Fossil Group Inc (FOSL) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Fossil Incorporated fourth-quarter and fiscal-year 2012 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions.

(Operator Instructions)

This conference is being recorded today, February 12, 2013. I would now like to turn the conference over to Allison Malkin of ICR. Please go ahead.

Good morning. Before we begin, you should be aware that during this conference call certain discussions will contain forward-looking information. Actual results could differ materially from those that will be projected during these discussions. Fossil's policy on forward-looking statements, and additional information concerning a number of factors that could cause actual results to differ materially from such statements, is readily available 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 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 webcasts.

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

Thanks, Allison. Good morning, everyone, and welcome. Joining us today to discuss our fourth-quarter and full-year results are Dennis Secor, our Chief Financial Officer, and Jennifer Pritchard, our President of Retail. We are pleased to report solid fourth-quarter results that represent both top- and bottom-line records for the Company, and concluded another strong year of growth for Fossil. During the quarter, we expanded our Business in each of our major geographies, with global sales up 14%, led by watches.

We improved our gross margins, as we continue to focus our resources toward higher return initiatives and efficiency improvements across our Organization. This drove expansion in operating margin, and a double-digit increase to operating income, and delivered record earnings per share of $2.51. This includes the anticipated favorable tax benefits that Dennis will describe shortly, along with the accretion from our long-term share repurchase program reflecting our strong cash flows even after investing in support of future growth.

In the fourth quarter, we continued to capitalize on the advantages of our global design, distribution, and sales infrastructure to increase our geographic reach across our three core businesses of -- Fossil, our watch portfolio, and SKAGEN. By geography, we continued to develop our Business around the world, with particular emphasis on our growth markets. Asia remained our fastest-growing geography, and continues to be our single largest opportunity. We remain in the early stages of development in the continent, and continue to see tremendous long-term potential there. In North America, our holiday performance was strong, with sales accelerating significantly from the third quarter. We were also pleased to deliver growth in Europe, even as we continued to navigate Company-specific and economic challenges.

Turning to our three core businesses, we grew our Fossil brand, where a strong consumer acceptance led to solid growth of watches at wholesale, and our19th consecutive quarter of positive retail comps. During the quarter, we gained traction in our jewelry business, seeing a positive response to our recently launched global assortment in our owned retail stores, which led to positive comps in the category. We also began to introduce our new jewelry line at wholesale, and saw sales improving from earlier in the year. In accessories, sales were down slightly, however, our infusion of color and our new spring assortment has been positive for the Business at the start of the first quarter.

Our watch portfolio maintained its consistent strength, posting a 20% increase in sales in total, with growth across each of our regions. The quarter also marked our fourth consecutive year of double-digit watch growth. We expect this growth to continue, driven by the power of the portfolio of our brands, our ongoing design excellence, and the significant opportunity that exists to broaden our geographic reach, and to capitalize on our global infrastructure to grow market share in a growing industry.

While the fourth quarter marked a record quarter for Fossil, it also brought to a close a yet record year of outstanding performance, where we made significant progress on many of our long-term objectives. As a Company, we focus on growing our three core businesses, and have three key enablers to drive those businesses. First comes expanding the Fossil core brand. The Fossil brand is a key to our strategy, and last year we made significant progress. During the year, we restructured Fossil under a common global leadership team to ensure brand consistency across all geographies and all product categories. Overall, sales were up solidly during the year, with a particularly strong performance in watches, and we feel we are well-positioned to drive growth in the future.

Second is SKAGEN. We successfully integrated and positioned our newly acquired SKAGEN brand to achieve its long-term potential. Growing the owned brands is critical to our plans, and we see a great potential for SKAGEN, with its rich Danish heritage and contemporary appeal. In 2013, we are now well-positioned to benefit from operating SKAGEN through our owned subsidiaries, and we will begin to expand into more categories, starting with a jewelry line that is going to launch in the spring.

And third is our portfolio watch business, and 2012 was another outstanding year, with growth of nearly 20%. We drove strong increases across both long-standing and newer brands, as we consistently delivered compelling styles to market, increased our geographic reach, and commanded a greater market share. We currently have 14 brands in our portfolio, each at different stages of growth. One of the many advantages to our portfolio approach is that we can easily adapt and focus on the brands and styles that are gaining momentum in a particular geography, providing us with a sustained growth platform. In 2013 and longer term, we will continue to leverage our global distribution and supply chain strengths to grow our brand to their maximum potential, which is significant given the market dynamics in play.

We also expect to capitalize on our Swiss watch opportunity, as we continue to see a significant opportunity to fill an increasing white space in the market for accessible luxury watches that are lifestyle branded. Leveraging our existing infrastructure, we have developed Fossil Swiss-made watches for the Asia market and our owned stores, and our initial shipments for spring are performing well. We are very excited about our Emporio Armani Swiss-made line that will launch in the third quarter this year. We feel this is a unique opportunity to add to the overall Emporio Armani business, and to make it even more significant. And in a few weeks, our new Karl Lagerfeld watch business will launch in 250 select doors around the world.

And as we announced in our press release today, we are very pleased and excited to be working with Tory Burch to develop a global watch business that will begin shipping in 2014. This is a terrific brand and company, and we will be working closely with them to create something special and authentic for the rapidly expanding Tory Burch customer base.

