Fossil Group Inc (FOSL) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Fossil, Inc., second-quarter fiscal 2010 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, August 10, 2010.

I would now like to turn the conference over to Allison Malkin of ICR. Please go ahead, ma'am.

Thank you. Good morning, everyone. 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 on 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 direct comparable GAAP financial measure and the 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.

Now, I would like to turn the call over to Fossil's CEO, Kosta Kartsotis.

Thanks, Allison. Good morning, everyone, and thanks for joining the call today. With us today are Mike Barnes, our President and COO; Mike Kovar, our CFO; Mark Quick, our Vice Chairman; and Jennifer Pritchard, our President of Retail.

First let me start by thanking our Fossil team members and partners around the world for a terrific performance in the second quarter and the first half of the year. The second-quarter reported results included a net sales growth of 30.6%; gross profit margin expansion of 4.5 percentage points, rising to 57.4%; and operating income increasing to almost 3 times the number it was in 2009.

Driving these results is the successful global expansion of our two core businesses, our Fossil brand and our multibrand watch business. The Fossil brand is continuing to gain in importance around the world, as evidenced by both our wholesale expansion of the brand across many categories and the continuation of strong comps in our direct channels.

We attribute this to the focused point of view and imagery of the brand, as well as the continued introduction of new and innovative designs and materials. Fossil's unique, modern-vintage point of view is being communicated through our growing retail presence, through increased catalog mailings, and an acceleration in Web-based initiatives. All of this combined with our highly efficient sourcing and global distribution infrastructure provides us with a significant competitive advantage in the marketplace.

Fossil [heads into] a lifestyle opportunity is huge, long-term, and global. We are planning increased marketing investments this holiday to capitalize on our strong positioning. We see this as an opportunity to drive additional awareness to the brand and to fuel more growth in the short and long term.

Some specific highlights of our second quarter included -- and these are in constant dollar terms -- a 28% increase in the worldwide sales of the Fossil brand. By region, Fossil sales in North America rose 21%, Europe was up 36%, and Asia-Pac increased 27% in the quarter. Watches was the fastest growing Fossil category and was up 39%.

At retail, comp store sales increased 15.5% on top of a 4.9% increase last year. As you know, our store expansion the past few years has been mostly outside the United States. We have, however, experienced strong performances in our United States stores, showing sequentially better double-digit comps over the past (technical difficulty) quarters, culminating in a 20.8% comp increase in our US accessory stores in Q2. As a result, we expect we will expand our US store base in the United States at a faster rate in 2011.

Our Web group also had a strong quarter, driving strong increases in brand awareness and sales. Our US site was up 42%, Germany up 49%, and the UK was up 64%.

Our Fossil leathers business also continued to capture market share, especially in Europe and Asia, both recording sales increases of over 60%. Our increasing retail presence in these regions is building the brand and allowing us to grow our leathers business at a very fast pace. We believe the long-term growth potential of this category is substantial as the brand continues to grow in importance around the world.

As to our second core business, our multibrand watch business, we saw accelerating growth during the second quarter and posted a 42% increase. This business is a global portfolio of licensed and owned brands that is based on design and innovation, speed to market, and great global distribution.

In addition to our strong position in this industry, we are now benefiting from what we believe is the early stage of a resurgence in the watch business globally. The strong trends we are seeing are broad-based and consistent and being driven by new ideas that are fundamentally different from the types of products we have sold the past few years.

We are seeing consistent growth across all of our brands in virtually all of our geographies. We feel that with our operating model we are in a position to gain market share in a growing industry.

As to the balance sheet, our strong performance continued to strengthen an already strong balance sheet. Our cash and cash equivalents increased by $170 million over the last year to end the second quarter at $435 million. While we continue to evaluate our long-term strategies for utilizing excess cash flow, we remain committed to offsetting the impact of dilution from our long-term incentive programs. Therefore, we are announcing today that our Board has approved a $30 million share buyback plan to add to our recently completed $20 million plan.

As we begin the second half of the year we feel the Company is in a very strong position. Our two core businesses are benefiting from ongoing fundamental improvements and both are in a great position to grow and to increase market share in both the short and long term.

What we are seeing is the inherent strength of our operating model and the terrific ongoing performance and growth of our people around the world. We are looking forward to continuing to expand our sales and earnings at a double-digit pace. Now I will turn the call over to Mike.

