Fossil Group Inc (FOSL) 2013 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Fossil Group's third-quarter fiscal 2013 earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Tuesday, November 5, 2013. I would now like to turn the conference over to Allison Malkin of ICR. Please go ahead, ma'am.

Good afternoon, everyone, thank you for joining us today. 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 and 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 direct comparable GAAP financial measure and 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 the Fossil Group's website.

Please note that you may listen to a live webcast or replay of this call by visiting www.FossilGroup.com under the Investor Relations section. Now I would like to turn the call over to the Company's Chairman and CEO, Kosta Kartsotis.

Thank you, Allison, and good afternoon, everyone. Joining us today is Dennis Secor, our Chief Financial Officer. We are very pleased with the third-quarter results that we announced today. The Company executed well and maintained the strong momentum that we had coming out of the first half of the year. We achieved growth across geographies and categories highlighted by double-digit increases in each of our core businesses, FOSSIL, Skagen and our licensed watch portfolio.

We delivered growth in watches, jewelry and leathers in all of our regions driving solid increases in North America, Europe and Asia. And we maintained our focus on operational excellence which drove substantial improvements in gross margin. And we continued to invest in initiatives to support long-term growth.

Overall for the third quarter we delivered an 18% increase in revenues and a 25% increase in earnings per share which includes some timing items that Dennis will describe later. Our performance validates the strength of our business model and the ability of our talented team to deliver outstanding results even as we see opportunities for further improvements.

The FOSSIL brand posted another strong quarter with growth across all regions. In total we increased FOSSIL's sales by 13% led by the continued strength of watches and excellent growth in jewelry. We continue to gain traction in this category, especially in Europe, as our new global assortment continues to resonate with consumers.

In leathers our wholesale sell-in trend improved slightly, though we still feel there are opportunities to improve this business. Handbags are a particularly competitive category right now, so we're continuing to monitor this business carefully. We have some great product flowing into the stores over the next several weeks and into next year that we think can improve the business. And in addition we are increasing the amount of made for product in our outlets that we believe will give us better sales results in that channel.

We grew our direct-to-consumer business in the quarter as we expanded our own store base globally. Our international stores performed well, particularly in Europe where we again posted positive comps in nearly every market. Our comps declined slightly in the United States where the retail environment remains challenging. The traffic continued to be down and the surrounding retail environment remained very promotional during the quarter.

Skagen showed a strong increase with a plus 29% for the quarter. The brand continues to benefit from its integration into our global network with stronger overall sales and margin and expanded distribution through new doors in Europe and Asia. Our goal is to strike the right balance between owned and licensed brands and our entire global team is increasing their focus on Skagen.

We are building a dedicated brand leadership team focused on continued product innovation and we're expanding into new categories like our jewelry line which is already growing nicely and we will introduce leathers next year. And we are investing and expanding our retail presence with a new redesigned store concept that will first open in London by the end of the year.

Our vision is to develop Skagen into an accessories based lifestyle brand and we believe that its rich Danish heritage and unique market position make it a perfect addition to our business model.

Once again our watch portfolio performed well delivering a 20% increase with solid increases for both long-standing and newer brands. Our design innovation, supply chain and global distribution network afford us a competitive advantage to partner with the best lifestyle brands in the world. We continue to see opportunities to garner an even greater share of the growing global watch market by leveraging our distribution to grow existing brands and by adding new brands like Tory Burch which will launch next year.

In the quarter we also advanced several key initiatives to drive our strategic objectives. Our ability to efficiently grow brands on an international scale gives us a key strategic advantage and our quarterly international performance was strong. Europe saw the greatest rate of growth with several of our brands driving increases across both our wholesale and retail businesses.

We posted strong gains in multiple countries including more established markets like Germany and the UK as well as newer markets like Russia, Turkey and the Middle East. And we continue to gain traction in our owned retail stores as we once again posted positive comps in nearly every market. We're making great progress in Europe which has grown almost 20% so far this year.

And our Asia business continues to grow as well. During the quarter we posted constant currency gains of nearly 20% in the region and continued to build our distribution network and leverage our existing footprint to grow newer brands. We are making strong progress in newer markets and expanding in longer standing markets like Japan, Australia and Korea.

As we continue our expansion into China, which again grew more than 50% in the quarter, we took another major step in building brand awareness in that country with the opening of our first FOSSIL flagship store in Hong Kong at Causeway Bay. We feel this high traffic important location in Hong Kong will introduce the FOSSIL brand to a new customer and give us access to millions of tourists in this heavily traveled pedestrian area that is a gateway to China.

And lastly, we are continuing to build a world-class organization as we enhance our visibility and execution. We will continue to simplify processes and speed information and product flows across our Company while providing improved visibility and real-time data driven decision making. We're also enhancing the dialogue with our customers as we gather insight to improve our innovative product offerings and how we can bring those to market.

