Fossil Group Inc (FOSL) 2013 Q1 法說會逐字稿

Welcome to the Fossil, Inc. first-quarter fiscal year 2013 earnings conference call on 7 May, 2013. 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 Allison Malkin of ICR. Please go ahead.

Thank you. Good morning, everyone. Before we begin, you should be aware that during this conference call certain discussions will contain forward-looking information. Actual results could 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 through this release under in 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 homepage, and then on Investor Relations, and select Webcast under the connections heading.

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

Thank you, Allison, and good morning, everyone. Joining us today to discuss our first-quarter results are Dennis Secor, our Chief Financial officer; and Jennifer Pritchard, our President of Retail. We are off to an excellent start in 2013, and we are pleased to report results that exceeded both our top- and bottom-line expectations and set first-quarter records for both revenues and earnings.

We executed well across our entire business, increasing revenues by 15% as we posted double-digit gains across all our geographies. We delivered strong margins, even as currencies turned less favorable and worked against us. We manage our resources tightly, and continue to invest in our share repurchase program. With this, we delivered earnings per share of $1.21, up 30% from last year's $0.93.

Our results include some timing and discrete items that Dennis will explain in just a moment. Our consistent performance continues to demonstrate the power of our global operating platform; our compelling brands; strong innovation; and the outstanding execution by our team. And we continued to make significant progress against our long-term strategic objectives.

The Fossil brand sales rose solidly, led by a 17% gain in watches, and was balanced across geographies and fueled by strong innovation, market share gains, and the addition of new doors. We are pleased with the performance of our repositioned jewelry assortment, which is performing well and validates that our new offerings are aligned with our customers' expectations for our brand.

In accessories, our small leather goods performed well; and in women's handbags, our assortments look great and is infused with great colors, and we are continuing to work toward improving our performance in that category. Our direct channel continued its robust growth with a global comp increase of 4.3%, marking our 20th consecutive quarter of comp store sales increases. Comp growth was strongest in Asia and Europe, and North America was up solidly as well, with watches and jewelry leading our category performance.

In total, we remain very pleased with the performance of the Fossil brand overall, and continue to expect solid growth in 2013. Skagen recently celebrated its one-year anniversary as part of our Company, and we are very pleased with the performance and the future outlook of the brand. Following our integration of the business in 2012, we are now realizing the lift in sales and margin as we operate the brand through our own subsidiaries.

During the quarter we launched Skagen jewelry, added another growth driver to the brand that perfectly complements our watch offering. This year we are focused on maximizing Skagen's potential in Europe by adding new doors and increasing the brand's penetration in existing doors. In Asia, our goal is to drive higher volumes and margin expansion as we sell through our own subsidiaries.

We have developed an exciting new store design for Skagen as we evaluate the brand's retail store opportunity. Overall, we remain very excited about Skagen's long-term growth potential.

Our watch portfolio continued its favorable momentum, with a 23% increase in sales. We balanced our growth across many brands, and our results included strong performances from both long-standing and newer brands. Over the last several years, our sales growth in the watch category has outpaced the market overall and we expect this trend to continue into the future, as we capitalize on our global distribution platform and continue to innovate across our portfolio.

In February, we launched the Karl Lagerfeld watch line and have been very pleased with the response. We also continued to work toward our Swiss watch opportunity by leveraging our existing infrastructure, and capitalized on a white space opportunity for accessible luxury watches that are lifestyle branded. During the quarter, we continued the introduction of our Fossil Swiss watch offering in Asia and in our own stores. Our Emporio Armani Swiss watch offering is underway, and we are now planning to launch in spring of next year.

And we continue to prepare for our launch of Tory Burch watches just ahead of holiday 2014. We see tremendous opportunity to continue to expand our portfolio of brands in the new doors and geographies, and to increase the penetration of our brands within our current distribution. We also believe we are poised to benefit from the ongoing preference for global brands by consumers.

This trend is especially strong in the watch and jewelry category. And the interest in watches continues, and our innovation is sustaining this momentum. In the quarter, we continued to make significant progress in our initiatives to build our global platform, to drive efficiency, and to develop a world-class organization.

One of our key focuses has been on realizing our potential in Asia, and the first quarter represented continued progress towards this goal. We have been developing our infrastructure to support a much larger business and to capitalize on the increasing spending from the growing middle class in Asia who love watches and accessories and prefer global brands.

In China, our strategy is to operate directly in first-tier cities and to work with partners to open doors in second- and third-tier cities. In the quarter, we signed a new regional partner with the potential to open 100 doors in the future. And we are in active discussions with many others, working only with the best and proven partners as we work toward our ultimate expansion goals in the country.

In Europe, we experienced solid growth and increased retail comps in virtually all European countries. We are very encouraged by our results in our European wholesale business, which continued its sequential improvement that began last year's second quarter. Our performance in watches and jewelry has been strong as market conditions have stabilized. In the quarter, we made excellent progress in developing outside of our core base in Germany, with strong performances in the UK, as well as in markets in Eastern Europe and the Middle East.