In order to reach the full potential of our brands, we continue to develop our distribution, and install the organizational engine to drive and support our businesses as we expand. Globalization is our first key enabler to our growth, and central to our strategy, with Asia being integral to our growth strategy. Last year, we grew Asia by more than 20%. Our strong performance in key markets like Japan, Korea, and China, and the success of our concession rollout is an indication of the current strength we have in the marketplace. In 2013, we have exciting plans in place to continue our expansion. Opening concessions and working with partners in China are key components to achieving this objective.

We are finding that the fragmented distribution in China is lengthening the time required to sign partners, and develop our targeted regions, impacting our near-term growth and profitability targets. That said, we are confident in our ability to achieve our long-term goals. Asia's rapidly growing middle class loves watches and jewelry, and in particular, our brands. This, combined with the significant talent and infrastructure we have developed, have us well-positioned to eventually grow Asia to one-third of our total Company sales. Asia also represents our highest margin region, so it is a high return opportunity for us as well.

While Asia represents our biggest opportunity, we see similar opportunities to increase our ownership in other countries and geographies of interest. In 2012, we acquired the remaining interest of our Mexico joint venture, and we followed that with the acquisition of one of our Latin American distributors just last month. Latin America has been a strong area of growth for their Company, and both these transactions give us full control of our brands in these regions, and put us in a position to accelerate our growth there. As we move forward, we plan to continue to evaluate additional opportunities in other regions.

We also have made strides to advance our efficiency, which is the second enabler of our growth. Our overarching goal is to build a larger, world-class entity of excellence, focused on long-term and sustainable growth. We believe that our biggest hindrance to growth is complexity, and as such, we have taken steps to simplify our processes, and to speed the flow of information and product across our Company. In 2012, we reduced lead times and successfully navigated higher labor costs by increasing the automation in our manufacturing facilities. Inventory management also benefited from the reduction in our total watch SKUs.

Our outlet store growth initiative has also increased our efficiencies, allowing us to more profitably clear discontinued watches in our owned environment. As we expand outlets globally, we also expect to reduce costs, and to improve inventory turns, by not having to ship these watches across geographies to clear. We expect to further increase our efficiencies in 2013, with several systems initiatives in place to help us achieve this goal. We also expect the increase in our vertical operations through concessions and owned retail stores will give us greater visibility over time.

Our third and final enabler is our team. Building a solid and enlightened leadership team is critical to our success. We have been inspired by the ongoing growth and development of our employees. And this past year, we have promoted many of our managers across the globe to new positions in the Company. In addition, we have added several new members to the management team from outside the Company, to help us build a world-class Company utilizing benchmarking, best practices, and the technology from larger global entities.

In summary, we were pleased with our performance in the fourth quarter and for the full fiscal year, and see an incredible opportunity to continue our positive momentum in the future. In 2013, our priorities continue to focus on our core growth businesses in Fossil, SKAGEN, and our watch portfolio. We will also continue to leverage our global infrastructure to expand our business around the world, and in particular, in Asia.

The advantages of our portfolio approach to the watch category, the nimbleness with which we operate, the incredible talent of our design teams, and our brand's proven success around the world provide us with a powerful platform in the accessory category to deliver long-term sustainable growth. We expect to increase our efficiency and to further develop our Organization, as we focus on creating a world-class operation positioned for sustained growth. Above all, our goal is to continue to build a diversified, scalable, and predictable business model that generates solid cash flows and delivers outstanding returns for our shareholders.

In closing, we want to thank all of our employees and partners globally for another record year for Fossil, and we are looking forward for another strong year in 2013. And now I will turn the call over to Dennis.

Thanks, Kosta, and good morning. Let me start off by highlighting our reported fourth-quarter 2012 financial results from this morning's press release. Fourth-quarter net earnings increased 28% to $151 million, and diluted earnings per share increased 34% from $1.87 to $2.51 a share, which includes a $0.09 per share unfavorable impact related to foreign currencies. Excluding certain nonrecurring expenses related to last year's SKAGEN acquisition, and an income tax benefit from prior year's audit, adjusted diluted earnings per share increased 21% to $2.27 for the fourth quarter. Net sales grew 14% to $948 million, and increased 15% in constant dollars, with each of our segments delivering sales growth in the quarter.

The expansion of the global watch business was the most significant driver of growth, along with the acquisition of the SKAGEN brand where total quarterly revenues were $43 million. Jewelry sales increased, bolstered by the success of the Michael Kors line. The growth in those categories more than offset a modest decline in our leathers business. Overall, we increased our penetration in our direct-to-consumer business, as we continue our strategy to expand our global outlet presence.

In our North American wholesale business, sales increased 16%(sic-see press release "15%") to $355 million, which includes a $2 million favorable currency benefit. We posted sales increases in the US, Canada, and Mexico, as well as with our Latin American distributors. Our sales growth was led by a strong performance in watches, particularly with our licensed brands along with a $15 million contribution from the addition of SKAGEN.

While our leathers business declined in the quarter, jewelry sales increased as strong performance with our licensed brands offset the impact of the repositioning of the Fossil line. The fourth quarter also benefited by about $17 million in shipments, as certain customers delayed holiday deliveries from the third quarter into the fourth.

