Fossil Group Inc (FOSL) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Fossil Inc. fourth quarter and fiscal year 2011 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Tuesday, February 14, 2012. I would now like to turn the conference over to Allison Malkin of ICR. Please go ahead.

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 material differently -- differ materially from those that will be projected during these discussions. Fossil's policy on forward-looking statements and additional information concerning a number of factors that could cause actual results to differ materially from such statements is readily available in our Form 10-K and 10-Q reports filed with the SEC.

In addition, Fossil undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise except as required by law. 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 supplement 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 About Us at the bottom of the home page and then on Investor Relations and select Webcast. Now, I would like to turn the call over to Fossil's CEO, Kosta Kartsotis.

Thanks, Allison. Good morning, everyone, and welcome. Joining us today to discussing our fourth quarter and full year results are Mike Kovar, our CFO; Mark Quick, our Vice Chairman; and Jennifer Prichard, our President of Retail. At the conclusion of these remarks, we will open the call up for your questions. The fourth quarter concluded a very successful year for the Company. We experienced double-digit sales gains across all of our business segments and all our principal brands and product categories. We believe these results demonstrate the ongoing success of our two core businesses, the overall Fossil brand and our multi-brand watch business.

Our direct-to-consumer channel had a great holiday quarter with sales growing 23%. We continued to experience strong comp store sales while growing the global store base to just under 400 locations by year end. In fact, Q4 represented our third consecutive holiday quarter of double-digit comp store sales growth. Our ongoing innovation through design and imagery, coupled with our own distribution model, allowed us the opportunity to present powerful and consistent branding, compelling product offerings and superior financial results while gaining market share on a global basis. In particular, 2011 included several significant milestones. Total sales topped $2.5 billion, increasing by over $500 million during the year. The sales of Fossil branded products surpassed $1 billion, coming in just shy of $1.2 billion for the year. Our multi-brand watch business grew to over $1.8 billion with both Michael Kors and the Armani brands exceeding $300 million. And we made significant inroads into establishing a much larger infrastructure in Asia that will serve as our base for growth within that region.

The Fossil brand continued to make significant progress during the year, increasing 19% in constant currency, led by a 20% increase in watches and a 31% increase in leather sales. As we present the image of American vintage with more authenticity and clarity, the brand continues to grow in importance around the world. With increasing focus on fewer, better told stories and platforms has given us the ability to give a richer brand experience at the point of sale. We believe we are in the early stages of this process and that there is a significant global opportunity in front of us as the Fossil brand becomes even clearer and more aspirational. The brand is strong in both men's and women's side of the business and works all over the world. As we expand around the globe, our positioning as an accessories based lifestyle brand gives us huge advantages as these categories carry higher margins, have shorter lead times and have less obsolescence than other categories. It is a much simpler business to operate, especially on a global scale.

Our comp store sales had another strong showing and were up 14% for the quarter with North America up 16%, Europe up 8% and Asia up 21%. It was our ninth consecutive quarter of double-digit growth which shows the ongoing improvement in the overall branded customer experience in our stores. For the year, global comps rose 17% on top of a 19% increase last year with a similar performance regionally to that of Q4. We have made solid progress in improving the productivity of the store base over the last four years, evidenced by the expansion of our four-wall operating margin. With our stores performing well across all regions and with our metrics improving, we believe we are still in the early innings of a rather large multi-year retail growth opportunity. In 2012, we will continue to focus on increasing the productivity of our existing stores while we also accelerate our store openings. We currently expect to open 70 to 75 new stores with equal distribution between the United States and international markets while closing approximately 18 doors. We will focus on opening accessory stores, outlet stores and Watch Station stores. Our global real estate team is well ahead of where they were at this time a year ago. As of today, we have commitments to 49 locations for 2012, including 21 signed leases.

Turning to our multi-brand watch business, sales were up 20% in the fourth quarter and 27% for the year. This impressive growth follows 40% increases in both the fourth quarter and full year last year. Our brand team, creative teams and our sourcing and sales organizations continue to do an [excellent job] and telling more compelling product stories and delivering a better, more branded customer experience. During the fourth quarter, some notable call outs include Michael Kors with sales up 56%, Marc by Marc Jacobs doubling over the prior year and Armani Exchange increasing 48% while Diesel and Burberry were both up 30% or more.

As mentioned earlier, Michael Kors sales surpassed $300 million this year in watches. We also launched the Kors jewelry line in the fall in limited doors, and the sales exceeded our expectations with sales exceeding $6 million. With most of the Kors business still in the United States, we believe we have a significant opportunity to grow this business to a much larger number as the Kors brand is further introduced globally.

We are also expecting tremendous growth in up in up and coming brands like Marc by Marc and Armani Exchange, both demonstrating sizable sales growth in this past year. And we believe all these brands have significant long-term opportunity in Asia where we saw our sales last year increase by 28%. This growth was led by Korea, which grew at 74% and China growing 71%. Japan also did very well considering the tsunami and had a growth of 9% for the year. The rapidly growing consumer market in Asia is particularly predisposed towards watches, jewelry and leather goods and has an affinity for the global brands that we produce. It clearly is a game changing opportunity for the Company. We have made considerable progress this past year in attracting talent and growing concessions and building our infrastructure to capitalize on what we expect to be a much larger long-term opportunity.

Turning to Europe, sales rose 18% in the quarter and 22% for the year, led by Germany, which remains our most highly penetrated European country. We also saw double-digit growth in France, Italy, the UK and the Netherlands. Each of these countries represent a sizable opportunity for continued expansion over the next several years. For 2012, we continue to focus on investing in the Fossil brand in key markets like France, Italy and the UK as we expand our footprint through market share gains and product expansions, as well as through Internet and retail store buildouts.