So looking forward we feel our assortments look great and are well-positioned for the holiday season. In the United States traffic remains a headwind and there are concerns about consumer confidence as we go into the holiday season. That can certainly impact our business and our near-term expectations.

Despite these challenges so far this year we've posted strong top-line gains and delivered solid EPS growth. Our performance shows the strength of our diversified business model and our capital structure should enable us to deliver consistent results and outstanding returns for our shareholders over the long-term. And now I will turn the call over to Dennis for more insight.

Thanks, Kosta, and good afternoon. Third-quarter net sales grew 18% to $810 million as we posted sales increases across all of our segments. Our growth continues to be balanced with all three geographic regions contributing to our expansion.

The current quarterly comparison benefited from $20 million in shipments which we had anticipated delivering in the fourth quarter mainly in North America. It also benefited from last year's $17 million delay in North American holiday shipments which we reported last year and contemplated in our previous guidance. These combine to favorably impact the current quarter's sales growth rate by nearly 6 points.

Our global sales growth was driven by a 20% increase in our watch portfolio with solid increases from many brands. Our proprietary brand also performed well during the quarter as FOSSIL grew by 13% and Skagen posted a 29% increase. Our FOSSIL growth was fueled by continued strong performance in watches where we posted gains across all of our regions. Our new jewelry line remained strong and we increased our overall leathers business.

In North American wholesale, sales increased 18% to $301 million. Last year's delayed holiday shipments along with this year's third-quarter pull forward benefited the quarter's growth rate of by about 13 points. Increases in watches and jewelry drove the growth across the United States, Canada and Latin America. Leather's revenue increased with higher sales of prior season products to make room for our new made for outlet styles.

In Europe wholesale sales increased 28% to $210 million, which includes $8 million of favorable currency benefit and a small benefit from earlier shipments. Our European growth was very balanced with FOSSIL, Skagen and our watch portfolio all posting solid double-digit gains. We also expanded all of our major categories with watches, jewelry and leathers also delivering double-digit increases.

The quarter-over-quarter European comparison was particularly strengthened by jewelry as the revenue declines from last year's third quarter were more than replaced in this year's third quarter. This year jewelry has been a particularly strong growth driver as our customer has responded well to our upgraded assortment. In Europe we are continuing to enjoy the benefits of scale as we leverage our extensive European infrastructure and distribution to drive growth across multiple brands.

Sales from our Asia wholesale operations increased 7% to $105 million which includes a $5 million unfavorable currency translation impact. We posted solid gains in our proprietary brands with a strong increase in FOSSIL sales and our business in Skagen, while still relatively small, more than doubled. Our watch portfolio also grew with increases coming from many of our brands.

In constant dollars our business grew in virtually all of our markets and was particularly strong in China, Japan, India and Australia. Sales concessions grew double digits primarily driven by door growth, particularly in China, combined with a modestly positive comp. Concession sales were strong in Japan, so the weak yen consumed all of that growth. In Korea we continue to grow our business by expanding our distribution. During the quarter we added a net seven concessions overall in Asia and ended with 301.

In our direct-to-consumer business third-quarter sales increased by 16% to $195 million. Sales growth was driven by store expansion as overall comps declined 0.5%. We are very pleased with the performance of our international stores where overall comps have been positive, especially in Europe, with nearly every market improving sales productivity. Jewelry remained a strong category as customers continue to respond to our new line.

In the Americas, while our Canadian business has been very strong, weak traffic and a highly promotional environment continues to affect our US business, especially in our full price store. In our outlets our comp trends, while still down, have been improving and we use promotions to drive traffic as we devote more space to our new made for handbag and watch line.

Through the end of the third quarter we have opened a net 52 stores in 2013 bringing our Company owned store count to 525. We now expect to open about 70 stores net of closures with the majority focused in international markets and in outlets.

Gross profit increased 22% to $465 million in the third quarter and gross margin expanded 160 basis points to 57.4%. The gross margin benefited from regional mix as we continue to expand our international businesses. The relative growth of our concession channel, as well as the larger mix of higher margin categories like watches and jewelry, also drove the margin expansion. These were partially offset by margins in our US outlet business as we used promotions to drive traffic and cleared prior season product to make room for our made for line.

Operating expenses increased 21% to $324 million. Our expense rate increase by 80 basis points to 40% in comparison to last year and the comparison was favorably impacted by the combined effect of both last year's and this year's shipment shift. The $56 million increase was expected and driven by continued investments in retail store and concession expansion, enhanced marketing programs, corporate and Asian infrastructure, and the impact of acquisition. We did differ about $5 million of anticipated expenses into the fourth quarter.

Operating income increased 25% to $141 million and the foreign currency translation impact was not material. Operating margin expanded 90 basis points to 17.4%. Both operating income and operating margin were impacted by this year's and last year's shipment shift.