In our European wholesale business, sales increased 4% to $233 million, which includes an $8 million negative currency translation impact. These results reflect a sequential improvement in our core business. Growth in our watch business drove the sales increase, most notably due to the addition of SKAGEN, whose shipments totaled $19 million in the quarter, and we experienced declines in both leathers and jewelry. Overall, economic conditions remain challenging in Europe, particularly in Italy. We experienced a modest decline in Germany, our most developed market, while both the UK and France grew in the quarter.

Sales from our Asia wholesale operation, both in constant and reported US dollars, increased 19% to $103 million. The growth was driven by the strong performance of the watch category, the addition of the duty-free business, and includes $5 million related to the addition of SKAGEN. The Asia sales increase resulted primarily from the addition of concessions, where we opened 34 and closed 9, along with a low-single-digit comp. Overall economic conditions in Asia are not as strong as we had anticipated, and customers are managing their inventories tightly.

In our direct-to-consumer business, sales increased 20% to $257 million, with no significant impact due to currencies. The growth was driven by new door expansion where we added 25 stores and closed 2, increasing the average number of Company-owned stores by about 19%, along with a comparable-store sales increase of 2.4%. Watches were our strongest category in our stores, and we have been encouraged by our customers' initial response to our repositioned Fossil jewelry product. SKAGEN sales in our direct channel totaled $5 million.

Gross profit increased 16% to $540 million in the fourth quarter, and gross margin expanded 80 basis points to 56.9% despite significant currency headwinds. The success of our SKU rationalization has reduced our liquidation needs, and our outlet strategy has enhanced our capacity to liquidate at stronger margins. Higher penetration of our watch business, along with selective price increases, also contributed to the stronger margin.

Operating expenses increased 15% to $335 million, and our operating expense rate increased 20 basis points to 35.3%. The $43 million increase was driven by new-store and concession expansion, infrastructure investments to support our Asia growth and global initiatives, demand creation investments, along with higher selling expenses to support our sales growth. The increase also includes the effect of SKAGEN operating expenses, offset by a favorable adjustment of our purchase-related liability. The operating expense rate increase resulted from the impact of both the Asia investments and global initiatives, partially offset by the effect of the SKAGEN adjustment and leverage from our retail stores.

Operating income increased 17% to $205 million, including a $14 million negative foreign currency translation impact, and operating margin expanded 60 basis points to 21.6%. Other income/expense, which primarily relates to gains and losses on foreign currency contracts and account balances was a favorable $2 million in the current fourth quarter, compared to a $4 million net charge in the prior-year quarter.

Our effective income tax rate declined from 27.3% in the prior fourth quarter to 25.6% in the current fourth quarter, including an $11 million audit settlement benefit. Our full-year effective income tax rate for 2012 was 28%, and includes the 220-basis-point benefit for the audit settlement.

Now turning to our cash flows and balance sheet. For the full year, operating cash flow increased $183 million to $434 million, compared to $251 million a year ago, driven by higher earnings and strong working capital management. We deployed our operating cash flows, along with existing cash balances and our credit facility, to fund our store expansion, the acquisition of SKAGEN, and the continuation of our stock repurchase plan. We ended the year with $177 million in cash and equivalents, compared to $288 million at the end of the prior year. We also ended the year with $78 million of debt, compared to $15 million a year ago.

During the fourth quarter, we invested $65 million to repurchase 744,000 shares of our common stock at an average price of $87.33 per share. During the quarter, our Board of Directors approved a new $1 billion share repurchase program. Combined with the remainder of our previous programs at year end, we had approximately $1.068 billion remaining on our combined repurchase authorization.

Inventory at the end of the year was $506 million, an increase of 4% compared to $489 million at the end of the prior year. Our inventory growth was driven by investments in components to preserve production flow, the acquisition of SKAGEN, and new store growth. These additional investments were partially offset by lower finished goods inventories, given our SKU rationalization.

Accounts receivable increased by 20% to $364 million at the end of the current year, compared to $302 million at the end of the prior year. The growth in receivables resulted from our wholesale sales growth, the April 2012 SKAGEN acquisition, and a small increase in DSOs, which grew from 43 to 46 days compared to a year ago. During fiscal 2012, we invested $108 million in capital expenditures, and depreciation and amortization expense for the year totaled [$61] million.

Moving now to our outlook. For the first quarter, we are expecting revenues to increase by roughly 10%, and for the full year we are expecting revenues to grow between 10% and 11%. In addition, many of our wholesale customers operate on the NRF calendar, which included an extra week in January 2013. The extra week in our fiscal calendar will take place in January 2014, leaving every month this year misaligned. We did experience a measurable shift of shipments of about $10 million from the last week of January into the first week of February, and expect a similar shift every month this year. Accordingly, the shift will not fully reverse until next January.

For both the first quarter and the full year, we expect that gross margins will improve overall, given our efficiency initiatives, fewer SKUs, an overall direct channel shift, the development of our outlet strategy, and an improved currency environment. We are also planning with a higher operating expense rate for both the year and the first quarter, as we continue to make investments in our infrastructure and growth, and as we build out our direct channel. Our guidance does not anticipate achieving expense leverage in our Asia business in 2013. Overall, we are planning that first-quarter operating margin will be in the range between 12.5% and 13.5%, and that full-year operating margin will be in the range between 16.5% and 17%.

