Fossil Group Inc (FOSL) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Fossil, Inc. fourth-quarter fiscal year 2010 earnings 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 15, 2011. I would now like to turn the conference over to our host, Ms. 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 directly comparable GAAP financial measure and reconciliation of this 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 you may listen to a live webcast or replay of this call by visiting Fossil's website and then clicking on Investor Relations at the bottom of the home page and then on Webcast. Now, I would like to turn the call over to Fossil's CEO, Kosta Kartsotis.

Thanks, Allison. Good morning, everyone. Thanks for joining us. With us today are Mike Kovar, our CFO; Mark Quick, our Vice Chairman and Jennifer Pritchard, our President of Retail. It was an amazing quarter and year as both of our core businesses, the Fossil brand and our multibrand watch business, continued to have breakout years. We continued to show double-digit sales growth in all of our businesses across all of our geographies.

Strong fourth-quarter operating and financial results culminated in the achievement of several significant milestones. Some of the highlights are as follows. The Fossil brand continued to gain importance in the global marketplace, resulting in a 24% increase in sales for the quarter and for the full year. We continued to see a strong response to innovative vintage-inspired product presented with increasing focus and clarity. This lifestyle brand message was strongly communicated to our growing retail format and through our increasing investments in marketing through our websites and catalogs.

Our total direct-to-consumer business had a 29% increase in 2010. Our stores group continues to make improvements in all areas and had comp increases over 20% for the fourth quarter and 19% for the year. We continued to expand our Web activities through increasing investments in infrastructure, advertising, search activity and social media. This resulted in huge increases in Web traffic and provided a 56% increase in sales in the fourth quarter and 50% for the year.

We continue to gain marketshare in the growing global watch market as the uptrend in that category continues. Our global watch sales were up 42% for the quarter and 40% for the year. In addition to significant gains in Fossil watches, we had dramatic gains in our licensed brand portfolio with increases of 180%, 66% and 40% in Kors, Burberry and Emporio Armani respectively during the quarter.

We continued our progress in the explosive Asian market, which grew by 45% in 2010. An example is in Korea where we are converting from distributor operations to Fossil-owned concessions. In 2010, we tripled the previous year's business adding $25 million in sales and are now set up for continuing rapid growth in that market.

We were also able to control our sourcing and operational costs, giving us significant operating leverage for the year and enabling us to reach an 18.5% full-year operating margin performance. This was well above our stated goal of reaching 17% two years from now.

And finally, we reached a milestone by crossing over the $2 billion sales mark and provided $3.77 in earnings per share to the shareholders. It clearly was a remarkable year.

One thing we learned last year is that in both of our core businesses, given the strength of the Fossil brand and our significant resources and positioning in the global watch market, we feel we now have a much larger opportunity than we thought just a short time ago. When you consider that Asia is less than 15% of our sales, it is in itself a significant long-term opportunity.

With Fossil and our portfolio of luxury brand watches, we have considerable runway ahead of us all over the world, but especially in Asia. Our focus in 2011 will be to continue to capitalize on all of our opportunities while continuing to build our capabilities to maximize the long-term growth of the Company.

Our increasing size and profitability provides us the opportunity to make increasing investments in future growth. Our stated long-term operating margin goal of 17% as a target we felt was not only achievable, but represented the optimum percentage that allowed enough reinvestment in our business to sustain healthy growth.

Therefore, as we continue to maximize our sales potential in 2011, we will be continuing to make investments in the Company including the following. We will be significantly accelerating our store growth and are planning to open 80 to 85 new stores in 2011 across all geographies and all store concepts.

With our upgraded and focused e-commerce platform and infrastructure, we will accelerate the rollout of e-commerce-capable websites across our global markets. We are also implementing a robust customer relationship management system, CRM, that will allow us to significantly increase our ability to communicate with our consumers. This will enhance our brands and make our marketing investments through Web stores and catalog more efficient.

We will increase the development of our multibrand watch distribution capabilities by increasing our efforts and watch concessions globally and by increasing our efforts around our Watch Station store and website. We will increase our resources and our product development and supply chain organizations in order to expand our production capabilities to handle our expected long-term growth.

And given the significant opportunities in Asia, especially Japan, Korea and China, we will accelerate our investments in that region with an eye on creating a much larger entity to capitalize on the game-changing opportunity we have in front of us. We think Asia long term could represent one-third of the Company sales.

