Fossil Group Inc (FOSL) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Fossil Group first-quarter FY14 earnings conference call.

(Operator Instructions)

This conference is being recorded today Tuesday, May 13, 2014. And I would now like to turn the conference over to Eric Cerny, Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, thank you for joining us and welcome to Fossil Group's first-quarter 2014 earnings conference call.

I'd like to remind you that information made available during this conference call contain forward-looking information and actual results could differ materially from those that will be projected during this call. 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 assumes 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.

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

Thank you and good afternoon, everyone. Joining us today is Dennis Secor, our Chief Financial Officer. We are pleased to be off to a good start in 2014 with a solid first-quarter performance that produced revenue growth at the top end of our expectations. We continue to expand our international footprint as we gain significant market share in both Europe and Asia. And as we expanded our business in the Americas, even the small traffic remained challenging.

Our growth was driven by strong performance in watches with both Fossil and our multi brand portfolio delivering solid increases. Our jewelry business accelerated with a strong double-digit increase which highlights the significant opportunity that branded jewelry represents for the Company.

During the quarter, we continued to pursue many operational initiatives to drive efficiencies throughout our global infrastructure. We also invested in areas that will able us to capture future growth and we maintained our commitment to our share repurchase program. With all of that we feel that we are on track for the year as we delivered earnings that were just ahead of our expectations for the quarter.

We continue to attribute our consistent positive performance to the many competitive advantages of our diversified business model, including our design and brand building talent, our compelling portfolio of desirable brands and our world-class manufacturing capabilities as well as our expansive global distribution network. With our experienced Management team and the advantages of operating in a high-margin category, we are well positioned to deliver sustained growth well into the future.

For the FOSSIL brand, watches delivered the strongest increase with solid growth rates in all three regions. Our strongest growth came from Asia where we have been investing in brand building and also expanding our distribution. Fossil jewelry sales also increased while leathers delivered results even with last year and continued to lag our expectations.

In jewelry, we continued to drive our performance through an elevated assortment and higher quality materials. In our US stores, our customers are responding well to our jewelry assortment and in our Fossil branded environment. We are planning to narrow our wholesale distribution throughout the year where delivery and mark down cadences conflict with our brand messaging.

Our leathers performance showed progress in our retail stores, but the category remains highly competitive and promotional in the wholesale channel. This area of the business is still our biggest opportunity for improvement and we are focused on ways to elevate the assortment and the brand presentation within our US department store partners. To that end, we will continue investing in shop-in-shops that allow us to provide a true showcase for the brand.

This year we also plan to increase our investments to enhance FOSSIL brand awareness and further cultivate the emotional connection that customers have with the brand. By expanding our print media campaigns and our digital and social media presence, we expect to drive more traffic into our stores and enjoy a better conversion in unit sales as customers shop across the full breadth of our assortments.

For Skagen, we delivered solid double-digit growth in both Asia and Europe while sales were down in the Americas as we are redefining our distribution to support our overall brand strategy. During the quarter, our two newly remodeled UK stores continued to perform very well and we believe they are an indication of the potential for the brand. We continue to see strong results in Skagen jewelry particularly in Europe and are excited about the full launch of leathers later this year when the assortment will fully reflect more of our design team�s new look for the brand.

In our multi brand watch portfolio, we continue to gain share and posted a solid increase of 17% for the first quarter. Once again our growth was balanced geographically with double-digit increases in all three regions and with the majority of our brands posting gains. Michael Kors continued to be a strong driver of growth and the brand is gaining significant momentum in many of our international markets. We expect the strength to be ongoing as we continue to expand the brands presence in our global network.

During the quarter, we launched our Emporio Armani Swiss assortment at the Basel Fair to very favorable reviews. We also remain on track to launch Tory Burch in the fall with a unique assortment of Swiss made watches to a targeted global distribution. We remain confident that this brand will be an exciting business for us in the future and we are looking for to launch later this year. With our strong brands and operating model, we feel we're in position to continue to gain share in the global watch market.

We also announced during the quarter our partnership with Google as we pursue opportunities in wearable technology. This partnership allows us to bring our creativity and design and the power of fashion brands to the world of technology in collaboration with some of the most innovative companies in the space. These are very early days in this exciting partnership and as things evolve, we look forward to sharing our plans with you.

