Fossil Group Inc (FOSL) 2014 Q4 法說會逐字稿

Good day and welcome to the Fossil Group Q4 2014 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Eric Cerny. Please go ahead sir.

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

I'd like to remind you that information made available during this conference call contains 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 on 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 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 will begin today's call with our prepared remarks and then open the call to answer questions.

As we look back on 2014, we are pleased to conclude another year of solid sales and earnings-per-share growth for the Fossil Group. The strength of our diverse business model, our team's disciplined execution of our strategies, and our strong financial position drove overall results within our expectations. We returned value to our shareholders through the continued execution of our share repurchase program while navigating unfavorable changes in currency at the end of the year. Importantly, we delivered strong results for the year while continuing to invest in the business to fuel future growth. And we drove efficiencies in our operations that position us to deliver solid returns for our shareholders well into the future.

2014 included an 8% topline increase to $3.5 billion, an 8% reduction in our share base as a result of continued execution of our share repurchase program, and we delivered $7.10 in earnings-per-share, an 8% increase over last year.

Changes in foreign currency aside, our fourth quarter included increased sales, robust growth internationally, very strong gains in jewelry, operating margin expansion, double-digit increase in earnings-per-share, and was highlighted by continuing strength in our Fossil and Skagen lifestyle brands. That said, we are not entirely satisfied with our fourth-quarter performance, particularly as it relates to our North American business.

We begin 2015 intensely focused on taking advantage of the many opportunities available to us to drive future growth, including enhancing our multibrand portfolio to drive growth, investing in strategic initiatives to further grow our own brands, and developing new categories that we believe can drive topline growth.

We reflect on this past year as one in which we achieved our goal of maximizing the strength of our portfolio of brands through our global distribution platform. We believe our portfolio of highly desirable brands, our continuous innovation, disciplined execution and considerable whitespace opportunity by brand category and geography has us well-positioned to continue our successful growth for many years in the future.

In 2014, we made solid progress on many key objectives that we will build upon in 2015. We grew our own lifestyle brands, Fossil and Skagen. Our Fossil brand grew at 3% for the year with growth in all regions. We leveraged our position as a leader in lifestyle branded watches and drove solid high single-digit growth in the watch category for the brand. The brand's growth was strongest in Asia with strong high teen growth in the region.

Outside of watches, the year included the successful repositioning of our luggage business. We improved our performance in the category, particularly women's handbags, where we concentrated efforts to add to our design team and bolstered our product to gain broader consumer appeal. Our elevated assortment is resonating with customers, particularly in our retail stores where we have the best opportunity to clearly communicate the brand story and in improved presentations through shop-in-shops within US department stores.

We continue to believe Fossil jewelry is an opportunity for growth and having spent this past year repositioning our US distribution, we believe we are well positioned to capitalize on synergies that jewelry shares with watches. In fact, the overall jewelry category is benefiting from the influence of lifestyle brands and our compelling brands and developed distribution infrastructure can facilitate growth in this category.

During the year, we turned our attention to directing investments toward demand creation opportunities that we believe will yield dividends for the brand in the future. We increased investments in our CRM capabilities and we believe we are taking the right steps to achieve our goal of becoming world-class over time.

We also invested in brand building and demand creation activities, including marketing initiatives for Fossil. These are activities that we believe will broaden our customer base and drive increased interest in market share gains for the brand.

This year, we made solid progress advancing Skagen. We achieved a 14% growth with sales accelerating in the back half of the year. The brand saw balanced growth across geographies with watches and jewelry posting solid double-digit gains. We drove solid growth in jewelry, successfully launched handbags and opened two new high profile store locations in Frankfurt and New York that are performing well. These stores, along with our remodeled stores in London, allow us to showcase the full array of Skagen's products in an environment that reflects the differentiated and unique position of the brand. Additionally, we enhanced our customers' digital experience with the brand with the launch of a redesign Skagen website which includes improved functionality for the customer and incorporates rich brand content designed to bring greater awareness to the brand.

In our portfolio, we continue to leverage our competitive strength in branding, design, sourcing and distribution to gain increased market share in the growing watch industry. Our multibrand watch portfolio grew 9% for the year with the strongest gains internationally. Across brands, we saw strength in long-standing brands as well as newer brands, with Michael Kors, Armani, Diesel and Marc by Marc all driving growth. Our launch of the Tory Burch watch collection was highly successful and highlighted our design and Swiss production capabilities. We introduced a distinctive Swiss watch assortment to a strategically targeted global distribution and expect to build upon the initial success of the line in the spring season.

In addition to Tory Burch, we advanced our Swiss initiative with the spring launch of Emporio Armani Swiss Made. The Swiss opportunity represents one of the important whitespace opportunities we see available for lifestyle brands, and given our sourcing and production capabilities, we are well positioned to take advantage of the long-term opportunity with our licensed brands as well as the continued execution of Fossil Swiss Made.