Interest expense increased $2 million to $3 million compared to a year ago and net other income, which primarily relates to foreign currency activity, was negligible, down from $2 million last year.

Our effective income tax rate was 33.2% compared to 29.8% in the prior year quarter given an earnings mix shift among operating entities along with a prior year discrete item. We are planning with a full-year tax rate in the range between 31.5% and 32%.

So overall third-quarter net income increased 17% to $90 million and diluted earnings per share increased 25% from $1.26 to $1.58 which includes a $0.03 per share unfavorable foreign currency impact. We estimate the favorable impact of this quarter's shift and expense deferral on EPS was $0.19 and the unfavorable impact of last third-quarter's shift on EPS was $0.11.

Now turning to our cash flows and balance sheet -- operating cash flow declined $11 million or 34% to $21 million for the third quarter driven by higher earnings that were more than offset by working capital changes. We ended the quarter with $229 million in cash compared to $143 million at the end of the prior year quarter. We ended the third quarter with [$482] million of debt compared to $185 million a year ago.

During the third quarter we invested $228 million to repurchase approximately 2 million shares of our common stock at an average price of about $112 per share. We ended the third quarter with $615 million remaining on our share repurchase authorization. Our third-quarter results included an $0.11 benefit to EPS as a result of a lower outstanding share count.

Our inventories increased 11% to $657 million with the increase primarily driven by new store growth. Accounts receivable increased by 24% to $361 million with wholesale DSO increasing slightly as a result of acquisitions and earlier timing of holiday shipments. During the third quarter we invested $23 million in capital expenditures and depreciation and amortization expense totaled $21 million.

Now moving to our outlook. We are pleased with our performance thus far this year. All of our key businesses, FOSSIL, Skagen and our watch portfolio, are performing well and we've grown across all of our geographic regions, especially our international regions. Creativity and innovation have driven strong growth in watches. Our new jewelry line continues to resonate with customers and we're optimistic that our new leathers collection, including our new made for outlet products, can perform well at retail.

As we approach the important holiday season we have confidence in our assortment and the inventory position behind it. The retail environment, especially in the United States, is challenging. Mall traffic remains tough and many retailers are signaling an expectation that the holiday season will be highly promotional. Visibility is limited and will likely be further affected by this year's late Thanksgiving which will eliminate six shopping days from the holiday calendar.

It remains to be seen how the consumer will shop and how our wholesale partners will reorder. We always manage our business with a keen eye on the long-term. As we go through the holiday season we will remain flexible, responding to current conditions but always with an eye on protecting our brands for the long-term.

While we did post third-quarter sales and EPS ahead of our expectations, $20 million of sales $0.19 per share relates to this year's timing shift and will directly affect the fourth quarter. We have adjusted our expectations accordingly. For the fourth quarter we expect sales to increase between 6% and 8%. The negative effect on the fourth-quarter growth rate of this year's $20 million shift and last year's $17 million shift is roughly 4 full points.

Our fourth quarter sales expectations would result in full-year sales between 12% and 12.75% compared to last year. We do expect fourth-quarter gross margins to be higher than last year. We expect to continue to realize the benefits of mix in many of our operational initiatives, but not to the same level as we have seen in the most recent quarters. We also expect to operate with a higher expense rate in the fourth quarter given the investments in our growth and infrastructure.

Overall, our assumptions would result in fourth-quarter operating margin between 19.25 and 20.5%. This would result in a full-year operating margin between 16.7% and 17.1% with gross margin expansion generally offsetting a higher expense rate.

Our guidance assumes that foreign currencies remain roughly at prevailing rates and also assumes net interest expense. Overall, we are expecting earnings per share for the fourth quarter between $2.26 and $2.46. For the full year, while we do feel that conditions are a bit more challenging than they were a quarter ago, we still expect to deliver earnings-per-share in the range between $6.15 and $6.35.

I want to highlight an important modeling point. Given the timing and volume of this year's share repurchases, we anticipate this year's full-year EPS calculation will be roughly $0.05 lower than the addition of the four quarters. Lastly, we now expect annual capital expenditures will range between $95 million and $100 million and that annual depreciation and amortization expense will be approximately $80 million. So now I will turn the call back over to the operator for your questions.

(Operator Instructions). Oliver Chen, Citigroup.

Just tactically could you explain what happened with the shift? And it sounds like it wasn't fully expected or what happened strategically? And then my question is on North America wholesale. If you strip out the shift it kind of sounded like that was growing at around mid single-digits. What were the strengths and weaknesses within that channel that you were seeing?

Sure, let me just start with the -- kind of if I can take the opportunity to help people understand because there is a lot of moving parts. But over -- the way we are looking at the various shifts and the impact is if I step back and I look at the quarterly flows this year, there are really three things that are impacting that.

