory stores during Q3, which represented a sequential improvement from Q2. In addition, given the environment and the fact that we have a full price strategy, our results compare favorably to the performance of other specialty retailers and we have seen this trend improve going into the fourth quarter.

In the US our men's and women's leather product categories continued to drive the comp performance and while we've experienced an improvement from the first half of the year, tourist locations are still underperforming relative to the total comp base. In the European stores all categories contributed to the strong sales trend.

Our outlet stores also continue to post great results, delivering an 8.4% comparable store sales increase in the third quarter. As you know, our outlet stores are a profitable liquidation vehicle for our discontinued inventory and are instrumental to our overall inventory strategy. As we've improved our global inventory position, we've also been able to reduce the pressure on pricing in the outlets, resulting in four wall operating margins coming in at 24.5% for the third quarter.

Our eCommerce business continues to show strong growth potential as well. We just completed an upgrade to the site in the last few weeks and we're encouraged by the results we're experiencing, including a significant increase in visitors and higher conversion rates. If you have been to the site lately you'll notice that we now have products on model, a vintage campaign, and we've added a lot of really cool interactive parts and videos. We've also initiated implementation of our social network plan so you can now find Fossil on Facebook.

As for the catalog portion of our direct-to-consumer business, we are expanding distribution for holiday and increasing our investment in search terms. We believe our holiday catalog that hit just last week is the best we've seen to date and recent selling results in our stores and on the Web are supporting this. We encourage you to take a look at the catalog if you haven't yet seen it.

Globally we ended Q3 of this year with 342 stores; this includes 208 full price accessory stores with 117 or 56% of them located outside the United States and 88 outlet locations, including 14 outside the United States. Additionally, we ended the quarter with 33 apparel stores and 13 multibrand stores. This compares to 288 stores in the third quarter of last year, including 156 full price accessory stores, 78 of which were located outside the United States and 81 outlet locations including eight outside the US, plus 33 apparel stores and 18 multibrand stores.

During Q3 we opened 18 new stores and we closed five existing locations. That would be three outlets and two multibrand watch stores. Through Q3 we have opened 29 new stores, 19 full price accessories and 10 of those outlets including seven outside the United States and three new Watch Station outlet concepts in the United States.

We closed 11 stores during the first three quarters of 2009. We anticipate opening another 13 stores in Q4, bringing total new store openings to 42 for 2009. We plan to close one additional store in the fourth quarter. Now I'll turn the call over to Mike Kovar.

Thanks, Mike. I'll start off today by summarizing our third-quarter results from this morning's press release. Net sales decreased 6.9% to $381.4 million compared to $409.8 million. Gross profit fell 6% to $210.7 million compared to $224.2 million. However, the gross profit margin increased to 55.3% compared to 54.7%. Operating income decreased 10% to $57.4 million or 15% of net sales compared to $63.7 million or 15.6% of net sales. Net income declined 3.3% to $35.3 million compared to $36.5 million and diluted earnings per-share decreased 3.7% to $0.52 on 67.4 million shares outstanding compared to $0.54 on 68 million shares.

Combining the double-digit growth in our direct-to-consumer segment with reduced wholesale shipments during the quarter, we experienced a significant shift of 550 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 third quarter was as follows -- 18% from domestic wholesale watch sales; 13% from domestic wholesale businesses including leather goods, sunglasses, footwear; 24% from worldwide direct-to-consumer businesses; 29% from European wholesale sales; and 16% from wholesale sales and other international locations.

The 6.9% decline in reported net sales for the quarter consisted of the following increases and decreases by category and geographic region -- domestic watch sales increased 2.7% to $68.6 million compared to $66.8 million in the prior year quarter. Other domestic sales decreased 17.1% to $49.4 million compared to $59.6 million in the prior year quarter.

Sales generated from European-based wholesale operations decreased 17.9% to $111.3 million compared to $135.5 million in the prior-year quarter and excluding currency that negatively impacted reported net sales by $4.9 million in this segment, European wholesale sales declined by 14.3%.

Other international sales, which consist of export sales to distributors, shipments to our Spain joint venture and sales from our Canada, Mexico and Asia Pacific wholesale operations, decreased 16.1% to $60.4 million compared to $72 million in the prior year quarter. Excluding currency that negatively impacted sales by approximately $900,000 in comparison to Q3 last year, other international wholesale sales declined by 14.8% and included a $14.6 million or 46% reduction in shipments to third-party distributors in our Spain joint venture.