Before I turn the call over to Mike, let us share with you our thoughts on the acquisition of Skagen and what we think this means for the Company. We signed this deal back in January and expect it to close around the end of March. Skagen is a fast growing and profitable watch brand that has a global footprint and is successful in North America, Europe and Asia and also operates 13 retail locations around the world. The company has demonstrated a strong track record of growth with 2011 sales of about $120 million and an operating margin similar to ours. Skagen is a design-driven brand with a unique point of view based on Danish design. It is contemporary in look and different than any of the products that we currently make. Our objective is to turbo charge the Skagen watch business while supporting it and expanding its distribution. And just like the Fossil brand's mission is to curate and communicate American vintage-inspired merchandise, our long-term plan with Skagen is to curate and communicate its unique Danish design heritage and to tell its story more broadly as an accessory-based lifestyle brand.

And there are also a number of other benefits. They have great people in management that will now be joined with ours to create something new and greater together. We also will gain some needed additional sourcing as their factory base is different from ours. It also gives us more critical mass in the global watch business and gives us an additional owned brand that we can focus resources on in an effort to make it a much larger business with additional categories as well as additional stores and websites. All of these initiatives will further leverage our existing and growing global infrastructure and give the Company a larger long-term opportunity.

In closing, we would like to thank our Fossil team members and partners around the world for another terrific performance in 2011. The numbers for last year are due to their collective spirit and the ongoing pursuit of excellence. Mike?

Thanks, Kosta. I will start off this morning by briefly touching on our fourth quarter 2011 versus 2010 results from this morning's press release. Net sales increased 18.5% to $831 million compared to $701 million. Gross profit increased 16.4% to $466 million, or 56.1% of net sales compared to $400 million, or 57.1% of net sales. Operating income increased 16.6% to $174 million, or 21% of net sales compared to $150 million, or 21.3% of net sales. Net income increased 22% to $118 million compared to $97 million, and diluted earnings per share increased 28.1% to $1.87 on 63.2 million shares outstanding compared to $1.46 on 66.3 million shares. The $831 million of net sales was at the lower end of our previous guidance but still represented double-digit sales growth across all of our operating segments and major businesses in comparison to Q4 last year. The impact of a weaker euro during the latter part of the quarter and slightly weaker sales growth in certain non-strategic Asia-based markets were primary factors.

In comparison to Q4 last year, we experienced an 80 basis point shift in sales mix from our wholesale business to our direct-to-consumer businesses. And on a regional basis, each of our wholesale businesses experienced a slight decline in comparison to the prior year quarter mix. In connection with our wholesale operations, sales from our North America wholesale businesses, which include our operating activities in the US, Canada and Mexico, as well as sales to third-party distributors primarily located in South America, grew by $45 million, or 17.3% to $307 million.

Excluding approximately $1.7 million from unfavorable currency comparisons to Q4 last year, North American wholesale sales increased by 18%. Sales from our Europe wholesale operations increased by $33 million, or 17.5% to $224 million, and excluding currency that unfavorably impacted sales by $1.7 million, Europe grew by 18.5%. Sales from our Asia wholesale operations increased by $12 million, or 15.7% to $86 million. Excluding currency that favorably impacted sales by $1.4 million, Asia wholesale sales grew by 13.8%. Sales from our direct to consumer businesses increased by $39 million, or 22.6% to $214 million. Year over year currency fluctuation had no significant impact on reported sales in this segment. Constant dollar comps in our retail stores maintained their strong double-digit performance, coming in at 14.4% in Q4 on top of a 20.3% increase in the prior-year quarter. This represents the 15th consecutive quarter of positive comps, and as Kosta mentioned, the ninth consecutive quarter of double digit positive comps.

Globally, we ended the year with 398 stores and occupied 715,000 square feet compared to 644,000 square feet at the end of 2010, an increase of about 11%. This included -- 245 full price accessories stores, 142 of which were outside of North America; 104 outlet locations, including 29 outside of North America; 36 clothing stores with 4 outside of North America and 13 full priced multi-brand stores including 11 outside of North America. This compares to -- 364 stores at the end of 2010, including 230 full price accessories stores, 127 located outside of North America; 93 outlets, including 22 outside of North America; 31 clothing stores with 3 outside of North America and 10 full priced multi-brand stores with 5 of those -- I'm sorry, with 9 of those outside of North America. For the year, we open 51 stores and closed 17.

From a watch and non-watch category perspective, total watch sales increased $103 million to 20.4% to $607 million with the Fossil brand sales increasing $33 million, or 19.3% to $201 million and licensed watch sales increasing by $82.3 million, or 30.8% to $350 million. While on the non-watch side of our business, leather product sales increased $26 million, or 23.4% to $137 million, and jewelry sales increased $4.5 million, or 7.7% to $63 million.

Q4 gross profit margins declined 100 basis points to 56.1% compared to 57.1% in the prior-year quarter. This decline was principally driven by an increase in the cost of factory labor in certain watch components, as well as lower gross margins on sales to the off-price channel. The lower off-price channel margin were primarily a result of sales of discontinued inventory in the footwear, Relic watch and mass market businesses at levels below cost. Year-over-year currency rate changes benefited overall gross profit margin by approximately 80 basis points in comparison to the prior year. For fiscal 2012, we expect full-year gross margins slightly below the 56.1% level achieved in 2011. At prevailing FX rates, currency will negatively impact gross margins throughout the year with a more severe impact on Q2 and Q3. Also in comparison to the prior year, Q1 and Q2 margins will be impacted by input cost increases as we don't anniversary most of the production cost increases we absorbed last year until the second half of 2011. However, select price increases expected to take place in March, a reduction of sales through the off-price channels and an expected higher mix of sales from our Asia wholesale and direct to consumer segments throughout the year will partially offset the impact of currency and higher input costs.

Operating expenses expressed as a percentage of net sales decreased to 35.1% in Q4 compared to 35.7% in the prior-year quarter. We generated nice leverage in the quarter against the backdrop of continued investments in Asia and increased costs related to our new headquarters. Total operating expenses in our wholesale segments increased by $17.5 million, of which approximately $10 million were related to the Asia region. On a combined basis, our North America and Europe wholesale businesses were able to generate approximately 200 basis points of SG&A leverage in Q4. Expense increases of $17.4 million in the direct-to-consumer segment were primarily attributable to store growth, increased web-based marketing expenditures and ongoing costs associated with our new CRM initiative.

