Fossil Group Inc (FOSL) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Fossil, Inc. second quarter fiscal 2012 earnings conference call. Throughout today's recorded 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 Miss Allison Malkin of ICR. Please go ahead, ma'am.

Thank you. Good morning, everyone. Before we begin you should be aware that during this conference call some of the discussions will contain forward-looking information. Actual results could differ materially from those that will be projected during these discussions.

Fossil's policy on forward-looking statements and additional information concerning a number of factors that could cause actual results to differ materially from such statements is readily available in our Form 10-K and 10-Q reports filed with the SEC. In addition, Fossil undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise 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 supplemental financial information (technical difficulty) this release under the Earnings Release section under the Investor Relations heading on Fossil's website.

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 Webcasts under the Connections heading. Now I would like to turn the call over to Fossil's Chairman and CEO, Kosta Kartsotis.

Thanks, Allison; good morning, everyone. Joining us today in our Dallas office to discuss our first quarter are Mike Kovar, our CFO, and Jennifer Pritchard, our President of Retail.

Our second quarter net sales of $636 million represented an 18% increase from last year in constant currency. These sales results were higher than consensus estimates even though we saw increasing currency headwinds during the quarter. In addition, the Company delivered double-digit sales growth across all of our business segments. Please also keep in mind that last year our sales increase in the second quarter was a plus 35%.

As a result of our broad-based sales growth coupled with the gross margin and expense leverage that has surpassed our initial expectations, our reported earnings per share of $0.92 significantly beat our guidance and represented a 15% increase over the prior year quarter.

At just less than $3 billion in sales projected for 2012 we have nearly doubled our top line in just three years time. Our aim has been to develop great product, augment our global infrastructure and to foster growth across our multiple channels of distribution while continuing to deliver above-average returns to our shareholders.

Our efforts in these areas continued to deliver positive results during the second quarter with specific highlights including -- sales growth acceleration across each of our wholesale business segments; continued growth in the sales of our Fossil brand and our multi-brand watch portfolio; positive contribution from the Skagen brand, which we acquired at the start of the second quarter; and the maintenance of a strong financial position.

In constant dollar sales growth North America sales rose 18%, or 13% excluding Skagen, primarily on the strength of our watch business. All markets within North America reported solid results with the US delivering 15% growth, Mexico 65% and Canada 23%.

Our wholesale women's business was challenging during the quarter due to some product misses that we have identified and are correcting. Handbags in our own stores was plus 11% and we feel we have a large opportunity going forward.

Jewelry also contributed to growth in the region as the continued rollout of Michael Kors jewelry more than offset the decline in our Fossil jewelry line as we reposition the category for the launch of our new assortment this fall.

In Europe constant dollar sales exceeded our expectations with a 14% increase, or 7.5% excluding Skagen. This included solid growth in Northern Europe partially offset by a challenging sales environment in Italy and Spain. Although the current macro environment remains challenging we are still expecting this region to be a part of our sales growth for the second half of the year albeit at a lower rate.

Long term we see strong opportunities for market share gains throughout Europe as we look to expand our existing owned distribution footprint and to take advantage of the strong appeal of the Skagen brand in the region.

Our wholesale business in Asia increased 29% during the quarter, 4% of which was attributed to Skagen. Our business in China more than doubled during the quarter and, while still small in scale, we are making a significant amount of progress in positioning our multi-brand watch business in the market.

We also experienced accelerated growth in Japan and Korea during the quarter and Asia continues to represent our largest growth opportunity and we are continuing to build our infrastructure there to support a much larger business.

Over the longer term we expect operating margins in the region to expand as we monetize the investments we are currently making and accelerating the opening pace of high return and high-margin concessions.

Additionally, over the last several years there has been a large white space developing in Asia for watches and accessories as luxury brands continue to elevate prices due to the strong demand for these categories. Specifically for watches; as the prices and demand have risen for Swiss watches it has created a large opportunity for our products in the region. We believe the robust appetite for accessories coupled with the developing white space is a significant opportunity for both the Fossil brand and for our multi-brand watch portfolio.

Fossil brand sales rose solidly during the quarter led by the leather business which rose 11% primarily related to a store expansion and watches which grew 7%. Direct to consumer sales were up 15% for the quarter and comp store sales increased 2% globally following a 22% comp gain in last year's second quarter and a 15% comp gain in Q2 of 2010.

While the environment in Europe is placing some pressure on our store comps, we experienced solid double-digit comps in Asia and single-digit comps in North America. And we are pleased that we were able to deliver our 17th consecutive quarter of comp store sales increases.

As you may know, we have not run sales in our regular price Fossil stores over the last few years. Instead we have been sending discontinued styles to our outlet stores for clearance. This year for four weeks, the last week of June and the first three weeks of July, we had an end of season sale on some seasonal accessories in our stores and on our website; about 25% of the store was on sale and there were no watches included.

This not only allowed us to clear product at higher margins versus what we would achieve in an outlet store, but also improved customer traffic which spurred increased sales of regular price watches and accessories. This enabled us to engage more customers in the Fossil brand during a typical sale period when most of the other stores are on sale. We plan on doing this type of controlled four-week sale twice a year, after the Christmas holidays and during the summer sale period.