Thanks, Kosta. Good morning, everybody. First I would like to remind everyone that, to keep things simple and consistent, all the sales highlights and my comments are calculated on a constant currency basis. As Kosta mentioned, our second-quarter sales were led by increases in our Fossil brand and in our portfolio of watches globally.

Our North American business, which includes the US, Canada, Mexico, as well as our export businesses to South American distributors, duty-free, and travel retail, experienced a 37% increase in wholesale shipments for the quarter, with our watch and non-watch categories increasing 59% and 1.9%, respectively. While we experienced growth across each market in the Americas region, the US, Mexico, and our export businesses were particularly strong.

Our Fossil watch brand business was up dramatically, with sales increasing 50% over the prior-year quarter. Adding to our domestic sales growth was our proprietary luxury brand Michele, which recorded a 40% growth in wholesale shipments during the quarter. Michele outperformed the overall category of luxury watches in the market throughout last year, and this trend has continued through the first half of 2010.

We recently expanded the assortment by introducing some additional fashion styles at lower entry-level price points featuring new materials. This has allowed us to broaden the price range for our customers while still maintaining Michele's great brand identity.

We also experienced solid double-digit growth across the rest of our fashion watch assortment. Leading the way was another great quarter for Michael Kors; but Emporio Armani, Armani Exchange, DKNY, Marc Jacobs, Diesel, and Burberry all had great quarters as well. The one consistent theme throughout our watch assortments is that innovation is definitely driving the performance.

On the lower end of the price scale, our proprietary Relic brand as well as our private label and mass-market businesses all delivered double-digit wholesale growth in the quarter.

Looking at our other accessories, our North American business experienced a 1.9% increase in wholesale shipments during the second quarter. Although our women's handbags business was up 5% in the quarter, this growth was partially offset by a decline in our men's leathers business, which is currently a tough category at retail. We continue to expect that our watch business will outperform leathers this year, but we still expect to see a sequential increase in our other accessories sales in North America for the back half of the year, given the very strong, positive reaction to our fall and holiday product already seen by the retailers.

Jewelry was another standout category for North America in the quarter, driven by our Fossil accessory jewelry offering, which saw a 31% increase in shipments. Jewelry remains a relatively new category for us in the US, as we just launched it a few years ago.

In the second quarter we were able to expand our footprint in many of our existing customer doors with additional real estate. We also experienced solid comp results in existing doors, and we're also benefiting from new door rollouts.

As I mentioned, our North American export business expanded nicely in Q2, and we had sizable increases in our shipments to our South American distributors, our duty-free customers, and our travel retail businesses outside the US. Our shipments were up 62% from the second quarter last year, demonstrating a marked improvement over the last year, when the recession impacted tourism and many of our customers were destocking inventories.

Now let's look at the international wholesale business segment. In the second quarter, our international growth was led by strong resurgence in our European business, where wholesale shipments increased 30%, well ahead of our own expectations and substantial improvement to the 1.3% decline during Q1.

Not only was the resurgence of business in Europe great to see, but it was extremely encouraging to see strong growth out of our four largest penetrated countries, namely Germany, United Kingdom, France, and Italy. Driving the growth were sales increases in Fossil watches, licensed watches, and jewelry, which all exceeded 30% increases compared to the same quarter last year.

Within Europe, Fossil watch shipments increased 34% in the quarter, matching the performance of our licensed watch brands. This growth was broad-based across all markets. Along with 30-plus-% growth in our larger licensed brands, our newest introductions into the region, including Michael Kors and Armani Exchange, are growing their market share at a very rapid pace.

Total jewelry shipments increased 36% in Europe. Fossil jewelry led our growth this quarter, and we also saw solid sequential improvements in our DKNY and our Emporio Armani lines. The jewelry category continues to remain a big growth opportunity on a global basis for us.

We are continuing to see solid sales increases in our leather category as well in Europe, as Fossil brand customers get introduced to the product line through our own retail expansion, our e-commerce expansion, and a growing list of retailers. During the second quarter, Fossil wholesale leather shipments rose by 67%, with strong sales gains across both women's and men's products lines.

We have confidence that results of our second quarter in Europe not only represent the start of a very sustainable growth opportunity for the balance of the year, but also validates our historical assumptions for longer-term growth as well.

In the Asia-Pacific region, shipments rose 28.8% in constant currency with a strong performance throughout all markets and product categories. We also continue to move forward in transitioning the Korea business from a third-party distributor to a wholly owned subsidiary.

