Fossil Group Inc (FOSL) 2011 Q3 法說會逐字稿

Welcome to the Fossil, Inc. Q3 earnings conference call on 8 November, 2011. Throughout today's presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator instructions). I will now hand the conference over to Ms. Allison Malkin. Please go ahead, madam.

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 GAAP financial measure to GAAP will be provided as supplemental financial information to this release under the earnings release section under the About section 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 the About Us section on the bottom of the home page, and then on investor relations. In addition, Yahoo! has had certain glitches this morning posting our earnings release. You may also find our press release for the third quarter on our investor relations section of our website.

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

Thanks, Allison, good morning, everyone and thanks for joining us. With us today to discuss her third-quarter results are Mike Kovar, our CFO; and Jennifer Pritchard, our President of Retail. Mark Quick is in New York today and not on the call.

We're pleased to report third-quarter results that achieved our sales targets and exceeded our earnings expectations. We continue to report broad-based and consistent growth across all of our brands and geographies. In total, net sales rose approximately 23%, 18% in constant currency, on top of a 40% sales increase last year. Across all channels and in constant dollars, North America was up 16%, Europe was up 21% and Asia was up 19%.

In Asia, our emphasis has been on growing our focus areas of China and Korea, which rose 72% and 51%, respectively, in the quarter. In fact, when you exclude Japan and also Australia and India, where strategic decisions impacted short-term results, the Asia region was up 53%.

We are very pleased with the ongoing progress of our two core businesses, the overall FOSSIL brand and our multi-brand watch business. Growth from both of these businesses fueled our 18.5% operating margin, beating our internal plans. We think this demonstrates the strong type of margins the Company can achieve even though we are increasing our investments to support future growth and absorbing higher production costs.

The FOSSIL brand was up 14% for the quarter with watches up 13% and leathers up 28%. As you know, we have been focused on building FOSSIL into an accessories-based global lifestyle brand. Increasingly, we are able to communicate a unique point of view and an American vintage-inspired brand through our web, stores and catalogs. This is resonating with customers all over the world and presenting us with a significant long-term opportunity.

Over the past few years, our strategy has been to increase customer awareness and their engagement in the brand through product, image and an engaging experience at the point-of-sale. We have improved in storytelling and have moved towards more iconic products and platforms that have improved our visual presentation and our brand clarity. We have a lot of opportunity to make the brand even stronger as we become even more global.

The brand is clearly more aspirational but still affordable and based on value. We have seen our customers respond very favorably to higher price point merchandise that has even more detail and authenticity. Our stores are doing well all over the world and would feel we are in the early innings of a rather large multi-year opportunity.

As to our multibrand watch business, sales were up 20% for the quarter on top of last year's Q3 increase of 49%. We saw significant increases across all our brands and geographies as our global platform provided compelling lifestyle branded watches to our customers around the world. The growth in Q3 was led by an 87% increase in Marc by Marc, a 62% gain in Armani Exchange, a 43% increase in Michael Kors, a 34% growth in Burberry and a 32% increase in Diesel.

Michael Kors continues on a strong growth track with a 31% increase in North America and an aggressive rollout in Europe that resulted in an 89% sales increase in that region. This brand remains on track to achieve approximately $300 million in sales this year, which is an increase over $110 million over last year. And our Emporio Armani business, which is in its 15th year, had a 27% increase and, combined with AX, this brand will also be approaching $300 million for the year. The ongoing and long-term opportunity for all these bands is significant, especially when you consider our growing distribution in Asia.

We're also pleased to be working with Karl Lagerfeld to develop a watch business under the Karl brand. This will be a great project for us, given that Karl Lagerfeld is a unique, globally known fashion icon with a unique point of view. The line will be launched through our global distribution network in early 2013 and will be in the $250 average price point. This will be a great addition to our global business.

While we are seeing increasing growth opportunities in North America and Europe across all our watch brands, Asia remains the largest opportunity for us over the next 5 to 10 years. While the current quarter's performance was impacted by unusual events, we're making great progress towards our goal of $1 billion in this market, or roughly three times what we will do this year. As we've mentioned, we are aggressively building infrastructure and recruiting talent in the region to assist us in achieving this goal, and we believe these efforts will result in an accelerated growth over the next several years. We have added a number of key management and other employees this year and are very pleased with the progress we've made in all the Asian countries. Our business model is focused on expanding our concessions model across key markets -- Korea, China and Japan -- while exploring opportunities to further advance the FOSSIL brand and to introduce our Watch Station concept across the region.

At the end of Q3, we operated 205 concessions in the Asian region, a net increase of 62 locations over the last year. We believe that over the next five years, we can grow this number vary significantly. And the productivity of our existing concession model has been extremely encouraging, achieving a year-to-date sales increase of 95% and a year-to-date comp increase of 31%. These concessions are a large opportunity for the Company in that they allow us to control the brand presentation and customer experience at the point-of-sale and capture the full retail price. They also have a higher operating income percentage and a higher return on capital.

Overall, we would say that we are pleased with performance for the quarter and expecting to continue the momentum into the fourth quarter and the years to come. As we have said on recent calls, we feel both of our core businesses have reached a tipping point and can be much larger than we previously thought.

Considering our business model and our brands, our balance sheet and our cash flow, we feel we are in a great position and have a unique opportunity in front of us. We have a clear roadmap ahead of us and are focused on getting better at every level and in every area of the Company.