The first quarter we had the Skagen benefit because of the anniversary in the second quarter. Then we have our NRF and Easter shift that ultimately mostly impacted Q2. And then we have these shift, which are just really a function of the timing of when wholesale shipments roll.

If you neutralize for all of that, based on our guidance, you are looking at a quarterly growth pattern that for most of the quarter is right in that 12% to 13% range with the first quarter being a little bit shy of that, which fairly tightly aligns with the overall annual growth rate.

So I just want to help illuminate that because, first of all, we are a wholesale business, the trucks don't roll, the deliveries don't happen exactly in the same pattern that they happened in prior years. And there was about $20 million this quarter that actually ended up coming out of October and benefiting September.

Okay, and extrapolating -- stripping out the shifts within North America wholesale, it seems like growth was more modest at mid single-digit. What were the strengths and weaknesses there and what you are seeing. My follow-up is also related to your comp -- the same-store sales comp. It sounds like you're more encouraged, so how should we think about your enthusiasm in context of how we model fourth quarter?

Yes, let me just sort of double-click on the regional pieces as well because there again, it creates a lot of noise. But if you try to look at this business with some of the movements it just -- you can't really draw the right conclusion quarter by quarter. So if you step back and you look at the regional mix; if I factor out the shifts that are happening this quarter between the third and fourth quarter and look at the whole American business, so far this year it has grown at about in the high single-digit range.

Then if I do the same thing and I look at the international market, both Europe and Asia sort of X currency are operating in the high teens. And then Asia gets taken down because of the yen. And Europe gets taken out because of the euro. That is generally probably the best way to think about the overall growth rates in the various geographies for the year.

Okay, thanks. And if you could just help us think about the comp and the run rate. I know traffic and promos and the handbags are undergoing a transition. So should we still think about negative low single-digit given the North America relative performance to Europe?

You know, we have looked at -- we have taken into account the current trends that we are seeing, our expectations for traffic and our ability to convert that and some of the initiatives that we have and with the new product hitting the stores. So we've factored all of that into our guidance and given you a range because we think that the performance can obviously operate within that range. So we have done our best to try to factor all of that in.

Okay, thanks, guys. Best regards for the holiday season.

Omar Saad, ISI Group.

Nice job, guys. Getting back to the regional differences. Sounds like North America is more of a single-digit grower, Europe and Asia on the margin I think are growing faster. Is that how we should think about the different markets longer-term? I know Asia is obviously probably the biggest and the most underpenetrated. And is it because in Europe and Asia you are still filling out the channel in the wholesale side whereas in North America maybe the channel is a bit more filled out?

Omar, in Europe we are seeing -- we are up against somewhat smaller increases from last year I think as part of the increase. Asia obviously is a big long-term opportunity. So I think just going forward we are looking at slower growth Europe and US, larger growth in Asia, larger growth in Asia over time. But we think that is where most of the growth -- the big number is going to come from over the next several years. But we do expect to be gaining share in both Europe and the US while we are putting in place a much bigger infrastructure in Asia.

The other opportunity we have here in North America -- or in the Americas rather, is Latin America. We acquired our distributor and we think that that can be a potentially very strong market for us as well.

And then Karl Lagerfeld was launched in February I believe. How is that doing so far? It's kind of your first big new brand I think in a while, kind of from scratch, building it from scratch. And I know you've got Tory Burch waiting in the wings as well. How is that process going?

Yes, Karl is doing pretty well, still in a small number of doors and typically, as in the past, we have had brands start off, they stay small for a while until we -- they are ready for prime time. We really don't expand them until we see a good operating model of sell-through and we are not there yet with Karl.

The brand is still relatively unknown, they haven't -- there is not a lot of stores out there in the market yet, although they are accelerating that now and the awareness should increase. And we think over time it will be a grower for us. But for right now it is pretty much in an incubator stage.

Is that usually, what, a couple year period, Kosta, or is there (multiple speakers)?

It can be -- I think even in Michael Kors case it was three years or more. Sometimes it just takes a bit to really get the operating model, the brand to resonate. And for us to -- we are doing a lot of testing and learning right now and that is part of what is going on.

So we are trying to get the assortment tuned and really productive before we push the pedal on the distribution. But we do think it has long-term potential over time as that brand continues to resonate globally and as we get a good operating model on the assortment, etc. So it should be a good brand for us over time.

Thanks, that's helpful.

Rick Patel, Stephens Inc..

I just have a question on the jewelry business. You have had some great success in this category across multiple brands. Where do you see this business going longer-term? Are there any brands in your portfolio where jewelry could make sense? And how should we think about what the sales and margin opportunity is over the long run?

Well, a lot of the growth we are getting this year is in FOSSIL, which, as you know, we had a tough time last year so we are getting growth there. In addition, the Kors jewelry business continues to be strong, especially in Europe, it is showing very strong sell-throughs. And as we continue to build watching jewelry shops for Kors around the world I think that is going to be a big opportunity for us.