As it relates to Skagen, the Brand contributed $25 million in sales and $0.02 to earnings during the second quarter. We were pleased to see a positive contribution as our first order of business was to begin integrating the business into Fossil. Since acquiring the brand on April 2 we have completed the integration of their North America, Germany, UK and Hong Kong operations onto our platform representing approximately 90% of the Company.

We also provided notification to certain Skagen distributors of our intentions to transfer operations to our owned subsidiaries. By moving existing third-party distribution relationships to our owned subsidiaries around the world we will not only capture the full sales and margin value for Skagen products, but also be able to leverage our global distribution infrastructure.

As one would expect, this effort resulted in each Skagen distributor placing less emphasis on ordering new product. That said, we are encouraged by the opportunities for accelerating Skagen growth during the fourth quarter as customer relationships are transferred to our owned subsidiaries. Long-term we continue to expect Skagen to become a sizable global lifestyle brand with a unique positioning within accessories given its rich Danish design heritage.

As to our financial position, our balance sheet remains strong. We ended the quarter with $139 million in cash after having invested over $100 million in cash toward the acquisition of Skagen and the purchase of 2.5 million common shares at a cost of $234 million since the second quarter of last year.

On an absolute dollar basis we are projecting year-end inventories to be at or slightly above last year's level which will significantly increase our operating cash flows in comparison to the last couple of years. We have been able to reduce our lead times from the factories and have focused on fewer SKUs each driving more sales. This has enabled us to reduce our weeks of supply and has improved are inventory position.

As Mike will outline with you shortly, we are in effect revising our guidance slightly downward for the balance of the year. Most of this is due to the US dollar being much stronger. In addition to that there is a lot of uncertainty and lack of visibility in the global marketplace. We are confident in our business going forward but we feel it is prudent for us to plan our guidance more conservatively for these two reasons.

Our business model is very resilient and inherently profitable and we are positioned to capitalize on opportunities while we continue to move our strategies forward in a focused and efficient manner.

In summary, as we begin the second half of the year we remain optimistic about our growth prospects. Our brands remain strong and in high demand with consumers, watch trends remain favorable and we see a considerable white space developing that gives additional runway to the business. We have a lot of opportunity to get better at what we do.

The integration of Skagen is off to a great start and already generating positive returns. We believe the investments we have made in our talent and infrastructure coupled with the ongoing strength of the Fossil brand and our multi-brand watch portfolio will allow us to achieve our long-term growth and earnings targets.

We will also continue to focus on managing our balance sheet. By delivering consistent earnings growth we will further improve our already strong cash flow which will allow us to drive even higher returns to our shareholders. And now I will turn the call over to Mike for more detail.

Thanks, Kosta, and good morning, everyone. I will start off by highlighting our reported first-quarter 2012 versus 2011 results from this morning's press release.

Net sales increased 14.3% to $636.1 million compared to $556.7 million. Gross profit rose 14.2% to $356.4 million compared to $312 million and remained constant at 56% of net sales. Income before income taxes increased 7.8% to $88.1 million or 13.8% of net sales compared to $81.7 million or 14.7% of net sales. And diluted earnings per share rose 15% to $0.92 on 62.1 million shares compared to $0.80 on 64.1 million shares.

From a sales mix perspective, our wholesale versus direct to consumer mix remained relatively unchanged from last year's Q2 levels. However, within our wholesale segment Asia and North America both increased approximately 100 basis points while Europe dropped just over 200 basis points.

And specific to our wholesale operations, North American-based sales, which include our operating activities in the US, Canada and Mexico, as well as sales to third-party distributors in South America, grew by $37 million or 17.2% to $250 million. Excluding approximately $2 million from unfavorable currency comparisons to Q2 last year, North America wholesale sales increased by 18.2% including $11.2 million in sales related to Skagen.

Sales from our Europe wholesale operations increased by $6 million or 4.2% to $148 million. Excluding currency that unfavorably impacted sales by $14 million, Europe wholesale sales grew by 14% and included $9.2 million of sales related to Skagen.

Sales from our Asia wholesale operations increased by $18 million or 24.3% to $84 million. And excluding currency that unfavorably impacted sales by $2 million, Asia wholesale sales grew by 27.2% and included $3 million of sales related to Skagen.

Relative to our concession business in Asia, we added 13 new locations during the quarter and closed one. We ended the quarter with 225 locations and we expect to open an additional 51 locations in the second half of the year while closing eight.

Specific to our direct to consumer business, sales increased by $20 million or 15.2% to $154 million. Excluding currency that unfavorably impacted sales by $3.4 million, direct to consumer sales grew by 17.7%. Constant dollar comps in our retail stores were 1.8% in Q2 and eCommerce sales increased 1.4% for the quarter or 3.8% on a constant dollar basis.

Globally we ended the quarter with 413 stores, 196 of which were outside of North America, and we occupied 743,000 square feet compared to 642,000 square feet at the end of the same quarter last year, an increase of 15.7%. This included 249 full price accessory stores, 146 of which were outside of North America; 116 outlet locations, including 36 outside of North America; 34 closing stores with two outside of North America; and 14 full price multi-brand stores including 12 outside of North America. This compares to 367 stores, 166 of which were outside of North America at the end of the prior year quarter.

Last year's total store count included 235 full price accessory stores, 95 outlet locations, 27 clothing stores and 10 full price multi-brand stores. During the first six months of this year we opened 25 new stores and closed 10 and we are currently on track to open an additional 50 stores by the end of the year while closing an additional 16.