And finally, we will be consolidating our corporate facilities in Texas by leasing an existing building nearby where we are now. This larger building will alleviate our need for space now and give us ample room to expand over the coming years. As you may know, our corporate office is now split into two buildings that we own, which are about a mile apart. The building we plan to lease will allow us to once again have all corporate teams under one roof.

We believe that while accelerating these investments, we will still be able to achieve an operating margin in the 17% to 17.5% range for 2011. We feel this range allows us to report strong earnings while investing prudently. And we believe, from a long-term perspective, that not only will these investments allow us to continue to deliver strong top-line growth, but also will result in expanding operating margins in the future.

In closing, we would like to thank our Fossil team members and partners around the world for a terrific fourth quarter and year. The Company's performance once again shows the strength of our business model and the ongoing growth and development of our people. And with that, I would like to turn it over to Mike.

Thanks, Kosta. I will start off this morning by summarizing our fourth-quarter 2010 versus 2009 results that was included in this morning's press release. Net sales increased 32.8% to $701.1 million compared to $527.8 million. Gross profit rose 34.5% to $400.1 million compared to $297.6 million. Gross profit margin increased 70 basis points to 57.1% compared to 56.4%. Operating income increased 38.5% to $149.5 million, or 21.3% of sales compared to $108 million or 20.5% of net sales last year. Net income increased 38.1% to $96.7 million compared to $70 million and diluted earnings per share increased 41.7% to $1.46 on 66.3 million shares compared to $1.03 on 67.7 million shares.

The sales mix breakdown for the fourth quarter with comparable prior year levels was as follows -- 37.3% from North American wholesale activities versus 34.5%; 27.1% from Europe wholesale activities versus 30.4%; 10.7% from Asia-Pacific wholesale activities versus 9.1%; and 24.9% from our worldwide direct-to-consumer businesses versus 26%.

In connection with our wholesale operations, sales from our North America wholesale business, which include our operating activities in the US, Canada and Mexico, as well as sales at third-party distributors in South America, grew by $79.9 million, or 43.8% to $261.8 million. Excluding approximately $800,000 from favorable currency comparisons to Q4 last year, North America wholesale sales increased by 43.3%.

Sales from our Europe wholesale operations increased by $29.9 million to 18.7% to $190.2 million. Excluding currency that unfavorably impacted sales by $13 million, Europe wholesale sales grew by 26.8%. Sales from our Asia-Pacific wholesale operations increased by $26.6 million, or 55.3% to $74.7 million, and again, excluding currency that favorably impacted Asia-Pac sales by $3.7 million, wholesale grew by 47.6%.

From a major product category perspective, results from our global wholesale operations were as follows. Total watch sales increased $120 million, or 42.8%, 44.8% ex-currency, to $400.8 million. Some notable performances by brand were as follows. Fossil watch sales increased $17.7 million or 23.2%, 27% ex-currency, to $94.1 million. Michele watch sales increased by $10.2 million, or 65.7%, to $25.7 million. Our licensed watch businesses increased by $93.9 million, or 62.7%, 64.5% ex-currency, to $243.7 million.

And some of the notable increases in constant dollar terms within the license group are as follows -- Emporio Armani, up 42.8%; Michael Kors, up 173%; Burberry, up 71.4%; Marc by Marc Jacobs, up 170.5%; and Armani Exchange, up 173.7%. And all other major license brands experienced sales growth in excess of 25% for the quarter.

Leather product sales increased by $8.8 billion, or 15.7%, 16% ex-currency, to $65.2 million and jewelry sales increased $6.8 million, or 17.5%, 24% ex-currency, to $45.8 million.

Moving onto our direct-to-consumer segment, sales from direct-to-consumer businesses increased by $37.1 million, or 27%, to $174.4 million. Excluding currency that unfavorably impacted sales in this segment by $1.8 million, direct-to-consumer sales increased by 28.3%, constant dollar comps on our retail stores for the fourth quarter soared to 20.3%.

Globally, we ended the year with 364 stores and occupied 644,000 square feet compared to 632,000 square feet at the end of last year. This included 230 full-price accessory stores, 138 of which are located outside the United States; 93 outlet locations, including 23 outside the US; and 31 clothing stores and 10 multibrand watch stores. This compares to 354 stores at the end of the prior year, including 218 full-price accessory stores with 126 outside the US; 90 outlet locations, including 16 outside the US; 33 clothing stores; and 13 multibrand stores.