And now I will turn the call over to Mike for more information.

Thanks, Kosta. I'll start off briefly by touching on our third quarter 2011 versus 2010 results from this morning's release.

Net sales increased 22.7% while gross profit rose 20.3%. Operating income increased 6.8% while net income attributable to Fossil, Inc. increased by 2.1% and diluted earnings per share increased by 9%. The sales mix breakdown for the third quarter, in comparison to the prior-year level, saw Europe and Asia wholesale sales increasing at a faster rate than North America while our direct-to-consumer business held steady at 22.6% of overall sales mix.

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 third-party distributors in South America, grew by $33 million or 15.8% to $241 million. And excluding approximately $1 million from favorable currency comparisons, North America Wholesale sales increased by 15.4%.

Sales from our Europe Wholesale operations increased by $41 million or 30.1% to $178 million. Excluding currency that favorably impacted sales by $13 million during the quarter, Europe Wholesale sales grew by 20.5%, and sales from our Asia Wholesale operations increased by $18 million or 29.1% to $79 million. Without currency, sales increased $5 million -- or without the currency of $5 million favorable, Asia Wholesale sales grew by 20.5%.

Sales from our direct-to-consumer businesses increased by $27.2 million or 23% to $145 million, and excluding currency that favorably impacted sales by $3.9 million, direct-to-consumer sales increased by 19.7%. Constant dollar comps on our retail stores maintained their strong double-digit performance, coming in at 14.1% in Q3 on top of a 19.9% increase in the prior-year quarter. This represents the eighth consecutive double-digit quarterly increase and the 14th consecutive quarter of positive comps.

Globally we ended Q3 with 379 stores and occupied 669,000 square feet compared to 630,000 square feet at the end of Q3 2010, an increase of 6.2%. This included 236 full priced Accessory Stores, 134 of which were outside of North America; 100 outlet locations, including 25 outside of North America, 32 clothing stores, including four outside North America; and 11 full-priced multibrand stores, including 10 outside of North America. This compares to 358 stores at the end of the prior-year quarter, which included 226 full-priced Accessory Stores, 123 of those located outside of North America; 91 outlets, including 20 outside of North America; 31 clothing stores with 3 outside North America; and 10 full-priced multibrand watch stores, including 9 outside of North America.

In Q3 we opened 14 stores and closed two stores, and during the fourth quarter we plan on opening 24 new stores and closing 4 and will end the year with 399 stores globally.

From a watch and non-watch category perspective, total watch sales increased $92.4 million or 24.8%, 20.3% ex-currency, to $464 million with proprietary brand watch sales increasing $21.7 million or 15%, 11.3% ex-currency, to $166 million, and licensed watch sales increasing by $73.7 million or 34.9%, $29.4 million ex-currency, to $285 million. While on the non-watch side of our business, leather product sales increased $21.9 million or 25.3%, 21.8% ex-currency to $109 million and jewelry sales increased $5 million or 12%, 5.8% ex-currency, to $47 million.

Gross profit increased to $359.5 million in the third quarter, a 20.3% increase in comparison to $299 million in the prior-year quarter. Gross profit margin of 55.9% decreased 110 basis points compared to last year's Q3 gross margin of 57%. Increases in production costs were the primary driver of the gross profit margin decline and were partially offset by 170 basis points increase as a result of favorable currency comparisons against last year and a slight mix shift to higher-margin international Wholesale sales.

While production cost increases are expected to remain stable over the balance of the year, the dollar has strengthened over the last quarter, which impacts our previous Q4 guidance. When we originally gave guidance for Q4 back in August, we were expecting about 80 basis points of currency benefit to gross margins, based upon the then-prevailing FX rates. Given the recent strengthening of the US dollar, we are now expecting a currency benefit to gross margins of approximately 30 basis points. As result, we see fourth-quarter gross profit margins coming in slightly below last year's Q4 level.

As a percentage of sales, operating expenses increased to 37.4% in the third quarter compared to 35.8% in Q3 last year. Total operating expenses increased by $53 million, including a $7.7 million unfavorable impact from the translation of foreign-based expenses as a result of the weaker US dollar. This increase is primarily related to the following -- variable cost rising in line with sales and store growth, strategic marketing and infrastructure investments in Asia, direct-to-consumer expense increases related to strategic investment in marketing and costs associated with our new CRM initiative and costs associated with the move into our new corporate headquarters of approximately $3.2 million, including nonrecurring costs of about $1.5 million.

Regarding our planned strategic investments for the fourth quarter, we are estimating approximately $8 million of additional spend in Q4 with the lion's share of this related to strategic marketing and continued infrastructure build in Asia. The remaining spend is associated with sales growth, higher operating cost related to our new corporate facility and ongoing expenses associated with our recent launched CRM initiative. Nevertheless, our planned Q4 sales productivity will help offset these additional costs, and as a result we expect Q4 operating expense as a percentage of sales to remain fairly consistent with last year's Q4 level.

Reduced gross margins and higher levels of operating expenses resulted in an operating profit margin of 18.5% in the third quarter compared to 21.2% in Q3 last year. During Q3, operating income was positively impacted by approximately $16 million as a result of the translation of foreign-based sales and expenses into US dollars. We estimate operating profit margin for the full year slightly below the 18.6% level we achieved in fiscal 2010.

