Fossil Group Inc (FOSL) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Fossil Group second-quarter fiscal 2013 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time.

(Operator Instructions)

I would like to remind you that this conference is being recorded today, Tuesday, August 6, 2013. I would now like to turn the conference over to Allison Malkin of ICR. Please go ahead.

Thank you. Good morning, everyone. Before we begin, you should be aware that during this conference call, certain discussions will contain forward-looking information. Actual results could differ materially from those that will be projected during these discussions. Fossil Group'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, the Company 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 a reconciliation of this non-GAAP financial measure to GAAP, will be provided as supplemental financial information through this release, located in the earnings release section, under the investor relations heading on Fossil Group's website.

Please note, that you may listen to a live webcast or replay of this call by visiting www.FossilGroup.com, and then clicking on investors, and then on investor relations, and select webcast. Now, I would like to turn the call over to the Company's chairman and CEO, Kosta Kartsotis.

Thank you, Allison, and good morning, everyone. Joining us today is Dennis Secor, our Chief Financial Officer. Jennifer Pritchard is traveling in Europe today and will not be on the call.

We finished the first half of the year with very strong performance, maintaining our positive momentum from the first quarter. During the quarter, we made excellent progress across all of our businesses as we grew both our FOSSIL and Skagen brands, and delivered a double-digit increase in our multi-brand watch portfolio. We continued to expand our global footprint, driving growth across all three of our geographies, with strong double-digit increases in both Europe and Asia. In all, we exceeded our top line expectations, delivering an 11% revenue increase. On top of that, we executed well, managed our resources tightly, and made excellent progress against many strategic initiatives that contributed to a substantial profitability improvement, and drove a 25% increase in earnings per share to $1.15, also well ahead of our expectations.

Our consistent growth continues to demonstrate the power of our business model, the strength of our innovation, and our team's solid execution. The combination of great brands and our increasingly-significant global infrastructure positions us to maximize our potential, as we drive our core growth objectives. In the quarter, the FOSSIL brand posted strong growth across all regions. The brand was up solidly, led a by 14% increase in watches. Jewelry was also up double digits in all geographies, due to our new global assortment, and easier comparisons from last year.

Our leathers business was down for the quarter, mostly due to handbags. We believe that the fall assortments that are being delivered to the stores now will reverse this trend. Our direct business grew in the quarter, as a result of store expansion in all three regions. Our overall comps were essentially flat, with handbag clearance negatively affecting our outlet performance, especially in the US. We feel this trend will reverse for fall, as we are delivering major outlet handbags and other leather goods to the stores right now. We had an excellent comp performance in Europe, where we delivered strong comps in almost every market, and Asia continued strong comp increases as well.

This quarter, Skagen celebrated its one-year anniversary as part of the Fossil Group, with a strong mid-teens increase. Skagen is benefiting from its integration into our global network, with stronger overall sales and margins. Our initial efforts have been focused on Europe, where we realize a double-digit increase for the quarter, largely due to door expansion, and the beginning of an encouraging jewelry launch. Our entire Company is focused on supporting this brand, with expanded leadership, early product extensions into leathers, and a new store design, scheduled to be launched in November in London. Skagen's rich Danish heritage and unique market position make it the perfect addition to our business model. We are excited about the potential we see for Skagen, and its opportunity to develop into an accessories-based lifestyle brand.

We continued our strong performance in our watch portfolio, as we posted a 15% overall quarterly sales increase, with solid gains from both long-standing and newer brands. Our strategies here are really paying off. We're leveraging our great design innovation and our global distribution platform to gain market share. Our strong brands and relationships give us a tremendous opportunity to gain additional space, and bring newer brands and products to market. This year, we introduced Karl Lagerfeld watches, and we are preparing for the Armani Swiss launch next spring, and we are gearing up to launch Tory Burch watches ahead of holiday 2014. We feel we are in a position for long-term sustainable growth, as we continue to place additional brands in a growing number of doors around the world.

A great number of these additional doors are in Asia, where we are making great progress. Asia led our international growth, with constant dollar sales increase of 18%. And China is at the core of our Asia strategy, and it has performed very well, growing by well over 50% for the first half of this year. We continue to build direct distribution in China, focused on Tier 1 cities, and are increasingly joining with distribution partners in Tier 2 and Tier 3 cities. We are convinced that the emerging Chinese middle class, and their love of watches, jewelry, and lifestyle brands, can mean enormous opportunities for us in the long term.

Our business in Europe continues to show great signs of progress. In addition to the strong retail comps mentioned earlier, our wholesale business was also very strong. This was led by watches and jewelry, and included outstanding performances in the UK and Germany, as well as in newer markets, like Eastern Europe and the Middle East. In the Americas, we performed well, with increases across the US, Canada, and Latin America. We are far along in the integration of our Latin American operations, and we are on schedule as we build out our team and our business in a very important region.