In the first quarter we continue to develop our operating platform and strengthen our business across all regions. Europe posted outstanding results growing sales by 20%. Our growth here was broad based as we grew both watches and jewelry and expanded our business in nearly all countries. We continue to be pleased with the trends we are seeing in our retail stores where comps have been positive in nearly all of our European markets despite challenging overall traffic.

We're also very pleased with our performance in Asia where our sales increase exceeded 20% and nearly all of our markets posted solid gains. China increased well over 60% for the quarter. And India, where we just opened our first Fossil store, increased significantly as well. Our focus is on continuing to develop distribution in Asia and creating an awareness for our brands in a very important region.

Our mission as a Company is to continue on our path of building a world-class entity of excellence where creativity and entrepreneurship are carefully balanced with operational discipline so we can drive growth and deliver solid returns for our shareholders in the near and long term. Our entire Management team is focused on optimizing our operating structure and driving efficiencies throughout our Company. Our goal this year is to drive efficiencies through our base infrastructure to create fuel to invest in brand building, customer engagement and demand creation as well as continuing to build structure for our long-term initiatives.

In addition to expanding Fossil's print, social and digital media presence, this year we're investing in CRM to better communicate with and to understand our customer better. We're investing in shop-in-shops and point-of-sale materials to enhance the customers' experience with our products and brands. We expect that higher advertising spending will broaden the exposure that customers have to all our brands.

In addition, we're continuing to build our infrastructure in China as well as to build out our Skagen team. As a Company we're focused on using all of our resources to drive shareholder value and we have made excellent progress so far this year. There's still much of the year in front of us but we're pleased with our first-quarter performance. And while there remain many challenges, we have the momentum across the entire enterprise to drive results for the rest of the year. And now I'll turn it over to Dennis.

Thanks, Kosta, and good afternoon, everyone. First quarter net sales grew 14% to $777 million reflecting sales increases across all our reported business segments and included this fiscal year's extra week which occurred in January. We slightly exceeded our earnings expectations with stronger gross margins and a lower tax rate.

We drove growth during the quarter with strong performances in Asia and Europe with both regions delivering growth rates in the low 20% range. Our growth was also well distributed among our brands as our multi brand watch portfolio grew 17% with the vast majority posting increases. The FOSSIL brand grew by 5% globally primarily driven by a double-digit increase in watches and growth in jewelry while leathers were roughly flat.

Skagen sales were up 2% in the quarter with strong growth in Europe and Asia while America sales declined as we are transitioning business from selective customers to support our overall brand strategy.

In North America Wholesale, sales increased 7% to $273 million. Our North American Wholesale growth was driven by double-digit gains in our multi brand watch portfolio and jewelry while sales in leathers declined. Our US sales grew while Mexico and Canada both declined.

Our US sales growth was driven by increases in boutiques, specialty accounts and off price partners. Our US department store business was affected both by the underperformance of leathers, where we still have work to do on our assortment, and the highly promotional environment where we limited our participation in promotions to protect brand integrity.

In Europe Wholesale, sales increased 18% to $206 million which includes $7 million of favorable currency benefits. Our European growth was driven by double-digit gains in our multi brand watch portfolio as well as in our jewelry business with particular strength from our license portfolio. For Fossil, watch growth was offset by declines in leathers.

Our growth continues to be balanced geographically as we posted gains in all markets other than Italy. We posted strong sales increases in established markets such as the UK, France and the Middle East.

Sales from our Asia Wholesale operations increased 19% to $104 million, which includes a $4 million unfavorable currency translation impact. We posted gains in our proprietary brands as well as our multi brand watch portfolio. The growth was across nearly all of our markets with particular strength in China, India, Japan and Korea.

Sales through concessions grew double digits primarily driven by door growth. In the quarter, we added a net six concessions overall in Asia and ended with 315.

In our Direct to Consumer business, first-quarter sales increased 18% to $195 million. Sales growth was driven by store expansion as overall comps based on a 14-week calendar declined 2.4%. The comps were also negatively impacted by this year�s later Easter.

Positive comp store sales results in Europe and Asia were offset by a decline in North America primarily driven by the US stores where our conversion rates have improved though not sufficiently to offset the impact of mall traffic declines. Comp store sales in jewelry increased in the quarter while sales of watches and leathers declined. During the quarter we closed a net one store, bringing our Company-owned store counts to 542 at quarter end.