Other income and expense, which is primarily composed of our mark-to-market activities and hedging and other transactional activities, decreased unfavorably by $6.6 million, slightly more than we planned for Q3, as a result of higher losses on spot trades during the quarter resulting from the US dollar strengthening since the end of Q2.

At prevailing foreign currency exchange rates, we believe that outstanding forward contracts with scheduled settlement dates in the fourth quarter of fiscal year 2011 could result in hedge losses of approximately $3.6 million.

Our effective income tax rate of 35.2% for the third quarter was slightly below last year's Q3 rate of 36.3%. We estimate our effective rate for the fourth quarter of this year will approximate 35%, excluding any discrete events.

Third-quarter net income attributable to Fossil, Inc. increased by 2.1% to $69.6 million or $1.09 per diluted share, well above the high end of our guidance. A weaker average US dollar during this quarter in comparison to Q3 last year favorably benefited net income by $0.09.

Turning to the balance sheet, we ended the third quarter with cash, cash equivalents and securities available for sale totaling $240 million compared to $372 million at the end of Q3 last year, and we had approximately $15 million of debt. As of today, since the inception of our $750 million buyback authorization last year, we have repurchased $412 million of common stock, representing approximately 5.8 million shares.

Inventory at the end of the third quarter was $512 million, an increase of 32% in comparison to last year's Q3 balance of $388 million.

We are expecting fiscal year-end inventory increases to be in line with sales growth. However, the timing of year-end shipments may be adjusted around the impact of Chinese new year.

Accounts receivable increased by 5.8% to $273 million compared to $258 million at the end of the prior-year quarter. Third-quarter days sales outstanding was 49 days in comparison to 57 days in Q3 last year. This decrease is primarily due to a higher mix of concession sales and improved collection efforts.

During the first nine months of fiscal 2011 we had capital expenditures of approximately $100 million and are expecting full-year capital expenditures in the $125 million range. As we have previously mentioned, the bulk of this year's CapEx is related to new store openings, leasehold improvements related to our new corporate facility and added infrastructure capacity across our sales, marketing, distribution, supply chain and other back-office functions. Depreciation and amortization expense for the first nine months of the year totaled $33 million, and we estimate full-year 2011 depreciation and amortization slightly short of $50 million.

As it relates to guidance for the fourth quarter, in the fourth quarter we expect reported net sales to increase around 20% with constant dollar net sales increasing by approximately 19%. The reduction in reported net sales from our previous guidance is related to the impact of the strengthening US dollar over the last 90 days. Fourth-quarter 2011 diluted earnings per share are expected to be in a range of $1.75 to $1.78. This reduction to our previous guidance is also a direct impact of the strengthening dollar over that time period.

However, given the beat in Q3, we are increasing our full-year guidance to $4.50 to $4.53, compared to our previous guidance of $4.44 to $4.50. This new range reflects the 19% to 20% increase in comparison to 2010 diluted earnings per share of $3.77.

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 will turn the call over to the operator to begin the question and answer portion of the call.

Randy Konik, Jefferies.

(technical difficulty) would be, is there a way we can think about a little bit longer term the different -- the growth rates we could maybe expect from the different regions of North America, Europe and Asia? Just trying to get a sense of -- you're seeing volatility in the different sales growth rates, just trying to get long-term how you think about those businesses or those geographies.

Sure, Randy. I think, as we've always said, North America is our most penetrated market. We feel like we obviously have some opportunities to continue to ramp up our store base in North America based upon a limited number of stores we have today compared to other specialty chains out there.

But long-term, I would say our expectations for our North American growth would be kind of at the lower end of double digits, higher end of single digits. Europe, although we are penetrated in countries like Germany and the UK, we feel like we have a lot of opportunity in other markets, including Europe -- or in Europe, including Italy, France, Spain. We continue to see great opportunities and growing our third-party distributor markets, and over time we believe we have some opportunities to also take on ownership in certain of those countries as well. So we see Europe over the long-term probably at a mid-teen type of growth. And Asia -- we think Asia can be 25% plus as we continue to roll out our concession strategies there and we build the FOSSIL brand and the Watch Station brand.

Great. So would that translate to somewhat, about a 20% kind of growing company on the top line? And then you gave us some color around fourth-quarter Asian expenses. How about longer-term? How should we be thinking about opportunity to leverage the business, as Asia-Pacific gets more economies of scale, etc.? How should we think about the long-term there?

Well, as we've talked about over the last couple of calls, we are in a pretty significant mode of building infrastructure in Asia right now to take advantage of what we believe to be some game-changing markets in terms of Korea, Japan, China and ultimately India. As we've said, those will be ongoing investments into 2012 as well, as we add headcount, we build on our store model, we build out our concession models as we advance.

So long-term, if we are right by those investments and we are able to significantly increase the overall mix of our Asia business to total Company, that will come at a much higher-margin rate in terms of gross margins, and we believe ultimately also leverage a lot of the investments that we are making today.

And just last, last question would be on the color of supply chain costs. So it sounded like you said they will be somewhat elevated in the fourth quarter, offset by channel mix and geographic mix. What is your view of supply chain cost trends going into 2012?