Lastly, we are making terrific strides in driving efficiencies and improving our execution. Our strong inventory management contributed to our gross margin expansion. We are continuing to simplify processes and speed information and product flows across our Company. We are implementing new systems to improve visibility and support real-time data-driven decision making. And we are investing to enhance our consumer insights, and improve our ability to efficiently communicate directly with consumers. Our goal in all these important projects is to build a world-class entity of excellence, focused on long-term sustainable growth, that delivers great returns for our shareholders. With our talented team and so many strategic advantages, we remain confident in both our near- and long-term prospects. I'll now turn the call over to Dennis for more color on the quarter.

Thanks, Kosta, and good morning. Second-quarter net earnings increased 18% to $68 million, and diluted earnings per share increased 25% from $0.92 to $1.15, which includes a $0.06 per share unfavorable foreign currency impact. This quarter's EPS includes about an $0.08 benefit, as we shifted certain marketing and systems expenditures into the third quarter. Second-quarter net sales grew 11% to $706 million, as we posted sales increases across all of our segments. Our growth continues to be very balanced, with all three geographic regions contributing to our growth. Our global sales growth was driven by a 15% increase in our global watch portfolio, with solid increases for many brands, including double-digit gains from FOSSIL, Skagen, and or licensed portfolio. The recent retail success of FOSSIL jewelry extended into our wholesale channels, with increased selling that helped drive a 25% increase in overall jewelry sales. Offsetting these gains was our leathers business, which did not meet our expectations, with a 5% overall quarterly decline, coupled with the impact of last year's strategic decisions to exit the footwear and optical frames businesses.

In North American wholesale, sales increased 4% to $261 million. These results were negatively impacted by this year's earlier Easter, which we estimated shifted $15 million of sales from Q2 into Q1. For the first half of this year, North America wholesale sales have increased nearly 9%. We drove sales increases across the US, Canada, and Latin America, led by solid increases in jewelry and watches while leathers and eye wear declined.

In European wholesale, sales increased 16% to $171 million, which includes $1 million of favorable currency benefits. Watches drove this growth, as we delivered double-digit gains among our licensed portfolio, as well is in both Fossil and Skagen. Jewelry sales also grew in the double digits, with the strong sale in our Fossil, jewelry coupled with the launch of Skagen jewelry. Shipments of leathers declined in the quarter, particularly women's bags, and sales of eye wear were down as well. Sales grew in most of our major European markets, with particularly strong performances in the UK, Germany, Eastern Europe and the Middle East. Shipments in France declined, and Italy was flat, as conditions in these markets continue to be challenging. The consolidation of our Spanish joint venture, which began a quarter ago, also contributed to this quarter's revenue growth.

Sales from our Asia wholesale operations increased 14% to $96 million, which includes a $3 million unfavorable currency translation impact. The growth was driven by strong watch performance, with increases in nearly every significant brand. In constant dollars, our business grew in virtually all of our markets, and was particularly strong in China, Japan, and India. Our growth in China was led by significant concession to our expansion, along with strong concession costs. Korea improved to post modest sales growth, driven by an improved traffic and a modest comp improvement, despite continued challenging economic conditions and consumer sentiment. Sales in Japan were affected during the quarter by a significant currency decline versus the prior year. During the quarter, we added a net 13 concessions and ended the quarter with 294.

In our direct-to-consumer business, second-quarter sales increased by 16% to $179 million. Our direct sales growth was driven by real estate expansion, as comps were flat. Our customers have continued to respond very favorably to our FOSSIL global jewelry assortment, delivering positive jewelry comps in our full-priced stores in all regions. Watch sales continue to be strong in our Fossil, Skagen, and multi-brand stores. Leathers, particularly women's handbags, continue to be our most challenging category, and particularly impacted the performance of our outlet stores. Overall, global comps were flat for the quarter, driven by this year's earlier Easter, and the impact of clearing handbags, particularly in America, where second-quarter comps declined. On a year-to-date basis, our global comps are up about 2%.

We continue to be very encouraged with productivity gains in our European stores, where virtually all countries delivered positive comps in the second quarter. Comps in our Asian stores also increased in the quarter. We ended the quarter with 493 Company-owned stores, and remain on track to open a net 70 to 75 new stores this year, with the majority focused internationally and in outlets. Gross profit increased 15% to $409 million in the second quarter, outpacing sales growth, with gross margins expanding 190 basis points to 57.9%. Our margins benefited from our improved liquidation strategy, as we better balanced sales in off-price partners and our outlets. On top of that, we are benefiting from overall cleaner inventories, and some efficiencies we gained by operating with fewer SKUs.

Product mix helped drive margin expansion, given the strength of higher-margin categories like watches and jewelry. Our higher mix of retail, along with the impact of our acquisitions, also contributed to the margin expansion. Partially offsetting these factors was the impact of a higher mix of sales to distributors, and a modest currency headwind. Operating expenses increased 13% to $302 million, and our expense rate increased by 60 basis points to 42.8% in comparison to last year. The $34 million increase was driven by new store and concession expansion, increased marketing initiatives, investments to support our Swiss production capabilities, along with other global initiatives, and the impact of acquisitions.