We also have an Emporio Armani growing business. We think with our Asia distribution expanding the Emporio Armani jewelry will grow very nicely. And then of course we've got DKNY in Europe only. But the way we look at it is jewelry is kind of part of our watch portfolio, it is got similar characteristics in terms of assortment, flow of inventory, actually sold in the same stores as watches is so it leverages our distribution channel. Sales reps, for example, are selling watches and jewelry to a certain store.

Obviously the global jewelry business is much, much larger than the watch business and increasingly it will become more globally branded, which gives us a long-term opportunities. So for right now we are focused on the brands we have, expanding their distribution, getting a better operating model. We are working on expanding our capabilities for sourcing, etc., and we are putting plans in place where it can expand over time.

The other thing just to add to that, Kosta said on his prepared remarks talked about Skagen, we have launched it there, it's still fairly small. But that is an important part of our arsenal to really develop Skagen into a full lifestyle brand.

And then just a question on Europe, a follow-up to an earlier question. Can you just help us understand what is driving the strength there aside from perhaps easier comparisons? I am curious if there's something that you are doing different strategically that is gaining traction that wasn't gaining traction in prior years. Or if it is just a function of consumers feeling better about the marketplace. Just help us think about that.

Well, as I said earlier, part of it is just we had relatively slow growth last year, so we are getting bigger growth in jewelry. Plus we have a couple of watch brands over there gaining big share, Kors is obviously one of them, resonating really strongly with customers over there. We have got a couple of other brands that are doing the same. So we are gaining share in watches and we are expecting that to be an ongoing process over there.

The thing that encourages me about Europe is that the growth we're seeing is fairly broad based, it is across categories, it is across countries, in both newer and older countries, and it is across brands. So we have seen a fairly broad pick up in our business over there.

Thank you. And all the best for holiday.

Anna Andreeva, Oppenheimer & Company.

Congrats on a strong quarter, guys. A couple of questions. Just looking at gross margins, have come in significantly better than expected for the past two quarters already. So if you could maybe conceptualize the opportunity as we look into 2014.

And looking at 4Q guidance for gross margins to be up modestly, I understand the tough environment out there but I am assuming some of the liquidation initiatives and the mix shift benefits continue, so why couldn't we see a bigger gross margin upside in the fourth quarter?

And also just bigger picture, as the outlook footprint of the business has doubled in the last couple of years, can you just remind us where are you guys with made for outlet initiative maybe what is the margin differential between outlet and your full price stores and how big do you think the footprint could be down the road?

Okay, going to -- with respect specific to the 2014 margins, we are not yet at a point where we are commenting on what next year is going to look like. But I think if you -- as we get into the margins for this year, we have been expanding our margins with a combination of mix, product mix, regional mix, channel mix as well as some of the initiatives like you mentioned liquidation, like the reduction that we have had in the SKU count that helped drive some margin improvement.

By the time we now get to the fourth quarter we start anniversarying some of that. So obviously trying to hurdle it again becomes more challenging. So you are faced with some of that happening as well.

The other thing, we sort of evolved our liquidation strategy and initially the thought was we opened outlets so that we could clear through those outlets rather than using exclusively off-price partners. As we've developed the made for line we are now sort of reengaging to some extent that outlook -- or off priced partner so that we essentially make room for that product. So we in fact did clear some of those older bags in the third quarter using some of our off-price partners as well as our own outlets.

Okay, terrific. And just on the outlet opportunity, how big do you guys think that footprint could be? And just a quick follow-up on Asia-Pacific as well. It looks like trends slowed a little bit versus the recent performance and longer-term goal. I think you said virtually every market was up. What region did not perform?

On the outlets, as you know, we have built quite a few outlets both last year and this year. Part of that was a catch up from the huge growth we had going back the last three, four years. So when we benchmark other companies in different merchandising industries we still have a very small percentage of our business going through outlets, it's a single-digit percentage. And we do have a think opportunities to have a better customer experience by having made for products in the stores which can increase the productivity and the customer experience in the stores at the same time.

Having said that, we are going to take a very balanced approach to it, we are not expanding this dramatically. We don't want to have so much liquidation, so many outlets that it impacts the brand. So it is still going to stay a relatively small percentage of the total Company, but it will expand from where it is now.

And in the Asian business, the major markets for us were up. Japan was strong, although we lost those revenues because of the yen; China was up, Korea. Despite the fact that it is economically not the most robust environment there, Korea grew for us. Australia was up, gave back some of that in currency and India was strong of course. So the largest markets in Asia posted increases.

Okay, thanks so much guys. Best of luck.

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

Congrats to everyone. Great quarter, guys. Wanted to ask about if you could give us an update on the Swiss watch initiative. What is going on there? What your plans are? And then perhaps somewhat related to that, just thoughts on smart watches. You have been there before, are you going to go there again? Thanks.