Well, I think as we said on the call, Randy, we expect production costs to remain stable in Q4 relative to what we've seen in the last quarter. As we move into 2012, our expectations are that we will see increasing labor costs. We believe that that's something that anybody producing in China is going to have to live with for some time. We are able to leverage some of those increases in terms of the production capacities that we are increasing as well as looking at automating certain functions within the assembly of watches.

We would expect something in the neighborhood of probably a 20% increase in those labor rates next year, and that could come as early as March. I know that the Chinese government has issued some information about that recently. We are currently negotiating with our movement suppliers. And although we saw some significant increases in movement cost this year, relative to the tragic events that occurred earlier this year, that is something that we believe can stabilize over time.

Got it, thanks, guys.

(Operator instructions) Omar Saad, ISI Group.

I'd like to give you guys (technical difficulty) --

Omar, you are cutting out. We can't hear you.

Can you hear me now?

Yes, we can.

I wanted to give you guys (technical difficulty) talking about the North American wholesale business a little bit. I know last year in the fall and the holiday season watches really kind exploded as a category. We saw that business and the shipments slow a little bit this quarter. Does that reflect anything more than just the kind of more difficult comparisons, or are retailers running out of space that they can allocate to the watch category? I just wanted to give you an opportunity to talk about that a little bit more. Thanks, and then I have one follow-up.

Well, in the United States, as we have said before, the stores have given it more space and attention. There is a lot more interest in watches than there had been in past years. We had a -- also a 40% increase last year, I think, in the United States. So all of our metrics and the inventory turns show that the business is still expanding and we are expecting to gain market share in there.

It is interesting, if you go in a lot of stores in the United States, you will see expanded presentations. Some stores have added an additional department in the men's area, and all the information that we get says that the category is still expanding, as it was last year.

As then, Kosta, as you think about the holiday season this year, anything you are seeing in the marketplace the last quarter or two and into November, key trends or styles or new emerging trends, styles (technical difficulty) popular this holiday as we kind of think about whether this category can break out from the ceramic and some of the core fashion sales have been very strong into other areas of strength.

Yes, good question. We are actually seeing sort of a shift, and I guess it's been going on, sort of a fundamental shift in that it's not really the fashion watch business anymore. It's not novelty or somewhat tricky, it's more lifestyle branded watches. We seem to be more in sort of a luxury watch model where, when we innovate within the familiar and we show iconic styling and we present it with clarity, that we are getting great results across all the brands.

And I think that specifically that will manifest itself in a very important way, I think, in Asia because this whole watch business that we are in, in Asia, somewhat is a leapfrog. And we're going to present -- the hundreds of millions of additional middle-class consumers in the next several years are going to be presented with a category that doesn't largely exist right now, through our concession. We think it's a very significant opportunity.

Okay, great, thanks, good luck, guys.

Ike Boruchow, JP Morgan.

The direct-to-consumer segment -- can you guys talk about, Mike, did you give the comp breakdown, North America, Europe and Asia? And also, could you talk about the online business? I guess it came in flat this quarter. With the launch of the new Watch Station website, we would've thought there were some more growth there. Could you give us a little more color?

Sure. I'll give you the comp information, and then I'll let Kosta talk to the e-com business. Within the 14.1% increase globally, we had a 16.9% increase in North America, and that was on top of a 22.8% last Q3. Europe was up 5.1% on top of a 10% in the prior-year quarter, and Asia was up 16.8% on top of a 23.9% last year.

And if you look at our website and our catalogs, just looking back now versus what they were a couple years ago, we recently have put a new website out there that's much more branded, has a lot more clarity, more platform driven and it's got a lot of great storytelling in it that we think is going to resonate very strongly with customers.

In addition to that, if you will notice on our website, you will see our two most recent catalogs. And if you look at, again, the photography, the image that we are presenting, the brand clarity, more aspirational in nature, we think both of these vehicles are in a very good position to improve our branding, and therefore, our sales growth over the next couple years.

Got you, and one quick follow-up -- on the gross margins, it seems like in Q4 you should have a similar mix benefit. I guess you gave 30 basis points benefit from currency versus the 170 last quarter. But the overall gross margins you're expecting to be much better from the down 110 we just saw. Could you just give us a little more color on what that is implying? Is there AUR increases in pricing that's built into that? And then how should we think about the gross margin trend into the first half of next year?

Sure, Ike, there's a couple of things there. The first thing is that we are advancing our store growth in Q4 compared to last year, so you will see direct-to-consumer as a percentage of the mix increase by over 300 basis points from where we were in Q3. And that's a much higher spread in comparison to Q3 to Q4 last year. We're also expecting to see a higher spread in terms of mix benefit toward our international operations, including Asia, where a lot of that growth will come through concessions, where we are operating basically in a retail model as well. So those are the primary factors why we see the ability to bring in a gross margin that's going to be a little more consistent, albeit slightly below last year, than we've seen over the last couple of quarters.

Okay, great, thanks, guys.

Oliver Chen, Citigroup.

Regarding the fourth-quarter guidance, it looked like you're going to experience some price increases or conduct price increases across a select number of styles. How is this happening in regards to your multi-channel model, and which models? And then going forward, when can we expect the core collection to have price increases and the rough magnitude of each? Kind of which quarter will the consumers be to react to potential increases on the core?