Our momentum in Latin American also continued strongly, with increased sales in Mexico, and from our newly acquired Latin American distributor. During the quarter, we continued to integrate these operations into the Fossil organization, and are pleased with the progress thus far. Across categories, we are seeing strength in watches across our portfolio and expect this trend to continue.

We also continued to focus on advancing our efficiency goals. During the quarter, our inventory was well-controlled, and we maintained strong margins even as currencies moved against us. While labor cost inflation in China is challenging, we are managing with fewer SKUs and continue to invest in automation to drive even greater efficiencies, improved turns, and offset some of the cost headwinds. Our overarching goal is to build a world-class entity of excellence focused on long-term and sustainable growth. And we have taken steps to simplify our processes and to speed the flow of information and product across our Company to achieve this goal.

We are on track to implement systems this year to further improve our visibility and efficiency. We will continue to invest our strong cash flow to support our long-term growth and to purchase our shares through a $1 billion repurchase program.

And, finally, we have continued to develop an outstanding team here at Fossil. We are very pleased with the ongoing growth and development of all our people, and that we were able to make a large number of key promotions across our Company to recognize people for their leadership skills and their proven success.

We've complemented these promotions by recruiting great talent from outside the Company to help take the Company to the next level. All in all, we think we're in a great position, and are looking forward to long-term sustainable growth of sales and earnings.

And now, I'll turn the call over to Dennis for more detail.

Thanks, Kosta, and good morning. Before I review our financial results, I want to highlight some items, both favorable and unfavorable, that affected our quarter. First, as we shared on our last car, this year's NRF calendar is misaligned with our fiscal calendar. That resulted in the loss of a critical shipping week in January, and negatively impacted net sales by $10 million, which we included in our previous outlook.

Next, we experienced a separate favorable shift of about $15 million as customers requested March delivery for shipments than we had anticipated for April; likely due, at least in part, to this year's earlier Easter. This favorable shift benefited EPS by $0.07. And, finally, we recorded a $6 million non-cash, non-operating, mark-to-market gain related to our future acquisition of our Spanish joint venture. This benefited first-quarter EPS by $0.11.

With that, let me review the quarter's results. First-quarter net earnings increased 24% to $72 million. And diluted earnings per share increased 30% from $0.93 to $1.21, which includes a $0.02 per share favorable impact related to foreign currency. We are very pleased with our results, which exceeded both revenue and earnings expectations even without the shift and Spain benefits.

First-quarter net sales grew 15% to $681 million, and increased 16% in constant dollars as we posted double-digit sales growth across each of our segments. Our sales growth was driven by a strong performance in our global watch portfolio, with solid increases coming from many of our brands, both owned and licensed. Jewelry sales increased modestly, while eyewear sales were lower, given our exit from the optical frame business late last year.

Our leathers business declined compared to a year ago, and improved on a sequential basis. Fossil brand sales increased globally, and the acquisition of Skagen contributed $29 million of sales to the quarter. In our North American wholesale business, sales increased 13% to $255 million, and the currency impact was not material. We drove sales increases across our geographies of the US, Canada, and Mexico, led by a solid performance in watches, while leathers and eyewear decreased in the quarter.

The acquisition of Skagen contributed $10 million in first-quarter sales. And, while not material in the quarter, we were pleased to begin direct shipments into Latin America in February, following the acquisition of one of our distributors, Bentrani. Compared to last year, the two shifts I mentioned favorably impacted North American sales by a net $5 million.

In our European wholesale business, sales increased 14% to $174 million, with no material currency translation impact. We posted strong double-digit growth in our watch category, along with a modest increase in jewelry. Shipments of eyewear and leathers declined in the quarter. The addition of Skagen contributed $13 million in sales for the quarter. And during the quarter, as a result of our future acquisition of our Spanish joint venture, we began to fully consolidate those results, which increased European sales modestly.

Sales grew in most of our European markets, with a particularly strong performance among our Eastern European and Middle East distributor market, along with the UK. Shipments in Italy declined, as conditions there continue to be challenging. Sales from our Asia wholesale operations increased 13% to $87 million, which includes a $1.6 million unfavorable currency translation impact, due primarily to the weak Japanese yen. The growth was driven by the strong performance of the watch category; the addition of the duty-free business; while the acquisition of Skagen contributed $3 million in revenues.

Our business was strong in markets like China, Japan and India, though sales in Korea were challenging. During the quarter, we added a net 11 concessions, and ended the quarter with 281.

In our direct-to-consumer business, first quarter sales increased by 22% to $165 million. Our growth was fueled by our continued global retail expansion and comp store sales growth of 4.3%, our 20th consecutive quarter of positive comps. Our customers have responded very favorably to our new Fossil global jewelry assortment, delivering positive comps in our full-price stores in all of our regions. Strong performance in both watches and small leather goods also contributed to the growth -- to the comp growth, rather; though our women's handbag business has not yet met our expectations. Comp sales were positive in all of our regions, and we are particularly pleased with Europe, where we are seeing a steady improvement since the second quarter of last year, and where we delivered positive comps in virtually every market.