In the first quarter, gross profit increased 17% to $443 million. And gross margin expanded 150 basis points to 57.1% compared to 55.6%, which was last year's lowest quarterly gross margin. The improvement was primarily driven by the impact of a greater sales mix of higher margin products, improvement in freight and other cost, prior year acquisitions and a favorable regional distribution mix given the growth in international markets. These benefits were partially offset by increased promotional activity in outlet stores and reserves associated with leather.

As planned our operating expenses increased $54 million, or 19% to $339 million including the impact of the extra week. The expense increase was driven by our retail and concession expansion, infrastructure investments to support growth and global initiatives and higher advertising royalties.

The comparison was also negatively impacted by last -- first-quarter's acquisition of Credit Insurance which reduced operating expenses in that period. These were also the main drivers of our 190 basis point expense rate increase from 41.7% to 43.6%. Many of our infrastructure investments were made in the latter part of last year and will remain headwinds until we lap them towards the end of this year.

Operating income increased 11% to $105 million for the quarter and the foreign currency translation impact was negligible. Operating margin declined 40 basis points to 13.5%. Interest expense increased $2 million to $4 million compared to last year and net other income decreased by $10 million compared to last year's first quarter which benefited from the non-cash mark-to-market valuation gain related to the acquisition of our Spanish joint venture and net gains on foreign currency contracts and account balances.

Our effective income tax rate for the first quarter was 31.3% compared to 28.1% last year which was impacted by favorable discrete items that included the settlement of prior-year tax audits. So overall first-quarter net income decreased 8% to $66 million.

During the first quarter we invested $117 million to repurchase about one million shares of our common stock at an average price of about $117 per share. We ended the quarter with $376 million remaining on our share repurchase authorization.

First-quarter earnings per share increased to $1.22 from last year's $1.21 which included an $0.11 benefit from the Spanish joint venture acquisition. We generated higher operating income this year and operated with a lower share base which more than offset the impact of a higher tax rate, increased interest expense and nonoperating currency related losses compared to gains last year.

Now turning to our cash flows and balance sheet. For the quarter, we generated operating cash flow of $97 million compared to $86 million a year ago. We ended the quarter with $303 million in cash compared to $241 million last year and debt of $542 million compared to $153 million a year ago.

Our inventories increase 16% to $602 million. The year-over-year increase primarily reflects investments we've made to ensure availability in some of our best-selling watch brands as well as higher levels of leathers.

Accounts receivable increased by 6% to $290 million and wholesale and DSOs were roughly flat compared to the prior year. In the quarter, we invested $22 million in CapEx primarily to support new and remodeled stores along with system investments. Depreciation and amortization expense totaled $23 million for the quarter.

Moving now to our outlook. After achieving our sales expectations in the first quarter, we feel we are on track for the full year. We continued to expect strong growth coming from our watch and jewelry businesses with both Europe and Asia continuing to gain share. Our biggest challenges are the retail environment here in the US and jumpstarting our leathers business.

As we said on our last call, we anticipate relatively consistent sales growth for the remaining three quarters now that the extra week is behind us. For the second quarter we expect sales growth between 8% and 9.5% and continue to expect full-year sales growth between 8% and 10%.

With respect to gross margin, given the strong mix of high margin products, international mix and the impact of last year's acquisitions, we continue to plan full-year gross margin expansion, in fact slightly better than our previous expectation. These tailwinds should be partially offset with traffic driving promotions in our outlets and the impact of clearing leathers. For the second quarter however, we expect gross margin to be roughly flat as favorable mix will likely be offset by outlet promotions which began later last year and the impact of off-price sales where last year's second quarter off-price volumes were the lowest of the year.

This year's stronger gross margin will allow us to invest strategically in our business and maintain our operating margin structure. While we expect to operate with a higher expense rate than last year, our goal continues to be to create efficiencies in more developed areas of our business to fund investments in growth opportunities. We view this year as a transition from investing in infrastructure to investing in areas that can fuel our future growth.

Based on our plans, this year's expense deleverage will be mainly driven by investments in brand building, customer engagement, marketing and demand creation including the initiatives that Kosta shared. These are important investments that should benefit us in the long term and we are committing to them now even though they do consume flexibility in achieving near-term results considering so much of our annual sales volume is generated in the last several weeks of the year.

To a much lesser extent, the build out of our China infrastructure and Skagen team should also result in some modest deleverage this year. Based on this year's plans and sales expectations, however, our goal is to achieve leverage on the rest of our operating expense structure.