In addition to our watch brands delivering great growth in this emerging market, we're also getting the benefit of the full retail value of the business due to our concession model. This is resulting in exponential growth in the sales dollars we are reporting year-over-year.

Each of our watch brands reported strong double-digit -- or in one case actually better than double-digit -- growth for the quarter. We also continued the successful expansion of our leather offerings with a 63% growth, albeit still off of a small base. All-in, though, we continue to expect strong double-digit growth for this region for the foreseeable future.

Moving on to our direct to consumer segment, we saw a continuation of a very strong performance since holiday 2009, with sales growing by 28% during the quarter. This was a result of continued store growth and comp store sales increases of 15.5%.

With the expansion of our catalog program we saw e-commerce sales grow by 44% in the second quarter, up from 26% increase in the first quarter; and that was on top of a 7.2% increase in last year's second quarter. We continue to see great reaction to our products in our stores, on the Web, and through our catalogs -- again, reinforcing our thoughts on the sizable opportunities that the Fossil brand presents over the long term.

Our principal growth engine in this direct to consumer segment is the Fossil Accessory Store concept, which delivered US comp increases of 20.8% following a decline of 4.7% last year. On a global basis, Fossil Accessory Store comps rose 14%, which compares to a 1.8% increase last year.

While traffic was at or slightly below last year's levels, our conversions were up, and we are seeing a mild increase in our average unit retails. On a regional basis, Europe Accessory Store comps increased 5.7%, but that was on top of a 13.2% increase last year. And Asian stores were up 14% against a negative 3.4% last year.

We continue to be pleased with our global performance, especially given that we operate in a full-priced environment.

On the outlet store front we reported comp store increases of 14.3% during the quarter. This is following a 9.9% increase last year. And with a very clean inventory, we are generating record gross margins throughout our outlet channels.

In addition, our comparable store sales have continued to be favorable in the first six weeks of our third quarter, with comparable store sales up in the mid teens. Globally, we ended the quarter with 354 stores and occupied 619,300 square feet compared to 593,500 square feet at the end of the second quarter of 2009. This includes 222 full-priced Accessory Stores, 130 of which are located outside the United States, and 88 outlet locations including 18 outside the US.

Additionally, we ended the quarter with 31 apparel stores and 13 multibrand stores. This compares to 329 stores at the end of the prior year's second quarter, including 198 full-priced Accessory Stores, with 109 outside the US, and 81 outlet stores including 10 outside the US, plus 33 apparel stores and 17 multibrand stores.

During the second quarter we opened nine new doors and closed 10 in (inaudible) locations. For the second half of the year, we plan on opening an additional 20 doors and closing 11.

As we mentioned previously, our priority for this year in 2010 was to focus on sales productivity growth by closing less productive locations as well as opening new stores in great locations, basically increasing the productivity of the store base. This strategy has resulted in the segment contributing nicely to the overall earnings productivity of the Company.

As to new stores for 2010, our expansion plans will continue to be focused outside the US. But as Kosta mentioned earlier, given the recent strength of our US stores we are having dialogue with mall developers about opportunities for next year.

Finally, we are aware that there has been some concern about input costs rising during the back half of the year. Like everyone else, we are experiencing some labor cost increases in China, and prices for certain materials such as leather are increasing as well. However, labor costs are not a significant component to the overall production cost of a watch, and we are confident that we can work around other input cost increases without any significant negative impact to our existing margin structure.

Now at this time, I will turn the call over to Mike Kovar.

Thanks, Mike, and good morning, everyone. I will start off by summarizing our second-quarter 2010 versus 2009 results from this morning's press release. Net sales increased by 30.6% to $412.6 million compared to $315.9 million.

Gross profit rose 41.7% to $236.9 million or 57.4% of net sales compared to $167.2 million or 52.9% of net sales. Operating income increased by 186.3% to $64.3 million or 15.6% of net sales compared to $22.5 million or 7.1% of net sales.

Income taxes decreased by 22.1% to $7.5 million, resulting in an effective tax rate of 12.1% for the quarter; and this compares to $9.6 million, resulting in an effective tax rate of 36.6% in the previous quarter. Net income increased by 227.8% to $54.5 million compared to $16.6 million.

And diluted earnings per share increased by 220% to $0.80 a share on 68.3 million shares compared to $0.25 per diluted share on 67.1 million shares.