During 2010, we opened 33 new doors and closed 23. For fiscal 2011, we plan on opening an additional 80 to 85 doors and based upon our recent comp performance, we are happy to announce that the US will be a part of that store growth plan.

From a concept perspective, we will continue to focus primarily on the full-price accessory stores. We do expect to close another 26 to 28 doors and we believe our strategy to close less productive locations will continue to improve the overall productivity of the portfolio.

As a result of the increase in net sales and margin expansion, gross profit increased 34.5% to $400.1 million in the fourth quarter in comparison to $297.6 million in the prior year quarter. Gross profit margin increased by 70 basis points to 57.1% compared to 56.4%. The increase in gross profit margin was principally 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 brands.

Additionally, reduced levels of low-margin sales through mass-market distribution channels and higher outlet store gross margins also benefited the overall increase in gross margin. These increases were partially offset by a stronger US dollar, which unfavorably impacted gross profit margin by approximately 50 basis points during the fourth quarter. And from a segment standpoint, gross profit margin was negatively impacted as a result of a higher mix of domestic wholesale sales, which historically generate lower margins than international wholesale and direct-to-consumer sales.

For fiscal 2011, we expect gross margin to remain consistent with fiscal 2010 levels. Although we expect to experience some pressure on supply chain costs moving forward, we believe a higher mix of sales from our higher-margin international wholesale and direct-to-consumer segments, as well as continued innovation will help to offset this.

On the SG&A front, we originally guided toward deterioration in our SG&A leverage for Q4 and as you recall, this was primarily related to investments we were making in further advancing the awareness of our Fossil brand globally through increased catalog distribution and Web-based marketing initiatives. However, the increased marketing initiatives had a better-than-expected impact on our sales resulting in 20 basis points of leverage during the quarter. And although we are confident that these brand-building initiatives will continue to reap long-term rewards, it was good to see that we also experienced some short-term ROI.

Expressed as a percentage of net sales, Q4 operating expenses decreased to 35.7% compared to 35.9% in the prior year quarter. In absolute dollar terms, operating expenses in the fourth quarter increased by $61 million and included a $4.1 million favorable impact from the translation of foreign-based expenses as a result of a stronger US dollar in comparison to the prior year quarter.

In addition to the marketing-based initiatives touched on above and other variable expenses associated with increased net sales levels, constant dollar operating expense growth was primarily associated with increased compensation costs, as well as a non-cash charge of approximately $3.7 million related to the write-down of two of our headquarter buildings.

For fiscal 2011, in addition to those investments Kosta has already shared, as well as increased capital expenditure levels, both of which we expect to commence in early Q2, we project operating expenses expressed as a percentage of net sales to increase in a range of 100 to 150 basis points.

Operating income increased to 21.3% of net sales in the fourth quarter compared to 20.5% of net sales in the prior year quarter, primarily the result of increased net sales, gross profit margin expansion and lower operating expenses. During Q4, operating income was negatively impacted by approximately $5.3 million as a result of the translation of foreign-based sales and expenses into US dollars.

Other income and expense increased favorably by $3.5 million for the fourth quarter and this increase was principally due to net mark-to-market foreign currency transaction gains in comparison to net mark-to-market losses in the prior year quarter and was partially offset by an increase in net income attributable to noncontrolling interest.

Based upon our current hedge contracts in place for 2011 and the balance sheet exposure related primarily to foreign currency, receivables and payables expected to be settled in US dollars and assuming current spot rates will prevail for the balance of 2011, we would expect an approximate $5.5 million mark-to-market loss to flow through earnings in 2011.

On income taxes, our effective tax rate for the quarter was 36% and this was compared to 34.5% in the prior year quarter. For fiscal 2011, we estimate our effective tax rate will approximate 35%, which reflects the Company's structural rate. This rate does not include the impact that any discrete events may have on this structural rate.

Fourth-quarter net income increased by 38.1% to $96.7 million, or $1.46 per diluted share, inclusive of an unfavorable $0.01 per share diluted impact related to a stronger US dollar. For the fiscal year, net income increased 83.4% to a record $255.2 million, or $3.77 per diluted share, in comparison to $139.2 million, or $2.07 a share last year. Our fiscal year earnings per share of $3.77 included an approximate $0.07 reduction related to currency in comparison to the prior year.

Now turning to the balance sheet, we ended with cash, cash equivalents and securities available for sale totaling $402 million compared to $413 million at the end of fiscal 2009. And we have $9.8 million in total debt.