Corporate segment expenses increased $6.1 million, which were primarily attributable to increased payroll costs, including stock compensation, and higher operating costs associated with our new corporate headquarters. For fiscal year 2012, we are expecting slight deleverage in operating expenses. The deleverage will be more impactful in the first half of the year as we won't anniversary the bulk of the Asia investments and expenses associated with our new headquarters into the second half of the year. As a percentage of net sales, Q4 operating income decreased slightly to 21% of net sales compared to 21.3% in the prior year quarter, primarily the result of a decrease in gross profit margin, partially offset by 60 basis points of SG&A leverage. During the fourth quarter, operating income was positively impacted by approximately $7 million as a result of currency translation.

Other income and expense net decreased unfavorably by $10.6 million for the fourth quarter. This decrease was primarily driven by unfavorable foreign currency charges resulting from mark-to-market, hedging and other transactional activities during Q4 compared to currency gains in the prior-year quarter. Currency losses were slightly higher than we expected as a result of the significant appreciation of the US dollar against the euro and certain other currencies from the end of Q3 to Q4. The Company's income tax expense for the fourth quarter was $46 million, resulting in an effective income tax rate of 27.3%. Fourth-quarter income tax expense was positively impacted from certain tax provision offsets carrying a higher effective tax rate. For fiscal year 2012, we estimate our effective tax rate will be at or slightly below the 2011 fiscal year rate, excluding any discrete events. Fourth-quarter net income attributable to Fossil Inc. increased by 22% to $117.9 million, or $1.87 per diluted share, compared to $96.7 million, or $1.46 per diluted share in the prior-year quarter. Q4 was negatively impacted by net unfavorable currency losses of $0.03 per diluted share.

Now turning to our balance sheet. We ended the year with cash, cash equivalents and securities available for sale totaling $288 million compared to $402 million at the end of fiscal 2010, and we had approximately $15 million of debt. Since the inception of our $750 million buyback authorization in August of 2010, we have purchased $487 million of common stock representing approximately 6.6 million shares. And under our latest 10b5 plan that we completed last week, we produced 863,000 shares at a cost of $75 million. During fiscal year 2011, we purchased 3.1 million shares at a cost of $271 million. Year end inventory was $489 million, representing an increase of 31.5% from the prior year end balance of $372 million. The percentage increase exceeded our Q4 sales growth, primarily due to an acceleration of factory watch shipments near the end of the year that effectively represented a five day reduction in lead times. Additionally, given the events that unfolded in Japan in early 2011 and the concentration of our movement supply in that country, we have also increased the level of inventory related to key watch component parts, including those with longer lead times.

Accounts receivable increased by 14.9% to $303 million at year-end compared to $263 million at the end of fiscal 2010, primarily due to the increase in wholesale shipments during Q4. Our DSO for the fourth quarter was 43 days in comparison to 44 days last year. During 2011, we had capital expenditures of just over $130 million and are expecting 2012 capital expenditures of approximately $120 million. Depreciation and amortization expense for the year totaled $45 million, and we estimate full-year 2012 depreciation and amortization of approximately $60 million.

As it relates to our guidance for 2012, the following guidance, as well as the prior forward-looking information as to gross margins and operating expense expectation, excludes the impact of Skagen. For the first quarter and full-year 2012, we expect reported net sales to increase around 15% with constant dollar net sales increasing at a slightly higher rate. First-quarter 2012 diluted earnings per share are expected to be in a range of $0.90 to $0.92. For the full year, we expect diluted earnings per share in a range of $5.40 to $5.50. We expect 2012 operating margin to fall approximately 70 to 80 basis points below the 18.4% level we achieved in 2011. However, we do anticipate EPS growth to outpace operating income growth as currency hedges in place will partially offset expected currency translation losses flowing through operating income. Additionally, we expect a lower share count in fiscal 2012, a result of our continuing share repurchase program, and a sustainably lower effective tax rate to also benefit EPS growth. 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.

As it relates to Skagen, although we have cleared regulatory hurdles in Germany and the US, we are still waiting on clearance from the UK which we expect in late March. And because we haven't closed the transaction at this time, our 2012 forward-looking projections exclude any Skagen activity. However, we felt it might be beneficial to provide you with Skagen's 2011 sales and operating margin. In that regard, Skagen's net sales for 2011 were approximately $120 million with an operating margin slightly north of 17%. While we believe there are both some short-term and long-term synergies available to us, we also recognize that there will be certain one-time charge related to the transaction and the ultimate integration of the business. And now I will turn the call over to the operator to begin the Q&A portion of the call.

Thank you. (Operator Instructions) The first question is from the line of Randy Konik with Jefferies & Company.

Hey, great. Thanks, guys. My first question would be for Mike. MIke, you know the SG&A leverage you got in the quarter? Is that something that we can expect to continue in 2012 despite the lower operating margin guidance? So, is the operating margin guidance more of a gross margin compression?

And then just related around the operating margins, you have been guided down for 2012. Is that something where we'd see it down in the first half but up in the second half? Can you just give us a little more color there? Thanks.

Sure, Randy. As we've always said, it is easier for us to leverage operating expenses in the fourth quarter just due to the seasonality of sales in that period. We generate a lot of operating margin improvement based upon our direct consumer business having an overweight in the quarter. So, I think we even gave some guidance back in November when we laid out Q4 that we expect to see some potential leverage in Q4 just based upon the seasonal sales waiting.

You're exactly right, as we move forward into 2012, the reduction in operating margin will be a combination of both gross margin declines as well as deleverage on the SG&A side with most of that SG&A deleverage occurring in the first half of the year as we don't start anniversaring a lot of the Asian investments and the cost associated with the new corporate office until the second half of the year.