In addition to the initiatives that are affecting the full year rate, we do expect our second-quarter expense rate will be significantly higher than last year�s. This will result from the timing of many investments we made during the latter part of last year as the well the impact of our display and fixture rollouts which we are increasing and rolling out earlier this year.

We do expect the expense rate headwinds to abate as we move into the second half of the year with the potential for overall leverage in the fourth quarter given our current sales expectations. Therefore we expect operating margin for the second quarter in the range of 10.5% and 11%. As we noted on our last earnings call, we continue to anticipate earnings to be down in the second quarter and expect diluted earnings per share in the range of $0.90 to $0.97.

Overall for the full year, we continue to expect operating margins in the range between 16.5% and 17% with improvements in gross margin offset by the higher expense rate. We are now planning 2014 with the tax rate around 31.5%. We are planning assuming that currencies remain at roughly at prevailing rates, which would result in higher nonoperating expenses than we assumed in our previous guidance.

We continue to expect earnings to grow and accelerate as we move through the second half of the year and reiterate our expectations for full-year diluted earnings per share in the range between $6.90 and $7.30. Finally, we continue to plan annual capital expenditures in the range between $110 million and $120 million and anticipate annual depreciation and amortization expense will be about $98 million. So now we will turn the call over to the Operator for your questions.

(Operator Instructions)

Simeon Siegel, Nomura Securities.

Can you quantify the comps by geography and maybe talk about your store expansion strategy? How many stores and concessions are you planning this year and what format? And then Dennis, did you quantify the impact of the extra week this quarter? Thanks.

Yes, the comps were -- overall the comps were as we said down on a global basis from the direct business. Down in the Americas though they were positive both in Europe and the comps were also positive in Asia as well.

The last part of the question, we didn't actually quantify the impact of the extra week. We did say on the last call, if you remember, that the extra week is in January which is one of our slowest months. So if you straight line it in the first quarter you probably will be overstating the impact of that extra week.

Okay, great. And then anything on the store expansion for the year strategy?

Our plan this year is to open -- we're continuing to focus on outlets and international stores; that's where the bulk of our expansion will be. If you look at the last three years, the full price accessory stores have been roughly flat. We've been replacing as we close. But our strategy continues to be as we open stores to be focused on outlets and international stores.

Great, thanks. Good luck, guys.

Thanks.

Oliver Chen, Citi Research.

Hi, congrats on a solid quarter.

Thanks, Oliver.

Regarding maintaining your full-year guidance, you did exceed your guidance for Q1. So where is the incrementality in maintaining the full year?

And also as a follow up, could you walk us through the typical license renegotiation process and the catalysts we should think of, about as you undergo looking at that with Michael Kors. Thank you.

Yes, starting with the first. Relative to the year, we did slightly beat our expectations for the year. The margins were a little bit stronger than we had planned going in. We did -- we are planning to reinvest some of that in some of the initiatives that Kosta mentioned on building awareness for the FOSSIL brand.

But I think if you step back, the way we're looking at this -- not trying to put too fine a point on it, but the way we look at the year the first quarter is a relatively small quarter. We have a lot of time in front of us. The large portion of our revenues come towards the end of the year. So we're thinking about the year in roughly the same terms that we were thinking about the year two months ago when we first talked to you.

Okay, thank you.

Anna Andreeva, Oppenheimer.

I was hoping to get more color on what drove decline in watches at your own stores. Was that North America, was it across regions? And did comps and watch performance improve here in the second quarter with later Easter?

And then maybe talk about some of the buckets of SG&A spend as you're obviously reinvesting in the business. Maybe quantify the advertising spend this year and should we start getting some SG&A leverage in 2015? Thanks so much.

Trying to remember those. The watch comps were down overall. I think probably the easiest way to think about that is that's coming from our retail stores where traffic has been down.

So when traffic has been down in the double digits then you would not be surprised to see the watch comps down. We have been -- particularly in the US we've been able to convert better but not sufficiently to offset the impact of the lower traffic.

And just on SG&A maybe some of the buckets of the spend? Thanks so much.

Again the way we're looking at SG&A this year is based on our plans we think we will be able to achieve leverage on the overall operating structure. If you go back and think about the way expenses were timed last year, there was investments that were made in the back half of last year.

Things like we outgrew our structure in Asia and opened a new office building. We have been adding to the teams here. Building out the brand teams, building out the regional teams.