We ended the quarter with 477 Company-owned stores versus 398 a year ago, and remain on track with net new 2013 store openings in the range between 70 and 75, with the majority focused internationally and in outlets.

Gross profit increased 15% to $378 million in the first quarter compared to the prior-year quarter. Gross margin declined 20 basis points to 55.6%. The gross margin decline was driven by the impact of currencies, and was also impacted by the relative strength of our North American wholesale business and our European distributor market, where margin yields are lower.

These impacts were more pronounced than we had anticipated, as the currencies declined significantly in the quarter, and both North America and our distributor market outperformed expectations. The margin headwinds were partially offset by segment mix, primarily given the relative growth of our direct-to-consumer business, the strong performance of our higher-margin watch business, and improved margins in our full-price retail stores.

Operating expenses increased 15% to $284 million, while our operating expense rate remained constant at 41.7% in comparison to last year. The $38 million increase was driven by new store and concession expansion, infrastructure investments to support our Asia growth, and global initiatives. The increase also includes the effect of the acquisitions of both Skagen and our Latin American distributor, and the impact of including our Spanish joint venture in our consolidated results.

Operating income increased 14% to $94 million, including a $200,000 positive foreign currency translation impact. Operating margin decreased 20 basis points to 13.9%. Other income and expense increased favorably by $7 million, primarily as a result of the $6 million gain related to our Spanish joint venture, along with increased net gains on foreign currency contracts and account balances as compared to the prior-year quarter.

Our effective income tax rate was 28.1% compared to 27.8% in the prior-year quarter. The rate is lower than our anticipated full-year rate, given favorable discrete items in the first quarter. The Company continues to expect a full-year tax rate of about 31%.

Now, turning to our cash flows and balance sheet. For the first quarter, operating cash flow increased $51 million to $86 million, compared to $35 million a year ago, driven by higher earnings and strong working capital management. We ended the quarter with $241 million in cash and equivalents compared to $260 million at the end of the prior-year quarter. We also ended the quarter with $153 million of debt compared to $21 million a year ago.

During the first quarter, we invested $56.5 million to repurchase 559,000 shares of our common stock at an average price of $101.10 per share. By quarter-end, we had approximately $1.012 billion remaining on our combined repurchase authorization. We're very pleased with our inventory management. Quarter-end inventory totaled $520 million, an increase of 2% compared to $512 million at the end of the prior-year quarter. Our inventory growth was driven by our various acquisitions, new store growth, and investments in components to preserve production flow.

These increases were largely offset by lower finished goods inventories, given our SKU rationalization and improved lead times. Accounts receivable increased by 22% to $273 million at the end of the current quarter, compared to $223 million at the end of the prior-year quarter. The growth in receivables resulted from our wholesale sales growth and acquisitions. Excluding the impact of acquisitions, our wholesale DSO improved modestly.

During the first quarter, we invested $20 million in capital expenditures, and depreciation and amortization expense for the quarter totaled $17 million.

Moving now to our outlook. For the second quarter we are expecting revenues to increase between 8% and 9%. This is net of the 2 percentage point impact of the North American sales shift that I discussed earlier. Combined with the first quarter, our guidance would result in sales growth for the first half of this year of roughly 12%. For the full year, we continue to expect revenues to grow between 10% and 11%. We were pleased with the strength of our first-quarter sales, which were stronger than we had anticipated. And we are certainly encouraged by the momentum we have been seeing in Europe, both in our retail stores and among our wholesale accounts.

We are maintaining our sales guidance, given the currency environment, which has become less favorable than when we guided in February. For both the second quarter and now for the year, we are planning with gross margins that are flat to slightly higher. We continue to expect that our efficiency initiatives will help drive margin expansion along with overall channel and product mix and the development of our outlook strategy. The weaker currency environment, however, will likely erode some of this benefit relative to our prior expectation.

We are planning the second quarter with a higher expense rate than the previous years as we continue to make infrastructure investments and build out our direct channels. The second-quarter expense rate will also be affected by the impact of the revenue shift into the first quarter, along with the timing of certain expenses, such as Basel, which took place in the second quarter of this year versus the first quarter last year. We continue to expect through full-year expense rate will be higher than last year.

Overall, we are planning that second-quarter operating margin will be in the range between 11.5% and 12%. And we are expecting second-quarter earnings per share in the range between $0.89 and $0.94. For the full year, we continue to expect operating margins between 16.5% and 17%. Given the non-operating gain related to Spain, which is reported below operating profit, we are now expecting full-year earnings per share between $6.00 and $6.26. Our guidance assumes that foreign currencies remain roughly at prevailing rates. We are planning capital expenditures between $115 million and $125 million for the year, and expect depreciation and amortization will be between $70 million and $75 million.

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

(Operator Instructions). Randy Konik, Jefferies.

Thanks, guys. Kosta, can you give us some color on how you're thinking about the consumer environment right now? And if you could give us a little bit more granularity on the Kors performance in the quarter, that would be very helpful.