Well, as you know, we have been making Burberry Swiss watches for a number of years now. And we do think that because of the Asia situation and our opportunity there that we have a huge whitespace opportunity to put additional brands in Swiss made. So we added Fossil Swiss this year, still small, doing well, we also have our Zodiac Swiss watch business, again small. We are going to be launching Emporio Swiss next year. We think it has got a very large potential in Asia and there will be follow on brands over there as well.

So we have been ramping up our capabilities to execute more Swiss made watches as this kind of whitespace opportunity manifests itself in Asia. We have accelerated quite a bit our design team in Switzerland and our capabilities for innovation. We also, as you know, have been making our own automatic movements starting off small this year, we'll expand over the next couple years so we will have a supply of automatic movements to facilitate our growth into the Swiss market, especially in China.

As far as smart watches go, as you know, we have done those for a number of years. It is really quite fascinating to see all the interest in it. And as far as we are concerned, anything that gets people to wear watches on the wrist is good for us. There is a whole generation of people that grew up with cell phones and have never worn a watch. So if we can inspire them through branding and storytelling or through technology to wear watches we feel that is good for us.

So we are actually -- we are studying it, we are looking at different opportunities. The one thing that I think will happen is there will be increasing miniaturization of the technology and better battery life. Which means these watches over time may be easier to wear, not as clunky and the battery situation would be better.

So there could be in the future, and we are not sure exactly how far that is, but there could be more access to wearable technology that would actually look and be wearable. We maybe could put the brand's DNA in it. So there could be a convergence in the future and that is what we are looking at right now.

So stay tuned, in other words?

Right.

Okay, thanks.

Lorraine Hutchinson, Bank of America.

I wanted to follow-up on the slight downward revision in operating margin guidance. Is this solely related to the more promotional environment for the US mall-based stores or does it carry through to wholesale as well?

Primarily the change that we saw relative to expectations in the third quarter was that we ended up promoting a little more to drive traffic into the outlet. So if you step back and you look at the third-quarter performance, we -- and you factor out the shifts, we slightly over delivered on the top-line and probably beat EPS by -- compared to the top end of our own expectations by a couple cents, but brought the margins down a little bit. And we're essentially just rolling that through to the fourth quarter.

Thank you.

Matt McClintock, Barclays Capital.

Kosta, I was wondering if you could talk about traffic drivers specific to your retail stores within what we see as a highly promotional environment within retail not specific to the watch category, but apparel and other stores that we see in the mall. How are your thoughts evolving around driving traffic to your stores in this environment? As I recall the semiannual sale was one way that you are thinking about this, but are there any other initiatives that you are thinking about to improve the traffic to your stores? Thank you.

Well, the traffic decreases are in the United States mostly and obviously the environment is tough in addition to traffic being down. There is also obviously a lot more activity on line omni-channel activity which could be impacting traffic as well. So we are doing a number of things. We have a lot of initiatives based on omni-channel, CRM, etc. In fact, we have been testing some different ways of getting traffic to our stores and websites through different offerings, etc.

We think that we are doing a lot of testing now and we think we're going to end up in a good place with that. We are accelerating our activity on social media, mobile, etc., which we think will manifest itself in getting more traffic to our total organization. Some of that may come through in more web sales, but that is where we are there.

As far as globally, we think -- we are seeing very strong reaction to some of the new stores. We opened a new store actually in London today on Oxford Street, we actually have a store there and we took the space next to it and it has tripled the size. So we're seeing a good response there. The stores we opened in Hong Kong very high traffic, we are seeing a lot of new customers, a lot of new faces telling our story to a larger number of people especially as the Gateway to China we think is beneficial.

And then we are doing consumer insights, we are doing research in the US and in Asia and exactly what -- not just the FOSSIL brand, what it means and how we can resonate with consumers, but some of the watch brands also to try to understand what kind of product and opportunities we have in different price points, categories, looks, etc. We are getting more scientific about that and we're going to wrap it all into one and try to drive more traffic.

And then, Kosta, if I could follow up on the Hong Kong flagship store. Could you maybe explain some of the differences between that store and some of your other stores globally? How are you thinking about building brand awareness with this store specifically? And then how should we think about translating some of these lessons to other regions where you have a hi growth opportunity? Thank you.

Yes, I think our objective is really to get into some very high traffic location. These are small stores so they are not big, expensive typically what you would say a flagship. But they are very high traffic, very visible stores, the store and Hong Kong is one of the most visible in the area. So it definitely will be seen by almost everybody that's walking through there.

And really just to help us, especially in that case, resonate the brand throughout China as the travelers go back to China or travel around the world the brand will resonate. So we want to do that in the flagship cities throughout the world, so London, Paris, New York, and all the major cities and in New York is have an enhanced experience inside those stores to help resonate the brand.

