Fossil Group Inc (FOSL) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Fossil, Inc. fourth-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, February 16, 2010. I would now like to turn the conference over to 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 GAAP financial measures to GAAP will be provided as supplemental financial information to this release in 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 this 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 Prichard, our President of Retail. We will first give an overview of the quarter and then we'll welcome your questions.

Well, it was an interesting year to say the least. In some ways, it was one of our best years ever. We would like to take this opportunity to thank our more than 7,000 Fossil employees around the world for a terrific performance in a very difficult environment.

At the onset of 2009, we were focused on making the Company as efficient as possible on both expenses and inventory. At the same time, we set out to increase innovation in our product offerings and to develop new game changing product and branding ideas. It was not about price; it was about putting something different into the marketplace that would get the attention of customers. You could make the case that right now our product offerings in all brands and categories are better than they've ever been.

We also sought to increase our market share by continuing to invest in our expanding retail store base, by broadening our eCommerce and catalog initiatives, and by expanding our shop-in-shop and concession programs internationally. Our overall goal was simple -- to capitalize on opportunities while resetting our expense structure. Our record fourth-quarter results reflect the accomplishments of those efforts.

To summarize, net sales increased 8% on a constant dollar basis to a record $528 million. Our operating income increased 86% to a record $108 million. And our earnings per share grew 49% to a record $1.03 per diluted share. Our outstanding fourth-quarter results provided a noteworthy finish to what started out to be a very challenging year.

For the year, our net sales declined less than 1% on a constant dollar basis to $1.55 billion. Our operating income margin expanded by 70 basis points to 13.7%. And we delivered record net income and EPS of $139 million and $2.07 respectively.

Sales were driven by differentiation and innovation which was made possible by the advantages of our operating model and by our terrific design teams. This model allowed us to test new product on a broad scale, identify trends and react quickly to flow best-selling styles to our wholesale partners and to our direct businesses during the quarter. As a result, we increased the global sales of Fossil branded product by 9% in constant dollar terms during the fourth quarter.

Our Retail Stores proved to be the primary platform for leveraging these growth opportunities. Our direct-to-consumer channel reported a 22.7% increase in sales in Q4 with comp store sales up 12.1% globally. Our full-year stores comp was up 7.8% and included positive comps in all quarters and across the world demonstrating the strong acceptance of the Fossil brand and our product offerings.

Terrific product and branding combined with a great customer experience inside our stores drove the results. Our stores, website and catalog are spreading the Fossil brand message in a very powerful way and it is resonating with customers around the world. To see the most current view of the brand, we would encourage you to go to the Fossil.com homepage (technical difficulty) and click on Fossil Lifestyle to see our recent catalog, look books and more information on Fossil.

The brand continues to be a huge, long-term global opportunity for the Company as it develops even further as a lifestyle brand. In addition to new stores, we increased the distribution of our catalogs and our direct mail pieces and doubled our span through search engines during the quarter. This drove brand awareness and sales, not only in our direct channels, but in our wholesale channel as well.

In addition to the growth in our direct business, we achieved robust growth in our US and other international wholesale segments as well. It is also noteworthy that our record performance was achieved in a difficult economic environment and at a time when our company is not yet firing on all cylinders. For example, our European performance was below other geographies as we had expected.

On the balance sheet, the Company grew even stronger. During 2009, cash balances increased $235 million to $413 million and inventories remained at healthy levels, down 16% to last year. Our strong financial position will allow us to continue investing in our growth initiatives while also capitalizing on opportunities to leverage our global distribution platform.

As we execute our 2010 plan, we realize that the economies around the world are still uncertain and our guidance is consistent with that view. We do feel, however, that we are in a great position in terms of our brands, our innovative product, our business model and our balance sheet and we intend to aggressively use these advantages to continue our positive momentum. Now I'd like to turn the call over to Mike Barnes.