The sales mix breakdown for the second quarter with comparable prior-year levels was as follows. 37.8% from North American wholesale activities versus 35.8%; 26.1% from European wholesale activities versus 27.9%; 11.2% from Asia-Pacific wholesale activities versus 10.8%; and 24.9% from worldwide direct to consumer businesses versus 25.5%.

The 30.6% reported increase in net sales for the second quarter consisted of the following increases by segment. Sales from our North American wholesale business, which include our operating activities in the US, Canada, and Mexico, as well as sales to third-party distributors in South America, grew by $42.8 million or 37.8% to $155.9 million. Excluding approximately $900,000 from favorable currency comparisons to Q2 last year, North American wholesale sales still increased by 37%.

Sales from our European wholesale operations increased by $19.5 million or 22.1% to $107.7 million. Excluding currency that unfavorably impacted sales by approximately $7 million in the quarter, Europe's sales grew by 30%.

Sales from our Asia-Pac wholesale operations increased by $12.4 million or 36.5% to $46.4 million. Again excluding currency that favorably impacted sales by approximately $2.6 million, Asia-Pac wholesale sales grew by 28.8%.

Sales from our direct to consumer businesses increased by $22 million or 27.3% to $102.6 million. Excluding currency that unfavorably impacted sales by approximately $600,000, direct to consumer sales increased by 28%.

As a result of increased net sales and margin expansion, gross profit increased by 41.7% to $236.9 million in the second quarter in comparison to $167.2 million in the prior-year quarter.

Gross profit margin increased by 450 basis points to 57.4% in comparison to 52.9% in the prior-year quarter. The increase in gross profit margin was primarily driven by an increase in the mix of sales of higher-margin watch products in comparison to leather products, including a greater mix of higher-margin licensed watch products.

Our second-quarter gross profit margin also benefit from reduced levels of low-margin sales through off-price liquidation channels in comparison to last year's Q2. These increases in gross profit margin were partially offset by a slightly stronger US dollar which unfavorably impacted gross profit margin by approximately 30 basis points during the second quarter.

For Q3 we expect gross profit margin slightly below second-quarter levels, based upon an expected higher sales mix of lower margin leather goods sales. We expect Q4 gross profit margin levels to be above that of Q2, based upon the expected increase in sales mix of our direct to consumer segment during the holiday quarter.

As a result of exceeding our sales plan for the second quarter, operating expenses expressed as a percentage of net sales declined significantly to 41.8% compared to 45.8% in the prior-year quarter. Total operating expenses in the second quarter increased by $27.8 million in comparison to the prior-year quarter and included a $2 million favorable impact from the translation of foreign-based expenses as a result of a stronger US dollar in comparison to last year.

On a constant dollar basis second-quarter operating expenses in our wholesale segments and corporate cost areas increased by $15.5 million and $5.5 million, respectively, compared to the prior-year quarter. The increase in our wholesale segment was principally a result of increased net sales as well as increased payroll and marketing expenses. The increase in our corporate cost area was primarily the result of increased payroll expenses.

Operating expenses in the direct to consumer segment increased by $8.8 million in the second quarter primarily due to store growth, expansion of our catalog mailings, and increased Web-based marketing expenditures. Strong comp sales and door growth generated more than 500 basis points of SG&A leverage in our direct to consumer channel in Q2 as it relates to the second half of 2010.

With normalizing our marketing spend and certain other expense areas back to 2008 levels, we expect Q3 operating expenses as a percentage of net sales to be consistent with last year's levels. For Q4, with the additional investments Kosta mentioned earlier as well as the normalization of other expense categories, we expect operating expenses as a percentage of sales to increase by approximately 150 basis points in comparison to Q4 last year.

Operating income increased to 15.6% of net sales in the second quarter compared to 7.1% of net sales in the prior-year quarter as a result of an increase in net sales, expanding gross profit margin, and lower operating expenses as a percentage of net sales. During the second quarter, operating income was negatively impacted by approximately $1.6 million as a result of the translation of foreign-based sales and expenses into US dollars.

Other income and expense net decreased unfavorably by $6.1 million during the second quarter. This decrease was primarily driven by an unfavorable reduction in foreign currency transactional amounts resulting from the net of mark-to-market and hedging activities.

Additionally, net income attributable to non-controlling interests, which represents the minority interest in our less than 100% wholly-owned subsidiaries, increased by $1.5 million during the second quarter in comparison to last year as a result of increased profitability in our watch factories.