A lot of that was in the back half of the year. We need to fully lap that this year which is going to create some headwinds until we get to the back half of the year.

But overall our goal this year if sales behave and come in as we are planning them that we should be able to achieve some leverage on that overall based structure. Where we are then redeploying that is in a lot of the areas that we talked up just a few seconds ago.

We're building out brand, we're investing in brand awareness, print media campaign specifically for Fossil. Expanding our digital and social media, CRM customer relationship management, that's an important initiative for us longer term to get us better understanding and awareness of the customer. And ultimately get us better analytics and allow us to communicate much more directly and use that as a vehicle to drive traffic. We expect advertising spending will be higher this year and that should create awareness for all of our brands.

The other thing too last year we were pushing -- we pushed some of the display and fixturing initiatives later in the year. We're actually going to invest more in displays and do it earlier this year. That's among the things that's giving -- putting some pressure on the second quarter specifically is that a lot of that change is landing in the second quarter.

Kosta mentioned on the call too we're building out our Skagen team. China is still an initiative, both of those latter two will be less impactful for the year than the others. So again, the way we view this is that this can be that year where we reach that inflection point from investing in structure, investing in growth.

Terrific, thanks.

(Operator Instructions)

Omar Saad, ISI Group.

It's interesting to hear a lot of your comments and conversations around this accelerated investment theme. It's not that the Company's been under investing in the past, I wouldn't say, but can you talk about the timing, the catalysts, the philosophy about reinvesting in the business? Why accelerated commentary around it now?

Are you seeing returns in some of the existing shop-in-shops that you've rolled out and fixturing that you�ve rolled out that give you greater confidence to make those investments now, also around the marketing too? Thanks.

A couple things, as you know we have over the last year or so added an enhanced marketing team to the Company that are very proficient at consumer insight segmentation, research, social media, digital media, advertising and the measurement of all those things. The whole idea is put that functionality in place and do testing on different ideas of ways to create more demand.

We basically have been more of a pull organization, great point-of-sale, customer experience, great flow of inventory. We think that we can -- we have the opportunity to turbocharge the sales a bit by adding some demand creation. And if you specifically look at Fossil, and you look at the platform it's got globally with a lot of points of sales, our own stores are, we are in a great position.

Our research says that we have a lot of fans for Fossil. Customers love the brand, they love all the categories, they want us to be more aspirational and tell a clearer story. We even -- and some of our research says that we have the opportunity to raise some prices in some situations.

So everything tells us it's a go. So we are somewhat at an inflection point in the Company. We over the past few years have been investing in infrastructure for future growth, now I think we're going to convert more to investing in demand creation for maybe a faster growth track.

So we think we're in a great place and we're going to be spending some time and energy and resources doing it this year and more to come as we move on. The whole idea behind it is that we think it can be very beneficial and also very measurable which gives us the opportunity to tell a different story the next couple of years.

Thank you, Kosta.

Dorothy Lakner, Topeka Capital Markets.

I wondered if you could talk a little bit about the leather category and what you think you need to do to really get that going? Obviously the environment in department stores has been highly promotional.

So what do you do from here in terms of both the product and then to get around that highly promotional nature of the department store business? Thanks.

Well, this is obviously a very promotional and competitive environment. And we are actually showing some song results. We have in the first quarter in our own stores, we had a positive comp in our leather goods. And if you look at the product in our stores and you see it online, you see it's an improved product.

We also have over the last six months to a year have an enhanced design team. We've got some new design resources in there and it's starting to really look better and I think you'll see that over the next couple seasons. I think we're in the right place especially if you consider where the brand is positioning relative to the environment and our ability to do more brand building, et cetera, create more demand I think it's going to be helpful.

We also are going to be investing as we mentioned in shop-in-shops in department stores to create a better customer experience, a better environment. We also will support those with sales, with staff, et cetera, to try to turbocharge those sales, but we think we're in the right place for ongoing growth and we'll look to see how it plays out.

Great. Thanks and good luck.

Matt McClintock, Barclays.

Kosta, I was wondering if we could talk a little more about the merchandise and innovation in watches that you're putting in today -- out today. If I recall correctly from the analysts day you were talking about getting behind certain stories more meaningfully. And I was wondering if any of those stories today are resonating in a particularly meaningful manner that we should maybe pay attention to or keep our eye out for? Thank you.