The other thing is that what continues to be a big opportunity for us in all our businesses is travel retail, increasingly the numbers of people traveling globally -- these are great opportunities for us not only to sell a lot a product but really to present the brands and the ideas and the storytelling that we are presenting to the customers globally, that is another big opportunity for us.

I appreciate the color, Kosta.

Scott Krasik, BB&T Capital Markets.

Hey, everybody, congratulations. Can I just ask -- trying to parse out these shifts, it's implying about a 5% underlying growth rate this quarter. And given that you shipped early would imply retailers want what you have. It seems like we're hearing from other people retailers are canceling orders, pushing back orders. So how do you jive that with the 5% assumption of the growth rate?

I'm sorry, I'm not understanding your 5% growth rate.

Well, I mean it's --.

What we said is that if you look at the impact of the shift on the total it is about worth 6 points and we grew 18% in the quarter.

I mean 5% for US wholesale.

Understand.

After the shifts.

Okay so I mean again what I was trying to explain -- we don't -- trying to draw instances from this -- from a business in very narrow slices is probably not the best way to look at it. I mean we do view the wholesale business here, it is among our more mature business.

But we have taken a look at it. We have gone through our forecast, what we are hearing from all of our account reps based on what they expect orders to be, but it does remain to be seen, as we said on our prepared remarks. How the reorders will play out. So that is the area where we won't know until we are deep into the quarter.

Okay and then if I could just follow up on share buybacks. Very impressive the last two quarters. Maybe talk about the commitment you have to capital allocation towards buybacks going forward, please.

Well, I mean we've -- we are very committed to the buybacks, the Board approved this $1 billion buyback I think a year and a half ago. We have got $615 million left on it, so we have been actively investing in it. It is a -- we get feedback from investors that they feel it is an important initiative and we put capital behind it.

Congrats.

Erinn Murphy, Piper Jaffray.

I just was curious (technical difficulty) more about the Asia-Pacific region. And just speak to where we are at from an investment cycle perspective, particularly in China? And then as we think about that longer-term, how should we think about the leverage in this region? Thanks.

Yes, we are very pleased with the business. I mean as I said, if you strip out some of the noise overall across all channels, Asia is growing in that high teen range X currency and China, as Kosta mentioned in his remarks, over 50% and it has been growing at that clip pretty significantly.

I think to think about Asia in terms of how we are going to get leverage in Asia is probably not the same way we think about it. I mean we have got a number of different businesses that we are running, Asia -- the purpose that Asia serves for us is really right now to drive growth, not necessarily to drive expense leverage. We are really trying to distort our growth in that market because we think the opportunity can be big.

The other areas of the business that we are mainly focusing on, the more mature businesses, the corporate structure here where we are hoping to drive greater amounts of leverage. But the purpose of Asia for us really is growth and that is the way we are looking at it. So we are investing in Asia, we think it is an opportunity for us in the long-term and that is how we view it.

Barbara Wyckoff, CLSA.

Good job. Could you go over -- if you could you over the quarter or the year to date, what would you do differently merchandising wise, operations, etc.? And then I have a couple of follow-ups.

Well, it would be nice if we could have a do over, that would be great.

I think we executed pretty well. The great thing about if you look over our businesses that we performed well across regions. It was pretty broad brushed across regions. Categories, I think the area that we are really focusing on and improving is continuing to drive better performance in the handbag business. We think we have made strides there; we feel good about the assortment as we go into the holiday season, but it is not perfect yet.

We feel good about the made for lines, I think that can be a big driver and a margin expander. And we are looking at ways -- Kosta was talking about we're beginning to experiment what are the ways that we can drive people into our stores and get them there. Because what we're finding is that our conversion is up. So once we get those customers in the store they like the product. Traffic is the issue for us right now.

Okay. Great, thank you. Talk about the thought process between -- about building the sort of standalone stores in greater China versus concessions. How do you decide one versus the other? And then could you talk about the performance of the (inaudible) brand Emporio Armani stores versus the multi-brands?

Well, our objective in Asia is to build mostly concessions and we are going to build a number of stores, high-profile stores like the one in Hong Kong to communicate the brand and tell the story in a broader way. But then mostly what we will try to build is the concessions over there, both for the FOSSIL business and the multi-brand business and for Skagen as well.

So it's largely going to be concessions. As you know those concessions can -- have a higher return on capital, not as expensive to build, they can move faster, etc. So that is why we think we have a pretty significant opportunity in China especially.

How many do you have now -- concessions, and how many do you think you will open next year?

Right now we have 301 over in -- concessions in all of Asia. And we haven't yet -- we are still working on our plans for next year.

Okay. And the Emporio Armani?

Well, we have a small number of Emporio Armani standalone stores and, as you know, they do very well. It is not likely that there would be separate stores that we would expand Emporio Armani, most of what we're expanding is concession type mono brand shops.