Income tax expense for the second quarter was $7.5 million, resulting in an effective income tax rate of 12.1%. For the prior-year quarter, income tax expense of $9.6 million resulted in an effective rate of 36.6%.

Included in our 12.1% effective tax rate for the second quarter was a 22% rate reduction from our structural rate of 34.1% principally related to the recognition of previously unrecognized tax benefits as a result of recent audit settlements. We estimate our effective tax rate for the third and fourth quarters will approximate 35%, excluding any additional discrete events.

Finally, second-quarter net income increased by 227.8% to $54.5 million or $0.80 per diluted share, inclusive of an unfavorable $0.06 per diluted share impact related to the stronger US dollar and a favorable $0.22 as a result of the lower effective tax rate.

Now turning to the balance sheet. We ended the second-quarter with cash, cash equivalents, and securities available for sale totaling $443 million compared to $272.1 million at the end of Q2 2009. And we have $7.9 million in total debt.

During the second quarter we repurchased $11.2 million or approximately 293 million shares(Sic-see press release) of common stock in connection with the previous $20 million authorization. Subsequent to the end of Q2 we repurchased the remaining $8.8 million under this plan. And as Kosta mentioned, we have been authorized another $30 million repurchase plan which we expect to complete by the end of 2010.

Inventory at quarter end was $297.5 million, representing an increase of 18.9% from last year's balance of $250.1 million and well below our sales increase for the quarter. We expect inventory growth to be somewhat in line with sales growth for the balance of fiscal 2010, but could experience slightly higher levels of inventory at year-end as a result of Chinese New Year occurring two weeks earlier in 2011.

Additionally, we remind you that we ended Q4 of 2009 with an inventory decline of 16% on sales growth of 14%.

Accounts receivable increased by 17.1% to $162.9 million at the end of Q2 compared to $139.2 million at the end of the prior-year quarter. Days sales outstanding for our wholesale segments was 46 days, which decreased from 52 days in the prior-year quarter. This decrease was primarily related to a slight reduction in the sales mix of international-based sales that generally result in longer collection cycles than those experienced in the US; a higher proportion of sales generated through Company-owned concessions, primarily in Asia; and improved receivables management.

During the first six months of 2010 we had capital expenditures of approximately $20 million and are expecting fiscal year 2010 capital expenditures of $55 million to $60 million. The majority of our 2010 capital expenditures will be related to new store openings, store remodels, and the continued rollout of our SAP POS system to our retail stores in Europe, as well as additional maintenance CapEx.

Depreciation and amortization expense for the six months of 2010 totaled $19 million; and we estimate full-year depreciation and amortization expense of $41 million to $43 million.

As it relates to guidance for the remainder of 2010, in addition to the solid feat in the first half of the year we are raising our previous guidance for the second half of 2010 based upon the favorable sales trends we are experiencing. Specifically for the third quarter we expect reported net sales to increase in a range of 25% to 27% with constant dollar net sales increasing in a range of 27% to 29%. Third-quarter 2010 diluted earnings per share are expected to be in a range of $0.68 to $0.72; and this includes a $0.02 unfavorable currency impact primarily related to the translation of an average stronger dollar compared to last year's third quarter.

For the fourth quarter, we expect reported net sales to increase in a range of 14% to 16%, with constant dollar sales increasing in a range of 18% to 20% and diluted earnings per share in a range of $1.12 to $1.18. This range includes an unfavorable currency impact of approximately $0.06 per diluted share.

This guidance results in fiscal year 2010 diluted earnings per share in a range of $3.13 to $3.23, well ahead of our previous guidance of $2.55 to $2.65 and much higher than fiscal 2009 diluted earnings per share of $2.07.

This forward guidance is based upon the current prevailing rate of the US dollar compared to other foreign currencies for countries in which we operate. Now I would like to turn the call back over to the operator to begin the Q&A portion of the call.

(Operator Instructions) Randy Konik, Jefferies.

Yes, thanks a lot. You spoke about the market share gains that you are seeing as well as category growth. Just curious to get your input on the balance of category growth versus market share gains in the US market and abroad. How do you think it's -- where are you seeing more of, I guess, a gain? That is my first question. Thanks.

Well, we are seeing as we said strong broad-based consistent sales increases around the world and in every brand in every country. The watch business is obviously surging. Our growth is showing faster than what the total is growing.

And we are seeing this trend start to actually get better in the last several months. So I think we're just really in the early stages of this, and we're looking forward to the future.