Well, we have actually done some testing on increasing prices in our own stores, and we actually found that it was a very positive result; it actually give us more gross margin dollars. So slightly less in unit sales, but a big lift in terms of margins. So we know in our own distribution that we do have some flexibility there. We had, across almost every brand, looked at opportunities to start moving prices up in a very careful and strategic way, and we have been very successful in doing that. There will be more of that to come next year.

A lot of this is just in kind of re-innovating the product. We are putting more details in the products, for example, and charging even higher prices. And it's interesting, but we have seen the customer respond very strongly to that. In fact, if you look at our line of the brands and merchandise, we tend to be selling the higher-priced merchandise that has more detail and authenticity across FOSSIL and the rest of the brands and all across the world. The brands that we have that are or lower in price point and value seem to be having slightly slower sell-throughs and not turning as fast as the customer's clearly responding to the average increases in price and also detailing, styling and more -- better-looking merchandise.

So do you expect this to continue for a few quarters in terms of the benefit from your execution of price increases? And then the last question is about the Asia concessions. What are your thoughts on how to dimensionalize the productivity per point of concession, if that's one way to look at it? And also, you are at 205 now. Do you have any rough sort of feeling or view on what you maybe at the end of 2012 in terms of points of concession? Thank you.

Well, on the issue with the watches, we do think that we're someone in a different area in watches and this is kind of a different situation. The response we are getting to these lifestyle-branded watches at higher retails is becoming more iconic and there's more brand clarity in it and we're seeing customers respond to higher price points, more quality, higher detail. We really think this is ongoing, especially if you consider largely our growth will be in our own distribution and in Asia, and we will have a better control over it because more of it's direct. And we think we're in a great position to increase the average unit retails and the quality and detailing of the styling.

In terms of the concessions in Asia, we are very, very encouraged by the productivity we are seeing. One of the interesting things about our business model that's unique is that almost every country in the world is going to Asia and China and trying to build a brand. Because we have two core businesses, our multibrand watch business and our FOSSIL brand, we have the ability to immediately put in our multibrand watch business, and it's very successful from day one, good inventory turns, very profitable, very high return on capital. And we are controlling ourselves so we have a very close watch on inventory and the sales technique and the metrics. And that profitability, we think, is going to help give us an entree into the rest of Asia with the FOSSIL brand, which is basically how we've grown the Company globally.

So we think that this is a great, advantageous business model for us, to use the synergy of the two businesses to really work together to make it more successful.

We also think that, literally, there are hundreds and hundreds of potential concessions throughout Asia. If you look at Japan, Korea and China, we have 205 now. Potentially there are many hundreds more, especially when you consider that this -- two core business strategy will enable us in a lot of those department stores to put two concessions. One would be a multibrand watch concession and the other one would be basically a FOSSIL store, so a multi-category FOSSIL store inside those department stores as well.

So we are building the infrastructure out there for all the issues on concessions, the visual presentation, the fixture construction, salespeople, district managers, planners, etc. and being able to leverage the two puts us in a really good position, we think.

Part of that strategy for us is -- to get these concessions in there is to put flagship stores in some cities so that we can communicate the brand, and then in department stores we will put our concessions. So, for example, we have a number of really important stores in Tokyo and other parts of Japan that are facilitating FOSSIL brand growth and enabling us to put FOSSIL concessions inside department stores. We also are opening a store in Seoul; it's sort of a flagship location, relatively small store but a very important location, that we think will enable us to start putting FOSSIL concessions in those stores. And then the strategy would be the same for China, is to put stores there in important locations, enable us to facilitate the building of our FOSSIL stores and, potentially, Watch Station or multibrand watch concessions in the stores.

So the potential for the market is just huge.

Oliver, I would add, also, in terms of number of stores, as Kosta mentioned, we added a net 62 concessions over the last 12 months, which represents a more than 40% increase in the number of locations. And these are very productive environments for us. I would remind folks on the call that we write off the fixturing related to these concessions on the front end, as the lease lives are generally a lot shorter in that environment than we would find for a typical store that we would build.

So as we move forward and as the depreciation carry off the fixtures basically ends in the first year, we believe that we will see even far greater productivity as we grow the concession base.

Thank you.

Barbara Wyckoff, CLSA.

A couple of questions -- can you comment on the performance of your FOSSIL-owned and licensed brand products in key US and international accounts versus the competition? And then I have two more questions. Thanks.

Well, we do think that the overall watch market is expanding much faster than GDP. And our perception is that we are gaining market share in the United States and around the world. So we think we are in a pretty good position to continue to do that with our increasing resources, distribution, design and the brands that we have. And we think we're in a great position to continue to gain market share in what we think is a category that's going to continue to expand.

Great, thank you. And you talked a little bit about aging of inventory and having some sell-off for third parties. Could you kind of elaborate on that? And should we expect to see that going forward, content of inventories, how clean is it relative to last year, etc.?

Well, we have been very active over the last couple of years in just making sure our inventories are as clean as possible by selling off some quantities to some stores that sell closeouts. We think that's a very healthy thing for us to keep our inventory and our warehouses extremely current.

One measure of just the currency of the inventory is just our outlet stores continue to do extremely well. The margins are very high and the sell-through rates are very, very good there. So we know that we are in a pretty good shape in terms of a healthy inventory.

Okay, thanks.

Anna Andreeva, FBR.