Finally, sales from our worldwide direct to consumer businesses grew 20.8% to $91.7 million compared to $75.9 million in the prior year quarter. Gross profit decreased 6% to $210.7 million in comparison to $224.2 million in the prior year quarter primarily as a result of a decline in net sales partially offset by gross profit margin expansion.

Gross profit margin increased 60 basis points to 55.3% in the third quarter compared to 54.7% last year, and this increase is primarily the result of the following -- an increase in the sales mix of higher-margin direct-to-consumer segment sales; decreased levels of inventory obsolescence reserves as a result of reduced inventory levels and a healthier composition of inventory in comparison to the prior year; a decline in net sales mix of lower margin shipments to third-party distributors; and finally, a decline in the sales mix of domestic accessory categories that generate lower gross profit margins in domestic watch sales.

These increases in gross profit margin were partially offset by a stronger US dollar which impacted gross profit margin unfavorably by approximately 7 basis points -- I'm sorry, 70 basis points. On a sequential basis we expect our gross profit margins to improve by more than 100 basis points during Q4 as a result of the further weakening of the US dollar since the end of the third quarter and a continued increase in the mix of direct-to-consumer segment sales.

Third-quarter operating expenses decreased by $7.1 million to $153.4 million compared to $160.4 million in the prior-year quarter. Q3 expenses were impacted by a $1.7 million favorable reduction related to the translation of foreign based expenses as a result of the stronger US dollar in comparison to the prior year quarter. As a percentage of net sales, Q3 expenses increased to 40.2% compared to 39.2% in the prior year quarter, primarily the result of lower wholesale sales volumes.

On a constant dollar basis the decrease in operating expenses was primarily driven by approximately $14.2 million of reductions related to our wholesale business and corporate cost areas. Wholesale expense levels during the third quarter benefited from an approximate $3 million shipped and marketing expenses that we have delayed into the fourth quarter this year.

The wholesale expenses savings were partially offset by an $8.8 million increase in our direct-to-consumer segment as a result of an additional net 54 new stores opened since the third quarter of 2008. We expect fourth-quarter operating expenses will be at or slightly below last year's levels on a constant dollar basis.

Operating income decreased to 15% of net sales in Q3 compared to 15.6% of net sales during last year's third quarter as a result of a decline in net sales and higher operating expenses as a percentage of net sales. This decline was partially offset by increased gross profit margin.

In comparison to the prior year quarter, third-quarter operating income was negatively impacted by approximately $4.8 million as a result of the translation of foreign-based sales and expenses into US dollars. Other income and expense decreased favorably by approximately $800,000 during the third quarter.

This favorable variance was principally due to lower mark to market foreign currency transaction losses in comparison to the prior year quarter. These losses are primarily related to forward contract hedges settled during the quarter at rates below the prevailing currency rates. We expect losses to continue into the fourth quarter as the US dollar has continued to deteriorate since the end of Q3.

Additionally, other income and expense was unfavorably impacted by a decrease in interest income as a result of reduced yields earned on invested cash balances and compared to the prior year quarter. Income tax expense for the third quarter was $18.8 million resulting in an effective tax rate of 34.8% compared to an effective tax rate of 38.8% in the prior year quarter.

Q3's effective tax rate was favorably impacted by an approximate $900,000 reduction in our federal income tax liability resulting from reconciling our prior year tax provision to the 2008 return that we filed in September. We estimate our effective tax rate for the fourth quarter will approximate 37% excluding any discrete events.

Third-quarter net income decreased by 3.3% at $35.3 million or $0.52 per diluted share compared to $0.54 in the prior-year quarter. In comparison to the prior year quarter, Q3 diluted earnings-per-share included an unfavorable $0.03 per diluted share impact related to the stronger US dollar. This $0.03 impact from currency is comprised of a negative $0.04 related to the translation impact of foreign-based sales and expenses into US dollars included in operating income, partially offset by $0.01 of reduced transaction losses included in other income and expense.

Now turning to our balance sheet -- we ended the third quarter with cash, cash equivalents and securities available for sale totaling $306.7 million compared to $125.2 million at the end of the prior year quarter, and we have $8.3 million in total debt. During the first nine months of 2009 we generated $126 million in cash flow.