In connection with our share repurchase program, during the fourth quarter, we purchased $122.1 million of our common stock representing 2 million shares. And for fiscal year 2010, we repurchased $199.2 million, representing 3.6 million shares, an average of about $55 per share. At the end of the year, approximately $570 million remains open for additional share repurchases in connection with our Board's $750 million share authorization of last September.

Inventory at fiscal year-end was $371.9 million, representing an increase of 51.4% from the prior fiscal year-end balance of $245.7 million. This increase can be attributed primarily to three factors. One, in the fourth quarter of last year, inventory levels were down around 16% on a 14% increase in net sales and thus, on a two-year basis, inventory levels are much more consistent with sales increases.

Secondly, as we discussed in earlier calls, 2010 ending inventory was impacted by a forward shift in the Chinese New Year. This shift added approximately $30 million in inventory receipts and in-transit shipments to Q4 inventory levels in comparison to those deliveries occurring in Q1 of the comparable period.

And lastly, since Q2 of 2010, we have been implementing a smoothing effort to remove part of the hills and valleys associated with the timing of production needs while still supplying us with inventory levels to service our sales growth. This strategy has resulted in slightly longer leadtimes and thus higher inventory levels in advance of those expected sales.

Accounts receivable increased by 25.5% to $263.2 million at the end of fiscal 2010 compared to $209.8 million at the end of the prior year, primarily due to the increase in wholesale shipments during the fourth quarter in comparison to last year. Fourth-quarter days sales outstanding for our wholesale segment was 44 days and that was down three days to the 47 days in the prior year quarter.

During fiscal 2010, we had capital expenditures of approximately $55 million and are expecting fiscal 2011 CapEx of approximately $100 million. The planned increase levels are related to accelerating new store openings and adding increased infrastructure capacity across our sales, distribution, supply chain and back-office functions.

Depreciation and amortization expense for fiscal 2010 totaled $40.3 million and we estimate full-year 2011 depreciation and amortization of $46 million to $48 million.

Finally, as it relates to guidance for 2011, we are projecting fiscal 2011 net sales growth in a range of 19% to 21% with higher percentage net sales increases in the first half of the year in comparison to the second. Specifically, for the first quarter of 2011, we see net sales increasing in a range of 28% to 30%. First-quarter fiscal 2011 diluted earnings per share are expected to be in a range of $0.63 to $0.65 and include no impact from currency as current spot rates are similar to the average rates for the prior year quarter.

For fiscal year 2011, we are projecting diluted earnings per share in a range of $4.22 to $4.32, which includes about a $0.10 favorable currency impact related to the translation of an expected weaker dollar. From a share count perspective, considering shares repurchased throughout fiscal 2010, in addition to our expected level of repurchases in fiscal 2011, we are estimating a $0.31 diluted share benefit and comparable year-over-year earnings as a result of the lower sharecount. However, our higher planned effective tax rate for 2011 is expected to unfavorably impact year-over-year comparable EPS by $0.25.

As always, 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'll turn the call back over to the operator to begin the question-and-answer portion.

(Operator Instructions). Neely Tamminga, Piper Jaffray.

Great, good morning and congratulations on a fabulous year. I just wanted to ask you guys, under the banner of sales and productivity, just could you give us a sense of how your productivity of your retail businesses are doing across each geography. And related to that, if you wouldn't mind commenting on where your comp store sales trends are or overall sales trends by region as we round here into week 6, week 7 of the new quarter. That would be really helpful.

Sure, as we said for the full quarter, constant dollar comps were up 20.3%. The business was the strongest in North America and Asia. Our North American comps were up 26% and our Asia comps were up 25.7%. Europe was up 4.7%, but they were up against a little bit tougher prior year comparison than in the other two regions.

As we look at 2011, we had a great January. Comps were still strong double digits and we are expecting, over the balance of the year, comps to be in the mid to high single digit area with slightly higher comps in the first half of the year versus the second half of the year just due to how the comparisons set up year-over-year.

Neely Tamminga That's great, Mike. Thank you.

Matt McClintock, Barclays Capital.

Yes, hi, good morning, everyone. So you talked about a major focus on Asia this year and how does the Fossil brand play into your plan? And how should we think about growth across the region? Is Korea going to be the main focus?