From a watch and non watch category perspective, total watch sales increased $77 million or 19.3%, 23.2% ex-currency to $477 million and included approximately $25 million related to Skagen products.

On the non watch side of our business leather product sales increased $5 million or 5.7%, 8.2% ex-currency to $97 million. And leather sales growth, as Kosta mentioned, was primarily driven by our direct to consumer segment. Jewelry sales decreased $1 million or 1.8% but were up 4.8% ex currency to $38 million. While the continued launch of Kors jewelry added $7 million in sales, this was partially offset by a decline in our Fossil jewelry business as a result of the repositioning of the assortment.

Gross profit increased 14.2% to $356.4 million in the second quarter in comparison to $312 million in the prior year's second quarter. Gross profit margin remained constant at 56% when compared to Q2 last year.

Foreign currency exchange rate changes negatively impacted gross profit margin by approximately 90 basis points. Excluding the impact of currency, increases in the sales mix of higher-margin watch product versus leather product, select price increases across certain watch businesses and an increase in the mix of sales from higher-margin Asia-Pacific wholesale sales drove the improvement in margin on a constant currency basis.

While increases in factory labor costs continue to be a headwind in terms of market performance, we are beginning to a lap certain component increases that occurred in Q2 last year.

For the second half of 2012 we expect gross margin to continue to benefit from price increases instituted earlier in the year, the higher mix of watch sales and the higher mix of higher-margin Asia and direct to consumer sales.

Also our plans are to clear more discontinued product through our own outlet channel versus lower margin liquidators. However, due to the recent strengthening in the US dollar, currency losses will be more impactful and at current levels more than offset the favorable influences we have highlighted. Therefore we estimate gross profit margin to decline 30 to 40 basis points below last year's level over the balance of the year.

As a percentage of sales operating expenses increased 42.2% in the second quarter compared to 40.5% in the prior year quarter. For the second quarter operating expenses were favorably impacted by approximately $8.7 million as a result of the translation of foreign-based expenses into US dollars.

Nonrecurring costs associated with the Skagen acquisition amounted to $1.2 million during the second quarter and includes acquisition and transition related costs of $5.6 million, offset by a $4.4 million favorable purchase price adjustment. This adjustment relates to a mark to market gain on the contingent purchase price liability we have established with the expected Skagen earnout.

Because this potential additional purchase price will be paid in Fossil stock the mark to market adjustment reflects the fluctuation in our stock from the quarter to quarter and in this case from the time we acquired Skagen at the beginning of the quarter to the end of the second quarter.

On a constant dollar basis and excluding nonrecurring expenses related to the Skagen acquisition, operating expense increases were primarily related to the addition of Skagen operating costs, expenses associated with the increase in the number of company-owned retail stores, as well as expense increases across our wholesale segment.

Increased expense levels in our wholesale segments are primarily attributable to our continued strategic investment in the Asia region, primarily related to headcount additions and additional concession related costs. Additionally, we recorded approximately $4.7 million of expense in connection with legal costs and accruals related to the expected settlement amounts of routine business litigation.

As a percentage of net sales operating income decreased to 13.8% of net sales in Q2 compared to 15.5% of net sales in the same quarter last year and this was primarily a result of operating expense deleverage.

As to currency, operating income was negatively impacted by approximately $9.2 million as a result of the translation of foreign-based sales and expenses into US dollar. However, when looking at pre-tax margins the deterioration from last year was only 90 basis points compared to the 170 basis points decline in operating margin primarily due to the gains generated through our hedging activities.

As a result of these hedging gains versus hedging losses last year, other income and expense improve favorably by $5.4 million during the second quarter. At prevailing forward currency rates we are estimating that outstanding forward contracts with scheduled settlement dates in the second half of fiscal year 2012 will result in hedge gains of approximately $4.2 million and $4.7 million respectively in the third and fourth quarters.

Our effective income tax rate was 31.4% for the second quarter. We estimate are effective income tax rate over the balance of the fiscal year will approximate 31% which is our current structural rate. This rate excludes any discrete events that may occur during the remainder of the year.

Second-quarter net income increased by 11.6% to $57.3 million or $0.92 per diluted share, inclusive of an unfavorable $0.04 per diluted share related to foreign currency.

Now turning to our balance sheet. At the end of the second quarter we had cash, cash equivalents and securities available for sale totaling $139 million compared to $332 million at the end of the prior year second quarter. We also ended the quarter with $113 million of debt. The decrease in cash and increase in debt over the last 12 months was primarily related to the acquisition of Skagen during the second quarter and the continuation of our stock repurchase plan.

We just closed out our last 10b5 plan acquiring $82 million or 1.2 million shares over the last 90 days and as of today, and since the inception of the $750 million buyback authorization in August of 2010, we have repurchased $611 million of our common stock representing approximately 8.1 million shares. And based upon the current stock price and the historical parameters within our 10b5 plan, we anticipate closing out this authorization early next year.

Inventory at the end of the quarter was $524 million, an increase of 16% in comparison to $451 million at the end of the previous year quarter. And as Kosta mentioned, on an absolute dollar basis we are projecting year-end inventories to be at or slightly above last year's levels.

In comparison to last year, accounts receivable remain unchanged at $226 million. Days sales outstanding for our wholesale segment for the second quarter was 41 days in comparison to 47 days in Q2 last year. This reduction is primarily the result of improved collection cycles, a lower mix of European sales, which historically have longer collection cycles, and an increase in the mix of concession sales.