We also successfully executed 10-year renewals for two of our long-standing licenses, Emporio Armani and Michael Kors, solidifying our position as the natural partner for the best global fashion brands.

And today we announced another exciting development with the addition of Kate Spade. This brand is clearly resonating with consumers globally and it's positioned for long-term growth. We are excited to leverage our expertise in design, production and global distribution to grow their watch business and expand their brand around the world.

In another whitespace opportunity, we advanced our position in wearable technology with two very important partnerships with Google and Intel. We are partnering with the best in technology to leverage their knowledge and expertise and enable our portfolio of lifestyle brands to develop fashionable connected accessories. Our expertise in design and creativity, coupled with our partners' expertise in technology and innovation, will enable us to introduce wearable technology in a fashionable and scalable way.

We are working towards integrating technology into our accessories in a manner that keeps our focus on our core customer. We believe she prioritizes fashion but desires improved functionality.

As we look forward to introducing connected accessories later this year, we are working towards the larger objective of leveraging our strengths and leadership position in fashion watches to become the point where fashion, design and technology converge.

We operate a very diverse business model with many levers of growth. We are a globally diverse growth company and we operate in a growing industry. Our results this year continue to highlight this strength.

We achieved growth across each of our regions this past year. This includes the Americas, a region that is nearly $2 billion today and includes our most mature market, the United States, where we already have nearly 50% of the share of the watch market in the under $1,000 price point.

In our international markets, as lifestyle brands take share from traditional watch brands, our goal is to replicate the success that we've experienced in the United States. Europe continued to be strong for us this past year with 13% growth for the year and sales nearing $1.2 billion. This growth was balanced across markets, and we continue to have opportunity across Europe as we increase the number of our brands sold through existing doors as well as expanding into new markets.

In Asia, sales grew 15%, approaching $600 million with balanced growth across markets. Outside the United States and particularly in Asia where we have a much smaller share of the existing watch market, the trend towards lifestyle brands is emerging. As it does, we believe the market dynamics are in our favor. And given the investments we have made in infrastructure in the region, we are poised to capitalize on that trend. We believe the region and particularly emerging markets in the region represent a significant opportunity for us over the long-term.

As the world becomes increasingly globally branded, our watch portfolio continues to be a powerful tool to gain share in the growing global watch market. As an innovative category leader with world-class supply chain and a global distribution network of more than 30,000 doors, we are uniquely positioned to work with the best lifestyle brands around the world.

Our goal as a company is to build a world-class entity of excellence where creativity and entrepreneurship are carefully balanced with operational discipline to enable us to deliver solid returns for our shareholders in the near and long-term. As a company, we are focused on using all of our resources to drive shareholder value. Growth and efficiency are key components of that and you can see from our strategies and results that we are focused on those drivers.

We are also committed to leveraging our strong financial position. Last year, we invested $435 million to repurchase 4.1 million shares. We know this is an important program for our shareholders and we are fully committed to it. We are now operating with a share base that is more than 25% lower than it was just three years ago.

Before I hand it over to Dennis, we would like to thank all of our associates for their inspired contributions this past year as well as our partners and investors for their continuing support. As we reflect on the last year, we are pleased with our results but excited about our ability to improve on the Company's performance.

As we move ahead to 2015, our priorities will be very focused on the most important initiatives to driving growth. We will invest to ignite our own brands, Fossil and Skagen, to increase brand awareness, increase demand and accelerate their growth. We will invest in our digital capabilities to improve the customer experience online and increase our omni-channel capabilities. And we will leverage our new partnerships to advance in the wearable technology space with a goal to launch connected accessories later this year.

We are well-positioned as a leader in a growing industry with a strong global footprint and significant competitive advantages. Our diversification gives us access to multiple sources of growth and supports our goal of predictable earnings and cash flows. Our operating model gives us opportunities for leverage and efficiencies to drive greater profitability, and our strong financial position gives us access to the fuel that we need to drive our business and to deliver solid returns to the shareholders.

Now I will ask Dennis to walk us through our results and the outlook for 2015.

Thanks Kosta and good afternoon everyone.

Fourth-quarter net sales increased 3% in constant dollars and on a recorded basis were flat to last year at $1.065 billion. Sales for the quarter were below our expectations as increases in our international businesses and a strong performance in our direct business were offset by a decline in our North American wholesale business.

For the quarter, we delivered earnings-per-share of $3, a 12% increase over last year. Lower-than-expected sales were offset through expense reductions which drove operating income growth, virtually all of which was consumed by currency headwinds. We benefited from a nonoperating gain as well as a reduced share base.

The Fossil brand grew 3% in constant dollars and was driven by an increase in watches and leathers partially offset by a decline in jewelry. We continue to be encouraged by the performance of the Fossil leathers category, particularly the women's handbag business, which delivered strong comp results in our own stores during the quarter.