Got you. And the my last question would be, can you just give us a little color on what happens -- the Asian numbers came in a little below our expectations. Can you talk about the Asia numbers for the quarter and then how you see them unfolding going into 2012? Thanks.

We made a lot of progress in Asia last year, building out infrastructure, getting a lot of new management members and other people in place. And as you know, we sent some ex-pats over there from different parts of the world to beef up the organization and get some signing going on.

We also were up against some new concessions in Korea, so we are up against some pretty big numbers. So, although the sales growth I think was 28% I think we made a lot of progress in putting things in place to turbo charge that even faster going forward.

Randy, as we mentioned on previous calls, there were also some nonstrategic businesses that we were exiting throughout the year. We had a local jewelry business that we acquired in connection with the India distribution we opened up about three or four years ago, and then there was some non-branded watch businesses we were distributing that we also pulled back on.

Great, thanks, guys.

Thanks, Randy.

Thank you. The next question is from the line of Ike Boruchow with JPMorgan, please go ahead.

Hey, guys, thanks for taking my call. A question for you, I guess I will focus on the US wholesale business. It has been a great grower for the last several years. Kosta, how do you see this business leveling out? Is this more of a GDP grower? How is the channel today within the department stores? And a similar question for Europe. Is there more room for distribution and productivity within that region within that wholesale business?

As you know, the US watch business has been very strong the last couple years. And is that occurred, the stores have added more space, more salespeople, and it continues to be a strong grower. Our -- from what we see, it should outgrow GDP by some margin over the next couple years based on the overall interest in watches and all the dynamics going on.

In addition to that, we do have some very rapidly growing businesses. Fossil continued to grow in the US in the watch business and also, Kors had, again, very rapid growth, and AX had a fast growth mark by mark. Diesel is starting to grow really quickly in the US as well.

We also have, as you saw, we're starting to get -- because of the position of the Fossil and the more aspirational nature of it, we're starting to see handbags grow very quickly which is a big benefit to us, especially in the United States. We also are -- as you know, we're going to be adding additional stores in the United States, so our square footage will grow.

We're expecting comp store increases, and of course also in the United States we think that Skagen is going to give us some position and an opportunity to grow our US businesses as well. So, we think we can continue to gain market share in a faster growing business, both on the watch in handbags side.

As far as Europe goes, the environment over there has been somewhat rocky for the last couple years, and we continue to do well gaining market share. We have a lot of opportunities just in the metrics. As you know, Germany is our largest business for Fossil.

If we can get UK, Italy and France up to that level (technical difficulty) significant opportunity. We made progress in that regard last year. We put a number of stories in France, in Paris and Nice, that did very well. In fact, we are seeing the stores over there were -- they were selling -- they're selling more handbags per store than anywhere else in the world.

So, we have a very good position in the market. We also opened a couple of flagship stores in Italy, both in Florence and Rome, that are doing very well communicating the brand very strongly. Our business in the UK, the number of stores we build there over the last several years have really increased in profitability, and the brand is showing some real strength there as well. So, we're very -- obviously, our biggest opportunity long-term is in Asia, but we think that we have opportunity in both Europe and the US.

Okay, great. And then Mike, one quick follow-up. The tax rate that you mentioned, you guys ended around 32% for this year and you're guiding something similar for next year. Just to make sure we heard you clearly, is this a sustainable tax rate going forward for the Company, or is this a one-time year?

We do believe it is sustainable, Ike. Part of it is that we are increasing a lot of our taxable income in markets outside of the United States that, as most of you guys know, have better tax rates than the US has. So, that is something that we continue to see as we move forward, sustainable rates at that 32% or below as we move into 2012.

All right, great, thanks a lot, guys.

Thanks, Ike.

Thank you. The next question is from the line of Neely Tamminga with Piper Jaffray. Please go ahead.

Great, good morning. Thanks, you guys. So, just a quick clarification on the guidance for next year. The revenue stack, Mike, would you be able to give us just a little guidance as to what's based in by maybe Asia versus North America in terms of the 15% growth? And then I just have a follow-up question for Kosta.

Sure, if we look at it by region, Neely, what we're looking at is the US and Europe growing in the low double-digit area in terms of both wholesale and retail activity whereas with Asia, we see that to be 25% or more. As we now have a lot more infrastructure in place to affect rolling out more concessions and obviously driving metrics through our existing locations to improve the performance of those stores as well.

And then on the retail side, we're looking at 20% plus growth. Kosta alluded to the square footage growth that we are expecting in 2012, adding another 70 to 75 doors and closing around 18 doors. We will have square footage growth at about 14% increase, and we are expecting to continue, obviously, the momentum we have with our store comps. Store comps are in the high single-digit range for the full year.

Mike, that is really helpful. And then just a follow up question for Kosta. You touched on those jewelry opportunity and it is something that -- we've covered the stack for a long time continued opportunity for you guys. How do you view the next five years, Kosta, or three years, even for, is that licenses? Is it going to be Fossil? Where's going to be the primary growth story in your businesses?

You're talking about jewelry, right?

Yes, sir.

Okay, so if you look at what's happened over the last several years, Fossil last year did not grow as fast in jewelry as we like it to, and we have a whole initiative in place right now to (technical difficulty) globally, and you will see a total revamp of the line. It is clear to tell story (technical difficulty) and I think it will be a big boost to our sales globally. In addition to that, we are going to have, the Kors rollout will be going on during this year, and it's -- our expectations are that is going to be pretty good (technical difficulty).

We also, as you know, have some rather small businesses in jewelry, which is -- Emporio Armani, for example, we think has a much bigger opportunity, and we tune it more towards Asia, and we're working on that. We have a small business in Europe with DKNY, which is not growing at a very fast rate. And then the Diesel jewelry has shown some sparks.

Probably the biggest growers of the next couple of years is going to -- we think we can put a lot more increases on Fossil and develop it to a much higher level by adding more category type classifications to a charms, bracelets, et cetera and displaying that in our stores.