During the first six months of 2012 we had capital expenditures of approximately $50 million and are expecting fiscal year 2012 capital expenditures of approximately $120 million. Depreciation and amortization expense for the first six months totaled $30 million and we estimate full-year depreciation and amortization of approximately $65 million.

Now turning to our outlook, as a reminder we provide guidance 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 sales, typically we expect balanced sales growth between Q3 and Q4; however, this year our third quarter will end a few days earlier than last year which will result in some sales shifting out of Q2, out of Q3 and into Q4 this year.

We also expect Skagen sales increases to be more impactful in the fourth quarter as we complete the transition of their third-party distributor businesses into our subsidiary environment in early Q4. As a result, for the third quarter we currently expect reported net sales to increase approximately 11% with constant dollar net sales increasing 15%. For the fourth quarter we expect reported net sales to increase approximately 16% with constant dollar net sales increasing 18%.

Given the significant strengthening of the US dollar since we last provided guidance in May, we expect currency to negatively impact our current second half and full-year earnings guidance by $0.14 per diluted share. We're also including adjusted earnings per share estimates for the balance of the year. Adjusted earnings excludes the nonrecurring costs associated with the acquisition of Skagen and a reconciliation of guidance on a GAAP basis to adjusted is presented in our earnings release.

We are currently estimating third-quarter reported diluted earnings per share in a range of $1.09 to $1.11 with adjusted diluted earnings per share in a range of $1.15 to $1.17. In comparison to the prior year third-quarter currency changes are negatively impacting us by approximately $0.04 based upon today's prevailing rates.

We estimate fiscal year 2012 reported diluted earnings per share in a range of $5.20 to $5.25 with adjusted diluted earnings per share currently expected in a range of $5.29 to $5.34. Our adjusted earnings expectations for the full year represent a 15% to 16% increase over fiscal 2011 earnings per share of $4.61. And now I would like to turn the call over to the operator to begin the question and answer portion of the call.

(Operator Instructions). Barbara Wyckoff, CLSA.

Mike, can you talk about the preliminary findings in the state of the inventory and distributor for Skagen?

The State of the inventory and distributor for Skagen?

Yes.

Yes. As you know, Barbara, we have been obviously in contact with their third-party distributors and are working out plans to effectively transition that business so we can take over hopefully in advance of the fourth quarter and obviously we know bring those sales into our business.

Right now our expectations are that for most of those third-party distributors we would just buy out their existing inventory to reflect a clean transition into the business and not have to worry about any activities of them dumping inventory into those markets.

And as distributors the amount of inventory that they were carrying was really not that much anyway.

Okay. Also then can you talk about the performance of the new elevated leather bags in your owned stores? Are they distributed through all of your stores? Is this sort of the way of the bags are going to start looking and be priced going forward? I mean I think they do look terrific.

Yes, as you know, we have been increasing quality, details, et cetera on some of our upper end bags and had a very good response to it globally. In fact we have seen this type of product sell internationally very well and we had higher units per store sales in France, for example, in that category than anywhere else in the world. So we have I think ever good opportunity there.

Having said that, we also recognized we had an opportunity I think in Fossil to go back into some of the lower price points. And what we saw I thought was a very good response at the high end, but we felt we had an opportunity to be more inclusive on price in some categories in leather goods and even watches at a more opening price, especially with the economy being what it is.

I think that is one of the I think opportunities we are going to have going forward back half of this year and next year I think there is an opportunity for us to be more inclusive while we still get that aspirational customer.

Great, thanks. Good luck.

Oliver Chen, Citi.

Congrats on a great quarter. Regarding North America, the number there looked pretty impressive ex-Skagen at high teens. On a multi-stack basis it's still a relatively challenging comparison in the back half. What is happening there? Are the inventories pretty clean? What you think about the state of inventories and business trends in North America wholesale, especially given the mixed consumer environment?

I think when we look at it looking at inventories, and of course we stay really in close touch with that information, everything looks good. As the watches continue to be a strong category in the US, Kors is still very, very strong, we are seeing growth in a number of other brands also, the stores are continuing to give it more space and inventory and presence in the stores, you will see that on an ongoing basis through this year and next also as they get more capital to remodel stores, et cetera.

So the category itself continues to be very strong. Of course this is all high-value innovative merchandise sold at regular price. So we are very encouraged by the US consumer, even though the economy is not great, still responding strongly to the category.

And regarding the same-store sales comp, what should we think about regarding the run rate? The comparison is still double-digit in the back half. The number that you posted this quarter, could you help us understand the breakout between traffic versus ticket?

Well, I think like everyone else we are being impacted negatively by traffic in all environments, that's internationally and in the US. And in terms of our outlook, Oliver, for the balance of the year, we expect to see comps at kind of the same level that we performed at in Q2.

Although to Kosta's point, we think there is some opportunity in the leather category in the fourth quarter as we introduce some new assortments toward the end of Q3. And we think that from a regional standpoint you are going to see the comps perform again kind of consistently to where we were in Q2 with Europe being a drag, Asia continuing to report solid double-digit growth and the US kind of low to mid single.

Okay, thanks. And final question is related to the -- it looks like the Street has to rebalance third quarter versus fourth quarter. Why were those days so sensitive in terms of the shift in fourth quarter? Could you just eliminate that a little bit more? Thanks.