And then, Dennis, if you could give us some color on when we could expect to see a leveraging on the Asian growth expense; and then, separately, when do you think we should see an inflection point back in the gross margins? Thanks.

Well, I think if you look at the business, especially in accessories and watches, it appears to be very strong. We are probably benefiting from an ongoing situation where there's not as much interest in apparel, or it's kind of an overserved category. And with a small percentage of sales moved from that category into watches and accessories, it has a big impact. And we expect that to continue. So we are, we think, in a very strong position in terms of the ongoing business.

We also get -- we've seen estimates that the watch business will continue to grow at 7% to 10%, so we are playing into that strength as well. So we just keep doing what we're doing, and we're in the right place, and we'll continue to benefit from the tailwind. And Kors, obviously, continues to be very strong, as we said before. It's showing strength outside the United States as well, so we think that's going to continue.

We also have a number of other brands in our portfolio that are growing at a very fast rate throughout the world. So we think the power of the portfolio to adapt to markets and to show ongoing growth is -- we're really in a good position in terms of that.

Randy, on the Asia question, we feel very strongly about the long-term potential of our business in Asia. And as we said on the last call, our focus is building the distribution channel. One of the challenges there is finding the right partners. It's very fragmented. We're very pleased that we were able to -- and have signed one regional partner that has the potential, as Kosta mentioned, to open 100 doors for us in the future.

But our strategy, Randy, is to do it well rather than fast. We are really focused on working with the best operators in the region. And those discussions are ongoing. So, with respect to the inflection point, it really is a function of when we build that distribution. We are investing; that will put some pressure on the margins right now. But it's really going to take the revenues and the distribution channel to be built out. That will happen sometime in the future.

With respect to the margins, we're actually expecting gross margins this year overall to be flat to slightly up. There's a portfolio of initiatives that will help drive some improvements. Currencies are not going to be as favorable as we had happened. But still, for the full year, we expect to be flat to slightly up on gross margins.

Simeon Siegel, JPMorgan.

Great, thanks. Good morning. Were there any specific categories or price points that led to that 17% growth in the Fossil watches? And then in terms of the other $15 million incremental sales, can you help us where that fell geographically? And then keeping that Easter thought alive -- on the DTC side of the business, do you see any incremental strength during that last week of Q1 tied to that Easter timing? And then maybe, perhaps, followed by a negative side of the shift in Q2? Thanks.

As far as the watch business, obviously the growth was pretty strong across the world. In the United States, it was up 22% in the United States; up 17% globally. And it's really across the board. We had, as you know, reformulated the brand about how we go to market. It's more design-driven and brand-driven, rather than category-driven. And we are starting to see the benefits of that.

There's a stronger point of view and there's a really strong assortment. We also have benefited from having fewer SKUs, not just in Fossil but in all our watch brands. So what we're telling is fewer stories, more well-told. And I think customers are responding to that.

Was that 17% across all the portfolios?

17% in Fossil watches. The total watch business, across the whole world, was up 23%. US Fossil watch business was up 22%.

Then, on this shift, that was all North America-related. What we did was is we -- actually analyzing the timing of wholesale shipments is not a perfect science. So you look at patterns. And when we looked at March, we saw a very distinct second wave of shipments that happened in the middle of March that we had been anticipating for April. So we would expect that that shift -- that $15 million shift -- was fully turned in the second quarter.

Now, just not to confuse everybody, the first shift that we talked about the last time -- the $10 million shift that we saw in January -- that results from the NRF calendar disconnect this year.

That fully turns in January of next year, so that's a Q1 2014 event for us.

So did you see, on the DTC side, was there an Easter impact there?

On the DTC side, we saw an increase in March, as you would expect, and a decrease in April. But, overall, given the two months combined, we are very pleased with the result. And we were very happy with the fact that Europe came out positive in the month of April.

Great. And then, lastly, so how much was the incremental expenses that you guys just mentioned for Basel for 2Q?

We didn't disclose those.

Okay, great.

(multiple speakers) timing issue.

Right, right. All right, thanks a lot. Good luck.

Omar Saad, ISI Group.

Yes, thanks. Great job this quarter, guys. Wanted to get you to chat about some of the new developments you're seeing in the watch category coming off the Basel show. We heard some buzz that smaller, less ornate watch styles are becoming more in; less jewelry. What are some of the product trends in the watch category? I know you guys are usually cutting-edge in some of the stuff -- that you can talk about; and as you look out over the next year or two, that get you excited about ongoing replacement cycle at the consumer level.

Yes, actually there's a lot of different trends going on across our portfolio of brands in different categories. We are seeing -- as we have over the last couple of years -- when we innovate with a new material, a new idea, a new shape, we generally get a strong response. And as we mentioned just a minute ago, we're actually telling fewer stories. So we're telling them with more authority, and that's resonating also. But there are a number of new ideas that we saw, though, that we are working on. Some are, we think have a big potential. But obviously we don't want to talk about it on the call. But there are a lot of new things coming out.