Skagen sales grew 19% in constant dollars with strong double-digit growth in watches, an increase in jewelry, and our handbag assortment continued to do well following its third-quarter launch. Our multibrand watch portfolio grew 2% in constant dollars with strong performances internationally.

In North America wholesale, sales decreased 11% to $356 million and decreased 10% in constant dollars. Our US sales performance accounted for the decline, nearly half of which came from lower off-price and liquidation shipments and the other half from lower shipments to major department stores. Shipments to boutiques, a much smaller business, also declined.

Our multibrand watch portfolio saw the greatest volume decline for the quarter, followed by leather, which continues to be negatively impacted by a highly promotional environment while jewelry grew over 20%.

While we are disappointed that we didn't maintain our third-quarter sell-in momentum in watches, we believe that the change in sales trajectory was more a function of department store inventory than underlying sellout. The data we receive from our US department store partners suggests lower inventory levels at quarter end.

Looking back on the full year as well as for the fourth quarter, we estimate that our watch business in department stores was modestly down with encouraging trends from many of our brands, including Fossil and Skagen. In leathers, while shipments declined in the quarter, the retail performance of women's leathers, the largest part of that business, was down only slightly, having improved steadily each quarter in 2014. We feel very strongly about our new product and our goal is to see the same success in wholesale that we are already experiencing in our direct business.

Overall for the full year, our North America wholesale business was essentially flat. In Europe wholesale, sales increased 3% to $281 million and increased 8% in constant dollars. Our European growth was driven by growth in our multibrand watch portfolio and jewelry. We posted gains in most of our European markets with the strongest performance in the UK, Germany and distributor markets while Italy and Spain declined. For the year, European wholesale sales increased 12% in both constant and reported dollars.

Sales from our Asia wholesale operations increased 5% to $115 million and increased 10% in constant dollars. We posted gains in our own brand as well as our multibrand watch portfolio. We drove growth across most of our markets with particular strength in India, Japan and Australia. Our duty-free business was strong while our Korean business declined. China continues to be challenging both in terms of distribution expansion as well as softening economic trends and our business in Hong Kong has not been strong due at least in part to some of the political upheaval there resulting in fewer Chinese tourists.

Concession sales increased during the quarter while concession comps overall were down. We ended the quarter with 334 concessions in the region.

For the year, Asia wholesale sales increased 11% on a reported basis and 13% in constant dollars. In our direct business, fourth-quarter sales increased 12% to $313 million and increased 16% in constant dollars. Sales growth was driven by store expansion and an 8% comp increase with all three regions delivering positive comps and with increases in jewelry, leathers and watches.

We are very pleased with our retail business during the quarter, particularly in the US, where we took advantage of improving holiday traffic. With a great customer experience, compelling assortment and very targeted and tested promotions, we drove strong conversion and delivered a solid positive comp, the first positive comp in the United States since 2013.

Our performance emboldens us to believe that we are on the right track with the Fossil brand. Our goal is to build on this momentum, both in our stores and online.

During the quarter, we opened a net 12 stores, primarily outlets, bringing our Company-owned store count to 593 at quarter end.

For the full year, direct sales increased 13% on a reported basis and 14% in constant dollars. Comps increased 2% for the year with increases in Europe and Asia-Pacific while North America was flat. For the year, we opened a net 50 new stores, primarily international outlets.

The fourth-quarter gross profit decreased to $604 million and gross margin declined 60 basis points to 56.8%. The combination of international growth, a favorable channel mix and lower off-price volumes compared to last year all benefited gross margins in the quarter. These tailwinds were more than offset by changes in foreign currency, higher costs, as well as increased promotion levels, primarily in outlets, where we drove higher retail sales and profits with some compression in the rates.

As we talked about on our last call, we feel we have reached an inflection point in our spending, pivoting away from infrastructure investments and focusing investments on initiatives to drive growth. In the quarter, operating expenses declined 2% to $382 million with the reduction largely attributable to reversing incentive comp accruals. Offsetting that decline was a very modest increase in infrastructure spending, a small increase in direct retail expenses, as well as increases in advertising royalties and demand creation activities. We leveraged expenses by 80 basis points.

Operating income increased slightly to $222 million, including an $18 million unfavorable currency impact, and operating margin increased 30 basis points to 20.9%.

Interest expense increased $1 million to $5 million given our higher debt level.

Other income for the quarter was $7 million, which primarily relates to a $6 million gain associated with the settlement related to our 2012 Skagen acquisition.

Our effective income tax rate for the fourth quarter was 30.4% compared to 30% last year.

So overall, fourth-quarter net income increased 4% to $154 million as the decline in gross profit was offset by lower operating expenses and a nonoperating gain.

During the fourth quarter, we invested $117 million to repurchase 1.1 million shares of our common stock at an average price of $101, leaving $1.1 billion remaining on our share repurchase authorization.