We also think that the Skagen jewelry business as an opportunity. They do have a very small business in jewelry that is pretty successful, and we think that the opportunities to -- that we can grow that pretty quickly.

As you know, Fossil jewelry in Europe is $110 million, $120 million, because branded jewelry in Europe is a very strong positioning. Skagen brand is actually -- sells very well, especially in that northern Europe area and then the UK where that branded jewelry is important. So we think one of the low hanging fruit in that Skagen branding idea is to put jewelry over there quickly.

So, one of the things that we are doing, one of the first things we will do with the Skagen once it's closed is get our global operation really to support and to quickly grow that jewelry business. So, we think it is going to be a big opportunity. So, we expect that we're going to grow jewelry over than next several years at a pretty rapid rate.

Thanks, Kosta, and good luck.

Thanks, Neely.

Thank you, the next question is from the line of Omar Saad with ISI Group. Please go ahead.

Thanks, good morning, guys.

Good morning, Omar.

I wanted to see if I could get you guys to talk a little bit about the multibrand watch business. Traditionally in the US it has been a wholesale channel distribution largely and I think internationally, that has largely been true as well. Can you give us an update in terms of the dynamics in that department store channel in the US?

Where you stand from that standpoint, and is there an opportunity, if the watch category really can be a much bigger category? And how do develop the channel? And how's that different in Europe and Asia? And how does that -- lastly, how does that play into your plans for 2012 in terms of your CapEx investment to develop the watch channel, if you will? The multibrand watch channel? Thanks.

Well, we ended last year were 23 stores -- WatchStation stores, and our plan is that we'd end 2012 with 49, so we are going to build a number of those around the world. So, if you look at the United States, for example, WatchStation is mostly and outlet store strategy. We have a number of those in the US that are doing extremely well, and want to expand that really partly to help us with liquidation efforts as the Company gets to a larger scale.

We also will continue to develop our department store business by adding additional categories and space. For example, next year, about a year from now we will ship the Karl Lagerfeld line into that distribution, so we think that's going to be a very strong brand for us. And the stores, as you know, continue to add space and salespeople. A lot of the stores have really intensified their efforts in watches, and we think that is ongoing in the United States. So, that is pretty much what we will do there.

We are opening a few flagship WatchStation locations, really for communication of the brands and the stories we're telling and really to elevate the awareness of that as well as, we opened a WatchStation website last year that will get a lot more active this year in the United States.

In Europe, largely what we have is we sell mostly to small watch and jewelry stores. There's a pretty good network over there. Our WatchStation efforts other also on the outlet stores side as well as flagships. We opened a store in London last year that is doing very well in the Stratford Center near where the Olympics is going to be. And we are planning on looking at other potential flagship locations in Europe. We also, of course, as you know, have the House of Fraser concession there where we own the watch business in that market.

The biggest initiatives for ongoing growth are in Asia. Largely what we are playing into is it's a category that is -- the customers are somewhat very predisposed towards buying, and there is largely not a big distribution channel.

We've talked about this white space that is going on, especially in Asia where there's a huge demand for Swiss watches and a lot of scarcity. If you look at -- the Hong Kong market alone last year was actually 20% of Swiss watches went the Hong Kong. Actually, I think 24%. It was twice the size of the US market. The growth of watches in that market is really incredible and the awareness of it, and it seems to be the number one category in people's minds and probably jewelry and handbags are right behind it.

So, this lifestyle branded watch business that we are in, it is not really what we used to be in, which was the fashion watch business. It is not assortment driven and novelty driven. It is iconic lifestyle branded. It is really almost a brand-new category, not only in Asia, but in Europe and the US as well.

We've seen big growth in higher edge and retail in more developed, more design product with details, et cetera. It is really a new customer and a new business, but I think we have a distribution channel in Europe and Asia that can handle that. In Asia, largely it's a brand-new business, which is why we are so interested in developing the concessions we are developing. And also adding to it WatchStation stores that will be free standing in global markets over there. We think it's a pretty significant opportunity.

Omar, I'll add to that on the long-term investments side. In the US wholesale market, we have obviously a strong relationship with a lot of the majors here. And our ability to continue to grow our presentation of existing portfolios and add additional brands to that is basically something that does not command a lot of investment. It is basically a pipeline of orders that we fulfill.

And even on the WatchStation side, as Kosta mentioned, most of the growth will be in the outlet store environment, and the success we've had with WatchStation stores has been wildly successful. Our ROI on that activity is one of the best in the Company.

So, where we are really focusing a lot of the investment, and this was a theme in 2011 as well, is to build out that concession basis stores throughout Asia, have the appropriate level of back office in terms of field sales management, inventory planning, environmental design to fixture and build all these concessions out, and that is where most of the investment is going to come from as we move forward.

That's great, guys. Thanks a lot. Good luck.

Thanks, Omar.

Thank you. The next question is from the line of Oliver Chen with Citibank. Please go ahead

Thank you. Hi, guys. Related to the concession and the points of concession, what can we think about in terms of how many points of concession you may be able to ramp up to in '12 from your to '13 now? And secondly, regarding M&A and Skagen, could you refresh us for modeling purposes where the proceeds or where you're getting the source of cash for that deal? And secondly, related to M&A, are there any -- do you have an appetite for licensed or niched brands going forward?

As far as the number of concessions in Asia, potentially there are hundreds, literally hundreds of department stores there, and there's more being built all the time, especially in China. We have not identified the finite universe of ones that we'll go into, but it is a much larger number than where we are right now.

And consider the fact that in each of those department stores that are viable, the long-term plan is to have two concessions. One is a multibrand concession or somewhat of a WatchStation concession, and the other is to have a multicategory Fossil store inside that store. So, that is the infrastructure that we are building now, is the ability to open build and effectively run profitably that -- those businesses.