Yes, I think that's modus operandi in which we operate. And each brand has maybe different ideas or different stories they're telling that we actually are telling them I think with more clarity. As you know we have a lot fewer SKUs than we did two years ago in watches. So our ability to tell stories clearer I think is one of the things that's helped our growth and helped us gain share and we'll continue to do that.

But some of the ideas that the different brand teams are generating, some of it comes from the brands themselves and the initiative they have in place, the stories they want to tell. Some of it comes from our own R&D group, whether it's new materials or new ideas. And in some cases there are commonalities across brands, there are certain things that resonate with every brand customer and there's things that are somewhat more attributed to certain brands. But the idea of being able to tell some story with a brand ID at the point-of-sale is really what's driving sales.

Rick Patel, Stephens Inc.

A question on jewelry. You mentioned narrowing the wholesale distribution given some promotional concerns. Can you elaborate on that and perhaps talk about any potential impact that will have on sales and margins as we think about the rest of the year?

As we talked about with jewelry over the last several years, jewelry in the United States market is quite different than the category is in Europe for example. In Europe, we typically sell a higher level of quality and price point and it's done at regular price in a more branded jewelry environment. In the United States, the stores -- jewelry departments have typically in the past been very promotional, very much lower end, more costume jewelry in effect. And because of that we are actually pulling Fossil jewelry out of the US department stores and it will be only in our own stores and less distribution.

It really is too messy of a market for us right now to really participate. So we're hopeful that over time that our higher level of quality in the regular priced jewelry business would resonate in the United States.

And we're actually very encouraged by our initiatives with Kors in the United States, Kors jewelry, which is at that higher level and is resonating with customers and showing strong growth at regular price in the United States. So over time, this whole paradigm of how the department stores do their jewelry business may change and Fossil might be an entry at that point.

And we have contemplated that in the current year guidance.

And to clarify that do you mean pulling back on the FOSSIL brand or Kors or both?

No, FOSSIL Brand. Kors is actually selling extremely well and we're expanding that and building more shop-in-shops in the United States.

Thank you.

Lorraine Hutchinson, Bank of America.

I wanted to follow up on the smart watch opportunity. Can you provide us with some idea of expected timing? And then also any discussions that you've had with your brands about how they plan to roll out smart watches if they do?

Well it's in very early stages. So we're in the middle of discussions with many different companies and with Google as a facilitator to develop ideas for products. So it's really too early to say.

Except the one thing I would say is that we definitely will have some products. There's a lot of great ideas and brain power working on this. There's certainly a lot of interest on the consumer's part.

But we definitely will have some stuff. It's too early to tell and we'll keep you posted on that.

In fact your question about brands, I think all of the brands that we are associated with are interested in some point because there is a lot of opportunity I think to tell different stories for different brands. So we're keeping them posted on our progress and some brands may be interested in some type of product and some others. But it gives us an opportunity across our portfolio of brands to maybe have different technology products for different brands.

Great. Thank you.

John Kernan, Cowen and Company.

Can you comment on how you see the health of the fashion watch category in general in the US Wholesale channel? You've been pushing it seems like more product into the off-price channel and how are your wholesale partners and the department stores feeling about allocating more space to watches in general?

Well, the category over the last five years is many times the size it was, so there have been a huge amount of growth in that and obviously the growth rate has slowed down. It's still a very important category, high-margin category. And in terms of adding additional space where we see the stores that are remodeled, et cetera, we see the watch department get bigger and we think that's prudent. So we think it's still a very strong category.

Having said that, our plans are we're not really expecting to get big increases out of the US market. We are -- if we're going to -- our plans are to grow double digit over many, many years and that's mostly double digits in Asia, maybe singles in Europe and the US. So we're not really expecting the business to be phenomenal in the US.

One thing I would reiterate is we do have research from Euromonitor that says the last five years the watch business has grown 5.1%. They expect the next five years to grow at 5.6%. So our business model is blocking and tackling, gaining space, gaining market share while we're building out a much larger opportunity for Asia

Dennis, a lot of -- obviously you were very active in the share buyback in the first quarter, can you comment on what share count you expect to finish the year at? Thanks.

We didn't specifically give a number. What we have said --last year we invested pretty heavily in the share repurchase program. At the same time we did add a bit of debt to the balance sheet. We did say on our last call and it remains true that we expect to be continuing to invest in the share repurchase program this year, but not to the same levels that we invested in last year.

Okay, thanks, good luck.

Thank you.

Erinn Murphy, Piper Jaffray.