Now turning to our cash flows and balance sheet, for the full year, we generated operating cash flow of $377 million and drew down a net $122 million on our revolver. We used those funds to invest $435 million in share repurchases and $95 million in CapEx. We ended the year with roughly $276 million in cash compared to $320 million last year and debt of $630 million compared to $508 million a year ago.

We ended the year with inventory of $597 million, a 5% increase over last year. In constant dollars, the growth rate was roughly 11%. Accounts Receivable decreased by 5% to $431 million and wholesale DSOs were in line with the prior year. Depreciation and amortization expense totaled $22 million for the quarter and $96 million for the full year.

Now moving to our outlook, as Kosta described earlier, 2015 is clearly a pivot year for us with investments shifting from infrastructure to driving growth. We expect roughly 75% of our new OpEx investments will be focused on building brand awareness, engaging more with our customers, enhancing our digital presence, and developing and launching products in the wearables space. We believe those investments position us well for growth, both in the near and long-term. We operate in a growing industry and we believe our design, production, and distribution capabilities make us the best partner for global lifestyle brands.

We are excited to add Kate Spade to our portfolio, an existing business that will have an immediate impact on our sales. The combination of their brand and our capabilities can be truly explosive on a global scale. We see opportunities in developing new categories like wearable tech and growing existing categories such as branded jewelry and leather.

These opportunities do not come without challenges. While notable newcomers can help grow the market by bringing new customers into the category, they might also cause some near term disruption. Managing the natural ebbs and flows of brand lifecycles can also prove challenging. However, our portfolio of diversified brands can help navigate these challenges.

Although European business has been very strong, China with its enormous potential is taking longer to develop. We expect that the factors that have driven our success in North America will play out in Europe and in Asia over time. We believe that the demographics in Asia are certainly in our favor and while the acceleration in growth may be further in the future, we are well-positioned with our infrastructure largely in place.

North America, our most developed market, poses its own challenges as we work to protect our position and seek new opportunities for growth.

Now, specific to 2015, there are several factors that are significant and impactful to our financial results and will tend to obscure the underlying trends in our financial plans -- currencies, last year's extra week, and a restructuring charge.

To better understand our outlook, our 2015 analyses are done on a constant dollar basis and exclude restructuring. We will also provide an estimate of the sales impact of last year's extra week. Estimating these factors and their impact are not precise sciences and are provided to help gauge the overall impact of these factors rather than create implied non-GAAP measures.

In 2015, we expect the overall 2014 sales trend to continue with a stronger sales growth coming from our international market. We continue to expect strong performance from watches and jewelry with both Europe and Asia poised to gain share. Overall, we are planning for continued growth in the multibrand watch portfolio with opportunities from new and recently launched brands, as well as category expansion.

We are very excited about our prospects in our international market, particularly given the performance in Europe over the past year. In the Americas, we are not planning on wholesale growth. We do see category opportunities in the region, particularly as we continue to enjoy great success in branded jewelry. In our own retail environment, we have been very pleased with our most recent performance and as we continue to invest in our own brands, our goal is to continue these trends and drive productivity improvement in our stores.

For the full year, we are planning constant dollar sales growth in the range between 3% and 7%. This excludes the impact of extra week in 2014, estimated at roughly 1.25 points of growth. For the first quarter, we are planning constant dollar sales growth in the range between 3.5% and 6%, excluding the impact of the extra week. This also includes the impact of lower anticipated off-price sales compared to first quarter of 2014. Neutralizing for last year's extra week, the timing of off-price shipments and currencies, we see the first quarter trending at roughly the full-year rate.

With respect to 2015 gross margins, we expect strong international growth to benefit gross margins, which should help offset the impact of higher costs. We believe pricing can be an opportunity for further margin enhancement and continuously evaluate our pricing strategies to ensure that our products are positioned appropriately and competitively.

We executed on a very targeted price adjustment in the latter part of 2014 and expect that the competitive environment, particularly in light of currency changes, can create additional opportunities for pricing enhancement. Beyond that, our teams continue to work on initiatives to drive supply-chain efficiencies.

Overall for 2015, our goal is to achieve constant dollar gross margin expansion. We expect modest constant dollar gross margin expansion in the first quarter and expect that our margin enhancement initiatives, to the extent we achieve them, would yield improvements weighted towards the second half of the year.

With respect to operating expenses, we plan to leverage our infrastructure and reinvest that capacity to drive growth. We feel that the structure we need to support and grow our business for the foreseeable future is largely in place. Our second-half 2014 infrastructure spending grew only slightly and we expect that trend will continue. As a growth company, we will continue to look for opportunities to redeploy resources as our business evolves and that can create some variations among quarters.

Overall for 2015, we are planning nearly flat infrastructure spending with modest growth at the beginning of the year tailing off significantly as we anniversary last year's leveling of infrastructure and realize benefits from our efficiency initiatives.