In terms of other watch brands, as you know, we're -- we think the Skagen brand has got a huge long-term potential for us. It is a big project, something we invest in and really make large. The size of the Company now is such that new licenses don't move the needle. And we also don't want to end up with -- somewhere down the road with a large number of licenses that are hard to manage.

So, we're really have been focused the last several years on making our existing businesses much larger, starting with Fossil and then making Armani much larger has been a huge focus. We think Armani could potentially double or triple over the next several years, just based on the huge potential, for example, in Asia.

I would say that is true for all the brands as Kors becomes -- continues to develop the world with a branding, that business will continue to grow. Burberry has got a huge long-term potential as well as Diesel, Marc by Marc and the rest of the brands. So, we think we have got a great portfolio of brands that all of them can get much larger, and we're focused on that.

We think that Karl Lagerfeld has a unique positioning that is a great opportunity for us in a long-term, global opportunity. And we continue to look out there to see what other brands potentially could make a difference in the watch business, and we continue to talk to them and we will continue to look. But we are really focused mostly on the larger businesses that we have and making each one of the larger.

Oliver, on the Skagen purchase price side, the purchase will effectively include three separate legal entities. One in the US, one in Europe and one in Asia. So, some of those funds will come from the excess cash we have internationally as well as in the US. And if need be, in the US, obviously, we have the backdrop of the $300 million line of credit that we can tap into.

Thank you. And I had of final follow-up related to fourth-quarter gross margins in terms of the pressure from the increase in some of the off price retailers and the third-party distributors. Can you just give us the strategic understanding of what happened there?

I think what we had was we had three businesses that if we look at where we wanted to move excess inventory by the end of the year and had the opportunity to do that based upon the seasonality of the quarter with these off price guys, and as we mentioned on the call, that was basically our footwear mass market and Relic watch businesses. About $2.5 million of that product went out the door at below cost and obviously cleaned our inventory position up in those categories as we move forward.

On the third-party distributor activity, again, we have a lot of opportunity in our third-party distribution network to continue to grow sales. We have seen a significant amount of interest in watches in South America. We've got two distributors that we work with in that part of the country, and they're seeing phenomenal results in terms of our brands and their environments.

Additionally, even with what is going on in Europe and some of the southern European countries being affected by the sovereign debt issues, even though we have distributors in markets like Turkey and Greece, our third-party distribution business in Europe was up over 25% in the quarter again. So, I think that just identifies that there's a much larger opportunity in terms of eastern Europe, the Middle East, South Africa where we have sizable growth as these markets catch up to the trend that is going on in watches.

Great, thank you very much.

Thanks, Oliver.

Thank you. The next question is from the line of Barbara Wyckoff with CLSA. Please go ahead.

I have a couple questions. First, I guess for Mark Quick, can you talk about the performance of the Fossil, you're owned and licensed brands in key department stores relative to the competition? And than I have a follow-up question for Kosta.

Barbara, the performance in all of our major domestic department stores has been exceptionally strong. As Kosta mentioned earlier, the lead brands, Michael Kors, number one, some of the smaller brands putting on big, big increases, AX, Marc by Marc, Diesel, which is already a good-sized brand is just on fire right now.

So, that total portfolio as throwing off strong double-digit increases at retail. In fact, our retail increases are a slightly higher than the wholesale shipments going out the door, which is very encouraging for us to be in that kind of a balance situation.

As we go into the first quarter with them, we have not seen a significant change in how that business is actually continuing to flow in terms of brands that are increasing and the relative performance to their total portfolio,

Fossil continues to be the healthier component to it. And as you know, when you walk this pace line in any of our major stores, whether been Nordstrom or Macy's, you see a very, very dominant presence of the Fossil brands, which is reflective of how important we have become to them in our relative gains in market share.

Right, thanks. So, for Kosta, could you talk about Asia a little more? What is the biggest country? Is it Korea then followed by Japan and China? And then how do you see that growth potential by country? And then, can you talk about any obstacles outside of, I guess the diverse store base in China to accelerating growth in China?

Well, the three markets we are focused on are Japan, Korea and China. As you know, in Korea, the last several years we have converted from a distributor situation where we were selling to a distributor to our own concessions. So, there's about 70 big huge department stores in Korea.

The concessions that go in there are a pretty identified group of stores that are relatively easy to get to. And they are doing extremely well, and we have an opportunity to grow inside of those doors. We also are looking at a similar situation in Japan where we have a number of concessions there that are doing well and we think they can expand. Again, each of these department stores in those two markets, the idea is to have a multibrand watch concession and a Fossil store inside of those. So we are working on that.

We also have just recently -- we have opened a number of stores in Japan that present the brand really well that will help us get those Fossil concessions open, and we just opened a flagship store in Seoul, Korea, that we do the same. So, the idea is to take our experience in Korea, and those concessions that are extremely profitable and growing very quickly, to take our experience in Korea and expand that to China.

And China is more difficult, just because it is not as scalable. There's not a department store group that owns very many stores. A lot of them are individuals stores owned by local governments, et cetera. So it is just a more fragmented market, it just takes more people, time. There's more processes involved to really get those installed and up and running, and that is the process we are working on now.

But we do expect that over time we will be able to have an operation in China that is significant, and we'll have an experience similar to what is going on in Korea. We have enough sell-through information from existing concessions there to know that this multibrand watch thing is going to work very well once we get -- all get it in place.

Okay, great, good luck. Thanks.

Thank you.

Thank you. The next question is from the line of Rick Patel with Bank of America. Please go ahead.

Thank you, good morning. Can you give us an update on the rollout of Michael Kors across each geographical segment? Perhaps just talk about which inning you're in right now and where you expect to end the year?

Well, business is -- most of it is in the US, and it has been very explosive and ongoing. It is incredible to watch the depth and the customers continuing to respond to (technical difficulty) entered into a selectable situation, customers owning several, et cetera. So, in the United States, that continues.