As we said on the call, Korea has kind of jumped out of the box and is on a very quick trend and we are set up there to have some pretty rapid growth. Just in terms of Asia in total, obviously, the market is expanding quite quickly and the demographics show that it is going to continue to do so for a number of years.

One of the things that we are doing is putting a lot of extra resources there. We have a whole restructure of the organization. We are hiring more people. In terms of Fossil, we are actually -- the stores that we have there are doing very well, showing very strong comps. We will be building more stores there in addition to some concessions in Japan and other parts of the market, but the market is doing extremely well and we think it has got a huge opportunity.

One thing I would comment on is obviously this watch trend continues globally. In fact, the Swiss watch business grew last year. Exports out of Switzerland were up 24%. 50% of that was to China. It just looks like the whole region, and especially China long term, is a once-in-a-lifetime opportunity and we are putting resources in place to optimize that. So we have both businesses, the Fossil brand and all its aspects, store, Web and catalog will be expanding in that market. And then our multibrand watch business, which with our brands that we have, Armani, Burberry, Marc Jacobs, Michele, Diesel are all going to be very powerful in China and throughout Asia as we fully implement our programs over there. So it is a big massive opportunity for us long term.

Great, thank you very much.

Anna Andreeva, JPMorgan.

Thanks, good morning, guys and congrats on a great end to the year. I had a couple of questions. My first question is just on gross margin guidance of flat for next year. You guys have obviously talked about being just in very early innings on some of the new materials in watches driving results internationally. I guess is that not the case? And if so, why wouldn't we see bigger upside in gross margins as you roll out some of those products?

And my second question, how is the quarter starting out in Europe? You are lapping still a very easy comparison here in 1Q and you obviously talked about Asia being an even bigger opportunity than originally expected. What is the degree of confidence in Europe for the next two quarters?

I will take the question on gross margin expectations for 2011 and then I'll let other folks jump in on Europe. As we mentioned within the script itself, Anna, we are expecting some level of supply chain cost pressures, as everybody else is saying out there. However, we believe that our ability to continue to innovate around that and use alternative materials and in many cases, take up prices will help to offset those types of cost increases.

Relative to 2010, we saw a lot of the margin growth based upon just the overall growth we had in the licensed brand businesses, which, outside of our direct-to-consumer activities, carry some of the highest margins within the Company. We do expect the overall product mix shift to benefit us from margin growth in 2011 as we expect our international wholesale and direct-to-consumer segments to outpace the US wholesale segment where we saw a lot of growth last year. However, we also expect a little bit more of a balanced growth between leathers versus licensed watches versus Fossil watches. So I would say a 57% range, which is where we were for the full year, and that being 200 to 300 basis points above where we have been historically and in our best year I think is a prudent way to look at 2011.

As it relates to Europe, we talked about the retail comps earlier. I would like to mention one other thing. We did see some impact from some of the weather Europe was having in December that affected the overall performance in the fourth quarter. And that was somewhat even more apparent to us based upon the fact that our e-commerce businesses in December and in the full quarter were up almost 100%. So I think there were some folks that were choosing not to get out in the weather to hit the brick and mortar stores and eventually found those purchases on the website and we think that was the case with our business.

As it relates to Europe, yes, we do have an easier comp as we proceed through Q1. Our business continues to progress nicely there. We would expect to see Europe continuing strong double-digit growth, not only into Q1, but also through the balance of the year as a lot of the initiatives that are taking place right now are just being pushed into Europe such as Kors and other opportunities. The Michael Kors growth we had in 2010 was primarily in North America and we have got a large initiative in 2011 to explode that brand in Europe as well.

One way to look at the watch trend is you might say, prior to a year ago, watches globally was growing at GDP rates and last year that has accelerated quite a bit. It started in the United States. We have accelerated with the new materials and a lot of the innovation we put in the market in the United States. We are starting to see that trend catch in Europe and parts of it in Asia.

So one way to look at this is that we are taking this time period during this tailwind to continue to push our innovation around the world and to really gain marketshare during this time. And then, at the same time, build an infrastructure out there around the world, especially in Asia. You might say that the trend started in the United States is a tailwind. It is moving towards Europe. There is a much bigger trend sitting in Asia out there that is not only going to be innovation-based and new material-based for watches, but just pure increases in disposable income and demographic shifts, etc. There is a big, big horizon out there of opportunity for us that we are moving towards.

Okay, that's helpful. I appreciate it.

Scott Krasik, BB&T Capital Markets.