For 2015, we will continue to make significant marketing investments to support the expansion of our portfolio brands while we fund incremental investments to ignite Fossil and Skagen. Continuing to build out our digital capabilities is critical to our strategy, and we are earmarking funding to enhance those capabilities. And with solid partnerships already in place with tech giants like Google and Intel, we are poised to invest in connected accessories and support a product launch later in the year.

In 2015, in addition to our ongoing market investments, we plan to invest up to $35 million or $0.50 per share to support these critical strategic initiatives. We expect the highest relative increase for our marketing investments will come in the first quarter as we anniversary a very low level of spending last year and in the fourth quarter as we invest to support our holiday business. We expect roughly 20% of our expense growth will come from investments in our direct businesses, mainly concessions, which require far less capital than stores. We expect store related expense growth will be highest in the first quarter, tailing off as we anniversary stores added last year. Our strategy in 2015 is to expand our digital presence and open fewer stores, a net 10 new stores focused on international outlets.

Lastly, as I mentioned in my fourth-quarter review, we reduced our incentive comp expense in 2014 as we did not achieve all of last year's goals. Our 2015 expectations include an assumption of success against our 2015 goals which would then result in an expense headwind in Q4. Inclusive of all these investments, we expect our overall expenses to grow in the high single digits. We expect the highest growth rates to be in the first quarter, which also includes the impact of earlier expenses from Baselworld. We expect the expense growth will be lowest in the middle two quarters, increasing again in the fourth, given our marketing investments and expectations around incentive comp.

Taking all of these factors into account, we expect full-year constant dollar operating margins to be roughly flat to down 80 basis points as gross margin expansion and infrastructure leverage offset the impact of growth investments. For the first quarter, we expect constant dollar operating margins in the range between 9.5% and 10.5%.

As we mentioned on our last call, currencies will have a material impact on our financial results for 2015. In November, we estimated the impact on our 2014 results if the then prevailing rates would have been in effect for full 2014 year. That estimate adjusted for the first three quarters of 2014 anticipated no Q4 headwinds since the guidance assumed prevailing rate as of November. Since then, the US dollar has further strengthened against most currencies that affect us, especially the euro, which is the currency that impacts us most. The euro averaged in the mid-$1.30 in the first three quarters of 2014 and was roughly $1.25 when we spoke in November. Since then the euro's depreciation has accelerated, particularly since year-end, reaching roughly $1.14 today.

Now, the impact on the first three quarters of 2014 has more than doubled and there is a significant currency headwind in the fourth quarter as well which is the quarter in which we earn roughly 40% of our operating income. That much larger 2014 headwind will now expand further as we move into 2015, given most of our earnings growth will come from our international businesses and our gross margins will be further impacted by the rapid strengthening of the US dollar.

Based on prevailing exchange rates, we estimate that the net impact on our 2015 results, inclusive of hedging program offsets, will be roughly $1.20 per share. We will continue to look at pricing as a potential offset, so any pricing opportunities we may pursue would have a delayed impact and will primarily be dependent on the market's competitive environment. At prevailing exchange rates, we estimate the negative impact on our 2015 revenue growth will be roughly 500 basis points and the negative impact on both growth and operating margins will be more than 250 basis points. We expect a quarterly topline headwind of roughly 600 basis points until we reach the fourth quarter when the headwind will be roughly half that amount. The absolute EPS headwind should build and intensify as we move through the first three quarters and then stabilize in the fourth, where the relative currency headwind will be much smaller or the earnings base should be larger.

With respect to restructuring investments, while the process of optimizing our operating structure is always ongoing, we feel we are in the later stages of near-term infrastructure investments. In 2015, we plan to invest roughly $25 million, or $0.35 per share, to refine and optimize our structure, creating greater efficiencies and improving our retail profitability. These initiatives primarily emerge from the detailed strategic planning process that we undertook last year. These investments will include the remainder of the store closures that we announced in 2014 that were not completed by last year end. We believe these investments all have compelling near-term paybacks, including some benefits later this year, and just as importantly, will support our efforts to create a best-in-class operating platform capable of responding quickly to our many growth opportunities. We expect the vast majority of these charges will be recorded in the first half of this year with about $10 million or $0.14 per share impacting the first quarter.

On a reported GAAP basis, including all the factors I mentioned, we anticipate full-year revenues in the range between a 1% increase and a 3% decrease. For the first quarter, we expect to report revenues that are down between 5.5% and 7.5%. For the full year, we expect reported operating margins between 12% and 13%. For the first quarter, we expect operating margins in the range between 6% and 7%.

We expect full-year GAAP EPS in the range between $5.45 and $6.05 per share, which includes the negative impact of the $1.20 currency headwind, the $0.35 negative impact from the restructuring charge, and the $0.50 impact from our strategic investments. These amounts assume that currencies remain roughly at the prevailing rates and include net nonoperating gains associated with currencies, both contracts and account balances. They also assume a higher level of interest expense given increased debt, continued investment in our share repurchase program and a tax rate of roughly 31%.