We are expecting first-quarter earnings per share in the range between $0.93 and $0.98, and for full-year earnings per share in the range between $5.85 and $6.15 per share. We expect the calendar shift will negatively affect both first-quarter and full-year EPS by about $0.05 per share. We are assuming a full-year effective tax rate of 31%, and our guidance assumes that foreign currencies remain at prevailing rates.

We are planning capital expenditures between $115 million and $125 million for the year, and expect that depreciation and amortization will be between $70 million and $75 million. Lastly, we expect that this year's EPS growth will be strongest in the second half of the year, given the calendar shifts, early investments to support product launches and door expansion, along with the impact of our mix shift towards the direct channel.

So, now I will turn the call back over to the operator for your questions.

Thank you.

(Operator Instructions)

Our first question is from the line of Omar Saad with ISI Group. Please go ahead.

Thanks, nice job in the quarter. It was great to see that consistency, especially on the margin line.

Thank you, Omar.

Kosta, can you talk about the Tory Burch deal? It is pretty exciting. That is definitely a big, kind of up and coming brand that a lot of people are focused on. As we think about it -- but it is still mostly, I think, a largely North America brand in its existing businesses. How do we think about -- kind of the landscape at retail as you add -- kind of potentially new brands to the portfolio, and continue to grow your existing portfolio in North America, how do we think about where new brands like Tory Burch are going to fit? Is there room at the department stores? Are there other channels you can utilize for new brands like this? Or is there a little bit of an element of potentially Tory Burch, some of the styles might replace some of the existing styles? How -- help us think about how the landscape is going to develop at retail, as you get more new and exciting brands into your portfolio like this?

Thanks, Omar. Yes, it is actually we think a very exciting opportunity for the Company. It will start in 2014, which is obviously some time away. But if you look at trajectory of the brand, where it is going, the strength that it has, not just in the United States but around the world increasingly, we think it is a very strong long-term global brand. So similar to what we have done with Kors and some of the other brands, I think it is an opportunity for us to think differently about the market. It could in effect, create white space and interest.

And as we look at total watch business, the one thing that just continues to happen is, globalization across the world is driving a lot of this interest in global brands. So if you imagine that consumers around the world increasingly want to be part of a customer experience attached to a brand, rather than to a watch brand, we think that is ongoing and it can create a significant white space long-term. So starting with all of that, we were looking at it, and we think we can put it in a position in different parts of distribution around the world that could create a new business, and even more interest. If you look at what is happening with some of the other brands that have gone to market and some the success we have had, there is a wide open market out there. Consumers that are -- increasing numbers of consumers especially in Asia, they are very interested in this category, and are very willing to be part of a brand story that includes a time piece. So we were very excited about the future of it.

Understood. And then, do you think it could fit easily into your existing distribution, not just globally but in North America as well?

Yes, absolutely. We -- if you look at our distribution around the world, we have all types of distribution, and not all our brands in every point of sale. So there is a different profile for different brands, and that is -- there is a certain group of brands that fit into different distribution, and we think that Tory will fit very well in a lot of parts of our organization. Obviously, we will start off small, but we think it has the potential to expand, as the brand gets stronger.

Understood. Thanks, Kosta. Good luck.

Thanks.

Thank you. Our next question is from the line of Rick Patel with Banc of America Merrill Lynch. Please go ahead.

Thank you. Good morning, everyone. Can you just give us a little bit more color on price increases? Any brand or geographies that you can highlight would be great. And secondly, there is anyway to quantify the tailwind that you will get to sales growth in 2013, as a result of price increases taken last year?

Well, we did -- as we talked about before, we had made an effort in some brands and categories in countries to be more inclusive on pricing. So we actually lowered some prices, and increased assortments at the opening price. Overall, I don't think the impact actually lowered our average unit retail, as much as it just engaged more customers in the brand, and we were able to trade some of those people up. So I don't think we noticed anything in that regard, in terms of lower average unit retail. And I -- again on your question about the tailwind from price increases. I think our average unit retails for 2013 will be similar to last year. I don't think we are really going to see average unit retails going up. So I don't know if we are going to get a tailwind from prices.

All right, great. And then can you walk us through how the department store and specialty retail channel will approach a new brand launch like Lagerfeld? Do you expect them to create new cases to sell this merchandise, or do you think they will deemphasize underperforming products to make space for that brand? And is there any risk that some of the Fossil's other brands will lose shelf space as a result of Lagerfeld coming in?

Well, the one overarching issue is that this watch business has been very, very strong in all of the stores that we sell to, especially the United States. And they all have taken the opportunity to give it more space over time. This business is much, much larger than it was three or four years ago. And as you know, virtually all regular price, average unit retails are very high, and margins per foot is very high. So the stores are -- where they have the opportunity, are gaining -- getting more space. So we don't really foresee space an issue. It is going to obviously, start off small. But business is expanding at a rate where we think we can continue to gain space, and we are gaining market share also, and that will be an ongoing process.

Thank you very much, and best of luck.

Thank you.

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

Hi, congratulations.

Thank you.

Regarding the outlook, it looks like you are guiding to 16.5% to 17% operating margins versus your 17.2%. Could you give us a rough sense of how we should think about the gross margin leverage versus SG&A?