Well, a lot of are holiday of assortments are shipped out beginning kind of the second part of September. And as we are losing a couple of days in terms of shipping days in September, we are going to see a shift to some of that business into Q4 this year.

I would also say that if you look at the estimates that were out there for Q3 on an implied earnings basis, the Q3 was levered -- the Q3 earnings estimates implied greater leverage than Q4 and that's on a sales basis less than $250 million than Q4 is expected to be. So I think there was maybe just some disconnect there in terms of the expected leverage.

Okay, thanks. Congrats and great luck.

Randy Konik, Jefferies.

Hey, guys, this is (inaudible) filling in for Randy. How are you? Real quick -- I'm sorry if I missed this, but Michael Kors watches, did you mention what the growth rate was in 2Q?

It was strongly up consistent with what we have seen the last several quarters, so that continues to be a strong player. One thing about Kors is that, as you know, as we continue to expand it globally we are seeing somewhat of the same response in some markets, so we feel it can be kind of a catalyst for growth in other markets like it was in the United States so we are continuing to do that.

A lot of that is being instigated by we have a watch and jewelry shop that we have started putting in some locations both in the United States and outside and we are getting a strong response to that. We think it is a great way to communicate the brand and the presence and the whole idea of jet set watches and jewelry. So we think we are in pretty good shape on that.

Okay. And I just wanted to touch on Europe. You mentioned Italy and Spain are weak. Can you just talk about the sequential progression of the trends or within 2Q even? And also does it feel like this trend is stabilizing or does your guidance bake in further deceleration?

Well, when we provided guidance for Q2 we were expecting the Europe constant dollar performance kind of at a low to mid single level. So we outperformed that coming in at 7.5% excluding the benefit of Skagen. I would say the overall macro environment has not improved. I think we are finding that watches still tend to be a category that are outperforming the balance of consumer discretionary. And with the environment still rather difficult we are being very cautious on the back half of the year, as Kosta mentioned in his prepared remarks.

Okay. And then just lastly, the jewelry repositioning, is this nearly completed or is there still more to go (multiple speakers) within Europe?

Well, it's in process. Most of the new assortments will be in the stores in our wholesale channel in the third quarter. So it is kind of a process through the back half of the year.

Got it. All right, that is all I had. Thank you.

Ike Boruchow, JPMorgan.

Congratulations, thanks for taking my question. I guess, Mike, when you went over the direct to consumer business and the retail comp, could you also break that down by geography like you guys normally do with North America, Europe and Asia? And then is it possible to also get what the concession comp was in Asia this quarter?

On the retail side, again, the store comps were down double-digit, low double digits in Europe, up mid singles in the US and up strong doubles in Asia. And as I mentioned, that is the way we are kind of laying out the balance of the year in terms of our guidance as well.

As it relates to concessions we saw a similar performance in Q2 that we saw in Q1; we were down 1.8% in Q1, came in just over -- down 2% in Q2 in the concession environment. However, we did see a better performance to the end of the quarter. In June the concession comes were up 4% and in July the concession comps were up about 6%.

So as we have talked about, we have got a lot going on in Asia right now, we have added a lot of resources and we have always felt like there was some opportunity in terms of bettering the performance metrics around our concession business. And I think those resources are starting to reach out and help manage that environment with our local country resources and I think longer term we will continue to see improvement in that environment.

Okay, great. Just one a quick follow-up. On the SG&A. tell me if I'm thinking about this right -- if you would exclude the mark to market adjustment it looks like your SG&A dollars would have been up more like 23%, 24%. Is that the way we should be thinking about the back half because I assume you won't have any similar benefit in Q3 or Q4 this year.

I think you three will be a similar situation where you won't see any leverage, you'll continue to see deleverage on the SG&A side. The gain on the mark to market on the acquisition activity was also offset by the -- what we believe to be hopefully a one-time charge in terms of settling some litigation that was out there.

So I think in Q3 you will see a slight improvement against Q2. In Q4 we think there is some opportunity to generate some leverage given the fact that the sales in that quarter are far more productive than they are in Q3.

Okay, thanks a lot. Best of luck.

David Wu, Telsey Advisory Group.

Congrats on the great quarter. First on the DTC comp, could you talk about the sales complexion between outlets and full price? And how much of the comp do you think was impacted by more Company specific issues such as the product misses that you have previously mentioned?

I think we are seeing slightly stronger comps in our outlet environment than we are in full price environment in terms of the product, as we mentioned. In our stores our leather goods still continue to perform a lot healthier than they are in our wholesale channel. And I think that is just the selling expense we give the consumer in that space versus the department stores being kind of an open sell environment.

But watches still continue to perform positively in our own environment as well. So the only impact we have seen in terms of product category where we are trending down against last year in terms of comp will still be the jewelry category and that's primarily due to the fact that we are in this repositioning mode in terms of relaunching the line in the latter part of Q3.

And then those trends you think should start to reverse towards the end of Q3 (multiple speakers) with the introduction of jewelry?

Well, I think (multiple speakers) overall we are expecting the comp performance to remain somewhat similar, so we are being a little bit cautious on the outlook just given the prevailing environment. But I do think we believe that once we get the new jewelry in the store we are expecting that to be a positive influence.

Great. And then on Europe wholesale, can you talk about the sell out rate versus the sell in rates are tracking and if you think inventory levels at the retailers there are relatively healthier? Or if you think there could be any potential risk for de-stocking there?