Okay, thanks, Kosta. And then you mentioned some stuff in the prepared remarks about your supply chain, looking to become more automated. Can you talk to us in terms of how you're developing your manufacturing and supply-chain capabilities? Obviously it's been a big scale advantage for you guys. What's coming -- on the come, on that front as well, to continue to lock up that supply-chain advantage that you have?

There's a lot of activity in Asia, especially in China, on automation right now, as you can imagine. As labor costs go up, the entire infrastructure over there is working on new ways of making products with fewer labor hours; and we're benefiting from that. So there's a lot of opportunity for us to go into our factories and put in automation equipment. Instead of one person doing one function, that person now is managing five machines that do that function across many hundreds of objects, rather than one at a time.

The benefit from that, obviously, is both on the cost and the quickness side. So, we're very interested in the future. I think we're actually in the early innings of this, because there's so much activity and so much science being put into it, that the benefits from it will be ongoing for a number of years.

Do these kind of innovations give you the opportunity to move your production out of the Far East and maybe closer to your end market, so you can be quicker, more responsive, and be even stronger in terms of inventory planning?

Yes, I think eventually that is a potential. As you know, we're doing some testing on production outside of China now, so we're doing some testing in India. So potentially that could happen. But the infrastructure for all the different components we use are all made in the region there. And it's really difficult at this point to do that, but there is a potential for that at some point in the future.

Oliver Chen, Citigroup.

Hi. Congratulations on a great quarter. Regarding -- how do we think about the outlook? You raised the EPS, encouragingly, by $0.15 and you beat by a smaller amount. How do we think about the back half? And particularly with respect to the revenue growth, it looks like it's been -- it's been consistent but lumpy. And the compares to get easier in 3Q. Should we expect one of those quarters to outpace the other?

Also, would you mind talking a bit about handbags and the opportunity there? And also Kors jewelry, and what -- how that contribution will play out relative to the growth this year.

Sure. The general way I would look at the full-year outlook is, as we said in the prepared remarks, we're very pleased with the performance in the first quarter. We saw a lot of traction around the globe; particularly pleased with our performance in Europe. So when you factor out some of the timing noise and the Spanish joint venture, we did exceed our expectations.

The offset to that, though, is that relative to our previous expectations, the euro has weakened fairly significantly, as has the Japanese yen. In simple terms, I would think about the outperform in Q1 gets consumed by the change in the currency environment, since we last guided. With respect to the pattern for the full year, we would expect that the back half would be the strongest in terms of growth.

And then, within the quarters, the one thing that you might pay attention to, the third-quarter; because if you look at last year's currency pattern, the euro was weakest in the third quarter. So that might provide some additional uplift in the third relative to the rest of the quarters.

As far as handbags goes, as you know, our business has been difficult there for the last couple of quarters. Part of it was a product miss. We had probably not enough colors and bags were probably too pricey, maybe too dark, a little bit too heavy. And we have adjusted all that, and we're seeing stronger performance. We think our fall assortment, moving forward, is going to be very, very strong.

We also have -- and our handbags have actually brought down our average in our retails a little bit. And this is kind of in response to the huge amount of promotional activity that's going on in the category, especially over last 12 months or so. So we think we're going to be positioned better in terms of price point. As you know, we don't promote the line, but we're competing against people that do.

So adjusting that AOR, giving some more entry level, more democratic pricing, we think will help the business. But, overall, the product looks much better.

On the Kors jewelry side, still doing very well. Our entire jewelry business has gotten much better because, as we said, Fossil jewelry is coming back strongly. So we think we're in a really good position long-term, in terms of growing that jewelry business. And as we've always said, it's kind of an add-on to our global distribution channel; goes to the same stores, et cetera. So it's, we think, a big addition to our business model long-term.

Thanks, Kosta. And as a follow up, do you expect the Tory Burch brand to be as big as Kors in the addressable market and opportunity?

Well, certainly long-term -- has got huge potential. We're looking at it now, and we're putting the line together. We're looking at it in a way to be disruptive in the market and innovate into a white space. So we're looking at what the potential could be long-term. But I think it definitely has a big opportunity for us.

Neely Tamminga, Piper Jaffray.

Great. Good morning. Kosta, a little bit of a high-level -- maybe left-fieldish sort of question here. But we are noticing that Macy's is converting part of their floor to concessionary environments across a couple hundred doors in footwear. Just wondering if that might actually make some sense for Fossil and your portfolio of brands within US distribution, especially since you do have a competency in running concession environments.

And in a related fashion, the Watch Station strategy, or just a multi-branded your own store strategy beyond outlets -- what's your latest thinking on that? Thanks.

Well, as far as a concession at Macy's, I expect that to be unlikely. It's such an important category for them and such a big business. And it's growing, and it's one of the healthiest businesses in the store. And they're giving it more space. So I think it's unlikely that -- we are looking for opportunities to put more shop-in-shop into the -- in all the locations that we sell in the United States. Not necessarily concessions, but more branded experiences, both in watches and in leather goods, so we expect we'll continue to do that.