I was hoping to follow up on Europe a little bit. Your results there were certainly better than what we are hearing from other companies. Maybe just give us some color. What are you seeing by country? I know you have pretty sizeable exposure to the UK and Germany. And can you comment about maybe quarter-to-date in Europe, whether in the wholesale channel or DTC?

In terms of the performance in Europe, we are actually seeing a better performance in our larger markets, like Germany and the UK, and that's across both our wholesale business as well as our store base. Like others, we are seeing a little bit of challenge in some of the southern European areas -- Greece, Spain, Italy as well, to some extent.

The comps, which were up 5.1%, I think are an indication that we are probably outperforming the market. And that, again, as I mentioned earlier, was on top of a double-digit increase in Europe comps last year. We generally don't talk in terms of granularity in terms of the business for the first six weeks of the current quarter, but I would say that our expectations for Europe are similar for Q4 in that we expect to see strong double-digit growth in our wholesale categories within that region. And we are seeing a little bit of a slight dip in retail comps right now, but that's something we're looking at that we think can be assisted with focusing more on some productivity metrics that are out there.

Okay, that's great. So, Mike, is it some of the newer materials that are driving the business is there? I know Michael Kors obviously is so new in some of those regions. Is it the ceramics where you guys are seeing the strengths?

You know, we're seeing it at cross all brands. All of our brands were up in Europe in terms of watches and most were up double-digits. To what Kosta talked about, it's a great product, innovative product. We're finding that higher price points are selling very well as well. So I would say it's across the entire brand selection that we have and really very consistent with what we've seen over the last 12 to 15 months.

One thing that I would add is that, as you know, we have a very large Fossil business in Germany, where the other markets have been somewhat smaller. Over the last several months, we've opened a number of stores in France and Italy, and we are seeing those markets really start to kick in with FOSSIL. And relative to the size of our German business, they have a huge, huge upside. So we are very interested in watching that closely.

Okay, that's great. And just quickly on Asia-Pacific, I know you talked about discontinuing some of the nonbranded businesses in the second quarter. So is that continuing into Q3? I'm just trying to extrapolate why we saw some deceleration in the trends there. Sounds like it was more, really, Japan than anything else. Can you just give us a little bit more color?

Yes, it was actually couple of things. We were exiting a jewelry business that we acquired back when we opened up distribution in India that will continue to be an anniversary issue in Q4 but will go away in Q1 next year. We are also exiting distribution of certain brands that we don't own or license that we had been distributing in the market for some time. We will be through that situation by the end of the year as well. And you are right; Japan is still very challenging from a macro perspective. We do expect to see that business improve as we go into the fourth quarter. And then, as we also mentioned, we've seen somewhat of a slight decline in our wholesale business in Australia.

Our retail comps were up strongly in Australia. We're having some challenge with the wholesale business, and it's primary due to a number of our department store customers becoming a little more promotional with the watch business that we really don't want to participate in.

Okay, got you, very helpful. And just finally, I know obviously you guys are investing in the infrastructure in Asia, especially. Can you just remind us what are some of the expenses that fall off in 2012 from 2011, or should we think that as you ramp up square footage growth next year, that's going to potentially offset that?

Well, as we mentioned, we do have an ongoing situation where we will continue to build the infrastructure in terms of systems, people, concessions, stores, etc., over the first half of 2012 as well. And we will also be anniversarying that spend that really started in Q2 this year. But it's something that we feel long-term is, one, obviously needed in terms of a much broader infrastructure to take advantage of what we think can be strong sales growth for many years.

Okay, thanks so much, guys.

Eric Beder, Brean Murray.

Could you talk a little bit about how -- you mentioned a lot of brands. How is Michele doing in terms of the super high end customer?

Actually, Michele did pretty well for the quarter and has year-to-date, and it continues to be very important. That is one area where we do the increase in price of diamonds. We did raise prices there. And I think we saw just a small blip towards flat, but the sell-through trends continue to be very strong. And it's very important with that kind of luxury fashion customer and, I think, gaining importance in the channel. We do have a number of initiatives in place that we think can turbocharge that business.

In terms of the Karl Lagerfeld deal, is that going to be any type of drag on 2012 results? And does this finish your appetite for other potential licenses or acquisitions or other kinds of expansion that way?

It really won't be much of a drag. We have got a design team working on it and some other people, but it's a relatively small amount of expense next year. There will be some design sampling and other charges, but it's really a very small number. It's a very exciting project for us. We think this is going to be very successful. It's a unique positioning. It has somewhat of a different point of view on a lifestyle brand, and we think it's going to be very, very successful.

In addition to that, as we have always said, we are very interested in long-term gaining market share in watches and just adding more to our positioning around the world, and we will continue to be very mindful of that and look for other opportunities. Obviously, one of the things that has been very beneficial to us is just focusing on our existing brands. We put -- most of this growth over the last several years has come through our organic growth of the brands that we have. And we do think they can all be much, much larger than they are right now and they are all becoming more powerful across the board. And when you look at the long-term track of that, considering Asia, that can all be much longer.

But having said all that, we're always in the market looking around to see what's out there that could be additive.

And just a quick financial question -- when you announced the shares outstanding, the share buyback, you said you bought back a little bit of shares this quarter. What should we think about as the share count for Q4?

In the neighborhood of probably somewhere between 63 million and 63.5 million.

Great, thank you.

Rick Patel, Bank of America Merrill Lynch.