Yes, the inventories look to be in line. The environment is not great and the stores are not being aggressive with inventory and they are not seeing great sales increases, so it is kind of all in line. We do think that we can continue to gain market share. We've got a lot of new things going in the marketplace, new ideas, new categories and new brands in some cases, so we think we are going to continue to gain market share there.

Excellent. And then just lastly, with the new higher price point Burberry watches coming out this fall, can you talk about your initiatives to expand into the high end watch category, what the potential opportunity is across your other brands such as Kors or Armani and if you are planning to bolster your own internal manufacturing capabilities in Switzerland?

As we said, the Swiss watch market has been very, very successful in Asia, especially in China and even China travelers buying Swiss watches around the world. And the prices of those products have gone up dramatically and so has scarcity. It's I think given us an additional white space opportunity for us to put Swiss made products in the Asian markets --.

This launch of the Burberry Britain watch, which is kind of an iconic style for them starting at $1,000 it's an incredible watch and it is going to be launching in the next couple months. It is going to be a huge launch in their stores and throughout their digital media in addition to the best stores in the world and a lot of it is in Asia. But we think it is going to be a great entree for us into the more luxury world and be able to participate in a broader base of Swiss made watches.

We also are in the works of making a Fossil Swiss made watch which will be tested in our stores throughout Asia especially in the back half of the year, really in the fourth quarter, I guess. And then we are working on Swiss made watches for some of our other brands as well. So we think there is an additional crazy white space opportunity for us over the next several years to participate in this explosion of demand for Swiss made watches.

We think with our global lifestyle brands being able to participate in the consumers the way they think and how active they are in the category we think it is another big opportunity for us that we are working on. And we are in the process of enhancing our capabilities in Switzerland. We had acquired three companies 10 years ago for design prototyping and to facilitate the manufacture of Swiss watches and we are adding more resources to that, getting prepared for us to be able to do more business in that category. So we are pretty excited about it.

Excellent, thank you very much.

Neely Tamminga, Piper Jaffray.

Just a couple housekeeping items; with the many facets of your business I want to make sure we are understanding. So as we look ahead to the EU wholesale growth that you are still anticipating for the back half of this year, is that going to be primarily tied through the license business or are you expecting Fossil to rebound there as well?

We have actually seen Fossil do pretty well in that market. As we have talked about the last couple quarters we have quite a lot of growth going on especially in France, in Europe. So we are expecting it to be pretty broad-based and we do have some additional -- because Skagen of course is new that is going to help us gain market share and grow over there as well.

As we also said, we are not anticipating an improvement in terms of the European wholesale performance in Q3 from the 7.5% constant dollar ex-Skagen growth we saw in Q2. In fact, we are being a little more cautious by maintaining the guidance of where we were back in May at kind of a low- to mid-single-digit opportunity.

Okay. I'm just trying to size up, I guess overall the highest level here is the Fossil versus the license branded sales. It seems too that you have definitely accelerated and improved on the watch sales, which is encouraging, but was that driven again more by the licenses behind their watches or was it driven more by the Fossil brand?

I'd say Fossil. Fossil definitely participated in the overall watch business growth for the quarter.

Then just one little final housekeeping here. On the outlet side of the business, I heard what you said about outlet outperforming full price. There has been quite a bit of scuttle out there about what is going on with traffic levels out at outlet. Can you speak to your traffic level specifically versus maybe just your usual good work on conversion?

We don't have the information in front of us on traffic outlets versus regular. But I would expect the outlet traffic has been greater through the last couple of quarters, and we would expect that to continue.

Neely, it's Jennifer. We haven't seen the kind of declines in the outlet traffic that we've experienced in the regular based mall environment. That being said, we continue to work on the selling metrics that are consistent with our strategies over the last couple of years to drive greater productivity out of all environments.

Thank you.

Neely, in addition to that, a lot of our outlet growth is coming outside of the United States this year. So as we've talked about, we have had a need to create an outlet environment in Europe and Asia to help us deal with the growth in our business there over the last few years instead of having to move all that merchandise back to the US and try and clear through the number of stores we have here.

So I think our experience is that we are continuing to see travelers come into that outlet environment. And our focus in terms of locations are these great festive lifestyle outlet centers that people are in great moods and spending a lot of money.

That's great. Thanks you guys, good luck.

Rick Patel, Bank of America-Merrill Lynch.

Sales for your wholesale segment accelerated throughout all three geographies, but same-store sales in the DTC channel decelerated during the quarter. So can you just talk about the discrepancy there? Were your wholesale customers looking to restock a little bit more than usual during the quarter or is there something else going on there? Just help us think about that.

I think obviously our wholesale environment includes our entire global watch portfolio and, as we mentioned earlier, we are seeing some brands accelerate at a faster pace based upon the fact that they are not as significantly penetrated in those channels as our Fossil business is.

Additionally, the Fossil brand, in terms of our retail comps, as Kosta mentioned, is coming up against some pretty significant two-year comps. We were up 20% in Q2 last year and up 15% in the prior year quarter to that 2010. So I think it is just a little bit of a leveling out going on in that channel.

Okay. And then you can provide some more details around your price increases? On your last call you highlighted getting some push back especially for pricing changes on the entry-level product. Did you change prices for those products during the quarter? And if so how was that received?

And secondly, can you highlight which brands you think have been the most resilient to price increases that may provide an opportunity in the back half of the year?