Yes. We have got a lot of initiatives going on in the margin that we benefited from this year, and many of those should continue to drive improvements next year. And chief among them, the liquidation strategy as we really manage our inventories tightly, we got less inventory to liquidate. And as we develop our outlet strategy, we can liquidate it at stronger margins. And as those outlets go into the various regions, we don't have to move inventory around the world. So that we think should continue to help us next year. We have got the continued strength of the watch business, should be a tail wind for us as we continue to develop the direct channel including the outlets. That should also be a tail wind. And where we are planning currencies. Currencies right now, are stronger than they were on average a year ago. So those are the drivers of the margin.

Now we are going to give some of that back. We are still in investment mode. If you look at the last several years of this Company, it has nearly tripled over the -- say, the last three or four years. And that has added a lot of complexity to the business. Kosta said in his prepared remarks, that complexity poses a challenges for us. So we are continuing to invest in infrastructure both here and in Asia, and in systems to improve the customer experience, to improve our visibility, to help drive efficiencies in supply chain, a number of those. Those are going to continue to add to the SG&A line. But we believe next year that we should see some offset through the gross margin expansion that we can get. So that is -- those are all of the elements that drive that 16.5% to 17% op margin estimate.

Thanks for the detail. As a follow-up, there has been excitement about smart electronic watches, congratulations on Tory. But what is your overall big picture view on that opportunity, and versus your portfolio, and kind of strategically your thoughts on the evolution of that?

Well, we as you know have been involved in that business for some time, just some -- research and development is looking at it, and we are exploring it. We had a number of products out the last several years that were different types of smart watches. And the overall response was -- I would say poor. Part of it is just-- one of the issues is that you have to charge these devices up every day. So the complexity of people's lives, with the many multiple gadgets they have -- for people that charge up their watch every day is also we found somewhat restrictive. So we are watching it closely. We do have a number of things that we are looking at and watching. But our business I think is really more explosive on the globally branded lifestyle watch business. I think there is a huge amount of opportunity there for us. And we are continuing to move in that arena and we think it's a much bigger opportunity.

Thanks. Congratulations and good luck.

Thank you.

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

Hi, good morning. Thanks for taking my question. It seems like a lot of the SG&A investments are centered around your direct-to-consumer growth and store growth. Can you talk about unit growth by concept in 2013? It seems like there is a theme of greater outlet penetration, but also give us your thoughts on accessory store concept growth, watch station growth, and then of course, the Asian concession growth as well? Thanks.

Well, we are as we did last year opening more outlet stores this year than normal. And we had talked about this over the past couple of calls. And when you look at our outlet store sales as a percentage of the total Company sales, it is a single digit percentage. When we benchmark peer companies and other companies in the industry, that is a very low percentage. And we think that by increasing amount of capacity in the outlets, it gives us the opportunity to make our entire business model more robust and efficient and predictable. So having said that, we are going to take a very balanced approach, and we are not going expand it to the degree that some other companies in France have. But expanding it a bit this year, last year and moving forward, we think it's a good thing for us, and enables us to liquidate inventory globally, very efficiently and reduce a lot of cost -- not just on the [margin] side, but just in handling costs, et cetera.

So we still believe that if you look at our Fossil accessory store, we have about 250 stores I believe, and we are -- they do very well all over the world. Sales per foot are in the $800 to $900 range. We are really interested in putting stores in flagship markets to really increase the awareness of the Fossil brand, more than we are just filling -- back filling different malls around the world. For example, so we are -- we opened a store in Shanghai last year and it is doing very well. We are opening a very high profile store, a small store, but a high profile store in Hong Kong that we think is going to kick off our awareness in Asia. We did the same thing in Korea last year. Also we have done it, the same thing in Paris, in Milan and Rome. We are going to -- in UK, for example, we are doubling the size of our Oxford Street store. It is a very important store for, but we were able to get the space next to us and we are expanding that. That will increase the awareness, and help us kick off the market.

So in terms of Fossil accessory store, we are really more interested in raising brand awareness at this time. We are also looking very closely at omni-channel. So we were trying to understand how many stores we really need in the United States for example, long-term to really reach our objectives in terms of brand growth. So we have a lot of initiatives on the website and analytics and CRM, and the entire omni-channel world really to expand that. The Watch Station is largely at this point in our owned stores, is an outlet store opportunity. So we are expanding that quite a bit across the world. They have done extremely well as you know, and helped us clear goods really efficiently. Our biggest initiative in the entire Company is building watch distribution in Asia. So that is done through concessions. So we are still focused on building a large organization and technology to really expand concessions globally. So watch distribution in the concession mode is really our biggest initiative globally.

And then you talked about some of the fragmentation at Asian wholesale channels. Is that -- should we expect slower unit growth in that concession channel in 2013, and potentially into 2014? What type of total concession growth can we expect in that channel for this year and next? Thanks.

Well, we are undertaking a number of initiatives to improve the comp performance in Asia. The team that we built over there, very merchant-driven and focused and have got a lot of information and experience with driving comp sales, and all of the [caveats] that go with it. So we are -- really have a lot of initiatives in place to do that, in addition to opening additional concessions across the region. So we are working on both, and we think we can increase the productivity and also open additional concessions at the same time. One other thing that I would mention is that we are really more interested at this point in getting some partners involved in the China opportunity. It's a very complex and fragmented market, and we think that we can speed up our process over there by doing this and we are working diligently to try and execute that.

Okay. Great. Thanks.

Thank you.

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

Great. Thanks so much, and thanks for taking my question.

Sure.