Thanks, Kosta. Good morning, everybody. I'll start with a review of our domestic business where we saw sales increase by 9.9% for the quarter with watches up 12.1% and our non-watch categories up 5.7%. Domestic wholesale watch growth was very broad-based during the quarter with MICHELE, RELIC, MICHAEL by MICHAEL KORS, as well as certain other license brands being the standouts.

As Kosta mentioned, consumers responded very favorably to the innovation in our watches, especially the use of new and/or mixed materials. This provided some differentiation in our products and enticed consumer purchasing, even when in many cases the product was among the higher price points of the assortments.

MICHAEL KORS watches continues to be our fastest growing watch business in the US wholesale segment. Q4 shipments more than doubled, fueled by new doors and great comp results in existing doors. As we've discussed on prior calls, although value is important to consumers, having the right styling, regardless of the price, is really what drove sales. KORS is a perfect example of this as some of our best-selling styles were our most expensive price points at $450 and $495. And the opening price point for MICHAEL KORS is $95.

Our proprietary luxury brand, MICHELE, experienced double-digit increases at wholesale shipments for the quarter. MICHELE has been outperforming the overall category of luxury watches in the market throughout the year and this continued during the holiday season. MICHELE's great style and value contrasted to many other luxury offerings, really led to a strong year for the brand at retail. We expect MICHELE brand watches to continue to take market share in 2010.

RELIC watches also had a great Q4 as well. And again, it was primarily driven by great design and value as our retail partners increased the depth of their assortments and added additional promotional goods as well.

On the accessory side, our business experienced a 5.7% increase in wholesale shipments during the fourth quarter, driven by strong double-digit increases in Fossil women's handbags which is the largest business in our non-watch accessories category. These increases were aided by the ability to inject our best-selling handbags, not only in our own retail stores, but also into our wholesale channel as destocking gave way to increased order flows in the back half of the year.

Our RELIC brand accessory assortments also continue to be a top performer in its distribution channel generating an 8% increase in sales during the fourth quarter. Additionally, jewelry also performed well in the quarter as total shipments increased double-digits led by our Fossil accessory jewelry. This is a relatively new category for us in the US market having just launched a few years ago, so we continue to be very excited about the opportunities in front of us.

Now on to the international wholesale business segment. To keep things simple and comparable, all my references to sales increases and decreases will be based on constant dollars. In the fourth quarter, international wholesale net sales were essentially flat when compared to the prior year quarter with the shortfall in Europe being pretty much offset by an increase in other international-based sales.

In Europe, wholesale shipments declined 5.7%. However, on an incremental quarter basis, this was a marked improvement over the 14.3% decline we experienced in the third quarter. Sales volume growth generated in FOSSIL and KORS watches were more than offset by declines in wholesale shipments of various other licensed brands. Despite the sales decline, we believe our Europe-based business continues to outperform our competitors and is on a nice upward trend.

Total jewelry shipments declined by 11% in Europe. Strong growth in Armani jewelry was more than offset by declines in FOSSIL, which is our most penetrated brand, and DKNY as we anniversaried the launch of DKNY that began late in the third quarter last year. Jewelry was also up against strong double-digit growth in prior years. Overall though, we continue to foresee the jewelry category as one of our strongest growth opportunities on a global basis.

In the leather category, our expansion in Europe continued favorably and we're excited about the long-term potential to expand this category throughout the continent. In total, FOSSIL wholesale leather shipments rose by 15% during the quarter with strong sales gains across both women's and men's product lines. We believe the growth of our own store base in Europe is continuing to improve the FOSSIL brand awareness across all categories leading to further opportunities for wholesale expansion.

Other international wholesale sales increased a nice double-digit 11% with particular strength across many of our licensed brands within Asia Pacific, Mexico and Canada. We also made good progress in our jewelry and our leather businesses in the segment. However, these businesses remain relatively small compared to watches, which allows for continued future growth opportunities.

Although shipments to third-party distributors and to our Spain joint venture declined by 8.2%, this represented a large improvement compared to the 42.8% decline experienced through the first nine months of the year. Our Asia Pac businesses continue to represent our largest opportunity for percentage growth and we remain confident that our strategies will enable us to continue the favorable momentum into 2010.