For the first quarter, we expect GAAP EPS in a range between $0.59 and $0.69 per share, which includes the $0.14 restructuring charge and a $0.17 currency headwind.

We are planning CapEx of roughly $120 million. We expect that our capital investments will generally shift away from new store openings to investments to build our digital and CRM capabilities as well as incremental shop-in-shops.

Before I turn the call back over to the operator for your questions, we would like to remind you about our investor day being held in Dallas the afternoon of March 5. We look forward to sharing our long-term outlook with you and hope that you plan to join us either in person or through the provided audio webcast.

Now I'll turn the call back over to the operator for your questions.

(Operator Instructions). Randy Konik, Jefferies.

So I guess can we talk a little bit, get a little bit more flavor around the disconnect between the wholesale side of the business in North America and the retail side? So it sounded like your comments suggested that there wasn't necessarily a sellthrough issue in the wholesale channel, but more of a sell-in item. Based on your conversations with your key partners, are you under the I guess understanding, are they trying to destock or maintain conservative inventory posture ahead of the Apple watch launch in the spring, or kind of what are your conversations with your partners telling you about how they're trying to think about inventory levels and thinking about the upcoming launch of that particular watch? Thanks.

First of all, keep in mind it's just one quarter and we did have increases for the full year. Also keep in mind, in the third quarter of last year, we actually had a 9% increase in watches in the United States. So some of this may have been building stock for Christmas. We also know, as we mentioned, is that the sellout comp percent in our wholesale partners in the United States was not -- it was slightly negative down but not down as much as our wholesale shipments.

So having said all that, there's a lot of moving parts going on. The market is I think in the United States still -- we still think it's a very important category for the stores. It's extremely profitable. There's a lot of activity going on. We are launching Tory Burch and we are expanding to more doors. Kate Spade is already in there but we will be expanding it. We are hopeful to put some wearable technology in, in the space, in 2015. That could spark interest and bring more people to the counter.

But as far as the watch trend is concerned overall, Euromonitor says in the United States and globally, the watch business still grew at 4% last year. They are expecting it to grow 6% the next several years. We think we are in position to continue to gain share in a growing market and will keep pursuing that with as much innovation and branding and ideas as we possibly can.

Erinn Murphy, Piper Jaffray.

Great, thanks. Good afternoon. I was hoping if you could maybe speak a little bit more about the need to focus deeper in China as many investments you're making there, and just how you think over time you can leverage the brand portfolio that you have to really further grow that business? And then I have a follow-up for Dennis.

In China, the market, the retail environment, as you know, has been somewhat choppy the last couple quarters or so. We are still continuing to pursue new initiatives, new locations. We do have some new management in the region which we are very excited about and we think (technical difficulty) forward. But having said that, it's a very difficult, complicated market. We expect it will be a very significant opportunity for us long-term, so we are continuing to pursue opportunities and build out the infrastructure, and we are sure that it will be someday a very significant business. In the meantime, it's not going to grow quarter-to-quarter in a linear fashion. It's going to be somewhat choppy, we think, and we'll continue to pursue it.

Okay. And then Dennis, from an FX perspective, when you look at that $1.20, can you just help us think about two different aspects of that? One, how are you hedged currently and when do those start to roll off and start to adopt from a transactional perspective the significant deceleration we've seen in the euro?

And then secondly, can you speak to any of the impacts that you are seeing from your Swiss headquarters right now, just given the rapid appreciation of the Swiss franc? Thank you.

So, yes. Let me just step back and kind of give you a view of the overall currency environment here. We talked about the $1.20 headwind. Roughly half of that will come from translation. That means as we are translating our foreign earnings into US dollars, each line item on the P&L obviously translates into a lower amount. So when we consolidate all of that into US dollars, that all combines to represent roughly half of that headwind. So that's the part that we don't hedge.

Now, the other half of the $1.20 relates to the transactions in our foreign subs by inventory primarily in US dollars, so as the dollar strengthens, their cost of goods goes up and obviously their margins are reduced. Now, we do hedge that exposure with foreign contracts based on our order estimates, obviously, with the greatest visibility in the very near term. Our program runs roughly over 18 months and we dollar cost average into the rate. So the hedging offset is highest in the near quarter up to roughly 2/3 and then tails off over time, averaging just under about a half of a full-year offset as we head into 2015. So that helps offset the impact, although remember the offset is recorded below the line in other income. So that net impact is the other half of the $1.20 headwind.

Now, in addition to forwards, we've already implemented price increases, some last year with more to come very soon, and we are still working on more later in the year. So obviously their success will depend on market conditions. So, we can't yet predict the full impact. However, if you combine our contract hedges along with the price adjustments we are planning, combined they will virtually offset the full P&L impact, not the margin rate, but the transactional P&L impact of a strong US dollar at those rates. So that's the overall currency environment.