Inventory at quarter end was $279.6 million representing a decrease of 15.7% from the prior-year third-quarter balance of $331.6 million. We expect year end inventory balances to decreased by approximately 12% to 15% in comparison to fiscal 2008 ending balances.

Accounts receivable decreased by 19.5% to $184.5 million as compared to $229.3 million at the end of the prior year quarter. This decrease is principally due to a reduction in wholesale shipments during the third quarter versus last year's Q3.

Our days sales outstanding for our wholesale segment was 56 days which decreased from 62 days in the prior year quarter and this decrease is principally due to a reduction in the sales mix of international-based wholesale sales including a reduction in sales to third-party distributors that generally result in longer collection cycles than those that we experience in the US.

Through the first nine months of fiscal 2009 we've had capital expenditures totaling $28 million and are expecting fiscal year 2009 capital expenditures of just over $40 million. The majority of our fiscal 2009 capital expenditures are related to new store openings and to the addition of a global SAP point of sale system for the stores. Depreciation and amortization expense for the first nine months of fiscal 2009 totaled $30 million, and we estimate full-year 2009 depreciation and amortization of just over $40 million.

As it release to guidance for the fourth quarter of fiscal 2009, as we've discussed in the past, as we continue to grow our retail store base and eCommerce businesses, sales from our direct-to-consumer segment increased as a percentage of the total sales mix, generally benefiting profitability in the fourth quarter at the expense of the first and second quarter when, due to seasonality, it is more difficult to leverage direct-to-consumer expenses against direct-to-consumer sales.

For the fourth quarter of 2009 we expect reported net sales to increase at a range of 7% and 9% with constant dollar sales increasing in a range of 2% to 4%. Fourth quarter 2009 diluted earnings per share are expected to be in a range of $0.82 to $0.86 as compared to our previous guidance for the fourth quarter diluted earnings per share in the range of $0.74 to $0.80 which we provided during our second-quarter call in August. Fourth-quarter 2008 earnings per share was $0.69.

At the prevailing foreign currency rates we expect our fourth-quarter 2009 diluted earnings per share range will be favorably impacted by approximately $0.17 per share as a result of the weaker US dollar in comparison to the prior-year fourth quarter. Also, it should be noted that our 2008 fourth-quarter diluted earnings per share included a benefit of approximately $0.20 related to a lower effective tax rate and an unfavorable charge of approximately $0.11 related to trade name and store impairment.

Accordingly, our fourth-quarter 2009 EPS range, excluding currency benefits, reflects an increase of 8% to 15% against our adjusted 2008 fourth-quarter earnings-per-share. Our forward guidance is based upon the current prevailing rate of the US dollar compared to other foreign currencies for countries in which we operate. And now I'd like to turn the call over to the operator to begin the Q&A portion.

(Operator Instructions). Neely Tamminga, Piper Jaffray.

Good morning, and congrats. It's a fabulous outcome on this quarter. Mike and Mike, if you could talk a little bit about your outlook for outlet in terms of inventory levels being down and it is a liquidation challenge. Do you feel pretty good about the inventory levels that you have to sustain the trends out of outlet? So if you could speak a little bit about that.

And then, looking at some of your mass channels versus your [perceived] channels, are you seeing any sort of relevant changes occurring at either or preferences for one channel -- one versus the other or improvement out of one of those channels? That would be helpful.

And then for Kosta, if you're on, it would be great to hear from your perspective this trend that you guys have really just nailed for holiday, how that may translate into spring business or is this kind of a hit it for holiday and it's over? Just kind of wondering from your bigger picture perspective on the industry how these trends will translate. Thanks.

Neely, I'll take the first question as it release to the outlet margins. I'll pass the second question on to Mike and then Kosta can answer the last question. As we look at our outlet opportunity in the fourth quarter, you have to remember last year we were pushing a lot of product through our outlets in the fourth quarter and also pushing a lot of product through alternative channels at very low margins.

We're in a much better inventory position going into the fourth quarter than we were not this time last year and, as we talked about, was reflected in an improvement in our outlet margins in Q3 which we expect to continue to improve on a sequential basis into Q4. We're in the enviable position of adding a little bit of made for product in the stores to round out certain assortments because we are in such great shape on the wholesale side of the inventory.

But again, this is a minimal percentage of the goods that will be available in the store. And that channel continues to serve as our channel for discontinuing our inventories that come out of our wholesale businesses. But all in all, we'll see a significant increase in our outlet margin performance in comparison to Q4 last year, and that has obviously been built into the guidance.