We believe markets that we've recently entered such as China, Korea and India, as well as other markets that we've been in for a while, can become game changers for this region and the Company as a whole over the long term.

On our direct to consumer segment we continued strong performance from the first nine months of the year, growing by 22% during the quarter as a result of continued store growth combined with strong comp store sales increases of 12.1% globally. Our growth engine in this segment is the FOSSIL accessory store concept which delivered US and global comp increases of 13.2% and 11.3% respectively, in a full priced environment I might add.

In addition, eCommerce sales grew by 9.5% and that was on top of a 34% increase last year. Of the 29 full-price accessory stores we opened in 2009, all but five were opened outside the US and a majority of these openings were in Europe and Canada where we're consistently hitting or exceeding our pro forma targets. Our outlet stores, which we utilize primarily to clear discontinued product, reported comp store increases of 11% during the quarter, following a 7% increase last year.

Given the health of our inventory, we significantly reduced promotional activity in our outlets allowing gross margins to expand significantly while also posting these solid comp store performances.

Globally, we ended the year with 354 stores and occupied 629,000 square feet compared to 589,000 square feet at the end of 2008. This includes 219 full price accessory stores, 127 of which are located outside the US, and 89 outlet locations including 15 outside the US.

Additionally, we ended the year with 33 apparel stores and 13 multibrand stores. This compares to 324 stores at the end of the prior year including 191 full-price accessory stores with 104 being outside the US, and 82 outlet stores including eight outside the US, plus the 33 apparel stores and 18 multibrand stores.

During 2009, we opened a net of 30 stores comprised of 42 new stores with a closure of 12 stores. Currently we anticipate to open approximately 50 new doors, or slightly more than last year in 2010, the majority of which will be our full-priced accessory concept.

While we are pleased with the performance of our stores in the US in the fourth quarter, which we have seen continue to perform very well into the first quarter to date, we anticipate the majority of the new openings to remain outside the US. We will, however, remain open relative to opportunities within the US.

In addition, coinciding with natural lease expiration dates, we also plan to close approximately 28 existing locations globally with certain of these stores opening in more productive locations and formats. The net of all of this is an increase at just over 2% in total square footage, but bringing an expected increase of over 10% in total productivity. Our priority for 2010 is to increase sales productivity as we further improve store selling metrics with an emphasis on conversion. At this time, I'm going to turn the call over to Mike Kovar.

Thanks, Mike. I'll start off by summarizing our fourth-quarter 2009 versus 2008 results from this morning's press release. Net sales increased 13.7% or 8% in constant dollars to $527.8 million. Gross profit increased 22.8% to $297.6 million or 56.4% of net sales. Operating income increased 86.3% to $108 million or 20.5% of net sales. Net income increased 51.2% to $70 million and diluted earnings per share increased 49.3% to $1.03 on 67.7 million shares.

The sales mix breakdown for the fourth quarter in order of magnitude was as follows -- 30% from European wholesale sales; 26% from world wide direct-to-consumer businesses; 20% from domestic wholesale watch sales; 14% from wholesale activities in international locations other than Europe; and 10% from non-watch domestic wholesale businesses.

The 13.7% increase in reported net sales for the quarter consisted of the following increases and decreases by category and geographic region. Sales from our worldwide direct-to-consumer businesses grew 26% to $137.3 million. Domestic watch sales increased 12.1% to $103.5 million. International base sales excluding Europe, which primarily consists of export sales to distributors, shipments to our Spain joint venture and sales from our Canada, Mexico and Asia Pacific wholesale operations, increased by 18.7% to $76.1 million.

Excluding currency that favorably impacted sales by $4.9 million in comparison to Q4 last year, other international wholesale sales grew by 11% during the quarter. Non-watch domestic sales, which primarily include our leather, sunglass and jewelry businesses, increased 5.7% to $53.6 million. And finally, sales generated from European-based wholesale operations increased 6.3% to $157.3 million. And excluding currency that favorably impacted reported sales by $17.7 million in this segment in comparison to last year, European wholesale sales declined by 5.7%.