Could you give us a better read on your inventory strategy? They appear to be up a little bit more than your sales plan for the fourth quarter, so it would be helpful if you could put that into context. And also, to what extent are product costs affecting how much growth you are seeing in inventories on a dollar basis?

In terms of Q4 we do expect inventory increases to be in line with sales. As I mentioned in the prepared remarks, there's always a little noise around the end of the year relative to Chinese new year and the expectations of labor challenges once Chinese new year is done, although we believe that, as we look at it today, that inventory should be somewhere in the 20% range in terms of growth. And that, as I said, is consistent with our sales expectations.

With selling higher-priced goods, obviously we are carrying higher average unit costs as well within the inventory, so I would say those things kind of line up together. There's really no imbalance between what we're selling and what we carry in inventory. So our AURs would be equally impactful on inventories as well. As we move into 2012 I think we have an opportunity to continue to look at becoming a little more focused on our inventory growth in terms of sales.

What we have always said is through any type of normal period we would expect inventory turns to increase. And I think, as we are refocusing our assortments on deeper, more focused, iconic platforms, that eliminates some of the fringe that we've carried for some time that requires a lot of discontinued activity. So I think as we move into 2012 our focus will be on improving our inventory turns and increasing our inventories at or below the pace of sales.

Can you give us a read on which watch styles and trends are doing the best right now? And how should we think about the distribution of those styles by region, whether they are available today or you see that as growth opportunities in the future?

There's actually a lot of things that are working really well in watches across the board and across all brands. We're seeing a continued response to new ideas. As I said earlier, when we innovate within the familiar like it's an existing strong selling style and we come up with new ways of showing it, it does extremely well. You can go online and see some of the stuff that we have in there, you can see what we are talking about. But the customer is still, I think, overall is just responding to a well-told story at the point of sale. They see a certain style or category they like, and they may buy one or more of something that looks familiar to them. I think that's really what's driving the sales right now.

Great, thank you very much.

John Kernan, Cowen.

So I wanted to dive into North American retail real quick. Obviously, great comp performance this quarter. What's the outlook for square footage growth and store openings in that channel next year? I know you took down square foot or store openings expectations in this year from around 80. But do you think you would kind of reaccelerate square footage growth next year in that channel?

As we said before, we have been very focused on the productivity of the existing stores, especially in the United States. And I think we've done a great job of just increasing the comps in those stores. And the profitability has moved quite a bit and the sales per foot are very good. We do think we can even continue to get better that. The great thing about accessories is the potential sales per foot can be very, very high just due to the rather small nature of the products. Plus, as we continue to get more aspirational and raise the average unit retail, we think there's opportunities for that.

We also and productivity side had closed a number of stores this year, just less productive, not as important locations. I think that was a great thing. We are going to end up exceeding our sales plans in retail, plus all our operating metrics, etc., even though we opened fewer stores.

We do have in the pipeline for next year more stores than we did a year ago now. So we do think that we will have an accelerated number, and we are working on that very closely with the team. So we are also in a situation where we will be opening, I think, an additional number of outlet stores next year. It will probably be a higher percentage of our total openings, just based on the growing scale of the Company and the potential obsolescence and just the overall great performance that we've gotten in our outlet stores.

Okay, great. And then comp trends quarter to date -- are you comfortable talking to that in North America?

So far in the fourth quarter, we've seen similar trends than what we saw in the third. And we are expecting to have, honestly, a great fourth quarter. The stores look great. Our catalogs and our presentation of the brand look great. We are in a great position in all of the watch brands, so we're expecting to have a pretty strong fourth quarter.

Okay, great. And then shifting to Europe, your European shipments were up 35% in July on a dollar basis. I know there was a shipment timing issue in there. But that would imply kind of a deceleration through August and September. Is that just shipment volatility, or is that order volatility from some of your customers? Can you talk about some of the volatility you are seeing in Europe?

John, that was primarily the impact, if you recall, of some deliveries being late on newness for Europe in Q2. So it was just a timing difference of stuff that would have historically shipped in Q2, had the goods been in the warehouse, shifting into early Q3.

Okay. And then you talk about taking price increases and having a lot of success in your directly operated retail channels. Are there other channels and geographies that you have really been aggressive with price and see really no pushback?

No, I think we've done it more rapidly where we control the distribution, such as our concessions in Asia, for example. It's difficult when you use third-party retailers to go in and change prices, especially this time of year, because there's a lot of inventory in place and sometimes that's advertised and it's just kind of problematic. So we haven't done it largely across our wholesale business.

But the response we're getting overall has been very positive and I think we can continue to do that.

All right, great, guys, thanks for taking my questions.

Scott Krasik, BB&T Capital Markets.

I guess, Kosta, some of the newer initiatives -- you said you wouldn't take on a new license unless it could be a Kors or an Armani. So is that how you feel about Lagerfeld longer-term? And then also, maybe give an update on Michael Kors jewelry?

If you look at the Karl Lagerfeld brand, it's much more well-known as we start this than Michael Kors was when we started. And we just feel it's a very positive thing to put in the marketplace at this time, based on the global awareness and the unique positioning that brand has and what his design aesthetic is. We just think it's a great global idea. So we are very interested in that.

There's also -- the team that's doing it, we are familiar with them and the operating model and the way they are going to go about it we're very comfortable with, and we just think it's going to be very successful. So we're looking forward to that.