I have a couple of questions. First, I was hoping to get clarity around gross margin in the fourth quarter. I guess it came in slightly below expectations. What drove that? Was foreign currency a surprise for you? I mean, it looks like that number was a little higher than what we would have expected. Second, I am not sure if I missed that but comps by concept, just US versus Asia, your outlet and stuff like that? And I am not sure if you talked about Europe, but it looks like ex Skagen, Europe was down by 5% give or take? And Germany has been now challenging for the last couple of quarters? Can you maybe talk about your expectation in Europe as we go through the year, especially as a repositioned jewelry line begins to help the business?

Yes. The -- let me go back to the first part of that question. The gross margins in the fourth quarter were much stronger than they were a year ago. And that is despite the fact that we had big currency headwind in there. So we were anticipating that currency headwind. The big driver there that helped that, was what we alluded to earlier that should continue into next year, was the adjustment into liquidation strategy. As I mentioned, we have managed the inventories exceptionally well. They are much -- they are very clean, and we have been able to liquidate now more through our outlet strategy.

So you can see the benefit in the fourth quarter. You can hear us talk about next year. That is really driving the initiative to grow that channel. We also, with the strong watch performance, that also helps on the gross margins. And as we shift -- continue to shift more towards a direct model, that is helping to drive the gross margins. So those were the big drivers in the fourth quarter that helped the margins.

You are right on Europe, your observation on Europe, that ex Skagen the core business was slightly down. But as we mentioned in our prepared remarks, sequentially it was an improvement from where we were in the third quarter. So we were very encouraged by that. Germany is a large market for us, so it was down modestly. The biggest impact, just because of economic issues going on, is Italy. But we also grew strongly in the UK and France. So now it is a portfolio of markets that we were managing over there, and we are very encouraged by at least the trends moving from 3Q into 4Q were more positive.

And just expectations on Europe as we go through '13, Dennis?

It is our view is that we are looking at that business. We try to be as realistic as possible. I mean, if I talk about next year, if I kick it up one level, the good news for us is that our growth is coming from a variety of different sources, both in Europe and around the world. We are going to benefit from door expansions that we added last year, plus new doors. We have got new brands coming on. We can take new existing brands into new distribution. We pick up from an extra quarter of Skagen. So there are a lot of things that are supporting our growth. We were not overly dependent upon, upon comps. So I think what we approached, is we are looking at things realistically based on what we are seeing in the market, and we have got a number of levers that we can pull that will drive sales.

Terrific. Thanks so much. Best of luck.

You bet.

Thank you. Our next question is from the line of Liz Dunn with Macquarie Capital. Please go ahead.

Hi, good morning. Thanks for taking my questions. I guess I am interested in jewelry, kind of across both your owned brand and portfolio of brands, because it seems as though multiple brands, you are talking about jewelry initiatives. But yet jewelry was down in 2012. So can you just give us a little more color on how jewelry -- how the jewelry repositioning is proceeding in Europe with your own brand? And then how big of an opportunity are some of these initiatives with the portfolio brands? Because I think at ICR, Kors was saying they think it can be 5% of their owned store business, the jewelry business. So I am just trying to get a sense of what your expectations are for jewelry across your portfolio brands? Thanks.

Okay. Well, I think first of all, as we have been discussing, we had changed our Fossil jewelry line quite a bit, and that cost us some sales last year. And coming through the fourth quarter -- the new line that was out there, which was a more global assortment, more in tune with the Fossil design aesthetic actually was showing improvement in both our owned stores, and we saw some improvement in wholesale also. So we -- we went through that restructuring and we think we are in a good new place to grow, especially since in that category we are up against some lower numbers this year. In terms of the other businesses that we are operating, Kors has really has got to a great start last year and is showing like it's going to be strong long-term. We are actually seeing it sell extremely well, and not only the United States but in other regions of the world. It's kind of a different look and it's more iconic branded look, a higher quality that has resonated I think with consumers in a pretty strong way.

I think, there is a less and less interest I think, in costume jewelry and more in high quality iconic lifestyle brand jewelry, and that kind of plays into our strength. And then of course, the other thing we are very excited about is Skagen jewelry is coming out soon. And as we have discussed before, the Fossil jewelry that was in Europe was a different line, and it had more northern European look and kind of Nordic, didn't necessarily fit with what, where the brand was going. So we -- that change that we made in the line was because of that. So the team that originally built that line which was very successful and grew very quickly, has been for the last year really working on Skagen jewelry. So that kind of Danish design, Nordic look for northern Europe that's going to go into the market, is going to take some of what we dropped when we changed Fossil line. So we think the Skagen jewelry will grow pretty quickly not just in Europe, but around the world as we continue to penetrate more doors through our own distribution.

In addition to that, we do think long-term, jewelry and lifestyle brand jewelry is an opportunity. And we kind of look at part of our watch business, because it's same characteristic in terms of lead time,it's branded, it goes to the same stores, it leverages our global infrastructure. So we think it's an add-on and has the potential to eventually make the size of the Company larger. Of course, especially when you look at Asia, the categories that consumers over there are most interested are watches, jewelry and accessories. And that's our zone, and we think we are in the right place.

Do you have any sort of longer term goals how big that business can be? And can you just confirm that the margin structure is similar, gross margin structure is similar to watches?