On the Watch Station or watch distribution, the biggest initiatives we have in the Company are building more watch distribution, especially in Asia. So we're very focused on adding more concessions. They're not named Watch Stations; but as a follow-on, we're also building Watch Station stores more in Asia, really, because there's not a lot of distribution. We're having to build the distribution for these watch categories, both in our own concessions and in the Watch Station stores.

And also, on the Watch Station outlets, they continue to do very well. We're opening a number of those this year. Part of this is just through the growth we've had -- especially in watches, over the last three years -- we're doing some catch-up and building our own ecosystems so that we can liquidate efficiently. And we think this adds to the predictability and the ongoing efficiency of the Company. And it's been very, very strong so far. And we're going to continue to do that.

Thank you.

Lorraine Hutchinson, Bank of America.

Thank you. Good morning. As you look at the China business longer-term, can you give us an update on how you see the mix of concession versus owned stores versus outlet, going forward?

We're still in the early innings. But we would expect that it's going to be largely concessions. There's a lot of doors there, and more being built. And it's a relatively easy and -- return on capital-wise, very, very efficient for us to do that. We think that we can, on an ongoing basis, build beautiful concessions; operate them well; have them represent the brands really well; have a great customer experience; and grow very efficiently.

Building doors and opening stores ourselves is more problematic, and rents are still high. It is not as automatic, and not as fast. So we think that, long-term, it'll be more concession-based.

Great. And then can you share with us any learnings from the jewelry relaunch, whether it's price point or styling, or which doors work best? What are you learning about how quickly you can roll that new product aesthetic to other brands?

Well, the entire Fossil jewelry project we worked on was basically -- we had somewhat of two separate lines and two separate looks. So we consolidated under one brand look, and put it to market. There was disruption over the last six months while we did that. But now, as you can see, we are seeing a better experience, and it's growing again nicely. And our jewelry efforts are really more category-driven -- bracelets, charm bracelets, necklaces -- instead of being a more of a collection approach.

And I think that classification approach is more scalable, and it will get us to a better place long-term. So we're very interested in that. And that's similar to what we are doing and all our other jewelry brands as well.

(Operator Instructions). Dorothy Lakner, Topeka Capital Markets.

Thanks, and let me add my congratulations on the quarter, as well. Could you talk a little bit more -- give us a little bit of color on the systems initiatives you have going this year; timeline, and when we would -- and what benefits we would see from each of those initiatives? Thanks.

Well, there's a number of projects going on, one of our product lifecycle management system that's been worked on for the last 12 months, and I think has another 12 months ago, which will enable us to have an end-to-end product development process that's faster and more scalable. We're very excited about that. We're also -- we have a merchandise planning that is going in first quarter next year.

Our financial reporting system that we've been talking about is going live this year. We have several SAP functions going in; SAP HR is going in the second quarter. We have an SAP going into a couple of our locations around the world sometime this year. We're working on salesforce automation, especially in Europe, where we sell to a lot of small stores.

We have a number of technology projects based around our concession activity in Asia. So we have an iPad system that we're testing now that we think can be very helpful in efficiently executing inventory and concessions. Then we have a lot of initiatives on the whole omni-channel thing -- on Web, analytics, CRM -- a lot of activity in the Company around those.

So, there's -- all these efforts are obviously very expensive. But it will get us to a much better terms place in terms of ongoing scalability of the Company. So, all a lot of low-hanging fruit for us that we're very excited about.

Just in terms of a follow-up on the CapEx for those initiatives, could you put a figure on it?

Well, they are certainly included in our capital deployment this year. The plurality of our capital is still with stores and remodels. But we are investing a substantial amount of our capital this year in a lot of the systems initiatives that Kosta mentioned. That's also some of a drag that you're seeing on the SG&A side -- is some of the expenditures that's associated with that. But, as Kosta mentioned, all of this is designed to really drive long-term efficiencies.

We're operating a very complex global business, and getting -- making decisions on a worldwide business. Getting information quickly and efficiently in a scalable way is a big challenge for us. So we're really focused -- the entire organization is focused on these investments and maximizing their efficiency over time.

David Wu, Telsey Advisory Group.

Hi. Good morning, everyone, and congrats on a solid quarter. First, the guidance implies that we should see operating margin improvement in the back half of the fiscal year. And could you comment on how that should shake out between the third quarter versus the fourth, and what the main driver drivers will be? And are you doing anything at all to mitigate any of the FX pressure?

Well, the way to think about it -- we still are a retailer that -- and the fourth quarter is a big retail quarter, so the model is very sensitive to top line. The more that we -- the more earnings that flow into the back half of the year, the more that gives us the opportunity for margin expansion.

The other thing I mentioned earlier is -- just look at the euro patterns that we are anniversarying. The euro dipped last year in the third quarter. So that should also provide us some opportunities in the third quarter.

Great. And can you talk about how sell-throughs are tracking in the US, Europe, and Asia? And if there's any big discrepancies with sell-ins, and generally if the retailers are managing their inventory levels well?