Then with respect to the Swiss franc, we are fairly automatically or naturally hedged with that in as much as our Swiss franc expense base roughly aligns with our revenue base.

Oliver Chen, Cowen & Co.

Thank you. Regarding the lower shipments, what is incorporated in your outlook in terms of how the retailers may act in terms of their inventory management? Will that trend continue and what do you include in your guidance?

Also, could you just speak a little bit to wearables? Are all your brands going to embrace this, and do you think the route to market will be similar?

And I know you have changed pricing in the past, and sometimes you've gone too far in pricing. So what gives you confidence that you can have some enhancement and which parts of your portfolio may have better inelasticity to pricing enhancements there? Thank you.

So with respect to the general assumptions embedded in the guidance, we look at the trends coming out region by region coming out of 2014 with assumptions that those trends roughly continue. We still assume, as Kosta mentioned the Euromonitor data, we understand with respect to watch category growth we see continued international growth opportunities for share gains there.

Fossil has been on a great trend recently, positive comps coming into the year, improving wholesale trends with wholesale partners. Skagen grew double digits, accelerated towards the back half of the year, branded jewelry. Leathers have been trending well for us, new brands. So there's a lot of tailwinds in there.

There's also some risks. We talked about on new entrants into the market. North America continues to be a little bit choppy for us. And you're constantly managing -- you know, there's ebbs and flows in portfolio.

So we've tried to do our best to gauge the sum total of those risks and opportunities in the range that we provide you. As we've said before, we are not providing guidance to try to do anything other than give you a range of what we think some reasonable possibilities and outcomes are.

As far as wearables goes, what we are doing basically is building a platform for ongoing growth in the category. So we are looking at both display items like smart watches but also non-display items like jewelry and potentially bracelets, etc. And we think eventually it will probably impact all brands.

One way to look at this is if we have a business in wearable technology that involves fashion with some technology, whether it's sensors or communication, theoretically, potentially, someday every watch we make could have some type of technology in it. So I expect at some point all our watches will have enhanced technology, whether it's sensors, communication. There could be apps in the community involved as well, and that's really the approach we are taking.

So, as I said, we will be shipping something later this year. The Kors Group has actually been leading on this area and have been -- and brought a lot of discussion to us about wearable technologies. We are working closely with them and we are in discussions with all our other brands about the appropriate time to bring out some products.

Rick Patel, Stephens Inc.

Thank you. Good afternoon everyone. Can you talk about the promotional environment for watches in general? I know that demand has been a bit choppy in the US. So are you seeing elevated promotions continue early in the new year and what's your outlook for the rest of this year?

And then secondly, a question on inventories. They seem to be up a bit more than your anticipated sales growth. Can you provide some context there? Is it heavy in certain categories or brands? And should we expect sales to off-price retailers to be elevated in the near term as you address that? Thanks.

First of all, on the promotional activity, watches is one of the least promotional categories of fashion products in the United States and we like it that way. And we have been doing everything we can to inspire an ongoing trend of that.

We actually think, in the fourth quarter last year, there was actually less promotional activity than there was in prior year. So we are pleased with that trend and we look forward to continuing to keep this at a regular price. Also keep in mind it's mostly a regular price business. Margins are very high for those stores. Averaging retailers are very high and we want to continue to field it with new brands and ideas and innovation and technology. That's really our idea and we think we can do that.

On the inventory side, when we look at both the inventory in our wholesale partners' stores and also our own inventory, we think we are in good shape. We ended up in our own inventory slightly up, but that was mostly because of the sales mix. But as a practical matter, Chinese New Year is coming in and our global planning organization will absorb that and we'll keep going.

Also keep in mind that we have a good part of our inventory, especially in watches, on quick response items, so it's really just the process of managing the ebb and flow of quick response items, so we should be able to work through it pretty quickly.

Ike Boruchow, Sterne Agee.

Thanks for taking my question. Two quick ones. Dennis, on the guidance for Q1 in the fiscal year, you gave us sales. I know you had commented you don't expect North America wholesale to grow. Can you tell us what is embedded for North America wholesale for Q1 and for the fiscal year? And then also around the restructuring, should we be modeling store closures as we model out the next 12 months for the DTC segment? Thanks.

Yes, so generally we didn't specifically dive to regional sales growth. I think the best way to look about it is generally we assume the trends continue coming out of 2014, the full-year trends. And we also typically, and you see that in those numbers, would expect the regions to act and grow relative to their own level of maturity.

So, the international businesses drive the most growth for us. Europe has been very strong. Asia has been growing in double digits. And North America is the region where we are not anticipating wholesale growth, are very encouraged by the retail comps, so our goal is to see those trends continue.

With respect to store closures, what we said is that we are opening a net 10 stores. Most of those stores will be overseas. In fact, we should operate with fewer stores by the end of the year here in North America. So most of or all of the growth will be international. And we will execute some closures here. That's also what some of the costs in those restructuring charges will facilitate.