We are in an excellent position in terms of feeding this fire that is happening. Our operating model is firing on all cylinders. One of the things that happened that you can see in the numbers is we could have very easily ended up with too low inventory to fuel this fire.

Our sourcing organization, our entire supply chain from our global planning organization, our Hong Kong sourcing organization, our assembly facilities, our sourcing partners -- we actually shipped 6.5 million watches to our warehouses around the world last quarter, which was 2.5 times what it was the prior year. So it shows the nimbleness and shows the operating model we have, and that is why we feel certain we're going to continue to gain market share.

So if you think about the early innings that you spoke of, how long do you think this cycle lasts? And the last cycle we saw, how long did that one last?

Then lastly, just a question for Mike Kovar. Do you see any -- given these strong trends, given the operating margins are coming in better than expected, should we think about any type of structural change with your operating margin targets in the 17% range? Or how should we think about that long term? Thank you.

Well, we've actually seen big trend changes like this a few times. Most of the time they lasted several years. To speculate how long it's going to last is kind of premature -- except that it is a bigger, deeper, fundamental change than we have seen in the past and it is broad-based, consistent in all brands and across the world. So it looks like the early innings of something that could last for several years.

As it relates to the structural changes in the operating margins, with the guidance we provided today, the expectation built into that is that the operating margin for the full year will be slightly below that 17% range.

We have always said that 17% is a target for us, and once we got there we would reassess and look forward at that rate going forward. But we also have always talked about ensuring that we are continuing to invest in our businesses to maintain that double-digit top-line growth.

So we are in a year where we have had a fantastic performance across our watch business around the world. The sales growth is going to be significantly higher than we anticipated early in the year, and higher obviously than we have seen in the last couple of years. So we will always revisit that once we get to that point.

Randy, one other thing that I would add -- this is Mike Barnes -- is that a lot of the questions that we have spoken about, as well as I have spoken to others about, have been about Europe. You saw the strong resurgence in Europe in the second quarter compared to the first quarter of this year; and we expect to see that continue through the remainder of the year.

We think that that business has recovered, and it's recovered based on the same elements that the US business has recovered on. And that is just fantastic product innovation driving the business.

Thanks, guys. Thanks, Mike.

Matt McClintock, Barclays Capital.

Yes, hi. Good morning, everyone. Great quarter. Can we -- you just talked about, Mike, you just talked about Europe. Can we dial in on that one a little bit more?

With the resurgence in the wholesale business, can you maybe talk about how much of that was restocking? And then given the comp and your expectations for continued growth or strong results in Europe for the remainder of the year, can you maybe give us some color for what you are seeing so far in July and August?

Sure. Clearly, there is some restocking going on. But the sellthroughs -- the sellouts from the retailers are so strong it is kind of hard for them to get restocked. I have spoken with our Senior Vice President in Europe on a regular basis as we have been going through the second quarter, and some of their biggest customers that have really gotten behind the great new innovative products that we have just seen spectacular results. The sellthrough percentages are well above normalized percentages. They have come back very, very strong.

And as we continue to see the other retailers in Europe get into these new innovative products, I expect to see the business continue to get stronger through the back half of the year. So I feel very good about Europe.

Mike Kovar and I have both expected a slower recovery in Europe. And obviously we did see that in the first quarter, where we were slightly down. But the second quarter came back just extremely strong, and we really don't expect to see that back down in the back half of the year. We expect to see continued strength in Europe with better than the single-digit increases that we had previously expected.

Thank you very much.

(Operator Instructions) Eric Beder, Brean Murray.

Good morning, and congratulations on a great quarter.

Thanks, Eric.

Could you talk a little bit about what -- you talk about additional marketing spend in Q4. What is going to be the focus of that spend? And what are you trying to do there with that?

Well, as you know, our brand building around the world is based on Web, store, and catalog. So we obviously have a great base of stores around the world, and the performance is very strong, and it's a great opportunity for us to communicate what our brand image is in 3-D. And that continues to be our biggest brand awareness issue.

We also, as you know, had started a catalog program several years ago. We actually had originally planned to ship this year 18 million catalogs versus 11 million last year. We're actually going to accelerate that in the fourth quarter.

We don't have the final numbers yet, but it will include additional mailings in the United States; additional inserts into magazines, where we actually insert the catalog inside fashion magazines. We also will be doing catalog mailings and magazine inserts in Europe as well in addition to additional catalogs that we will hand out in all of our stores.