The second quarter's operating expenses were lower than initially expected, as we shifted some projects, display roll out and marketing activities until later in the year. Operating income increased 21% to $107 million, including a $3 million negative foreign currency translation impact. Operating margin increased 130 basis points to 15.1%. We posted a net other expense of $3 million, compared to no net other income or expense a year ago. This quarter's amounts primarily resulted from net losses from foreign currency contracts, and account balances. Our effective income tax rate was 32.5%, compared to 31.4% in the prior-year quarter. We have increased our full-year tax rate estimates to about 31.5%, given a slightly less favorable mix of earnings among tax jurisdictions.

Now turning to our cash flows and balance sheet. Operating cash flows decreased $28 million or 28% to $73 million for the second quarter. This was driven by higher earnings that were more than offset by working capital changes. We entered the quarter with $313 million in cash and equivalents, compared to $139 million at the end of the prior-year quarter. During the quarter, we entered into a $1 billion five-year credit agreement that includes a $250 million term loan, and a $750 million revolving credit facility. With this new facility, we were able to take advantage of today's attractive rate environment. We believe that the combination of this facility and our strong operating cash flows can provide us with ample liquidity to fuel our growth, fund our share repurchases and other cash needs, leaving dry powder for other strategic opportunities.

We ended the quarter with $341 million of debt, compared to $113 million a year ago. During the second quarter, we invested $169 million to repurchase approximately 1.7 million shares of our common stock, and at an average price of about $101 per share. We ended the second quarter with $843 million remaining on our share repurchase authorization. We continue to manage inventory as well, as inventories increased 11% to $582 million.

Our inventory growth was driven by new store growth, investments in components to preserve production flow, and our acquisitions. We believe our inventories are clean, and we are well-positioned to support our business in the second half. Accounts receivable increased by 14% to $258 million at the end of the current quarter, and wholesale DSO increased very slightly. During the second quarter, we invested $23 million in capital expenditures, and depreciation and amortization expense totaled $18 million.

Moving now to our outlook. We've been very pleased so far with our sales performance for the first half of this year, with sales that exceeded our expectations. Our watch business has been trending very well across many brands, and customer reaction to our jewelry line continues to be very encouraging. We are planning to flow more made-for products to our outlet stores and are optimistic about our new handbag selections, where very early reads have been positive. We continue to be pleased with our performance in Europe, where trends have been strong both in retail and among our wholesale accounts. Overall, we feel we have multiple initiatives in place to drive our top line performance for the balance of the year.

We now expect full-year revenues to increase between 11% and 12%, compared to last year. For the third quarter, we expect revenues to increase between 12.5% and 13.5%. This takes into account last year's relatively weak Euro but the Japanese yen is substantially weaker now, compared to a year ago. Gross margins were strong in the second quarter, as we benefited from many efficiency initiatives and cleaner inventories, despite currency headwinds.

We expect to continue to generate strong gross margins for the balance of this year, and expect to see gross margin expansion for both the full-year and for the third quarter. We continue to plan operating expenses to be up this year, as we make infrastructure investments, build out our direct channel, enhance our marketing and customer engagement efforts in key growth markets, and build out our team. The third quarter will be particularly impacted, given marketing and advertising initiatives in the run-up to the holiday season, along with the shifting of expenses from this year's second quarter. For both the full-year and the third quarter, we are planning with a higher overall expense rate compared to a year ago.

Overall, we are planning that third-quarter operating margin will be in the range between 15% and 15.5%, and we are expecting third-quarter earnings per share in the range between $1.30 and $1.37. For the full year, we are now expecting operating margin in a range between 16.75% and 17.25%, and we are increasing our full-year earnings-per-share guidance to a range between $6.15 and $6.35. Our guidance assumes that foreign currencies remain roughly at prevailing rates, which should result in a relatively neutral mark to market activity for the second half. We are assuming net interest expense for the back half of the year, given the impact of our new debt facility. Our guidance also includes the impact of a higher effective income tax rate, compared to our prior expectations. Lastly, we are now planning capital expenditures between $110 million and $120 million for the year, and expect depreciation and amortization between $70 million and $75 million.

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

(Operator Instructions)

Omar Saad, ISI Group.

Very nice quarter, congrats on that. I was hoping you could talk maybe a little bit about the US wholesale channel. I know you've got a lot of things globally going on that are really good. I know there was some timing shift here in the quarter, but just looking out a little bit longer, how do we think about, or how are you thinking about the kind of traditional watch channel, the department store channel in the US? How do you continue to grow there? You are so dominant in that channel already, especially as you layer in new brands like Tory Burch and Karl Lagerfeld. Any insight there would be helpful.

The US for the quarter, our sales were weaker mostly because we moved some deliveries from the prior quarter, I think you remember that. But if you look at the Americas in total, Canada, US, and Latin America, we still have huge opportunity there. We have seen significant growth, both Canada and Latin America, and we think that is ongoing. In the United States specifically, business continues to be very strong in the stores that we sell to, they're giving it more space. We feel like we can gain -- continue to gain market share, and we've got Tory Burch coming next year, so the category looks strong, opportunity looks strong, we continue to gain market share, so overall in the Americas, we think we are going to continue to grow.