Yes, we just don't have a target that we want to give. But we do think that it has got a very significant long-term potential. And the margins are very similar -- the actual -- almost all of the characteristics of the business in terms of lead times, numbers of SKUs, consistency of SKUs is really very similar. You can imagine a lot of our sales reps around the world that are going to stores, selling Kors watches, also have Kors jewelry with them. So it leverages our infrastructure and it just flows through our distribution pipeline.

Great. Thanks. Good luck.

Thank you.

Thank you. Our next question is from the line of Scott Krasik from BB&T Capital Markets. Please go ahead.

Thanks. Just a quick question on the contingency reversal. Is that because of earnout isn't going to be -- you have already taken a reserve for an earnout that they aren't going to meet? Is that the charge on the fourth quarter?

Yes. I mean, essentially what the -- when we executed the deal there was a target, a very short-term target in terms of top line that we needed to hit. It was a pretty challenging target. So we have now made the determination that we will probably won't hit that very specific near-term target, and that drive is reversing that liability.

And that was that 12 month target from May to May, or whatever that was?

Yes.

Okay. And then just you alluded to China, that you need to maybe bulk up with partners. But what was the sales in China for 2012, and what do you expect the dollar growth to be in '13?

Well, we are not reporting dollars by country. But suffice to say that China did grow very quickly, and it is still relatively small business. (Multiple Speakers). I'm sorry? It grew very quickly, and it has a huge potential going forward. So we are just looking at ways to move that along faster. And that's what we are working on now.

Okay. And then -- sorry, just lastly, I think at ICR a month or so ago, you still said that you thought you would get leverage in Asia in the back half of the year. So what changed in your thinking between then and now?

It is really just the top line. I mean, we look at that long-term opportunity, and we are as excited about it as ever. The top line just as Kosta alluded, it is a little more challenging to build out the distribution. We are looking for partners that we can engage with, that can help us really step on the gas. But obviously, getting that leverage as a function of what the top line looks like next year. So we have moderated that near-term view, just because of the challenges that we are having building that distribution as fast as we would have liked to.

Okay. Thanks and good luck.

Thank you.

Thank you. Our next question is from Neely Tamminga with Piper Jaffray. Please go ahead.

Great, thanks. Hi, Kosta, just a little bit more on the China distribution strategy. I think that it is great that -- sounds like you are planning to work with partners to kind of accelerate some of the opportunity there. Just wondering if there is another analog or company in which you aspire to kind of maybe emulate from that position, so that we can get a sense of who does it well, from your perspective?

Well, there is a number of multibrand multinational companies, that are in different categories. So you can say with Exotica in sunglasses, or Swatch group in watches, or L'Oreal and Estee Lauder in the beauty industry. I mean those are type of companies that we are benchmarking. We do think that if you look at accessories and the categories we operate in, relatively static product lines, high margin, high predictability and not a lot of seasonality. We think that our categories fit into a profile, a real systemized approach to business, handling multiple brands. So when we talk, a lot of the systems we are putting in place -- there is a lot of number of technology investments that we are making, like a PLM system, a product lifecycle management system to enable us to handle the product development for multiple brands and categories in a very efficient and quicker way.

And also we are installing a new merchandise planning system, a new financial reporting system, a SAP HR system, and SAP manufacturing management system, a sales force automation system is being tested right now. We have also a lot of initiatives in place, and in regards to omni-channel, web analytics and CRM. So a lot of things we are putting in place that really enables us to -- and we mentioned in the prepared remarks, is to efficiently manage a larger business with more brands and more categories, that we think is -- we are in a really good place in terms of where we are going. We just -- and have a large opportunity. And we want to be able to get it all organized, so we can have long-term sustainable growth. So we think we are in a good place.

So just a follow-up question to that. So as you look at China for the next kind of 12 to 24 months, do you think you need to see more capital allocation towards the human capital side, tech capital, or actually physical capital like a DC or something to that effect?

Well, some of each. I mean, as we have said before, we have put a lot of human capital in the region, and there is more to come quite honestly as we continue to get larger. In terms of capital for concessions, et cetera, they have a very high and quick ROI on them. So it is very profitable, and return on capital is very high. So you can see it in our margin and in our mix, for example, that it is a very big opportunity in terms of the return on capital. So it is just a big complex puzzle we are putting together, with a huge upside. And it is a game-changer for the Company, and we are moving diligently to get there as quick as we can. But we want to make sure that we don't go skinny on our investments in the short-term, that could cost us in the long-term, sustainable growth in the future. So it is a balance we are trying to strike, and that is where we are right now.

Thanks. Dennis, I know that I am the last questioner probably here, but I do want to say welcome to the Company officially on these conference calls so.

Thank you very much. Appreciate it. (Multiple Speakers).

Good to have you join us.

Good to hear. (Multiple Speakers). Thank you.

Thanks.

Thank you. Our next question is from the line of Jane Thorn Leeson with KeyBanc.

Hi. Thank you, and congratulations on a good quarter. I just have a quick question on Latin America. If you could explain how that business is laid out and some of your plans going forward there?

Well, with the recent acquisitions we made with Mexico and also the distributor in South America, we basically have under our control, every country in the region except for Brazil. So Brazil is a different country in terms of the types of duties and the way [FX] works there, so we are not currently operating on our own there. But if you look at the growth in the region over the last couple of years. It's interesting, but we always talk about how the people in Asia love lifestyle brands. So South America and Latin America is as least as strong there, and a lot of our growth in some of the new brands we had in the last five or six years has come from that region. So the potential is very large. So for us to be able to directly own that, and to invest in it, and to put our initiatives in place more directly, we think is a very large opportunity.