As far as the outlet stores go, we also have a number of things working there. That business continues to be good as the value shoppers out there. One of the things we're doing is, as you notice, we have so far this year I think opened seven outlet stores outside of the United States. So we have outlet operations that we're building around the world including Japan, Australia, Hong Kong, in Asia and in Europe.

So our strategy really is to build a global outlet store operation that will enable us not to have to build too many in the United States because, as you know, the more you build in the United States, it could have an impact on the brand.

In the United States there are a couple things we're doing. One is that we're going to be opening some larger format outlet stores in premium centers. These could be five, six or larger in thousands of square feet that will have our entire assortment, including a shoe department and an apparel area. So they're more branded, tourist driven locations. But we are going to be adding additional square footage they are in the United States.

Additionally, we have this year opened already five Watch Station outlets in premium centers and they are doing extremely well. And this was an effort really to separate some of the other branded product that's in our Fossil outlets and put it in Watch Stations instead of our Fossil outlets. It's a better way of printing these environments and these stores are doing very well, so we're going to be opening more of them.

That will enable us to long-term liquidate 00 as we grow our international business we'll be able to liquidate obsolete product other than Fossil brands through these Watch Station outlets. So we are very interested in long-term prospects of the outlets.

And the question about the new styling.

As far as -- you asked a question about mass-market versus the other channels. We are seeing good response from the mass market, but we don't really see customers trading down as much as you might think. Part of what we said in the prepared remarks is that the customer is responding to things they don't already have -- new ideas, new materials, new techniques, innovation. And sometimes those prices are higher rather than lower.

So there are a number of things going on. There's innovation in the mass channel and new materials there as well, so we're driving sales there, too. But one of the things that happened after the economy got tough last year is we decided at that point to spend more time on new materials, innovation and our product lines are better than they've ever been in terms of new ideas going into the marketplace right now.

Some of those things we tested in the last several months did very well, we got big quantities rolling during the fourth quarter. Some of these are kind of structural changes in the watch business and we've seen response to new materials other than traditional materials such as traditional stainless steel, traditional leather watches. I think the customer is trying to buy something out there that they don't already own, and we think that bodes well not just for fourth quarter but for next year and onward as well.

I think, Neely -- this is Mike, too -- that what I would add to that is we just finished market week at the beginning of this month, and to further answer your question, the great stuff that we tested that we've got rolling for holiday is not just for holiday and over.

It really fits in well with where we're going with the spring lines, and that's probably the most exciting part of it because we are continuing to build upon good things and our customers were very satisfied with the product offerings that they saw during market week. So we think that we've got a great head start moving into spring from holiday.

Great. Thanks, you guys, and good luck.

Barbara Wyckoff, Jessup and Lamont.

Hi, everyone. Good quarter. Can you talk a little bit about the multi-branded stores outside of the Watch Station outlets that you talked about? I know you closed a few. What's going on with those? And then I didn't hear to talk about any trends in travel retail. Is this an opportunity for growing the international business? And then could you also talk about what's going on in China?

I'll start off with the multibrand stores. We only have a handful of multibrand stores; I think the count was 18 that we talked about, and we did close a few of those in the United States. We still think that there is a great opportunity. Kosta mentioned the Watch Station outlet stores that we opened which are multibrand. They have done extremely well opening up.

We're also opening some Watch Station stores -- there's one opening in Singapore pretty soon, and we're pretty excited about that. It's a great location. I think that's going to tell us a lot about how that business is going to move forward. And some of the multibrand stores that we have throughout Asia, there's a handful and then there's another handful in Europe, have different brandings on them. They're called different names because they were started at different times and we didn't really have a global strategy.

Now that we have the Watch Station strategy we're looking at how we can convert these multibrand stores into a consistent format and really work to drive that business. We think it's still an opportunity for the future for a potential big rollout. Right now we're focusing on the biggest ideas first, but that is something that we'll get back to.

On the China situation, what's going on is we're actually putting a lot of focus, not only on China, but on a lot of the markets that -- what we call the emerging markets and a lot of those are in Asia. When you look at China, India, Korea, those are all markets that we've entered within the last couple of years and we feel like there's a big opportunity there.