Is the new -- the new Herald Square Macy's, the footprint for the whole watch department? Is that something we can look to as perhaps an indicator of where the channel could go over time?

Well I think it's showing what you can do with an incredible customer experience at the point-of-sale. It is obviously a beautiful brand-enhancing facility there, and we've done this in a number of other locations, specifically with core watches and jewelry, where we have great results building shop-in-shops in other stores around the United States, and around the world also. Part of our big emphasis, not just in the US but globally, is to build more enhanced presentations, more shop-in-shops and we think that is the long-term opportunity. We built our business largely doing that, especially in Europe over the last 10 years, and we think it's an ongoing continuing opportunity to build more larger shop-in-shop enhanced opportunities throughout the world.

Thanks, appreciate it.

Neely Tamminga, Piper Jaffray.

Really excellent job you did on your gross margin, and thank you so much for the outlook, Dennis, on Q3 and the full year. Wondering if you can help us contextualize a little bit of your opportunity. Obviously liquidation improvement has been a big contributor to your gross margin. Just wondering how that opportunity still sizes up for Q3 and Q4? And then also how much may for handbag strategies for outlet to really help improve your gross margins? Just trying to think about how Q3 might size up to the numbers you put in Q2. Thank you.

Yes, we are expecting the strong performance that we saw in the margin should continue for the balance of this year. Liquidations were a particularly strong driver in the second quarter. We sold less at liquidation than a year ago, and the outlets are also contributing to that. But the good thing about the margin expansion, it comes from a variety of different sources. We are benefiting from segment mix with a lot, Asia growing and the retail business growing. The product mix is working well for us, with strong performances in both watches and jewelry. The acquisitions are impacting the margins as well, so there is a strong balance of initiatives and drivers that we think will continue to help support those gross margins for the rest of the year, with improvements in -- for the balance of the year, rather.

That's really helpful. I just have one follow-up question. Dennis, I think you indicated, I don't know if you said quarter-to-date trends or year-to-date trends were tracking up 2% in terms of comp. If you could clarify that, and maybe possibly give us some insights into some other traffic volatility that we're hearing, (technical issues) are experiencing similar trends quarter-to-date. Thank you.

You sort of broke up there at the end, but the first part, the 2% is the year-to-date comp in the retail stores, with Easter shifting a lot of sales from the second into the first quarter. We wanted to give some perspective about how the overall comps have performed for the full year. So that is what that 2% driver was. If you look at it, what we're seeing in our comps is really the biggest driver of the impact of clearing bags. We still have last season's bags that didn't -- we weren't successful in full price and they have impacted our outlet business, and outlets was where we really under performed, didn't meet our expectations for the quarter.

Thank you.

Scott Krasik, BB&T Capital Markets.

On Europe, really strong results. We've actually heard that you might actually be pulling out of some doors in wholesale to clean up that channel, get better visibility. Is that in fact the case, and what's the right growth rate? Which of the brands that are growing in Europe? How do you view that channel, going forward?

Well we've had an ongoing procedure globally, really, to close the smaller doors, some of those are not very brand-enhancing, and they typically don't sell very much product anyway, and really enhance and build shop-in-shops in the larger doors, so that whole procedure is ongoing, and continues to be a big volume driver for us. It's probably why the growth in Europe, I think the strongest, that whole procedure of closing small doors that don't do much volume, and getting more space in the larger doors, especially shop-in-shops, has really helped us grow the business, they're gaining more share et cetera, so a very positive result, and we're doing that throughout the world.

The other thing I would add is that the growth we've seen in Europe has been very balanced, in a lot of different ways across a number of -- you asked about brands. A number of our brands were strong performers in the quarter. Both watches and jewelry were up and we're getting good growth across a number of different markets. So, we're getting a strong diversity of growth coming out of Europe in a variety of different ways.

That's great, and then just a follow-up. A jewelry question, jewelry sounds like it's moving in the right direction. You didn't talk a lot about Kors jewelry. Can you frame the -- how big, or relatively how big that is in your jewelry business, and how big you think it could become?

Kors jewelry actually continues to be very strong. I think we are into what 1.5 years and still showing strong growth, and we're seeing it grow very strongly in Europe as well, so we're very pleased repping it. It looks to be like it's going to be a continuing growing business, and it has, we think, a pretty large opportunity.

Thanks.

Matt McClintock, Barclays.

Kosta, I know was small, but I was wondering if you could just help us understand what lessons you learned from adding a couple of watch SKUs to your semi-annual sale? Was that helpful to traffic? And then further, the second question, the second part, is I know you successfully raised prices over the last years, and I was wondering if you could comment on the current relationship of pricing and volume to your business? And how should we think about that as you continue to focus on enhancing the customer experience and continue to add innovative product like Karl Lagerfeld and Tory Burch in the future? Thank you.