Following up on the strength of the watch category, would love to hear in the context of Baselworld a few months ago what your teams have learned? What are you seeing in terms of fashion trends out there that are top of mind going forward?

And then Dennis for you, a follow up on Oliver Chen's question. I'm not sure if you answered it in terms of the -- how you typically approach some of the license re-negotiations. I know there's a lot of interest in the Michael Kors license as that comes up for renewal in 2015.

Would love any context of how the 2010 negotiation went and what we could be looking for going forward. Thank you.

A lot of the new things at Basel were more interest in, obviously you could expect Swiss watches. So there was -- we had a lot of interest in Emporio Armani Swiss, it was probably I would say the most well-received brand that was launched there and got a lot of excitement. And we're flowing product in the market right now, so it was a lot of momentum behind that brand.

In addition to that, the Tory Burch launch which we did in Basel which was a very limited distribution, mostly their stores and a few targeted other stores globally, created a lot of excitement because of the specialness of the brand and the product we did. And the price points are starting at $350, going to $1000. It's a Swiss made brand.

It's an opportunity to create a new Swiss business based around a brand that's very strong and growing across the world. So I would say those two things were very big in the Basel market.

The other thing you see is increasing numbers of automatics and complications. And we are continuing with our investments in Switzerland making our own automatic movements and being able to facilitate our wherewithal to develop the Swiss business, put automatic movements in the market place and distribute them around the world. Obviously a lot of that's going to go to Asia, but there's increasing interest in automatics and Swiss made in the US and in Europe.

As far as the discussions about the renewal of the contract, we still have a year. And a half. We have a great relationship with the Michael Kors company. The business is very, very strong right now.

We're really focused on putting strategies and resources in place in order to develop the business all over the world. There's a lot more opportunity in terms of not only around the world, but in the US. We're developing an immense business.

Our consumer insight shows us that the customer is willing to pay even more for men's watches. So there is the opportunity to put automatics in there as well as Swiss made at some point. The jewelry business is going very strong and we are building shop-in-shops and more distinctive distribution around the world because the brand is clearly going to continue to grow. So all in all, I say we have a great relationship with them across the entire Company, theirs and ours, and we expect it to continue to do business with them.

Great, thank you, guys.

Ike Boruchow, Sterne, Agee.

Sorry if I missed this, Dennis, did you comment for the quarter what the concession comp was for Q1 and also the impact of sales with the extra week that you got?

We didn't mention either the concession comp overall was -- it was positive, we didn't specifically quantify it. And we didn't specifically quantify the extra week, but we did say the way to think about it is it takes place -- that extra week takes place in January which is a relatively slow month for us. So if you try to straight line it off of the fourth quarter, you probably will overstate it.

Okay, great. And then as a follow up, I know you don't -- not to disclose the specific numbers but can you talk to us about in the US department stores, the wholesale margins maybe that you're seeing right now versus what's embedded in your guidance for the remainder of the year?

We've noticed some additional friends and family and discounts like that. I'm curious if you're sharing the costs with the department stores -- if -- who's paying for it? Any color you could give there would be helpful.

I think the best way to look at it is -- and we don't participate in those promotions. So that activity shouldn't have an impact on our overall margin structure.

The drivers of our margin this year -- we're expecting tailwinds coming from mix -- regional mix, product mix, a little bit of currency, some offsetting costs. The changes if you want to think about margin as you go through the year, we lap the re-engagement of price towards the beginning of the third quarter. If you remember last year, we re-engaged so that we would make more room for our made for product in the outlet. So we've got time to before we lap that.

We also increased promotional activity to drive traffic in our outlets towards the back half -- back part of the third quarter so we have that in front of us. So once we clear that then you get the full benefit of those tailwinds.

Great. Thanks so much.

David Wu, Telsey Advisory Group.

The China sales obviously very strong this quarter. Can you perhaps give us an update on the overall China business and really how the middle class is responding to the non-Swiss fashion watches versus the Swiss made?

And how much of the growth that you're seeing is coming from new distribution versus same door growth? And how should we think about the cadence of distribution gains going forward especially as you establish more local distribution partners in the region?

Well, our business in China I would tell you is obviously growing very fast, but really too small that we'd be impacted too much negatively by negative influences of GDP growth or feelings about watches in general. So we -- really in the early days still and just building distribution. We have a big initiative in place really to increase productivity of existing concessions as well as building out new ones.