Gross profit increased 22.8% over the prior year quarter as a result of increased sales and significantly improved gross profit margins. Gross profit margin increased by 420 basis points to 56.4% in the fourth quarter compared to 52.2% in the prior year quarter. The weaker US dollar contributed 165 basis points to the improvement.

In comparison to the prior year quarter, gross profit margins also benefited from reduced levels of low margin sales through off price liquidation channels. This is a direct result of managing our inventories to much healthier levels during fiscal 2009. To a lesser extent, gross profit margins were also benefited by a higher sales mix of direct to consumer sales, improved margins in our outlet stores, and reduced wholesale markdown levels in comparison to Q4 last year.

Year-over-year fourth-quarter operating expenses only increased by $5.1 million to $189.6 million resulting in a significant improvement in operating expense leverage. As a percentage of net sales, operating expenses decreased to 35.9% in comparison to 39.7% in the prior year fourth quarter.

On a constant dollar basis, and therefore excluding $7.8 million relative to a stronger -- or to a weaker US dollar in the quarter, fourth-quarter operating expenses actually declined by $2.7 million. This decline was primarily driven by approximately $16.2 million of expense reductions related to our wholesale businesses, inclusive of day $5.9 million that reduction and asset impairment charges when compared to the prior year quarter.

Partially offsetting the decline in operating expenses from our wholesale businesses was an increase in operating expenses in our direct-to-consumer segment and corporate costs of $11.1 million and $2.4 million respectively. The increase in the direct-to-consumer segment was primarily related to the impact on the fourth quarter of a net 30 new stores opened during the fiscal year 2009 period.

For fiscal 2010, we expect operating expenses as a percentage of net sales to increase slightly. The increase is predicated on a higher sales mix of direct-to-consumer sales which carry a higher SG&A component, but also generate higher gross margins as well, and the normalization of compensation and other expenses that we pulled back on in 2009.

Operating income in the fourth quarter increased by approximately $50 million over the prior year quarter inclusive of approximately $15.5 million as a result of the translation of foreign-based sales and expenses into US dollars.

Higher gross profit margins and significantly improved operating expense leverage increased operating income to 20.5% as a percentage of net sales. Other income and expense decreased favorably by $6.3 million during the fourth quarter and this was primarily due to lower mark to market foreign currency transaction losses in comparison to the prior year quarter.

Income tax expense increased by approximately $32.7 million based on increased earnings and a higher effective tax rate. The effective income tax rate for the 2009 and 2008 fourth quarter was 34.5% and 8.1% respectively. Last year, if you recall, our Q4 income tax expense was favorably impacted by a reduction of certain current and long-term tax reserves in connection with the previous year's income tax audits. For fiscal year 2010, we expect our effective tax rate to be in the 36% to 37% range excluding any discrete events.

Finally, fourth-quarter net income increased by 51.2% to $70 million or $1.03 per diluted share. Q4 diluted earnings per share was favorably impacted by approximately $0.23 related to currency, but partially offset by approximately $0.20 per diluted share as a result of reduced income tax expense during the fourth quarter last year.

Turning to the balance sheet, we ended the year with cash, cash equivalents and securities available for sale totaling $413.2 million compared to $178.4 million at the end of 2008 and we have $8.2 million in total debt. Inventory at year end was $245.7 million representing a decrease of 15.8% from the prior year balance of $292 million.

While wholesale sales increased by 10% during the fourth quarter, accounts receivable increased by only 1.9% to $209.8 million. Fourth-quarter days sales outstanding for our wholesale segments decreased to 47 days in comparison to 51 days in the prior year quarter.