Good question. Our sale in our stores, and we have not done watches before. We put a small number of watches in there, really just to try to understand what response the customer gives, and how -- what kind of result we got, and actually I think was very good and engaging more customers. One of our objectives is to get a more emotionally loyal customer, give them a perk every once in a while with some sale, and I think it had the benefit of doing that. We did not have actually in stores, totaling more clearance than we did last year. It just was more watches and maybe less handbags. So all in all, we're doing this twice a year, and really engaging customers and getting them more engaged in the brand, we think is a good thing. We also saw that especially both online in our stores, that when you do that, customers come in and typically buy regular price as well. So, we think that is beneficial.

On the pricing issue, over the last couple of years, we've talked about this before, is that we wanted to be more democratic in almost every category of business we're in. So we -- over the last six months to nine months have made an effort to put some democratic pricing in almost every category of business we have globally. Just to engage more customers, and have the opportunity to have them trade up and be engaged in the brands, and in those products. And I think overall that's been very beneficial, and we've been able to reduce our SKU count, so I think we are still very tight on that. But just have a few styles in each category that are at more opening price and especially in some markets. I think in Europe, that's a bit more important than it has been in Asia obviously, but I think on balance, I think we've reached a pretty good protocol where we can go to market, adapt ourselves to different markets, engage different customers at different price points and move them up through different brands, so I think we're pretty good shape.

Thank you.

Lorraine Hutchinson, BofA Merrill Lynch.

I just wanted to follow up on the earlier jewelry question. It seems like the category is a whole was exceeding expectations. So, I was hoping you could walk us through what is next, in terms of distribution and brands for that category?

Well we mentioned we had a strong increase in FOSSIL jewelry. Part of that was just from the difficulties we had last year, so it was up against an easier comparison, so us changing into that global assortment has put us a position where were starting to grow pretty strongly. We think the FOSSIL jewelry business will continue to grow, gain penetration et cetera. Our growth has been very strong, and we think it will continue to be. We're building watch and jewelry shop-in-shops, not just in the United States but around the world, but we think will communicate this brand and category pretty strongly. It has a very large potential we think.

We do have a situation where we launched Skagen jewelry, especially in Europe in the first quarter, we're seeing very strong result. And we think Skagen could be the next big jewelry grower for us, so we're putting a lot of resources behind it, and that's part of our overall branding effort for Skagen. Those are the three key jewelry brands that we plan on expanding across the world, and we do have a few other brands such as Diesel and DKNY that are smaller, also, Emporio Armani has actually been doing very well, we think it's got a larger opportunity in Asia, but the three big ones we're focused on are FOSSIL, Skagen, and Kors.

Thank you.

Oliver Chen, Citigroup.

Congratulations on the quarter. For the back half of the year and 3Q, 4Q, how should we think about expectations in relation to the comp store sales trends? Do you expect handbags to still land that comp, or should we think about a potential acceleration? Also, given the context of the marketplace and the environment, which has been relatively promotional in the mall, should we look for other specials in your store that are planned coming into the fall? And we just had a quick follow-up on China.

Well on our comp trends, what's affected us, as we mentioned, was a couple of things. Our outlet stores was handbags, and we had two things going on, was we were clearing last year's fall goods, we're competing in an outlet center. Again stores that are all made for, for example, spring merchandise, at very low prices. So that affected our comps.

In addition to that, our regular-priced leather goods business has been relatively soft, and we think that deliveries coming in now are going to be stronger, in fact, we're seeing some better sell-through results in the last couple weeks or so. So the combination of those two things, I think, is going to push the situation where we will have improving comps in our stores globally. So we're not putting some big number out there, and we're not having some big expectations, but what it looks to us is those are going to improve. The brand continues to be very strong and we think we are in a good position.

In terms of promotional activity, we really don't plan on putting anything in our stores or websites on sale, other than the twice a year that we've been doing the last couple seasons. We are looking for opportunities to engage customers through CRM, some consumer insight, et cetera. We could be doing some extra benefits to key customers, et cetera, but on a store or Web promotion business, we're not planning on expanding that.

And Oliver, if you look at the trend so far for the first part of the year, and you adjust for some of the anomalies like support of Skagen and the Easter timing, we are trending in that 12% range, which is our view for the rest of the year. So, we are expecting trends roughly to continue. Keep in mind that we don't have tremendous visibility into the fourth quarter, and it remains to be seen what the environment looks like. But, we are expecting trends roughly to continue. We are up against the easiest compares in the third quarter and among the hardest in the fourth.

Thanks. And Kosta, regarding China, just touching upon that. How has distribution growth been, relative to your expectations? I know there is a great market opportunity, but it's equally challenging as you try to ramp up and speed up your distribution potential there.

Well as we said, we would like to be able to grow our distribution faster, it's just complicated and very fragmented, and I think our team is doing a great job. I was actually there a month ago, and went to some Tier 2 cities as well, just to see firsthand, and the team is doing a great job. It's just complicated, fragmented, and there is a lot of relationship building that has to be done. That's why we think we can accelerate the process by using some partners, which we have been successful with so far, and we think there is more of that to come. But it's hard to predict exactly when this is going to hit a tipping point, but we think it is, and so far, all the signals are there, we've just got keep doing the blocking and tackling to get the distribution done.