But we are continuing to believe and it's showing up in the numbers that this whole idea of lifestyle branded watches in China is going to be a big opportunity. It's too compelling, the brands are all investing over there, a lot of them are already well known. There's a number of boutiques being built by all our partners.

We are building additional infrastructure and distribution capabilities to really capture the market in a bigger way. So all things that really positive to us as far as China goes.

Liz Dunn, Macquarie.

My question was on this discussion of narrowing the wholesale distribution. I heard you on jewelry, did I understand you correctly that that's also happening for the leathers business and maybe a little bit about repositioning for Skagen in the US?

How much of this is your own strategy versus the department stores maybe taking a stand on some of this product? And do we have an ability over time to reposition these businesses to see door expansion in the future or are they permanently reducing the wholesale door expansion?

Well, Skagen as an example, there's a customer that we've been selling to that we are over time going to discontinue. So it's going to be a change in the strategy. We actually are getting especially fall additional distribution for Skagen in the United States in department stores, et cetera. So it's really we're dropping some distribution we don't want and we're gaining some that we do want.

And especially when you consider additional categories we have in leather goods both men's and women's, we're going to gain a lot more distribution for Skagen. So we're going to be in leather goods departments, men's and women's in department stores in the United States in addition to just the watch department. Of course, jewelry in some stores as well.

The jewelry thing we described at Fossil is really we think a -- it could be a something that is -- there's an opportunity for us to get back in at some point and we're not really targeting any specific date.

The other thing I would say is in Europe, we have also been really looking closely at our distribution there and closing smaller, less productive doors. And I think that the ongoing benefit we're getting from that is increased sales in the top doors which obviously we win in the end, it ends up being more sales for us. So our distribution is changing pretty much all the time. We're moving things around but generally in the right direction and it looks like it's all going to be a big plus (inaudible).

Edward Yruma, KeyBanc Capital Markets.

Two quick ones. First on the shift from infrastructure spend to demand creation, is it your intention that this is a more permanent step up in demand creation and marketing expenses? And then two, on the leathers business, do you think that this is a product issue that's driving the weakness or do you think again this is a brand perception or marketing issue? Thank you.

On the infrastructure issue, and what we're trying to do basically is benchmark other companies our size and look really closely at our global organization and understand exactly what the SG&A should be and really be as efficient as we possibly can. As you know we had a number of technology initiatives the last several years to make the Company more efficient.

So as we scale, if we can hold the investments down it would enable us to fuel more growth by spending additional funds on that. So in our mind, it is permanent. We think it can get us to a better place.

As I mentioned before, we are going to have measurability in it to make sure that we're getting the results that we expect. But in our minds, it can be a pretty big issue for us to enable to speed up the growth.

In terms of leathers, I would say it's two things. One is we had some product misses. We, over the last couple years, had -- we had been on a cycle where we were growing very quickly with a certain type of look and the look changed. And we somewhat struggled over the last year to really get back on track.

In addition to that, it's a very, very difficult environment especially in the United States. It's very encouraging to us to see in the US, in all our stores globally, to see comp increases in the first quarter because we think the product looks better and the customer is obviously voting that way.

So we think we've got some ideas there that we can build on, but we'll keep going. It still remains to be one of the biggest opportunities in the Company. Our leather goods business has a huge runway ahead of us and we just got to get our product and our ideas on track and we think we have a big opportunity.

Great, thanks so much.

Barbara Wyckoff, CLSA.

Could you talk about how many Emporio Armani dedicated points-of-sale you had at the end of first quarter versus last year? And then looking back, if you could do over the quarter are there things you might have done differently?

You're talking about Emporio Swiss, or are you talking about Emporio Armani?

I'm sorry. Points-of-sale for Emporio Armani.

Yes, we don't have the numbers in front of us.

We can follow-up with you on that, Barbara.

Okay, thanks. And then if you could do over the quarter?

I guess we would probably point you back to the areas -- leathers we�ve talked a lot about, but in terms of areas of the business where we see the greatest opportunity for improvement as Kosta just mentioned, leathers is clearly there.

Okay. Thank you.

Thank you. I'd like to turn the conference back over to Mr. Secor for any closing remarks. Please go ahead.

So thanks, everybody, for joining us today and for your interest in the Fossil Group. And we're looking forward to speaking with you when we hold our next quarterly conference call which should be on the 12th of August. Thank you very much.

Thank you. Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation, you may now disconnect.