Overall, looking at sell-throughs across the entire globe, they look to be in very good shape. You can see our results in Europe have improved. And we're seeing, obviously, the category was very healthy in the United States. And, of course, Asia is like the Wild West. So we think -- it seems like inventory, relative to sales, is in good shape. And we're in a good position.

Excellent. And then lastly on the product launches with Lagerfeld and Skagen jewelry, can you update us on the distribution opportunity, and if you're still planning to introduce Lagerfeld in around 1000 doors by the end of this year, and what the door opportunity for Skagen jewelry is?

Well, as far as Karl goes, I'm not sure the number of doors that we're going to this year. But it is rolling out, and we had a very good response to the launch, and it seems to be very strong across the globe. There are some markets where they are very, very, excited about it, so we're adding more doors there. But it will add doors -- I'm not sure what the total number will be.

In terms of Skagen, as you know, in the watches we're adding additional distribution for watches just through our giant distribution footprint. So there's additional watch doors they're going to. And as far as jewelry goes, we launched it in a pretty small way, mostly in Europe; and doing well. And we think that it could potentially get to a large number of the Skagen doors.

It could -- if you look at our Fossil jewelry business, especially in Europe, relative to the size of the watch business -- it's a pretty significant percentage. We think we have that same kind of opportunity, especially in Europe, with Skagen jewelry. So we have pretty good expectations on it that will add fuel; gives us an additional category for Skagen; and help us in our long-term effort to make it into the accessories-based lifestyle brand with other categories in it. So, we think it's off to good start.

Scott Krasik, BB&T Capital Markets.

Yes, thanks. Try and squeeze in a couple in here. It sounds like the sell-through rates are great on a global basis, and your comps are beating plan. What's the chance that this isn't really a pull-forward in demand, and that the underlying demand is just strong, and you'll continue to see greater demand at the end of this quarter? That's number one.

Number two -- just so the bears on this stock don't write crazy notes in about a month -- are you planning on running the same non-watch promotion in your own stores that you did a year ago?

And then, number three, can you just parse out the gross margin impact between the direct -- or the distributors versus currency, et cetera?

Yes, the first part, just on the shift, we, as we said -- it's not an absolute science. So it's difficult to really completely nail down what order went last year, and what order went this year. But as I said, we saw a distinctive second wave of shipment. And then, the early part of April, the shipments did not meet our expectations. So we looked at it from a variety of different ways, and believed that what we saw was that movement from April into March, as customers were trying to make sure that they were adequately stocked for Easter.

As far as the sale, we are actually going to continue to do the semiannual sale. So we'll do it in the summer again, and then after Christmas. We will include a small number of watches on an ongoing basis, really more just to engage our customer and participate in the festival sale activities going on in the malls during that time. In looking at the situation versus our peer companies, and even brands that are much higher than ours, by us being so clean, we almost don't get the chance for people to engage in our brand and for us to give them a customer experience that possibly allows them to trade up and stay and have a relationship with us.

So, on a small, measured way we're going to, we think, expand it a bit. But it will still be, on balance, a very clean ongoing situation.

And then on the margins -- the currency impact, the currency headwinds, and also the strength of the distributor sales -- which, as we said, are lower-yielding, margin-yielding sales, those were roughly similar in their impact on the quarter-over-quarter margin compression.

John Kernan, Cowen and Company.

Hi, guys. Congrats on a nice quarter. Thanks for squeezing me in. I just wanted to -- the European revenue acceleration -- is there a brand or a price point that's really driving that? And then, can you remind us what inning we're in, in terms of the adoption of Michael Kors watches in Europe? I think it's a little less pure there than it is here in the US.

As far as the -- we're seeing strong growth in several of our brands in Europe. So I think the portfolio is very effective. We even see -- we're seeing some brands that are very strong in France, for example, and not necessarily in the UK, and vice versa with different brands. So the portfolio really works. We are able to -- depending on what's going on in those specific markets -- we're able to put product in there that results in a strong increase.

And our entire organization is set up so whatever is selling in that country, our planners are putting more of that product in that pipeline, and it goes to those locations quickly. So it's a pure sell-through situation. Whatever is selling in the market, we expand it quickly, and we are flowing product pretty efficiently to it.

I think we're getting better and better at that. As far as what inning Kors is in in Europe, I think we're in the bottom of the first, and there's two outs, and Mickey Mantle is at bat. It looks like it's going to be -- as we said earlier -- it looks like Kors is going to continue to grow outside the United States in a very strong way.

Thank you. Barbara Wyckoff, CLSA.

Hi, everyone. Can you talk about how many Watch Station outlets you had at the end of the first quarter? And are these extra stores enabling you to clear all of your discontinued multi-branded goods without selling to third parties? And then, at what point do you think you'd be able to be making product for the outlets, and what could that do for margins?

I'll take the last one first. We're actually, this month, we're beginning to flow some made-for product into the outlets. The outlets are -- the margins at the outlets so far this year have not been as strong as we had anticipated as we are clearing the handbags. But our strategy over time is to continue to increase the made-for penetration of the stores. And that should, longer term, be accretive to our margins in the outlets.