Thank you, congrats, and great job on the new handbags. We like the latest. They're a great look.

John Kernan, Cowen.

I think Michael Kors said that about 90% of the watches right now are women's and about -- the industry is around 50/50 in terms of men's/women. There's an enormous opportunity to build out men's for Michael Kors. And I know they are opening a lot more stores, they're devoting an entire floor in a new flagship in men's. What you think the opportunity for Kors watches is for you over the next couple of years? Men's-side business?

We definitely agree, and we're are putting some initiatives in place to really facilitate our expansion in men's, and we think it has a pretty significant opportunity. As you know, they're making some overall efforts to expand their men's business and men's presence. As a follow-on, we expect to do that with watches. It could have a very large potential, especially in Europe, where men's watches are very powerful, especially on a more aspirational lifestyle brand effort. So we agree, we think there's a big opportunity, but overall in the Kors business, not just men's but women's also, as we penetrate, more parts of the world has a very large long-term opportunity.

Great. Thanks. Another question I guess for Dennis would be, your cash balance is up significantly year over year, due to some of the debt you've taken out, and certainly your credit facility has a lot of dry powder. Are you potentially looking at another acquisition similar to Skagen last year? Do you think it's appropriate to add another global lifestyle brand to your portfolio?

I would characterize us as opportunistic when it comes to acquisitions. We acquired Skagen a year ago, and a couple smaller businesses along the way, but it's not a specific part of our growth plan. But if the right opportunity came along, then we would certainly be open to that.

And then one more follow-up, I guess, would be, the revenue acceleration in Asia and Europe was impressive. Was there any -- in Asia, was there any particular region or brand that drove that revenue acceleration?

No, China continues to be a big driver for us, and as Kosta mentioned in his prepared remarks, so far, we're up over 50%. We grew, if you factor out currencies, which obviously impacts us, we grew in all of our geographies there. Virtually all of our brands were up. So, it was again a very balanced, very balanced performance.

Japan, that business grew strong double digits in constant dollars, and concession comps were strong. Retail there was a bit softer. Korea, the overall business grew. The concessions weren't as strong, but the comps in the concessions were positive, which is an improvement over the previous quarter. So, again, we saw some improving trends and we saw a nicely distributed and diversified performance.

Okay, that is helpful. Thanks and good luck.

Barbara Wyckoff, CLSA.

I have a couple of questions. First of all, great quarter. Second, what criteria are you looking at when you choose to open a freestanding store versus a concession? And really I'm thinking about Asia. I'll give you all the questions and then you can go back.

The 294 concessions during the quarter could you break out how many were multi versus mono brand? You talked about the performance in the flagship in Shanghai and the enhanced positioning and multi-brand store plus the Fossil in Sanlitun, and then talk about distributors, where you're using them? How many are there? They are taking deliveries at good wholesale, I guess, and then putting out -- making the relationships, or how's that working? And then just lastly, given the interest in the Swiss made watches, is there an opportunity for ZODIAC down the road and then how are the Swiss Burberry and FOSSIL products doing?

We'll take a stab at this, you may have to help us with more information here. So on the opening of stores, or owned stores versus concessions in Asia. What we're doing basically is our opportunity first and foremost is concessions to build a broad based network of concessions throughout Asia. And to facilitate brand building in more high-profile locations with our own stores. So for example, as you mentioned, we opened the -- we have three stores now in Shanghai, I think, another one shortly to come. The whole idea is to have those in high-traffic locations to communicate the brand and then have concessions surrounding it. It's more like an ecosystem. Similar to that is the Watch Station in Asia. We will have a broad base concession strategy in the regions, and also have a very select number of locations for high traffic, where we want to communicate the overall idea of lifestyle-branded fashion watches through our Watch Station concept.

The other question you asked is what portion of our concessions in Asia are multi-brand versus mono-brand? The large majority is multi-brand. We have a relatively small number of Fossil concessions, but we are expanding those, and we have actually a new store design that we're working on that has a new model, also for concessions, that we will be putting in Asia over the next 6 to 12 months. We will also be adding some Skagen concessions in region in the next 6 to 12 months as well.

You also asked about our Swiss opportunity. We have been, as you know, investing in our capabilities in both not just assembly, but also on design and innovation, and our ability to make movements ourselves. So we are actually, and have been some time now making our own automatic movements. We are selling those to some other third-party Swiss manufacturers. It's a very good experience for us. Were getting great result and expanding that operation.

The whole idea is to produce movements that we can grow on our own through putting Swiss-made products into Asia. As you know we have the FOSSIL brand now, and we're adding Emporio Armani next year. We already make Burberry, which is Swiss-made, and of course ZODIAC, and we're planning on expanding into additional brands over the next couple of years, and mostly for Asia, to penetrate the market there. And we think it's a very large white space opportunity for us long-term, and we're interested in moving forward with that. Any other points I missed, Barbara?

I think you got them. Okay. Thank you. Sanlitun.