During fiscal year 2009, we had capital expenditures of approximately $46 million and are expecting fiscal year 2010 capital expenditures of $55 million to $65 million. As in fiscal 2009, we expect the majority of the 2010 capital expenditures will be related to new store openings, store remodels and the continued rollout of our SAP POS system to our Europe stores. Depreciation and amortization expense for fiscal 2009 totaled $39.5 million and we estimate full-year 2010 depreciation and amortization expense to increase by approximately 10%.

As it relates to guidance for 2010 -- 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, as we saw this past fourth quarter, but typically at the expense of the first and second quarter when due to seasonality it's more difficult to leverage direct-to-consumer expenses against direct-to-consumer sales.

For the first quarter of 2010, we expect reported net sales to increase at a range of 12% to 14% with constant dollar sales increasing in a range of 10% to 12%. First-quarter 2010 diluted earnings per share are expected to be in a range of $0.31 to $0.33 per share. This range includes a projected unfavorable currency impact of approximately $0.02 per diluted share.

While we expect to see some benefit to operating income from the translation of a weaker average dollar in comparison to Q1 last year, the significant strengthening of the dollar since the end of 2009 to the current prevailing rates is expected to result in mark to market losses as we settle unhedged foreign accounts payable balances during the quarter. Additionally, on a combined basis, a slightly higher tax rate and share count in Q1 this year versus last will negatively impact earnings by another $0.02.

For fiscal year 2010, we expect reported net sales to increase in a range of 9% to 11% with constant dollar sales increasing in a range of 10% to 12%. Diluted earnings per share for the year are expected to be in a range of $2.25 to $2.35. This range includes an unfavorable currency impact of approximately $017 per diluted share primarily related to the transaction impact of an average stronger dollar for the year and also includes the combined unfavorable impact of approximately $0.10 per diluted share from an expected slightly higher effective tax rate and share count in comparison to fiscal 2009.

We are not including any significant mark to market losses in our full-year guidance as we believe losses expected to be incurred during the first quarter will be offset by the benefit of forward contract hedges we have in place for the full year. Our forward guidance, as always, is based upon the current prevailing rate of the US dollar compared to other foreign currencies for countries in which we operate.

In summary, we are proud of our accomplishments in 2009 and are focused on continuing our positive momentum into fiscal 2010. We expect fiscal 2010 to represent another year of solid market share gains for Fossil as we capitalize on our global operating platform and the strength of our brands. At the same time, our strong financial position and solid free cash flow give us the financial flexibility to invest in our future growth and we will continue to evaluate all opportunities that lead to increases in shareholder value.

Now I'd like to turn the call back ever to the operator to begin the Q&A portion of the call.

(Operator Instructions). Neely Tamminga, Piper Jaffray.

Great, good morning you guys and congratulations. Just a fabulous job really considering this environment. Just a couple things here. Mike Barnes, one thing that you made a comment on about improving sales per square foot with an emphasis on conversion, that can evoke a lot of different strategies.

I'm just wondering if you guys could maybe build on that a little bit and enumerate, is it product innovation? I mean, are there some kind of cool technologies coming out that can be adopted broadly within the watch category? I've heard you guys talk about maybe the apparel apatite outside the US maybe being a point of conversion improvement. Just could you build on that a little bit? Thanks.

Sure, Neely. Good morning, thanks for joining us. Product innovation is really what's been driving everything for us this year. Kosta mentioned it and I mentioned it in the call as well. While we had some great opportunities in opening price points in many of our categories, brands, etc., it was really the innovation, it was the new materials that was driving the consumer to really make the purchases and the great designs that we supplied to the market.

So we feel like the product is the beginning point and that is going to help us drive higher conversion rates. The service quality within our own stores is also a huge part of that. We have improved our stores considerably over the last couple of years and we're seeing the great effects of that. If you look at the store comps that we had on a global basis, it's just really amazing in the environment that we had out there.

We are seeing some improvement also in our apparel stores. We have mentioned that we had really a great year in our apparel stores. We had a big remodel here in our store in Stone Brier Mall here just north of Dallas and it's performed extremely well ever since we reopened it in the fourth quarter of last year.