And we do have -- we have seen over the last couple years sparks of sell-throughs around the world that show very strong (technical difficulty). In the UK, it has been one of our fastest turning brands in House of Fraser, for example. Korea has been very strong. In that -- we've seen huge response and huge growth throughout Europe last year, as well as in several markets in Asia. And as you know, the watch business inside of their boutiques is a relatively large part of their stores.

So, as they continue to build out stores around the world, two things happen. One is we get sales from their boutiques, and then we also penetrate those markets with brand experience and knowledge that enable us to put larger wholesale business in there. So, just looking at the response and sell-through we see in emerging markets for the brand and their penetration of the world with stores, we think there's a huge long-term growth track for Michael Kors.

And then just a question on Skagen. You talked about margins north of 17% there. Once you start integrating that business can you talk about how you see those margins changing? Perhaps just highlight the synergies that you see across these businesses and the potential upside we can see from that?

Yes, I think long-term what we see is Skagen comes on board and has an opportunity to leverage a lot of the infrastructure we have built around the world in terms of distribution, brand management, et cetera. The principles will stay very involved with the brand, but obviously we will be able to give them the opportunity to leverage a lot of our design product development and all the other stuff that goes with building out a global aspirational brand.

We have a little history here. I think if you look at, the last acquisition we made in the branded space was Michelle, and we paid about two times sales for that business back in 2004. And that business has clearly been very successful for us and right now, on about an $80 million business that is throwing off close to 40% operating margins.

So, I think the ability to take these brands, not only leverage our distribution footprint, but provide a much larger back office for them to expand in terms of reach, expand in terms of categories will be something that will generate some pretty normalized leverage as we move forward.

Thank you.

Thank you. The next question is from the line of Anna Andreeva with FBR. Please go ahead.

Hi, good morning guys. Thanks so much.

Hey, Anna.

I have a question -- hey, how are you? I had a question on inventories, came in a little higher than what we were thinking. And given the sales growth that you guys are guiding to, how should we think about inventories as we go through the year? Should we expect that number to begin to moderate?

No, the good news on that inventory level is a lot of the increase in percentage was caused by us getting faster with lead times. I think we had the factories respond really well during the fourth quarter. Part of it is just due to a more regular flow of movements and that expedited the lead times. I think we had actually, during the fourth quarter our lead times were five days shorter than they were a year ago.

In addition to that, we do have additional work in process. We are keeping on hand a larger supply of movements just because we feel it is prudent, just based on what happened last year. So, the combination of those two things, if you take those two things out, we do have a more normalized inventory relative to sales growth. But the good news in all of this is that we have a number of initiatives in place to get our lead times faster.

As you know, during the last couple years, the huge amount of quantities that we have required out of the factories has put us in a position where the lead times have gotten longer. And we have a lot of initiatives in place to actually reverse that and get them quicker.

This was the first step, and I think it is very good news for the future because we do think that we can grow the Company and the sales over long period of time with slower growth in inventory and turn faster, which will make the Company even -- grow even faster and more profitably.

And to that point, we've gone back and reassigned weeks of supply targets for quarter endings that reflect this five-day improvement, which is almost a week, that we believe is sustainable. You will begin to see the impact fully by the end of the third quarter. So, that is when we really think the full impact on this shorter lead time will hit us.

Okay. So, ending 1Q inventory should still be, sounds like a little higher than the sales growth that you guys guided to, but as we move through the year, that should moderate?

Right. I would say, and I think I misspoke, by the end of the second quarter is when we will see a pretty dramatic impact on that.

Okay, got you. So, that is very helpful. Thanks, guys. And Mike you broke out the sales to the off price channel in the fourth quarter, and that was very helpful. Could you maybe give us the full impact for 2011, both sales if you have and margins? Just as we think about the gross margins for the year?

Yes, I think if you look at for the full year, off price channel sales were probably up about 15%, 20% from where they were last year. And the margin rates were holding very steady through Q3, and if you exclude the activity around the footwear, Relic and mass market watch businesses that we decided to move to the fourth quarter, those margins were at levels of last year as well.

So, until -- as we continue to grow our outlet store base, we still have a lot of pressure in terms of discontinued product as our watch business has grown dramatically over the last two years. Over the last two years, we have added over $1 billion in sales. And we have not added the outlook capacity to keep up with just how we flow inventory through our own stores an through the wholesale channel and take back product is we are introducing newness, et cetera.

So, we do believe the off-price channel serves a purpose for us, and it obviously allows those guys to have a flow of product as well, and they participate in what is going on in this category. But I think long-term, the opportunities is to reduce our exposure to that as we increase the exposure to our -- not only our Fossil outlet stores, but our WatchStation outlet stores.

Okay, okay, got you. And then Kosta, the final one to you. As you think about 2012, you guys have done a great job flowing newness. What are you seeing out there from the style perspective? I know the cycle began a couple of years ago ceramics, then rose gold was the big story as we went through the holiday. How do you see evolving that into next year?

Well, I think your issue, really, as we mentioned earlier, is just to tell fewer stories and tell them much better. If you look at our Fossil catalog, for example, and you can see it online, by the way, I think in there you will see there's a lot fewer ideas being presented and they're all being presented much better. I think we have something like 30% fewer SKUs in the catalog, and the year on sales have been very strong.

So, I think in all of our brands, and Fossil included, just continuing to innovate within the familiar, telling well told stories, presenting new ideas and innovation within something that they -- the customers are familiar with, I think is our strategy, and it is really resonating in a very strong way, and we will continue that process. We have seen over the last couple years, when we present a new idea of material or innovation with authority until that story well, that the customer will respond, and that is really our initiative.

All right, well, thanks so much, guys. Good luck.

Thanks, Anna.

Thank you. The next question is from the line of John Kernan with Cowen and Company. Please go ahead.

Hi, guys, thanks for taking my question, and congrats on another great quarter.

Thanks, John.

I just wanted to talk about the comp. Obviously not a good performance on top of a very difficult comparison. What was the driver of the same-store sales? Was it traffic, was it ticket? Just some thoughts on that.