Sanlitun, that's our store in Beijing. Sunil, do you have any comments on Sanlitun?

We can get back to her.

We'll come back with that later, we don't necessarily have that right to hand here.

Randy Konik, Jefferies.

Question, Kosta, can you just talk to in general how you're feeling about Europe? Does it feel like we have reached an inflection point there? Obviously, you talked good things about UK and Germany. Do you feel like we are closed on getting better in France and Italy?

Second question, I guess, would be, you talked about the strong sell-in on the jewelry side, what is the early sell through looking like right now? And then from a penetration perspective, how big do you think jewelry could be versus watches in the assortment, on a reasonable timeframe, maybe a couple years out? And I guess lastly, this one would be for Dennis, you did give us the operating margin guidance for 2013 annual, where it assumes at the high-end you are about flattish margins with 2012, but if we look out a little bit further, if Europe is indeed going to get better, jewelry becomes a bigger part of the mix, and Asia starts to get leverage on some expenses, here, is 2014 a potentially inflection point accelerating margin year? Am I thinking wrong in that regard?

Okay, on your question in Europe, as you saw from our announcement this morning, we are benefiting from Skagen doing very well in the market, and as we mentioned, we added Skagen jewelry to the market, which is going to be a big player there also. And just in general, the European market is -- we think a big long-term opportunity for us, as we continue to penetrate the different regions with more brands, and also, we have a structural opportunity with FOSSIL. A large part of our FOSSIL business in Europe is in Germany. So the idea is to build out awareness and stores, et cetera, in the rest of Europe to get the FOSSIL brand in the rest of Europe so it's the same level in Germany would be a very large opportunity, long-term. So our best markets have been UK, Germany, and France over the last year or so, and we've had, in the southern part of Europe, a more difficult time, but we think long-term there is opportunity there, so we continue to be opportunistic and look for places to grow, and we think there's a very strong brand building and business opportunity in Europe.

As far as jewelry, when we are talking about sales in jewelry and how well it's doing, we're really not just talking about selling, we're talking about sell-through, which is way we operate the Company. We typically do not really pay as much attention to what we sell in as we sell out, and that is part of our protocol, but jewelry is doing very well, and FOSSIL jewelry is doing well at retail and selling through. A lot of this, we see in our own stores. As to the opportunity for jewelry, we've always said that we look at jewelry as an add-on to our global watch portfolio. It's a very similar category. It's almost like watches that don't tick, and it has the impact of leveraging our entire global infrastructure.

Sales reps for example that carry Emporio Armani watches probably also carry Emporio Armani jewelry, and it gives us the benefit of having the potential larger business. Jewelry also is something like seven times the size of the watch business globally. And there's been reports of an analysis done recently that shows although the jewelry business is not very much globally branded, it is increasingly becoming so, and we think, especially in Asia, that ties very strongly for us. So we are interested in doing it and expanding it, leveraging our own resources and it will become, we think, a very large business over time, because it fits into our general business model, leverages our infrastructure and has similar profitability and inventory characteristics as watches does.

And just talking about the margin structure. Obviously, a lot of the factors that you talked about would naturally, as they improve, they would naturally be margin enhancing over time. The way we look at ourselves, longer-term, is we -- our goal is to be a double-digit top line grower, and over time leveraging our existing portfolio, leveraging our infrastructure, driving initiatives in our operations to ultimately grow the bottom line faster than that, expand our operating margins over time. So we certainly view ourselves as having opportunities to expand in the future.

How it plays out in 2014, we haven't yet finished our plans for 2014. So it would be premature for me to speculate on this call about what 2014 specifically will look like. We still have some investing to do. We are not done building Asia, we still have a lot of systems initiatives that we are driving here to help really establish a global platform that can really drive growth and profitability expansion over time. So let us finish that exercise before and we will share that at the appropriate time without my look for 2014. But certainly longer-term, we view ourselves as a double-digit top line grower and a margin expansion company.

Me just ask a follow-up?

Sure.

Sure, thanks. So I guess on just the Asian growth expense, I guess the market has been trying to figure out when do we get leverage on that investment. So, is that something that we can think about looking forward to in 2014? Just it's been something that's been thought about in the marketplace for very long time, since it started. So, what should we -- what should we be thinking about, in terms of when that lever is et cetera?

Well, the opportunity for us in Asia, as you know, is very significant and this is a project we are trying to take on in a very balanced way. We do not want to under invest there and miss a big opportunity. So, the visibility we have of exactly when this is all going to hit the tipping point, as far as leverage, is really difficult to say, except that we know it's coming and we're investing as prudently and in a balanced way as we can, trying to get there. We just don't have an exact date of when that time period is going to occur.

Rick Patel, Stephens.

Congrats on a nice quarter. Can you touch upon the performance in Korea? A little bit better in the second quarter, after a soft start to the year. Just wondering if you did anything different in that market or if it is just general volatility there? As a follow-up, can you update us on the sales mix in Asia? I'm curious if it is dominated still by Japan, Korea, and Australia, or if China has ramped up to be a significant portion of that segment?