So will have expanded presence for Emporio Armani in a lot of the stores throughout the region inside of department stores as a concession. We think it is a huge opportunity, especially as we expand into Emporio Armani Swiss. The Armani brand continues to be one of the most powerful in the region and I think there's going to be a great result from us expanding the presence for Emporio Armani both in Swiss and in regular.

Okay, thanks.

John Kernan, Cowen & Company.

Congratulations on a nice quarter. Just -- I think Michael Kors today talked about a big opportunity in their men's business, particularly in the watch category. He's starting to design new -- is there a new design there that could potentially get revenues going? When do you think that that men's business can start growing in a bigger pace and become a bigger portion of their watch sales?

Yes, we actually are working on that now. In some brands men's is 50% of the watch business, so there is a big opportunity there. So we are working on that and just the entire distortion of quarter's men's, in conjunction with all their other categories and to communicate that very strongly globally we think is a very large long-term opportunity, especially as we continue to get penetration with Kors in Asia.

You know, the Asia consumer is even more skewed towards male shoppers. So it can be a powerful catalyst over there as well. And of course also in Kors there is -- we continue to see large growth in expanding shop in shops. We are seeing strong growth in Europe. Travel retail is very strong. Our jewelry business is strong with Kors also. And so, we just keep moving forward and expanding into men's could be a pretty large opportunity.

Okay, and then I think you've talked in the past about the Asian concession growth being careful about growing into certain -- not growing into certain points of distribution there that you viewed as questionable. But have you started to find more suitable points of concession distribution there? And what does that unit growth look like for concessions over the next couple of years?

Well, we are looking for high-quality locations in high traffic, high-volume areas. And as we said before, the market is very fragmented, there is a lot of local ownership involved in all these stores, you have to have relationships for a long period of time. So we have accelerated our use of partners and we've seen some strong results from that and we expect that to continue.

And we do think that we will reach a point where these will grow at a faster rate than they are now. But for right now there is a lot of learning going on, a lot of relationship building, a lot of discussions going on and we think we are going to get to a better place over time.

Okay, thank you.

David Wu, Telsey Advisory Group.

Congrats on the very solid quarter. In Europe wholesale, obviously we saw very strong results this quarter. I was wondering how much of it is driven by stronger like door sales relative to new distribution.

Well, the stores that we sell to in Europe is pretty much of a fixed set of stores. In fact, over the last couple years we've actually reduced our doors over there. We have taken products and brands out of the smaller less performing doors and expanded our presence in large doors. And we have seen growth from that and I think that is part of the ongoing growth we are seeing.

Of course Kors is opening stores in Europe and there's obviously new distribution from that that is significant. And we are continuing to add additional brands to additional doors, so not all brands are in all doors. And Skagen has seen growth there by going through their own distribution plus adding jewelry, for example. So it is several levers working at one time to continue to gain traction and get more space and to get more sales.

Great. And it looks like you adjusted CapEx down for the year. I wanted to know if you were postponing any of your spending into next year, what that (multiple speakers)?

Most of that change was sort of some of the projects that we have ongoing where they don't fully complete, so some of that does flip over into next year.

Got it. And can you talk about performance by price point within the watch segment, if there any meaningful changes at all to call out?

Well, if you look at it as a Company our average in retail is higher and mostly that is mix. So we have -- as Asia continues to grow at a faster rate we capture full retail there. We also -- the category of watches that's growing the fastest is in the $150 to $300 range, so that has been growing the fastest and looks like it continues to. We have a number of brands in there that are growing really quickly. So the average in retail has gone up for the Company.

Excellent, thank you very much.

Liz Dunn, Macquarie Group.

Let me add my congratulations. Most of my questions have been answered. But can you just talk about your commitment to leverage beyond this year, leverage SG&A beyond this year assuming if kind of 12%-ish is a normalized sales growth rate? When will we return to SG&A leverage?

So we are going through our planning cycle right now and working on next year's budgets and looking for developing the plan. So it is probably premature to talk about them. I hope you got some color on the commentary we had about Asia. We have invested in significant infrastructure investment systems initiatives like new product lifecycle management, we are developing Hyperion, some other tools that are fairly broad based and enterprise wide kinds of initiatives.

So tilting them up is step one and then you've got to integrate them into your operations. And we are going through that process right now to try to get the full benefit of that. So we are really attempting to measure that and that is going to help inform what kind of investments and spending we are going to have for next year and what kind of benefits that we can derive from it. So that is still underway and we should have more that we can share with you in February.

Okay, great. Thanks, good luck.

Thank you. There are no further questions in the queue at this time. I would like to hand the call back to management for closing remarks.

We would like to thank you for joining us today and for your continued interest in Fossil Group. And we look forward to speaking with you when we hold our next conference call in February. Thank you.

Ladies and gentlemen, this concludes the Fossil Group third-quarter fiscal 2013 earnings conference call. We thank you for your participation and at this time you may now disconnect.