Thanks, good morning, guys. Just a first question on the level of SG&A investment for 2011. If you do manage to grow sales in excess of the 19% to 21% that you have laid out there, do you expect to grow your operating expenses in line with that or should we see leverage above that 20%, 21% sales growth level?

I think, one, Kosta has mentioned the target for 2011 being an operating margin of 17% to 17.5%. So on a slight outperform, margins we would expect would still fall within that level, obviously, toward the high end. If we are having the same type of performance against our plans that we had in 2010 then obviously there would be some opportunity to carry some leverage down to operating income. But again, we are planning our expenses in line with these investments that we are making and feel that the expectations for 19% to 20% -- or 19% to 21% top-line growth are pretty significant as well.

Okay. And then I guess a question for Jennifer. You have got a lot going on at retail. You are still closing stores, but you are accelerating the store growth. It is going to happen in multiple concepts. Can you just give us a little help in understanding maybe piece by piece where you are growing, what the opportunities are and when you think you can really grow those retail margins at or above Company average?

Well, I think we were pleased with the progress that we made this year and as we look to next year, we are continuing to focus on where the opportunities exist. We are continuing to look at the direction and growth out of the clothing concept [ahead] of Watch Station and kind of are using those as incubator businesses. We were very pleased with how both of those came through the holiday season and are continuing to read the results and react to those as our growth vehicle really is the accessory business.

And right now, we have seen very nice improvement in our store performances in the Asian market, which I think Kosta addressed. We are seeing much better opportunities in North America. So as we look to this year, we are going to increase the amount of stores that we are opening in North America to probably about half of what we are looking for and then the balance would be placed outside of the US.

And of the 80 plus stores, how many of those will be accessory stores?

The lion's share of them will be in accessories.

Okay. So Watch Station is still a 2012 story so to speak?

Yes. I think that we have a good solid foundation to prepare ourselves for 2012.

That's great. And then just sort of any thoughts on operating margins, when we should start to see those expand towards the Company?

One thing I would say is, as you know, we said publicly about five years ago that we were targeting a 17% operating income for the Company because we kind of think that is a good equilibrium number. We can report pretty healthy op income and still invest in the business for future growth. I would say we are still in that situation. I think the increasing sales has given us the opportunity to invest even faster and what we have done basically is gotten to this point. We want to kind of see what our business model looks like for a while. Last year with the huge increases, it was somewhat disruptive to the business and to the business model. We just want to let it settle a bit, let the dust settle, try to understand where we are. But we do think long term we do have operating income expansion as a possibility.

Just one other point on that segment basis, you will see that our direct-to-consumer segment delivered about 300 basis points of improvement in its overall operating margin contribution to the Company. So while it is still below the overall Company average, obviously, we are still at a base of stores that we expect can be much longer or much larger over the next few years.

That's helpful, thanks.

And Scott, if I could just add one more thing, a comment that you made regarding the closing of stores. This will continue to be a part of our process as we go forward. We are looking at the productivity of the portfolio, so we will always be trying to advance that.

Thanks.

Randy Konik, Jefferies & Co.

Hey, a quick question. Just on the retail square footage growth on a net basis, what is that looking like for 2011?

I would say it would be similar to the number of stores we are opening. So going to 80 plus stores on a 364 store base, we are looking at around 22%, 23%.

Okay, great. And then can we get a little -- Mike, can we get a little clarity then? If we were thinking about the 20% target around for total revenue growth for 2011, how would you think we should break that out between North American wholesale, Europe, Asia and retail or direct-to-consumer?

I would say the expectations are for our international wholesale businesses to grow faster than our North American wholesale business and part of that is just the comp that we have to how significant the US wholesale market was in 2010 with much larger growth opportunities for us in Asia, obviously, where we are less penetrated than Europe.

Retail stores would be something that would also see a positive change in its mix as total -- as part of the total sales due to the fact that we still expect to get great comp growth, as well as we're opening up a sizable number of new doors this year.

Thanks. And I guess lastly, you made a comment about Michael Kors going more into Europe, etc. Are there any other underpenetrated licensed brands in the portfolio you guys see today, whether it be in Europe or Asia?