Overall, traffic was static or slightly down, so we got higher conversion rates, higher average unit retails. Big driver in our stores globally continues to be handbags, and we've talked about this before is that as the brand becomes a clear vintage inspired story and we present our ideas with more clarity and focus. The brand gets stronger, more aspirational, and we're developing a more stronger, more emotional attachment to the customers.

And the handbag (technical difficulty) the most emotional and viral of all the categories and also has a big place in our stores. We actually had, and we're continuing to see that we are seeing very strong sell-throughs globally, as we said. We saw very strong sales in France. We were also getting strong sales on a per-store basis in Asia as well.

So, I think our handbag business, I think this quarter, was up 25% in our stores, and it is looking like it is just going to continue to grow much larger. I would urge you to go into our stores or look on our online and see the offerings that we have. It's much clearer. We have much fewer groups presenting our ideas, and I think the customer is really resonating to that clarity and simplicity in a strong way, and we think we have a lot more opportunities going forward.

Our store, basically, if you look at it is, the largest presentation that you see when you walk by the stores is handbags. It looks like a leather store. And those categories are oversized inside the store, which means they can do a lot more volume inside the store, which leads us to believe that we could increase our comp store sales and our product (technical difficulty) over the next several years as the brand gets hotter and we get more emotional attachment at the point of sale with the customers. So, we think we are in a very good place.

Okay, great. And then keeping on that thought, what is your outlook for price increases this year? And as you start to lap product margins down nearly 200 basis points in Q2 of this year, what is the ultimate margin recovery potential on that product margin line? Thanks.

John, as we talked about in the prepared remarks, we see little bit of pressure on gross margins as we move forward just as upon the fact that we have got some currency compares that are unfavorable and we won't start anniversarying and a lot of the production cost increases until we get into the second half of the year. However, we are going -- we have instituted price increases on newness and select Kors styles.

We think that could benefit us in terms of gross margin by about 60 basis points over the full year. That will not start until the March timeframe for the most part. So, we will continue to look at our opportunity in terms of reengineering the margin to gain as much benefit as we can within the gross margins. But also, we are going to look closely at how consumers are being impacted as we continue to raise prices.

Okay, great. Thanks, guys.

Thank you. The next question is from the line of Jane Thorn Leeson with KeyBanc Capital Markets. Please go ahead.

Hi, thank you for taking my question. Just had a couple more questions. How much progress in the infrastructure in field sales management team have you made to date for Asia?

Well, we have hired a number of people throughout the region from larger global companies than we are with a lot of expertise in doing this and a lot of knowledge of the markets, specifically in China. In addition to that, we have sent a number of ex-pats to that region, some planning people from the US. Some of our stores people from both the UK and from Hong Kong. So, they have been there over a year now, and they are trained a lot of people on the market.

So, I would say we are making significant progress. Some of our teams that have just been through there over the last couple weeks. The spirit of enthusiasm and the capability is dramatically increasing month-to-month. So, we think we are in a very, very good position. But it is ongoing. We still have a number of positions to fill. A lot of initiatives going on right now throughout the region.

Adding additional people to open and manage these concessions. Especially in China, it is a very large and difficult place to operate, but they're making a lot of progress, and we are looking for growing over a long period of time over the next several years.

Okay. And what percentage of your current business is actually in China?

Last year it's something like 13% of the whole Company.

China, Kosta. China represents -- still represents less than 1% of total sales. But we do feel we have a huge opportunity there. But as Kosta has mentioned, it is a very fragmented place in terms of distribution, and that is part of obviously building the necessary infrastructure and tier 1 and tier 2 and tier 3 state cities to affect the distribution. We clearly feel like we have some lead-in brands there like Armani and Burberry that could be impactful early on and set the stage for us to gain access to those markets.

And then just on the European consumer, what was your experience on those UK first (inaudible) the austerity measures and if you saw material impact back then and what you expect for Europe?

Most of our Europe businesses is in northern Europe, and we don't -- we are not impacted a lot by what is going on in southern Europe. We do have distributors operating in the region, in Greece, et cetera, that are a very small part of the Company's business, and we actually have seen our European distributor business grow at a very quick rate over the last couple years. So, we're not being impacted directly by southern Europe.

And we feel like we are in a position where even though the European economy has not been great over the last couple years, we are in a position where have a lot of momentum, and we have a lot of great initiatives in place. We're going to continue to gain market share. Our stores have done very well as we've opened there. We have a lot of opportunity, both on the branded watch side and on the Fossil side, and we just continue to move forward and do the best we can in the market.

Okay. And just my last question, do you anticipate anymore discontinued inventory -- to incur any more discontinued inventory in 2012 if you did --?

Yes, as far as discontinued inventory, we did, as we said, we sold some to third parties during the fourth quarter. And we feel that our inventories are very clean at this point. We are this year opening, as part of our store opening calendar that we've got in place, we will open -- almost half the stores we'll open in the United States will be outlet stores. So, it's going to be increasing numbers.

The WatchStation outlets have been extremely productive in getting rid of discontinued inventory, so we're going to open a number of those. And those are highly productive. The sales per foot in those operations are very high. You can't just look at a store count, you've got to look at the sales productivity that comes out of it.

So, we feel like we are in a very good place with the current inventory we have now and our ability to liquidate it going forward, we think we are in a very good situation. Especially when you consider that it looks like our lead times are going to be getting faster, which should throw off less discontinued product relative to the sales over the next couple years.

Okay, great. It's very helpful. Thanks.

Thank you. This concludes the question-and-answer session. I will turn it back over 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 and our pass code of 450-9170 followed by the pound sign. Again, those number are 303- 590-3030 or 800-406-7325 pass code 450-9170.

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Thanks again for joining us today. Our next scheduled conference will be in May for the release of our 2012 first quarter operating results.

Ladies and gentlemen, this does conclude the conference call. You may now disconnect. Thank you for your participation.