So we just think that there's a lot of opportunities out there and we think that Europe may also be a big opportunity for us. In fact, we're planning on adding apparel to a couple of the stores in Europe this year as well as on our website and we think there's a big, big opportunity for major growth in that area in the future.

Mike, would that include the German website as well?

Yes, the German website is what I was referring to. We already have apparel on our US website. It's actually one of the best-selling categories that we have on there.

Great, thanks you guys and good luck.

Thank you.

Barbara Wyckoff, Jessup and Lamont.

Hi, everyone. What a great quarter. I have some questions. Could you talk about the international opportunity in MICHELE and what would it take to get more critical mass overseas? And then the second question, if you could talk a little bit about your progress in China. And then lastly, could you give us some color on adidas? How much business did you do in this brand last year versus the prior year? And talk a little about the distribution in the future. Thanks.

Hi, Barbara. It's Mark Quick. I'll take this question on MICHELE. We continue to believe that the biggest opportunity with MICHELE is our domestic business. As we noted on the call earlier, we've seen very significant increases with our existing customer base. We also think there's opportunity with the more -- the smaller independent specialty retailers to get growth there.

Also, as you know, we've increased our emphasis on categories outside the watch business with MICHELE having recently launched both eyewear and handbags. That said, we are working in certain international countries like Germany, like the UK to gauge the level of potential opportunity for us with the MICHELE brand international. And we will continue to look at that, monitor those results closely to see the level of opportunity that exists for us outside the US.

Thank you.

On your China question, we think there's a huge opportunity in China and this is something that we're studying very closely. I spent some time in Asia during the fourth quarter last year, specifically meeting with a number of companies regarding their strategies on China and this is something that we're really going to get focused on.

We have been beefing up our team there. We've had an office there now for a couple years and we're really starting to make some progress. It's going to take time because China is a big country and it's a complicated country, but the overall opportunity there is really huge in the long term. And I think that you'll see us make some great strides there this year and going forward as well.

Our China comp numbers were up actually 16.7% -- is that a fourth quarter or -- in the fourth quarter, in our own stores, our China comp numbers were up 16.7%. So we also think that there's a huge opportunity for our FOSSIL brand in that market as well. You're going to be seeing a lot of grit in that area.

As for as adidas, I'm very happy to say after having many calls where we struggled with adidas that we had a pretty good year last year. We were up on the full year by almost 7% and the fourth quarter, we really hit our stride and we were up 51% with the adidas brand.

I think we really have found the DNA of where adidas needs to live. It's a great brand. Digital watches are really driving that business. A lot of great design and color is driving that business. And so it took us a couple of years to really get our full stride going there, but adidas is doing very well right now.

Thanks so much. Congrats.

Anna Andreeva, JPMorgan.

Great, thanks. Good morning guys and congrats on the great quarter.

Thanks Anna.

I was wondering if you can give us a little bit more color on the wholesale channel. I think wholesale, manufacturers so far are not seeing a ton of restocking from department stores, but obviously you guys had very strong results in this channel in the fourth quarter. So do you think we should expect similar double digit increases over the balance of 2010 or do you think maybe some of the orders move forward during the holiday, that's my first question.

We had seen through the first quarter three quarters of the year destocking really across the world at wholesale and at distributors. And the watch business also was rather tough. You could see it all the way from the high-end Swiss guys all the way through fashion watches, the watch business was tough. But there was somewhat of a turnaround in the fourth quarter both at retail and therefore our wholesale shipments and we also were seeing pretty strong results through this first part of this quarter also.

But we're expecting, especially when you consider the fact that we're up against somewhat smaller numbers, we're expecting to get some increases this year. And as we said on the conference call script, there's still an economic situation out there, so we're not totally thinking that things are going to turn around, we're going to be back to big growth. But we are in a great position in terms of our brands and our designs. And we think that even if the environment is somewhat difficult, we're going to gain marketshare, so we're hopeful for the rest of the year that we'll do that.