Just on the specific Watch Stations, the outlets are 36 at the end of the quarter. (Multiple speakers).

As we move to the back half of the year, we'll start to see made-for product rolling through the outlets. This is an initiative to continue to offer a radical experience to the consumer. So that starts delivering at the end of May.

Okay. And then, of the major department stores and semi-national stores in China -- Golden Eagle Parks and those kinds of guys -- how many of those are you in at this point? And do you anticipate being distributed in some of those major department store chains, in addition to the one-offs and distribution arrangements you were talking about?

Yes, we don't have that information in front of us, Barbara. But the intent is all the better stores in China that we want to have the appropriate concession and potential shop-in-shops for specific brands in those locations. So that's the process we're going through right now, is obviously starting with the best doors and making sure we have the appropriate representation in those, and then moving down to the lesser doors. That's the process we're going through right now.

Liz Dunn, Macquarie.

Hi. Thank you for taking my question. I was interested -- where there any brands that, on the watch front, that underperformed? And as you add new brands, do you find at all any sort of cannibalization effects? Or is part of the SKU count rationalization allowing you to add more brands without necessarily requiring the department stores to increase space? Thanks.

Well, we actually -- we do have a few brands that are underperforming. I think that's the nature of the portfolio. We're working on them, and getting them positioned where -- we're doing a lot of testing and other things to get them back on the right track. But in terms of just our ongoing growth, the watch business is growing 7% to 10% a year. And us having a -- probably a single-digit percentage of the global watch market, with a great operating model and exciting lifestyle brands, our objective is to take more space and take market share and be disruptive in the marketplace.

And I think that's what our objective is; and looking for white space opportunities around the world where we can go in and put some unusual products and customer experience in place to really capture and help accelerate the overall watch business. I think we're in a very unique situation. The ongoing benefit we have is that consumers all over the world want these exciting lifestyle brands rather than local watch brands. And we think that tailwind will continue and give us the momentum to continue to gain share.

Asked a different way, do you have to increase the selling space in order to drive growth? Or do you see ample opportunity to do it just through productivity of the cases?

Well, the productivity is going up. But, also, we'll gain other cases from other competitors as well, so there's that function. But you mentioned also the SKU count being less; there's a lot of benefits in that. That has actually improved the productivity. It's actually shortened our lead time, which you can see has manifested itself in a lower amount of inventory relative to sales. It's enabled us to offset some of the ongoing cost increases in China by making fewer SKUs and making more quantities of them.

And then it has resonated stronger with the customer because they see fewer stories told well. Other than that, it's a problem. But we think that whole model, especially with our global planning and inventory flow situation -- test and react, around a relatively stable, high-margin product category and product line -- we think we're in a very good position for an ongoing, significant amount of growth globally as we penetrate more markets in a more broad way.

Jane Thorn Leeson, KeyBanc Capital.

Thanks. Congratulations on the good quarter. My question was on the distributors in Latin America. Did distributor takings from Latin America impact the revenue this quarter?

There was a small impact on the Latin America revenues. They were actually -- in January, we weren't shipping because we were converting them onto our system. So there was actually a small decline because of that disruption in deliveries, as we were converting onto our systems. But, certainly, as we look longer-term, we expect that to be accretive to both the top and the bottom line for the year.

Rick Patel, Stephens.

Good morning. Thanks for taking the question. Can you just give us a little bit more detail on comp performance in direct, perhaps some color around average selling price and transactions? And as a follow-up, can you also talk about the cadence of comps within your retail stores? I'm curious if every month in the quarter was strong, or if it started weak, given the increase in taxes and the delay in tax refunds earlier in the year.

Well, relative to the sequential performance over the quarter, we saw a good result out of January. There was a weakness in February; and it came back, obviously strong in March. And, as I said earlier, the March and April combined performance was positive. In terms of our key selling KPIs, we are seeing a stabilization in traffic, which is encouraging, based on the work that we've done on the assortment. So we're pleased with that.

We continue to believe, given some of the democracy that Kosta spoke to in pricing, that there is an opportunity for us to see an increase in units per transaction. Conversion stays pretty steady to where it had been last year. No real big gains in that key metric. And the average dollar sale is slightly up, across the board, to last year.

And you highlighted some softness in Korea within Asia. Is this an execution issue? Or was the market there softer? And what can you do to strengthen that business?

Well, I think the market there is soft. As you know, it's one of our best and earliest countries in terms of our concession activity. And, basically, a lot of our business in North Korea right now is sell-through. And the sell-through has been less, and it has impacted the comps.

The comps were slightly down, but progressed -- actually through February and March, they actually strengthened to modestly positive. So, that was at least an encouraging sign overall for Korea.

Thank you. That concludes the question-and-answer session. Now I'd like to hand back. Thank you.

So, we want to thank you for all for your attendance and for joining us today. We look forward to speaking with you in a quarter, after our second quarter. Thank you very much, and have a great day.

Thank you. This concludes the conference call. Thank you for participating. You may now disconnect.