So we're really going to spread the message pretty strongly with our catalogs.

On the other side, our Web business and traffic continues to be very, very strong. We have been in the process over the last year or so -- it's really ramping up our expertise there. We have hired a number of very experienced Web experts. And the net effect of that is we're getting huge amounts of traffic increases both in the United States and our websites around the world.

It is a huge initiative of ours. We're actually just undertaking now a new initiative in CRM. We do feel like we have a huge amount of opportunity on the digital side.

But we will be spending additional monies in the fourth quarter on search, customer acquisition activities, and other methodologies online that really drive some additional traffic there.

We also will in some locations, especially in Europe, we will be doing some outdoor, kind of large-scale outdoor branding activities near our stores over there. We are starting a test on that in September in Germany, and we are planning to do the same thing in December.

But we feel like just adding some fuel to the already pretty strong Fossil brand over there could increase the brand awareness, the heat for the brand, and the comps all at the same time. So we are pretty interested in that.

It also, we feel, will have an impact in building the brand for next year and ongoing. So it's kind of an investment at the same time. So we feel like we're in a pretty good position.

Great. In terms of new stores for the domestic store base, when you are looking at 2011 for the new stores, what type of stores will really be the focus of growth there?

And what is the latest update on the clothing stores? How is that going forward as you look at it?

Well, we will start with the clothing stores first. As we mentioned before, it's still in an incubator stage and we are expanding that around the world. We actually are going to be opening a clothing store in Wiesbaden, Germany, and also in Dortmund I think in the third and fourth quarter this year.

We have been testing in our websites over there as well as in our Oxford Street store in Stuttgart where we have some extra space. So we are seeing a pretty good response.

We also will be opening two new stores, clothing stores, in the United States. In addition to that we will be remodeling our King of Prussia store, in the next 30 days or so it should be open.

We are still seeing from our Stonebriar test, the store in far North Dallas, very, very strong results. As we mentioned before, that store is actually doing as much or slightly more accessory business in it than our typical Accessory Store. So we feel it's a very interesting proposition for us.

We mentioned before we're getting very strong response on our websites for apparel as well. So we're kind of in a position that we think it will continue to grow.

As far as stores in the United States next year, as we mentioned we have seen some very good results as the brand gets hotter and the products are more focused. We are really seeing a terrific response in the United States. So we are looking at the United States as possibly a growth vehicle for basically all our concepts. That would include some outlet stores; we did open a larger format outlet store in Camarillo that is doing pretty well. So we're looking for opportunities to do more of that.

We also are looking for some opportunities to put Accessory Stores in great locations around the United States. We probably will continue to test clothing stores, an additional number, as well as opening some Watch Station outlets and Watch Station regular price stores, which is still in the testing stage.

So we feel like the environment is probably ready depending on what the developers' situation is. We feel like the United States is going to open up for us a little more next year.

Great. Congratulations again.

(Operator Instructions) Robin Murchison, SunTrust.

Thank you very much. Congratulations guys. Just a few questions here.

Could you update us on where you are planning the euro for the balance of the year? I think last quarter it was $1.28.

Yes, as we said within the prepared remarks, Robin, within the guidance section we're looking at prevailing rate. So right now I think that is around the $1.30, $1.31 level.

Okay, thank you. Then also, you want to give a little bit of an update on what you're doing with Michele? The new product looks just -- the new watches are just fantastic. And across-the-board you have got some -- the Blanc Noir collection, which I guess is a little bit higher price point, offset by the $300 Jelly Bean watches. But so if you could comment on that and what you are seeing.

But then also comment -- when I look on the website I don't see handbags anymore and I don't see sunglasses, and maybe that is a seasonal thing. So if you could just update us there.

Well, Robin, it sounds like you know our line as well as we do, the way you describe the watches. What you are seeing with handbags and sunglasses is that never developed to be a big business. We saw it really as a distraction to the huge success we were having in watches. So for the time being, we have pulled away from those two categories to put all of our emphasis on watches.

As a result, what you described is what really is driving the business. There is a significant expansion of the product offering. We are getting a lot of credit with our customers and they with their customers for the new breadth of the offering, all of the exciting new alternative materials starting with the silicone wrap Jelly Bean watch you were talking about, at $300, all the way up through some really terrific looking ceramic stuff in the $2,000 range is what is driving it.

So, product, product, product, and newness and innovation. We are getting exceptional response really with all our retail customers.