Okay. And a similar question on Europe. You mentioned you obviously saw some pickup in orders in the fourth quarter. Could you maybe give us some color by country? And also what are you guys embedding in your guidance for 2010? You're certainly lapping much easier comparisons really all year. Do you think Europe ex-currency could be up next year?

I think if you look at Europe, that was really the -- from a wholesale perspective that was the weakest region that we had in the fourth quarter. As we talked about all year long, Europe kind of came into this economic mess a little bit later than the US and we expected them to kind of come out of it a little bit later and that's what I think we're seeing. We did see some marked improvement.

Our distribution business was down a lot less than it had been throughout the first nine months of the year. I just think that they're being a lot more conservative on a wholesale basis in Europe right now. As you see in the news, there are still a lot of issues with certain countries in Europe that have not been resolved as of yet. I think that we will see continued improvement in that region though, and our own stores really point to that because our comps continue to be very positive in Europe in our own stores and our business continues to just get stronger over there.

So I think that we will see things improve in Europe just at a little bit slower pace than it has in the United States and in the rest of the world.

Anna, if you look at it from a guidance perspective, the first half of the year for the US wholesale business is a much easier comp than the back half of the year. Other than for the accessory business where we think there's a comp opportunity in Q3. Obviously with the Q4 we had, the growth rate that we're expecting in Q4 and 2010 is going to be a little bit tougher.

From an international perspective, if you recall the second and third quarters last year our businesses were down significantly. So we feel like the middle of the year for the European and other international segments provides some opportunity for us to grow. And for Europe specifically, we hope that by the time we get to the fourth quarter some of these more macro issues sell themselves out in Europe and we can see our business return to a normal level of growth.

Okay, that's great. And I know Germany and the UK are your two biggest countries in Europe. Did you see an improvement in those regions in the fourth quarter?

I would say on a country level basis, Germany still was a difficult market. I would say most of continental Europe was a difficult market. In the UK, we actually saw a double-digit increase in our wholesale business there. And I think part of that is the fact that the pound has gotten a lot weaker over the last couple of months against the euro and some of that may be just people traveling over and taking advantage of the currency. But I would say on a continental basis, we saw pretty consistent performance across each country.

But again, Anna, I would add that in our own stores, which we have all over Europe, we had very strong 13.2% comps in the fourth quarter and that came on top of an almost 13% comp from the prior year. So our own business is doing very well over there. I think the wholesalers are being a little bit conservative and I don't blame them at this point, but I think that we will see some improvement in Europe as the year goes along.

Okay, that's great. Very helpful. Thanks so much, guys, and good luck.

Matt McClintock, Barclays Capital.

Yes, good morning. Just a real quick question. You just threw out Europe; I was wondering if you could provide some more color on how the global 12% comp increase shakes out through the other regions.

Yes, we saw it across all regions with the US and Europe being the strongest double digit. Asia comps were up small single digits, but still a -- and that's on a relatively small comp base in Asia. We obviously haven't grown as many stores in that part of the world as we have in Europe or the US.

Right, okay. And then the second follow-up question would be European wholesale, you talked a little bit about how trends have improved. Have those trends continued to improve through the first quarter?

I would say that we're not seeing a significant trend difference from what we experienced in Q4. If you look at the guidance we laid out, the expectation is that Europe is still going to be a challenging growth opportunity for us in Q1. If you look at last year's performance, Q1 was the first quarter that we saw our European business decline on a constant dollar basis and that decline was much less than we experienced in the second and third quarters last year. So from a comp perspective, the wholesale business will be a little more challenged in Q1, but the comps get a little bit easier in Q2 and Q3.

Thank you very much.

(Operator Instructions). Eric Beder, Brean Murray, Carret & Company.

Good morning. Congratulations. Could you talk a little bit about average pricing? You talked about how the fashion has -- differentiated product has driven it and I know in the beginning of '09 you kind of lowered pricing. Are you seeing less resistance to higher pricing if a product has been [ripe]?