Yes, starting with Korea again, we were pleased with the performance. It's still -- conditions there still continue to be challenging. The economy is not robust and consumer sentiment still seems to be soft, but certainly in our business, we were improved with what we saw, moving from the first quarter into the second. The business did grow. We were able to accelerate our retail sales performance and deliver stronger positive comps.

Traffic improved in the second quarter, compared to where we had been in the first. I think I mentioned earlier, the concessions were not as strong as the retail environment, but we were able to and prove on the trend from last quarter and deliver positive comps in the concessions. So still not the most robust of markets, but we were pleased with the trend. In terms of the large markets, I think you hit the big ones, Japan, Australia, Korea, those are the biggest markets. China has not yet reached that same level, but it certainly continues to grow.

And can you also give us an update on Lagerfeld, just perhaps give us a read on how that's performing versus your expectations? And can you help us think about the opportunity there, now that's been in the marketplace for little while, perhaps if the greater opportunity is through new doors, or if you expect to increase productivity?

Karl is doing very well, meeting our expectations. As you know, we typically start up these brands really small, and do not expend them quickly until they are ready for prime time. I would say Karl on the balanced approach across all the distribution is really not ready to push it. So but having said that, it's in a similar situation in terms of size and number of doors as most of our brands have been, that we started over the last several years. It's basically too early to tell how big it's going to be.

And I know it's early, but do you expect to take a similar approach with Tory Burch next year?

We are working on the distribution strategy now, and it's going to be a similar approach, we're going to launch in a very select, special number of doors, in addition to our own stores. It will be a very much so, the global launch in a very unique number of special doors around the world.

Thanks very much.

David Wu, Telsey Advisory Group.

Congrats on a solid quarter. In terms of sell through trends, if you could talk about whether or not you did see improvement in the sell through rates for watches in the second quarter, just across your wholesale doors in US, Europe, and Asia and just how inventory levels are tracking?

Our sell through rates are consistent with not just last quarter, but over the last couple of years or so. We monitor that very closely and the inventories that are in the stores right now look like they're at the right level, and sell through rates are good and we're just moving forward.

Excellent, and Kosta, you mentioned being obviously more democratic with some of the price points, and I was wondering if you could talk about watch sales by price point, and if you're seeing any changes at all there, with consumer spending patterns?

We have seen in some markets, like I mentioned in Europe, for example, we may have seen a larger response to some of the opening prices that we have in Asia, for example. But on balance, it hasn't really affected our average unit retail. I think we are engaging some customers at the lower end and moving some of those customers up in the chain. It has been a relatively small number of units that we're selling there, but we think the impact is good, because it engages more customers and our brands.

Excellent. And then just any updates on new emerging watch trends that you are seeing, and what styles consumers are really gravitating towards?

There continues to be a huge amount of interest in watches, and there's a lot of innovation in mixed materials, new movement ideas, limited editions. We see it in the press a lot, the discussions and the discourse about watches is ongoing, and we think it helps us raise the awareness of the category in general. Our role is to be disruptive and put innovation and great brands with buzz in the marketplace, and create interest and business where there wasn't any before, and I think we're in a pretty good situation and the response of the marketplace is good and we think it is ongoing.

Great, thank you very much.

Liz Dunn, Macquarie.

Just a few follow-ups. I guess, first, can you tell us what you are men's versus women's ratio is in your business? For watches?

We don't have exact numbers, because as you know, women are very much so buying men's watches. So if we were to guess, we would probably say it's something like 65% of our business is women's, 60% to 65%, depending on the brand. Of course the other 35%, 50% of that bought by women also. But having said that, if you look at categories compared to apparel and other accessory categories, watches is a category that men are more interested in than others, just because it is a gadget, and it's an accessory they can wear.

So we think, especially in Asia, where the man's consumer is much more prevalent, that there is a large opportunity there for us in men's, and we do think that, as you have seen a lot in the press and other information, even in the United States, men are shopping more. They are more interested in fashion. We do think we have opportunities in men's as well. As we mentioned that Kors is a big opportunity, and of course FOSSIL is very strongly unisex, so there is an opportunity I think, both in Asia and around the world, to gain in more men's.

Okay, and then my other follow-up question is, relative to your North American comp, could you quantify how much was down and is it -- do I understand correctly that watches comps positively in North America? Thanks.

We didn't specifically quantify the specific regional performance, but, yes, it was down -- that was also impacted in a couple of ways, one the bags that are impacting our outlet business, as well as Easter, the Easter shift obviously impacted the quarterly comp in North America as well.

Ladies and gentlemen, this does conclude the question-and-answer session for today. And I will now turn the conference back to Dennis Secor, please go ahead.

Thank you, and thank you very much for joining us, and for your interest in Fossil Group. We're looking forward to speaking with you again when we hold our next quarterly call on November 5. Please take note that we plan to change the timing of that call, and hold it after the market closes. So thank you very much, and we will talk you soon.

And thank you. Ladies and gentlemen, this does conclude the conference call for today. Again, we thank you for your participation, and you may now disconnect your lines.