We actually feel like, with our existing brands, that we can double the watch business over the next five years. We saw growth across every one of our brands, including the Fossil brand added over $100 million last year. We think it can continue at that kind of pace. Kors also added over $100 million. Armani, Michele, Burberry, Marc Jacobs, Diesel, DKNY, Adidas, all of them had big increases and every single one of them looks like they can double or even triple, especially if you look at what is going to in Asia the next several years. We are penetrating these brands more thoroughly in that market. I think we said on the last call that Armani, which is over $200 million at this point, probably has an opportunity to double or even more than that.

In addition to that, we have the Armani A/X brand, which we started putting in the market a couple years ago that is turning at a very fast rate and looks absolutely explosive to us. So that is another big add-on for us. In addition to that, we most likely over the next several years will have additional licenses or brands in our portfolio. So we are interested in investing and getting further ahead in the market, really taking marketshare and expanding globally, putting more resources in place to really expedite that whole process.

Great. I guess lastly how do you guys think about the distribution model in China owned versus distributorship?

In China, we are actually studying several different methodologies. The one thing I would say about Asia that appears to us at this point like we have seen in Korea that a lot of it is going to be concessions, which they can tend to grow much faster because they are cashing full retail instead of wholesale.

The operating model is very good also in terms of profitability for us and it also enables us to control a lot of the process, the (inaudible) presentation assortments, the sales process, etc. So we feel like Asia and China will be largely concessions, which part of the infrastructure we are putting over there is really enabling us to implement a broader concession-based business throughout Asia. And I think that is what is going to accelerate the growth.

Thanks, guys.

Eric Beder, Brean Murray.

Good morning, congratulations. Could you talk a little bit about -- you talked about the leather business and some of the accessories -- other accessory businesses ticking up. What are you seeing that is driving that?

In general, the work we have done on the Fossil brands and then if you look at our Website, Fossil. Life. Style section, you look at our catalog, you go in our stores, the brand clearly is making huge progress in getting more aspirational and the communication of that brand continues as we increase our catalogs.

We also just recently, I guess last week, we opened a pop-up store in SoHo that you might want to visit to really get the feel of the brand. And as we said I think on the last call, the most emotional and probably aspirational part of any of our categories is handbags and leather goods. Once the brand gets hotter, it becomes -- it is really very viral and could have a huge change on our accessories and handbag business and that is really what we are working towards. And I think we're seeing that both at retail and in our wholesale customers as well. So that is part of what is happening in leather goods. We also are getting a very, very good response globally through our stores and Web and catalog on accessories too. So we think there is a big long-term growth track for us.

Okay. And in terms of the headquarters move, are you going to get rid of the two places you are in right now? Are you going to sell those off? What are you doing with the current locations?

Yes, we would sell the two buildings that we reside in today that we own and take a long-term lease on a facility literally just down the street.

And how many years do you think that will give you in terms of expansion potential before you'd have to do something like this again?

We are signing a 10-year lease, so we think at least 10 years and that property has additional parcels of land on it where we could construct additional office space if needed.

Two other quick wins. How did Relic do and are you going to look for further licenses or acquisitions --?

Relic last year was not one of our faster growing businesses, but I think we are expecting much, much faster growth this year both in watches and in accessories. And as we have always said, we are very, very interested in long-term marketshare in our watch businesses and we are always looking at what is out in the marketplace and we are talking to people all the time. So I would expect that we will have additional brands.

Great, thanks and congratulations on a great quarter.

(Operator Instructions). Robin Murchison, SunTrust Robinson Humphrey.

Thanks and I'll add my congratulations. A lot of my questions have been asked and answered. But Mike, will you just elaborate a little bit on what you're seeing in terms of supply chain costs? I presume marginally leather and labor and if not, if you'll just kind of correct that. And also will you remind us -- within your inventory, there is a lot of shared pieces or componentry, so notwithstanding your inventory increase, isn't it such that a lot of it is sheer componentry, so there is not a lot of obsolescence? Thanks.

On the supply chain side, as everyone else was impacted as well, we saw a labor cost increase probably 15% to 20% in 2010. And because we were moving from stainless steel to mixed materials and other components, the raw material side of that really didn't impact us significantly. And with innovation, we were able to move into those new materials and in some cases were less expensive than some of the metals and still raise prices. And that is part of why you saw the expanded operating margin performance in 2010.

As we move forward, obviously, there is discussions on cotton prices that don't affect us, other than some linings in some of the handbags and some of the small leather goods, but nothing that is significant. We would expect that with what is going on in China that we will continue to see pressure on labor cost increasing and we could see prices increase in certain component materials like stainless steel, etc.