Okay, thank you. Then for Mike Barnes, can you give us a little bit more color on the handbag evolution? Some of the stores I've been in have been pretty excited about some of the evolving styles, the Fossil handbags. I don't know if there is anything to say on shoes; I know that has also been a category that you are delving into and testing. But if you could update us there.

Well, I think Mark Quick can speak to that a lot better than I can, so I will let him answer that question. But I would just start off with a comment that we are seeing some great evolution in these other categories like handbags in the international marketplaces, based upon the -- it is a small base but great growth. And we have very high hopes for those categories going forward. Mark, do you want to add some color?

Sure. Robin, let me take your handbag question first. As you know, we have always been a significant player in the domestic handbag market. Our primary focus has been quality leather bags, and that strength continues in the market.

One of the things that we have seen happen in the last probably I would say eight to nine weeks is significant improvement at retail driven by two factors. It's interesting; we talked earlier about alternative materials in watches. That also is a phenomenon that is taking place for us in handbags.

We have a great new coated canvas group out that is not only different materials, but sells at slightly lower retails. I think that is bringing a new, perhaps younger customer to the Fossil brand.

But one of the other big successes we are having currently is an emphasis on what we are calling vintage reissue, which speaks to the heritage of the total Fossil brand. In the last two months, we have had some outstanding sellthroughs there as well.

We also continue to expand our handbag distribution base in the US. Recent new customer that we have added is Nordstrom's. As you know, they are a great service-oriented store, and we continue to get very, very strong sellthroughs there.

I think Mike mentioned the success we are having in overall leather goods in both Europe and Asia. That is being driven, I think, by the fact that this is really an underserved market, particularly in Europe. And our products are getting a very, very nice response. An indication we had early on based on the performance of the goods in our stores.

If you look at footwear, footwear is for us an experiment. It is a, as we see it, extension of the Fossil lifestyle brand. As you know, Robin, we very typically take a slow rollout; perfect our product; and then begin a more aggressive rollout with it. We are still in that perfection phase, although I would say to you the selling results we have gotten in this most recent season -- we have just come back from August market -- reaction to product I would say has been stronger than we have ever seen.

We have a really, what we think is a powerful collection to begin to gain some significant traction in footwear for us at wholesale.

Okay. Yes, I know you guys have your sort of -- your rollouts are slow and methodical. So I can appreciate that.

Then just lastly if I could ask about Stella. Now, Fossil Stella has been out there for a while and it's obviously been very, very successful. What I am wondering is that it has been such a hot trend for a while. How would you compare or contrast that style, say, with the -- seems like super popular runway watches that you have got in some of your licensed lines?

Well, I mean it's obviously been a successful category for us. One thing I would say about this trend we are seeing is that there is a predisposition for people wanting to buy a new watch, and they are responding to innovation across all different materials, platforms, ideas. It's not really based on any one thing, which is obviously good.

When we say what we are saying is broad-based and consistent, it is really the customer responding to several different things as long as it's got innovation and it's interesting and it's branded well and executed correctly.

So having said that, Stella has obviously been great for us and it's expanded quite a bit. It is has gone into different versions, etc.

But is not by far the single thing that is driving the business. There is a lot of different ideas in there. Some new ones just popped up in the last month or so, so this trend of responding to innovation I think is really something that is going to continue for a while, and it's pretty broad-based, and it's not based on any one thing.

Robin, you mentioned the runway watch. I think really what it is, is an expression of how business is changing. We have gone from an item business more to a platform business, a platform that a lot of SKUs sharing common components can be grown.

When you do that, you make way bigger impact at point-of-sale. But clearly the customer is reacting strongly to it.

Thank you very much. Good luck, guys.

I am showing no further questions at this time. I will go ahead and turn the call back over to management for any closing remarks you may have.

Thank you. Should you want to replay this conference call, it has been recorded and will be available from 10 a.m. Central Time today until 12 midnight Central Time tomorrow, by calling 303-590-3030 or 1-800-406-7325 and entering reservation number 432-7266. Again, 303-590-3030 or 1-800-406-7325, reservation code 432-7266. Remember to add the pound sign after that.

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

Finally, should you have any questions that did not get addressed during the call today, please give Mike Barnes or myself a call. Thanks again for joining us.

Our next scheduled conference call will be in November for the release of our 2010 third-quarter operating results.

Ladies and gentlemen, that does conclude our conference for today. Thank you for using ACT conferencing. You may now disconnect.