Yes, we did some of those pricing -- we really saw a pretty good response to it. So we will know better through the back half of the year. But so far, so good.

I would say specific to Armani, which we called out on the last call, we saw that brand increase to a double-digit growth pace in the quarter and improve tremendously in terms of the Europe environment where we dropped about $5 million in sales of Armani in Q1. So we have seen a much better performance as we have added some additional product to that entry-level price point level for the brand.

And just lastly, can you provide a little bit more color on your North American wholesale growth? Was growth consistent throughout the different channels of distribution, department stores, mass, et cetera? And what do you see as the biggest opportunity for growth throughout your distribution channel going into holiday?

Well, the growth, I would say, was strongest in the watch area and in department store, so across all our brands basically we had pretty good growth and we are expecting that to continue into the back half of the year, all the signs look good for us on that regard.

Great, thanks so much.

Omar Saad, ISI Group.

I wanted to follow up with a question on the Fossil brand. Kosta, you had made some comments about maybe tweaking some of the entry-level price points. I don't know if you gave a number for the overall Fossil brand growth in the quarter, but I think the comp probably reflects a little bit of a slow down there.

Can you kind of help us walk through what is going on with the brand and some of the strategic decisions you make around pricing? I know there is some noise with the jewelry business and some of the other pieces, but maybe just kind of give us a kind of State of the Union address on the Fossil brand right now?

Yes, as you know, the brand has grown quite a bit over the last five years where stack comps are in the 30s and 40s range. I think just looking back so far at the first half of the year we -- the economy changing I think globally, in addition to that there were some trend changes I think that -- we had some product misses. A lot of that was based on I think what we said on the last call we didn't have enough color.

The other issue I think was we probably had migrated prices up in some categories probably more than we should have and kind of evacuated that opening price similar to what we described in handbags. What we have done is gone back in and tried to be more inclusive I think which is very good. And also again another product miss was just our -- the transition of jewelry.

So again on balance when we look at all these issues and keeping in mind our lead times are relatively short, I think we have a very good opportunity going forward to really boost that business. But all in all we are very pleased with the Fossil business.

About half of it right now it's done in DTC and we think that is a very good thing. We are getting a very strong response throughout Asia, you our saw our comps again were very strong. Our stores were averaging $800 and $900 a foot and we think there is increasing productivity.

Again, the one thing that continues to be a huge advantage for us in our entire business model is the fact that dealing with accessories is inherently a much more profitable business, lead times are shorter, process borders easily, and there is this massive opportunity as the middle class in Asia grows in the response to Fossil has been very strong -- it just continues to look like a very large long-term opportunity for us.

So again, using our multi-brand watch business and our Fossil brand business, we have got two big core businesses using shared services, it's a very efficient model. We think we are going to have increasing return on invested capital going forward. And we just keep on going and everything looks good as far as we are concerned.

Thanks, Kosta, and that is really helpful. And then, Mike, maybe you could just clarify a little bit on the third quarter/fourth quarter as we think about kind of the implied margins. The differential looks like third-quarter margins are going to be down a few hundred basis points versus fourth quarter may be down 50 to 100. To make sure we -- help us understand what the differential and dynamics are on the margin line. I understand there are some days missing on the revenue side.

You are talking operating margins, Omar?

Yes.

Yes, again the biggest part of that is just the productivity increase in terms of sales in Q4 versus Q3. Additionally, as we said, we expect to see a much better performance from Skagen in the fourth quarter. As we get through transitioning some of these third-party distributor businesses and we start to see a lift in that business to offset some of the operating expenses we are taking on where we are leaving infrastructure in place.

As it relates to the strategic spend going on in Asia, our expectations for growth in Asia continue to be 25% or higher. And as we are starting to lap some of that investment in that region that occurred toward the second quarter of last year I think we have an opportunity in a more productive quarter by Q4 to really start showing some leverage from that region.

So I think our -- we anticipate that while Q3 will still show deleverage something similar to what we saw in Q2, maybe slightly better because of the revenue performance increasing slightly, Q4 is the opportunity for bringing the leverage back in line.

That is helpful. And then last, just any quick updates on Watch Station, what is going on with that business and what you are learning there?

Watch Station continues to do very well especially in the outlet channel. We are I think going to open about 20 or more Watch Station outlets this year, ending this year with about 50 total Watch Station stores. So everything looks good as far as that goes. We opened a number of stores throughout the world in Asia, opened a pretty good store in Hong Kong, so everything looks good.

We are also learning a lot. We have a very large opportunity, as you know, in watch concessions especially throughout Asia. So we are learning a lot on the direct to consumer watch side in our Watch Station stores that can be applied to our concessions globally. So we think we are in pretty good shape.

Great, thanks. Nice work.

Anna Andreeva, FBR Capital Markets.

I was hoping to follow up on the gross margin line. Gross margins came in significantly better despite foreign currency being a bigger headwind for you guys. Can you maybe extrapolate some of the drivers behind that? And looking out to back half, I guess why would gross margins be down in 3Q and 4Q? I understand the foreign currency, although 4Q your 4x comparison does get a little easier.

And then I was hoping to follow up on Europe. Nice acceleration there from mid-singles to 7.5% and that is despite, right, you said, Italy and Spain were a little worse. So did Germany and UK accelerate? Were there other markets that got better? Maybe you can talk about that.