I was actually in Hong Kong with Mark Quick a month ago, and we were exploring opportunities in China on the sourcing side, as well as having discussions about how we could move further and faster in rolling out our distribution businesses in those markets. I'm leaving again on Saturday to go back to have similar discussions. So that is an area we're focused on and I would say from a strategic planning standpoint growing these emerging geographic markets is a big part of our strategy moving forward, amongst other things.

And then travel retail?

Travel retail has been difficult during a lot of the tough economic times. I would say that we're starting to see some improvement there. One of our largest customers was actually in Dallas working with us for two days, and then they came to New York market and worked with us another two days.

And they carry some of our best brands like Burberry and Emporio Armani. They've launched Diesel in there recently. So I would say that there's an improving trend in the travel retail business right now. It was tough during the toughest times, but as things improve, the travel retail is coming back as well.

Okay. Thank you so much.

[Randy Connick], Jefferies.

I guess a question for Mike and Mike. Can you just give us -- you talked a little bit about the destocking cycle and so forth. Can you just give us a little more color on how you're seeing the destocking cycle across the different channels, i.e. mass versus department stores by geography, US versus international, and then by product category -- just give us some more flavor of the high fashion versus low fashion watch products and the non-watch products? Just trying to get a sense of where you guys think it is right now and how do we progress into spring 2010.

I would say to you largely we have experienced all the destocking we're expecting. I think retailers have managed to get their inventory in line with their sales expectation and are beginning to be cautiously optimistic about fourth-quarter results. As you know and probably have heard within the last 60 days, probably for the last or six weeks have been really fairly strong performance at retail or improved performance at retail. So as a result, we think they are getting more cautiously optimistic about the need to carry inventory and, in fact, we've seen that as a result as we've begun our fourth quarter.

One thing I would add to that, Randy, is with the destocking that took place, one of the steps that we took as a company and I briefly mentioned this in the prepared remarks, is we got behind some of our very best-selling key styles and we've got them on hand and ready to be able to deliver those for holiday.

So while our customers have pretty much finished destocking, as Mark Quick said, their inventories are pretty low after the results of their destocking. And we're prepared to step in and really deliver some of the best-selling styles.

Kosta mentioned the fact that what's really happening right now in the marketplace is the consumer is willing to buy if you give them a great reason to buy and it's not all price driven. We have an opening price point in Fossil that starts at $55, but our best selling style is $85. And by the way, it happens to be the best-selling style we've ever had. I mean, it is incredible to see the consumers moving towards new fashion, new materials, new looks, new technologies.

And it's very exciting and we're starting to see a lot of our brands really moving quickly and growing very, very fast with big door rollouts. We talked about Michael Kors and how strong that business is. adidas has had just a massive rollout of doors over the past couple of months and still going forward into this month. And so there's just a big opportunity as this economy continues to recover for the Company and our brands.

You know, when you look at our third-quarter wholesale shipments this year, keep in mind that last year they were buying larger quantities because they had higher plans in the fourth quarter which of course they didn't make. The stores going into this year are more conservative and in watches, as I said earlier, it is 45% of the sales in the next 10 weeks. Things can happen very quickly. They're going into it with a conservative inventory plan.

We actually have in our inventories some of our best known styles so we can ship quick and we have been hearing from some of our wholesale customers that they're willing to take goods if they need them. If they get good strong sell-through's as late as December 20. So they're all prepared if there's a big season to take more goods in later.

Appreciate it. So is it fair to say -- I mean, do you think that the -- at this point when you look at the different inventory levels or you kind just think about them across the world and across channels of distribution, would it be fair to say or do you think that the US department store channel distribution is kind of very, very -- one of the lowest in terms of stocking across the different areas you sell to?

When you look at relative to last year their inventories are lower, significantly lower. So they're expecting obviously not great things, but they're also looking at potentially there could be some upside and they're willing to respond to it.

Got it. That's very helpful. Thank you.

Ronald Bookbinder, Global Hunter.

Good morning and congratulations. When you look at though global retail real estate market, do you see any reason that you would have a slowdown in growth of company-owned stores?

We have not really finalized the number of company-owned stores that we would be opening next year. This year we will open in the neighborhood of 42, 43 stores, something like that, which is pretty much right in the middle of the guidance that we gave of 40 to 50 stores.

When we look at the performance of these stores, especially the international stores and especially in Europe, the numbers are just really fantastic. When you look at the comp store performance that they're delivering, it is definitely a business that we are very satisfied with. It's a big growth strategy for us in the future over the coming years. We will be continuing to roll out new doors. How many I couldn't say right now, but we're happy with the real estate.