Kors jewelry?

Kors jewelry is -- we started with a small number of doors and shifted I think early in the third quarter -- very, very high sell-through rates, which gives us an indication it's going to be very strong next year. Relatively small again in the fourth quarter in terms of sales, just because, as we always start off kind of slow until we get the entire operating model correct. But we will see a pretty strong growth there next year.

Just in terms of order of magnitude, I think you do Armani jewelry, how big is that jewelry business relative to the watches? And will Kors -- will the balance be similar, ultimately?

Well, Armani is a relatively small jewelry business, much smaller than what we expect Kors to be. Kors, I think, is positioned in a more important way, I think, in terms of the jewelry and the stores that we sell to in the United States and the type of jewelry we have. I think it's more iconic and more suited, I think, to the brand. Armani is a relatively small distribution globally, so Kors will end up being much larger.

Okay. Mike, I'm not sure if you answered it or not. Are you expecting to raise prices in your core business to offset the coming or continuing labor inflation in China next year? Or are you just expecting favorable mix-up to offset that going forward?

Well, what we've said is that we will look collectively at raising prices on core styles. We don't expect that to be significant in terms of across the board. However, as you know, our operating model is to continue to add a lot of newness into our assortments over the balance of the year. And we're taking advantage of that to ensure that we are creating a margin opportunity in terms of how we are pricing newness. And we will be tracking sell-through on those goods to determine that it's not impacting the consumers' reaction to higher prices. And as Kosta mentioned earlier, where we have had higher prices, and it has not been on core, it's been on newness, we have seen a very strong response and people continue to resonate with higher-quality goods, even at higher prices.

So I wouldn't expect -- you will see that we are raising prices across the board on core styles. We are very selective about that right now. And as Kosta mentioned, for some brands that can be very difficult based upon the multi-channel distribution model we have. But we will definitely be looking at managing our margins on newness to help offset the decreased production cost.

So that plus mix -- without giving guidance, you don't think that margin should be down next year. Right?

Well, we're not going to talk about 2012 margins. We'll get through the fourth quarter here and then we'll obviously lay out our guidance for 2012 in February.

Okay, thanks, guys.

Cliff Greenberg, Baron Capital.

Congratulations, guys. In Asia-Pacific, is the management team totally built out now? And remind me -- are you building two separate teams for the branded business and the license business, or is there one team there?

We've hired a number of key management people throughout Asia, a lot of them from big multinational brands have experience in the region. So we are very, very excited about the teams there. We also sent a number of ex-pats from here there, and also we have sent an ex-pat from the UK, one from Japan, kind of flooded the market with talent and expertise and knowledge of our business -- in all disciplines, from management to planning to communication training, etc. So we kind of -- I have got a great team over there, and we are continuing to add to it. And we are expecting, over the next several years, to build a pretty strong base of people that can continue to facilitate the growth that's over there.

Okay, thank you.

Ronald Bookbinder, The Benchmark Company.

Brazil -- how is Brazil trending, and is there an opportunity to bring it in house from a third-party distributor, benefiting revenues and margins?

Well, we've actually seen very, very strong growth throughout Latin America and especially in Brazil. One thing that's very interesting to us is, as fervent as the Asia customer is about brands, it seems like the Brazil customer is even more so. So we do know it's a big opportunity.

There are some problems with doing it direct. We are using a distributor, and we are in the process of analyzing our situation there and figuring out a strategy to be even more aggressive in the market. But we do know it's a huge opportunity for us in our business model and our brands.

Okay, and I've noticed that you've been advertising bags lately. Are the non-watch goods starting to ramp up faster than they have been? And if so, would it add to any margin pressure?

One thing we've said before is that if you look at our Accessory Store and also our catalogs and website, the whole idea is we are an accessories-based lifestyle brand. Watches is obviously what we started in, but if you look at our store, less than a third of the space is watches. We've always given more space to accessories and leather goods, really trying to build that into a more powerful business.

And just the nature of the brand getting more aspirational has given us the position where we can become more important in leather goods, especially handbags. You see the growth we've had this year and last quarter and ongoing in handbags really kind of talks to this issue of as we become a more well-known, more aspirational brand, the emotional nature of a handbag purchase really is in our favor. And we think we can do many times more what we're doing now in our stores in handbags because we have a lot of space to it.

We also have seen, as we add more authentic, more iconic, more -- higher average unit retail bags in our stores, the sell-throughs are very, very strong. And we're seeing the effect of this also filter down into the department stores we sell to also. So we do think we have a very large opportunity, long-term and globally, in this more emotional and somewhat viral handbag industry.

Okay, great, thank you.

That's all the time, ladies and gentlemen, we have for your call today. I would now like to turn the call back to management for any closing remarks. Thank you.

Should you want to replay this conference call, it has been recorded and will be available from 10 AM central time today until 12 midnight Central time tomorrow by calling 303-590-3030 or 1-800-406-7325, reservation code 447-7784 (Operator instructions). The conference call is also being recorded by StreetEvents and may be accessed through the StreetEvents website at www.streetevents.com or directly through our website at Fossil.com by clicking on About Us on our home page and then on webcast.

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 February for the release of our 2011 fourth-quarter and full-year operating results.

This concludes the Fossil, Inc. Q3 earnings conference call. Thank you for participating. You may now disconnect.