But again, I would say if you look at our assortments, a lot of the growth is being driven by a lot of the newness in the alternative materials. Although we do expect at some point in time that you will see a shift back to more modern stainless steel components as well.

The currency of the inventory remains solid. Our gross margins in our outlet stores are at record levels. So from a currency perspective, we feel very good about the overall inventory makeup. And as we discussed on the call, part of that increase towards the back of the year was just due to some of the items we have mentioned. But I would say our inventories are as clean as they have been and don't expect to see significant changes in how we work through them.

What about leather?

Go ahead, Robin.

I know leather is not a huge deal for you guys, but it is -- you do have exposure and I just wondered what you were seeing in terms of leather costs.

Yes, we are seeing increases in the price of leather and we think that, especially now that the brand has moved up, that we can handle price increases there and we actually have products in the marketplace that are selling very well at higher retails and we saw that last year as well. Having said that, we do have more fabric with leather trim bags in the market also just to kind of moderate that a bit. So we're working through that process now.

The other thing I would say, Robin, is if you look at the line future tent, what is coming into the market, there is a lot more detail, function, design built into the product, which will support a higher average unit retail, which we are expecting to see happen.

Great, thank you very much.

Barbara Wyckoff, CLSA.

Hi, everyone. Kosta, you talked about Asia kind of being weighted towards concessions, but how do you see the mix of channels, including other, evolving this year say in three years out? Is it going to be like 70% concession, 30% owned stores? Is there any wholesale business there and will China be any different than the rest of the countries?

And then also, second question, just one second, is your outlook on jewelry, didn't really hear you mention much about it. What is going on with Fossil, Emporio, Diesel? Is there a possibility to get a license from Michael Kors here? Thanks.

As far as our Asia business, as I said earlier, I think the majority of it is going to be through concessions and our own stores. We do have retail partners around Asia right now, but I expect the fastest-growing part of this is going to be our stores group, as well as concessions. Korea is an example of -- almost 100% of it is concessions at this point and we are in the process of really expanding those, giving them more space and it is a pretty significant opportunity for us.

We also have a big initiative in Japan to build additional concessions there. China is still somewhat in an infancy stage and we are kind of studying the market, but our expectation is it would be -- the bulk of it would be concessions or some type of partnership concessions, so we're working through that.

As far as jewelry goes, again, we had a very rapid growth last year in jewelry. The Fossil brand in jewelry did extremely well and did great in our stores. And the other brands that we do all had increases as well, so we are in a pretty good position.

We do expect that we would potentially have additional brands in jewelry, so we're working through that now, but we are definitely focused on growing that business over the long term.

Great, thanks. Good luck.

Scott Krasik, BB&T Capital Markets.

Thanks. Mike, you mentioned the impact from share repurchases into the EPS guidance, but maybe just talk about -- you did seem to slow down the pace of buybacks at these levels. Are you interested in repurchasing shares and how do you feel about completing the $750 million buyback that you have in place right now?

Scott, what we talked about initially when we went forward with the plan back in September last year was, one, executing that plan by the end of 2013 and obviously, the amount of shares we bought within that four or five-month period represents a pretty significant portion relative to the overall authorization levels. So we do anticipate to continue to execute against that plan.

As we move forward, it would probably be done more on a pro rata basis based upon the time we have left to repurchase the additional $570 million worth that is still outstanding. But yes, we do intend to take down that buyback by the original anticipation date of the end of 2013.

So just in your plans, what is your year-end share count implied in your guidance?

In 2011?

Yes.

We are somewhere in the 62.5 million to 63 million share range.

Okay, thanks.

Thank you. There are no further questions in the queue. Management, please continue with any closing remarks.

Thank you, operator. Should you want to replay this conference call, it has been recorded and will be available from 10 a.m. Central time until 12 midnight Central time tomorrow by calling 303-590-3030 or 1-800-406-7325 and entering passcode 4401355 followed by the pound sign. Again, those numbers are 303-590-3030 or 1-800-406-7325, passcode 4401355. 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 by clicking on Investor Relations on our homepage and then on Webcasts.

Finally, should you have any questions that did not get addressed today, please give me a call. Thanks again for joining us today. Our next scheduled conference call will be in May for the release of our 2011 first-quarter operating results.

Thank you, ladies and gentlemen. This concludes the fiscal year 2010 earnings conference call. You may now disconnect and thank you for using AT&T conferencing.