Especially -- you mentioned the global real estate. Some of the locations that we're able to get, especially internationally in Europe and secondarily in Asia, are just fantastic real estate locations. It's a less competitive landscape out there and retail is done on a different basis in Europe as well. It's a lot more consolidated. You have these global population areas that have 2, 3, 4 million people in them. And there's generally a major city of 1 million people in the center of that with two or three High Street shopping areas that are just packed with traffic.

And if we get traffic we can make the conversions. So right now we think that it's a big win situation for us on the global retail front and that is something that we will continue to look at our strategies ongoing and we will be opening new doors, we just haven't confirmed a number yet.

Ron, as we normally do -- this is Mike -- we usually set the expectation on the Q4 call in February for door growth. But what we are seeing, as Mike mentioned, is a great performance in these international base accessory stores that we're opening. And they're coming out of the box very strong. They're beating our pro forma targets. We've got an early mover advantage in those markets because we don't see a lot of competition from others in that space.

And I would add that if you look at -- Kosta talked about how well newness is being received. If you add that to the level of customer service we have in these stores, that's one of the reasons we're seeing such a great comp performance. Customers are coming in, finding the product they like and are having a wonderful shopping experience based upon the presentation and the people we have in the stores.

Okay, and while this past summer and I guess fall, the white ceramic type watch was a very big seller for you guys. What sort of material or style are you talking about that you're so excited about for the holiday season? What should we be looking for, and what sort of price point would it be at?

Well, there are a number of materials. If you look at Fossil and you see -- as you mentioned, those white plastic watches, there's a number of other things including silicone and other materials and treatments and some acrylics and some other plastics that are doing well. You see that also in the other brands, Michael Kors is a good example.

Basically, it's anything that is somewhat of a traditional material like stainless steel, core type watches have been downtrending. And we are very interested to see how those things sell during the fourth quarter, because when the gift buyer comes out, they might buy something more traditional. But what is driving a lot of the sales and a lot of these brands that are growing very quickly is other materials.

And as I mentioned earlier, people are looking for things that make a difference, and sometimes just buying another stainless steel watch doesn't, so they are buying a different material.

The other thing I should mention is especially for Fossil that is playing in our favor is there is a huge global trend towards vintage. And obviously, that plays to our strength because Fossil is vintage. And we are seeing this in our trend forecasting in leather goods and in watches, etc. So that really plays to our strength and we think that is a very good thing for us for the next several quarters.

Just lastly, how much was the impact of the reversal of the obsolescent reserves, and would you expect that to happen going forward?

I wouldn't say the impact was significant. As you know, we put up those reserves at the time when we feel like we have a lower cost to market issue on the inventory we own. So as that product is moved out through our outlet stores or through other channels, we would then release any reserves attached to it. It wasn't something that significant during the quarter.

What we did want to point out was on a go-forward basis, obviously with the inventory being much cleaner and much more current, that we don't have the same level of exposure as to margin risk as we saw in the fourth quarter last year.

Okay. Thank you and good luck in the fourth quarter.

(Operator Instructions). Robin Murchison, SunTrust.

Thank you very much. Good morning, guys. Could you on Michele, can you sort of talk about the price point strategy? Your third-quarter sales were really great. Just looking at the handbags, the non-watch category if you will, it looks like your AURs are down. So did you get some of the pickup from accessory business, and if so, I would assume it is from higher level of UPTs.

Let me take your question first about the non-watch piece of it. That's still a relatively small piece of the total Michele business. But as you've observed, we have reacted very strongly to average retails in both sunglasses and handbags.

We went out and launched this product pre economic difficulty, and discovered very quickly that we had reached too high on price point. So as quickly as we could, we reengineered both in the eyewear and the handbag product to get to a more what we saw as acceptable retail to do volume. That product has really just begun to hit the stores now, and we're seeing very strong performance in handbags particularly in that $400 to $600 range where before we had stretched up closer to the $1000 range.

Our price point performance change in eyewear has even been more dramatic. If you'll recall, we had product that went as high as $1,250 in eyewear. Now we see the sweet spot of that business and we're getting strong reaction at retail more in the under $200 price point. We think that's where the customer is looking for this product.