Yes, I'll talk about the gross margin question, Anna. Currency is obviously the biggest player there and when we provided guidance back in May the euro at that time was trading around $1.31 and today it is trading below $1.25, most recently in the $1.24 range. So it will be impactful for both Q3 and Q4.

Some of the benefits that we are seeing in terms of the better performance in Q2 was, as we talked about on the prepared remarks, we are seeing an increase in the mix of watch sales versus leather sales. And that is primarily due to the fact that, as we mentioned, our leather business was down in North America. So just that mix part benefits us because our watch margins are much higher in that wholesale channel than our leather margins.

Also we are continuing to see a greater mix of Asia versus the rest of the world. And obviously with the concession and environment we operate in Asia that is a much higher margin region than the rest of our segments.

We do think that as we move toward the back half of the year and in the fourth quarter there is a bigger opportunity for leather being additive to sales. And just because of the mix shift there from where we were in Q2 -- Q2 that is going to impact margins slightly negative just because of the disparate margins between watches and leather goods.

As far as Europe, it was pretty consistent across each reason region. As we mentioned, our Northern Europe performing solidly better than Southern Europe. We are still seeing kind of a strong performance in markets like France and the UK. Specifically where we have been investing in the Fossil brand we are seeing Fossil brand grow quite nicely there in terms of both the wholesale as well as our retail activities.

Okay, and just follow up on the gross margin question. What was AUR during the quarter? Did you guys quantify that?

I think we saw AUR in terms of our direct channel increase from where we were in Q2 commensurate with where we have been for the first six months of this year.

It's actually commensurate -- Anna, it is commensurate with where we were in the fourth quarter last year as well. So it has been pretty steady for the last three quarters.

Okay, okay, got it. Thanks so much. Good luck, guys.

Liz Dunn, Macquarie.

Congrats on a great quarter. So just to follow up on some prior questions in terms of the reduction to guidance. So currency has moved a little bit, there is an expectation of a mix shift that should have a bit of a negative impact on margins. And then what is the impact that you are seeing from just the global uncertainty just in terms of last quarter's guidance versus this quarter's guidance?

Well, I would say that the biggest part of that is we are dialing back our expectations on Europe given our performance in Q2 being a little bit better than we expected initially.

Also we are coming up against some pretty significant comps for the back half of the year in our North American wholesale operations and that is not a region where we are seeing a lot of door growth because obviously a lot of our businesses are already well penetrated in the department store channel in North America.

So I think it is those two things combined -- a little bit less of an expectation for growth in Europe and a little bit tougher compare against the US wholesale channel in the back half of the year.

Okay. And then I apologize if I got this wrong, but by thought I heard you say something about some women's fashion problems in the watch category. Could you expand on that a little bit?

Well, we felt we had some product misses. Part of it was I think we mentioned that we were not as inclusive as we probably could be on the lower side of our assortments. We had put a lot of products in the marketplace, more aspirational, more expensive, we had a very good response to them.

But especially I think with the macro environment and especially in Europe we saw that we probably moved up a little bit quicker than we would like to and we are -- we think it is an opportunity to go back in and really capture that customer.

We also had seen in our stores small leather goods selling extremely well, better than handbags and of course the retails are lower. So I think just that idea of being more democratic and more inclusionary and getting customers engaged at an average unit retail that is lower and moving them up through our -- engaging them in the brand and being -- giving the ability to have them continue to stay with the brand and move up towards the higher price points is a good thing.

We are just being more inclusionary I think and that is I think going to be a very strong thing for us for the next couple quarters.

Okay, great. And then finally, what is your capacity and interest in new brands? I know we have got Lagerfeld coming for 2013, but do you have the capacity and interest for new brands on the license side and would they only have to be -- would you only consider them if they are sort of, I don't know, just what's your interest there? Is there a sense or buzz in the marketplace about certain brands?

Well, first of all, we are extremely pleased with the brands we have, every single one of them is doing extremely well and has a huge upside. So I think focusing on our existing brands has been a big benefit to us and that is ongoing. Of course we are -- Skagen is going to be a very fast grower for us, as we said earlier.

Once we get everything settled, which is, I think, -- by the way, I think the Company has done and credible job of integrating Skagen very quickly, getting all the global teams together, both the Skagen people and ours, all working together towards a common end has been pretty inspirational from our standpoint. So we are moving forward on that.

Karl is going to launch in spring next year -- relatively small start, so we are going to have a select number of doors. But there is a lot of initiatives inside of each and every one of our brands that is going to we think add potential growth to them. Having said all that, we are continuing always to be in the marketplace to see what other brands are emerging and what could be additive to our assortment. We will continue to do that and be opportunistic.

Congrats, good luck.

Thank you. I will now hand the conference back to Mr. Mike Kovar. Please go ahead, sir.

Should you want to replay this conference call it has been recorded and will be available from 10 a.m. Central Time today until 12 midnight Central Time tomorrow. You can dial 303-590-3030 or 1-800-406-7325 for that replay and the pass code is 454-0220. (Operator Instructions).

The conference call has also been recorded by Street Events and may be accessed through Street Events website at www.streetevents.com or directly through our website at Fossil.com by clicking on About Us on our homepage and then our 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 November for the release of our 2012 third-quarter operating results.

Thank you, sir. Ladies and gentlemen, this concludes the Fossil, Inc. second quarter fiscal 2012 findings conference call. Thank you for participating. You may now disconnect.