As -- the interesting thing to us is again we have this big opportunity in Asia, but parallel to that are very large opportunities in other emerging markets Latin America, South America and Middle East and eastern Europe, and some parts of Asia and Malaysia, for example, Indonesia that are -- consumers are growing in large numbers there. And there is even starting to be activity in Africa, which is very interesting to us. There is a long term play here of additional gains for us, that we are trying to invest simultaneous to our big investments in Asia.

And then -- sorry -- and then following up on that, is there any costs we should anticipate going to that region for this year and next year incremental?

It is imbedded in our guidance. I mean just from a modeling standpoint, as we pick up some gross margin, but we also pick up some expenses. So just you need to model that -- and we have already anticipated that in the model. But the impact overall is going to be very modest to the consolidated results.

Okay, great. Thank you.

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

Hi, everyone. Good job in the fourth quarter, and thanks for the breakdown in classification. Very helpful.

Thank you.

Could you talk about the mix of brands in the business in Korea and Japan and the concessions there? How do you see -- where is it now? How do you see evolving over time? And then I want to talk about the outlets for a second.

Well, the Korea and Japan, and the brands that are strong over there, are similar to what the rest of Asia, which is mostly the luxury brands, Armani, Burberry, Marc Jacobs is very strong in the market, and Kors is showing some strength, especially in Korea. And across the board, I think all of our brands there, work there. Fossil is actually very strong throughout Asia, and especially in Japan we have a number of stores there. So it's -- the portfolio works. In some -- in Japan for example, it's interesting, we have some outside businesses with Diesel, for example. As you know the Diesel watches are very, very large, so it is kind of counter-intuitive. But basically, our system is such, that we put products in place and do a lot of testing and whatever sells-through at retail, we expand it quickly. And so -- it is kind of we are reading closely what the customer is buying, and put that product to market. So it leads us in different directions. But from our experience, all of our brands are going to work in Asia.

Okay. Then okay, on the outlets, at what point do you think you will be able to make product for the outlet stores? So are you just clearing goods now?

We expect that we are going actually be making some made-for products this year. And the great thing about that, is that it helps further enhance those margins that are coming out of the outlet strategy. So the outlets work for us in a variety of reasons -- or ways, both giving us additional capacity to drive sales of made-for product, and also to liquidate our other product at much stronger margins than we would if we were selling them through off-price.

Okay. And how many outlets are you opening this year? I missed that.

I think we --

It's -- give us one second.

It's about 57 outlets this year, pretty consistent with what we did last year.

Okay. And Jennifer, will they be just mixed between Fossil and Watch Stations?

Yes. And it is probably likely going to be right down the middle.

Okay. And locations?

We are filling in around the globe as the best opportunities, as the best opportunities present themselves. But we are very focused on rounding out our international outlet base.

Okay. Thanks.

You're welcome.

Thank you. Our next question is from the line of David Wu with Telsey. Please go ahead.

Good morning, everyone, and congrats on a great quarter.

Thank you.

In Asia/Pacific wholesale, can you comment on what you are seeing in terms of sell-through rates and inventory levels at the retailers? And do you think some of your fourth quarter shipments may have been pushed into January from December, just given the timing of Chinese New Year, which obviously fell in February versus January last year?

We are monitoring inventory relative to sales very closely throughout the entire world, but obviously in Asia as well. And we have not seen anything in terms of slower turns over there. And then in terms of shipments moving -- we really have not seen anything that tells us that there has been shipments moving from one quarter to the next. So we -- our business is quite a bit different than the Swiss watch industry. They are showing kind of volatile percentage increases month to month, if you look at it and some of it could be pipeline fill or de-fill. But if you look at the Swiss watch industry, the inventory turn at retail is about 1 time per year. Whereas our turns at retail are 3 or higher. In our owned concessions, especially in Asia, it's probably higher than that. So it is kind of a different business model. So you don't see those huge fluctuations of sales increases, that pipeline fill relatively sell out, like you might see in the Swiss watch industry.

Got it. And are you expecting Asia Pac wholesale to perform below sort of your 25% annual growth targets over the near-term, just given the tighter inventory controls? Or should we start to see improving trends as retailers start to replenish?

Well, I mean I think as we said a bit earlier, that we have moderated our near-term view. In the longer-term we continue to feel very strong about the ultimate opportunity in Asia. But given just some of the early challenges on building out that distribution, that is not quite going at the pace that we had initially anticipated. So that affects it in the nearer term.

Got it. And I think you mentioned that the Asia comp was up low singles in the quarter. Was there any sort of specific region that was driving that deceleration?

I don't have any specific details, anything that jumps out at us.

Great. Thank you very much.

Sure. Thanks.

Thank you. We have no further questions that the time. I will turn it back to management for closing remarks.

Great. We appreciate everyone joining us today, and look forward to speaking with you when we report the first quarter in May. Have a great day.

Ladies and gentlemen, this concludes the Fossil Incorporated fourth quarter and fiscal year 2012 earnings conference call. ACT would like to thank you for your participation, and you may now disconnect.