And as you know, the watch product has always had a history, even though it's a luxury product, of being value. Those price points, we feel like we had hit it correctly to begin with. We haven't seen much change there at all. Average unit retail on a diamond watch is somewhere in the $1,400-$1,500 range. And as odd as it sounds, we do consider that to be a value product in its channel of distribution, and that's one of the reasons we think Michele has the number one market share where we do business with Michele and we're continuing to get strong retail and wholesale performance.

Okay, great. Thank you. Also, could you guys address the license business? Similar to last quarter like Burberry, Marc Jacobs and Michael Kors, continue sort of on the up trend and Armani, DKNY and Diesel not quite as strong. Do you think that this is just sort of the age of the brand, the fact that those brands have been around longer and are operating off of a higher sales base?

I think there are a couple things going on there, Robin. Number one, clearly where we have less penetrated brands there's an opportunity to continue to grow your business even in a down economic cycle because you can still open new doors and get the growth that way as opposed to having to just sell more units in the same number of doors.

Emporio Armani, DKNY, Diesel, those have all been -- actually they were our first three licenses, so I wouldn't call it the age of the brands. I would just say the penetration of the brands because they have been around for quite some time.

The other thing I think that would speak to that is, as we've talked about a couple of times, people are voting for fashion and different materials in things and a lot of the core products have been weaker than the fashion products. And we do have a lot of core in brands such as Armani. So as Kosta mentioned, during holiday we may see a little bit of a reversal in people coming back to the core for gift giving. We don't know, but we're prepared either way.

We've got great offerings in the fashion area for all of our brands. We have added a lot of fashion merchandise and we still have some great core styling as well. But some of the newer brands certainly have taken off and done very, very well. A lot of that is new door openings, and a lot of it is just great product offerings. It really always comes back to the product.

You know, Robin, I would also add with a couple of the brands we're not seeing as good a performance as we historically have. We do believe there are action points we can take that will improve that performance. I would say Diesel is an example where we've really gone after a greater depth of key item strategy, focusing in on the most productive styles. We're already starting to see a positive response there in results.

In DKNY we've gone back and we've energized the fashion offering. We've really worked hard to get an improvement in there. And our early results in fourth quarter where we've shipped that product are very promising. So just because a brand is mature doesn't mean that we believe we can't get continued growth with it.

Okay, also --.

One other thing to keep in mind is that Armani is heavily penetrated in our distributor markets as well as travel retail and those are very hard-hit areas for us.

Wondering also if there's -- if you guys are seeing any kind of pickup in -- obviously you don't sell gold watches, but gold tone watches -- any pickup in demand?

I would say the one place where we're seeing probably really outside proportion of gold would be in the Michael Kors watches. I don't know that we would have seen it as a particular trend one place or the other.

I think their ad campaign is really featuring it right now.

Right.

Okay. And then also, I just wondered if you could talk about the UK versus the -- if you're seeing any differentiation in terms of the UK versus the continents business. What I had heard was that due to the valuation of the -- the greater value of the British pound versus the euro that you had a lot of folks from the continent flying over and doing a lot of their shopping in the UK where the euro goes a lot farther due to the weakened pound. Any comment there?

We're not really seeing any big difference in the UK's performance versus the rest of Europe right now. It all seems to be pretty consistent. And even when we look at our own stores, which is the best measure that we have, it's as consistent in the UK as it is with Continental Europe. So we're not seeing a big difference there.

Okay, and lastly I just want to make a comment. I want to commend you guys on your international store execution. I recently had the opportunity to visit some of the stores, and your locations, the store presentation, the service, every bit as good as -- and every bit as well executed as certainly what we find here domestically. There's great consistency in your stores, and it's evident that you guys are doing a good job.

Thanks, Robin. We appreciate that.

Ladies and gentlemen, there are no further questions at this time. I'm going to turn it back to management for any closing remarks. Go ahead please.

Thank you. Should you like 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 303-590-3030 or 1-800-406-7325 and you can enter reservation number 416-3978 followed by the pound sign. Again, those numbers are 303-590-3030 or 1-800-406-7325, reservation number 416-3978.

The 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, which we would encourage you to go have a look at other things on that site as well and you can click on investor relations on our homepage and then on webcast.

Finally, should you have any questions that did not get addressed today, feel free to call myself or Mike Barnes. Thanks again for joining us today. Our next scheduled conference call will be in February for the release of our 2009 fourth-quarter and fiscal year operating results.

Ladies and gentlemen, this does conclude the Fossil, Inc.'s third-quarter earnings conference call. You may now disconnect.