Well, I think what we're seeing is the customers responding to differentiation -- innovation, new materials, new ways of making products both on watches and in leather goods, sunglasses, etc. So I think what we've been spending time on is really putting the innovation differentiation in the market and the customer is responding to it even if it's higher priced.

In fact, in the FOSSIL watch line, our average unit retail went up quite a bit. Our best-selling styles, which are selling extremely well, are not at our normal $75, they're at $95 and $105. And so the customer is clearly responding to differentiation, things that they don't have, newness, if it looks right and if it appeals to them they're willing to spend for it.

Okay, can you give us an update on Armani, how that's doing? And are you looking for -- what are you looking to do with the cash now?

On Armani, Armani actually was one of the more difficult brands for the full year last year. The customer was really voting for fashion, innovation, new materials and Armani is a little bit more conservative, traditional brands. We did see it pick up in the fourth quarter though as gift giving time game around and people turned back towards a little bit more traditional as well as the fashion brands.

So we saw some improvement in the fourth quarter with Armani and we expect that going forward it's going to continue to be one of our best brands. It is our largest licensed brand right now. We expect that to continue and to see the brand continue to grow as we go forward. I'll let Mike talk about the cash.

Yes Eric, we also announced today that the Board did approve a small buyback authorization of $20 million for 2010. The premise of that is to allow us to go out and at least acquire as many shares to offset any dilution from our compensation plans that include stock grants.

Additionally, you saw where we are increasing our capital expenditure outlays about 30% to 35% on top of the $46 million. With all of that, we will still generate a substantial amount of free cash flow. We're always very opportunistic as it relates to adding to the opportunities that are out there.

I would say we're seeing a lot more activity in the area of acquisition opportunities and new licensing opportunities. I would say the attractiveness of those deals aren't where we think they ultimately could be. A lot of our competition is struggling out there, so we're going to just sit back and look for opportunities that make sense to obviously increase shareholder value for the Company.

Okay, congratulations again.

Barbara Wyckoff, Jessup and Lamont.

Hi, can you update us on the results of your Watch Station test stores? And then also, the Armani Exchange line, has it been shipped now and just curious how the bookings look? This does have a little more fashion and high functionality and pizzazz versus the Armani -- the Armani Emporio line. Thanks.

Hey, Barbara, it's Jennifer. We're pretty pleased with the progress that we've made on the Watch Station stores. As you know, we opened some in August of last year and stores in the US exceeded our expectations and continue to be very productive spaces. So we will continue to pursue that as part of our portfolio in our long-term brand strategy. We've also just recently at the beginning of December opened our first international Watch Station store and that is also exceeding expectations. So we're pretty pleased.

Great, thank you.

And Barbara, as far as Armani Exchange, we're pretty excited about that part of the Armani brand because it is different from the EA watches. It's a lot more fashionable, it's younger, it's a lot more logo driven and it's just an exciting product that goes across both men's and women's product lines. We continue to have a great rollout of the brand this year. We did almost $8 million in (technical difficulty) and we expect to see that continue to be very, very successful for us and add to the Armani portfolio very nicely.

Okay, thanks so much.

And there are no further questions at this time. I will turn it back to management for any closing remarks.

Thank you, Jo. 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 p.m. midnight Central Time tomorrow. And you can call 303-590-3030 or 1-800-406-7325, enter reservation number 420-5308 followed by the #. Again those numbers for the replay are 303-590-3030 or 1-800-406-7325, reservation number 420-5308.

The conference call has also been recorded by Street Events and may be accessed through Street Event's website at www.streetevents.com or directly through our website at Fossil.com by clicking on Investor Relations and then on our homepage and then on webcasts.

Finally, should you have any questions that did not get addressed today, feel free to give myself or Mike Barnes a call. Thanks again for joining us. Our next scheduled conference call will be in May with the release of our 2010 first-quarter operating results.

Ladies and gentlemen, this does conclude the Fossil, Inc. fourth-quarter earnings conference call. Thank you for using AT&T conferencing, you may now disconnect.