Omar Saad, Evercore ISI.

Thanks. Good evening. You mentioned several times 2015 being a transition year, kind of shifting from distribution -- I'm sorry, infrastructure building mode to more of a growth mode. Asia, China kind of exploring the Fossil brand and Skagen brand opportunities to extend those brands with smart watches. You've got a few different partnerships. You've got some new brands that you've signed licenses with. But help us understand in the context of this, the US kind of core multibrand watch number this quarter. I know it's just one quarter, but help us understand. That's kind of your core most profitable business, the multibrand watch platform. Are we getting ahead of ourselves and focusing a little bit too much on the growth or how do you ensure that core business remains stable, remains profitable, remains steady? What you strategies around that, I guess both in US and Europe? I think both are pretty big businesses. Thanks.

Again, we had a 9% increase in the third quarter. And all along, we've said that the US business has grown dramatically. As you know, over the last five years, the stores are doing, in a lot of cases, multiples of what they were five years ago, and all at much higher revenue in retail. The business has really been incredible, high-margin, high impact. There's a lot of awareness of watches. People love them. The efforts we've had in other companies with branding and innovation has really been well received at really high retails relative to apparel, which has had deflation. So it continues to be a great category, but the business is very significant. And it's been one quarter where we had a tough quarter at wholesale. We didn't see the department stores having -- they were slightly down, not especially with our product, we don't know what they were totally, but not a precipitous fall. But we still think that, with all the things we have in place, Fossil and Skagen still will continue to grow. As we mentioned, Tory Burch is just in a small number of doors in the United States, it will grow. We think we can expand Kate Spade and the rest of our portfolio.

We do have -- there's a lot of opportunity with us putting more ideas and more brands and continue to make the category grow, especially if you consider that wearable technology can have a play in that. So there's a whole bunch of activity going on that we think will continue to (technical difficulty). But having said, that our biggest opportunities are outside of the United States.

Matt McClintock, Barclays.

Hi. Thank you. Good afternoon everyone. So just follow up to Omar's question, Kosta, you've been making a lot of investments in the Company over the last couple of years, I would say probably two, in terms of infrastructure. How does the advent of wearables change the way you think about those investments? And given that you're thinking wearables could potentially impact all of your watch brands, should we expect the investments now to shift into a different category of wearables, etc., than probably from where you were investing before, distribution, infrastructure, things like that? Thanks.

We think, by investing in wearable technology, it enables us to leverage the global platform we have. We sell at 30,000 points of sale globally. We have a number of brands and access to more. We have a big share, at least mind share, in the marketplace, and we think we have the capability of bringing convergence of fashion and technology together so we can make great-looking products that have an emotional attachment to customers that love brands, but also have a little extra functionality.

And if you look at, from our perspective, the huge amount of spending going on in technology products, so phones, cell phones, iPads, cell service, etc., if you look at the huge amount of spending going on in that category, and the watch business is relatively small, it's just a small percentage of that spending drops down in the watch business could have a dramatic impact on the growth of the category and make it more relevant. And we think we are sitting right in the middle of something that could be much larger. So there's a lot of moving parts.

We are very excited to be investing with our partners, both Intel and Google and others, on coming up with new ideas to engage customers, have communication vehicles and really enable customers to make their watch and their wearable technology more relevant to their lives. I think it puts -- makes the watch category much more relevant, especially when you consider the Millennials largely have grown up without watches. They had a cell phone when they grew up and they don't necessarily have worn a watch, but now with the branding and technology coming into play, we think we've got a big opportunity.

Dorothy Lakner, Topeka Capital Markets.

Thanks. Good afternoon everyone. I just wanted to circle back on the new brands that you have. Tory Burch I know you said is in just a small number of doors, so I just wondered how we should think about how that brand will expand this year. And then Kate Spade you've talked about an immediate impact on sales. If you could just provide a little bit more color on where they are, what kinds of things you think you can add to the brand at this point. Thanks.

Tory Burch, as you know, we launch last year, at it's typical when we launch a new brand that we start off slow, a small number of doors, expand it slowly based on demand and sellthrough, wait until we get the operating model correct and then we expand it. So most of our license businesses we've started have been relatively small for the first couple of years until we were ready to expand it. I think Tory Burch would be the same situation.

We are seeing a great response. We're learning a lot. The brand is unique and we think it's going to be terrific, so we are very excited about that.

Kate Spade, it is an existing business. They've been doing watches themselves. They've done a great job. They have -- it's got a good business with a strong point of view and we're very excited to work closely with them. Since it's an existing business, it already has space, etc., so we'll be able to add on that and add additional doors globally, and we would expand it. So it's a -- you could say it's a little bit further along in the process than Tory Burch is because it's been around for a couple of years, and that's we think a good thing for us and we look forward to working closely with them.

Anna Andreeva, Oppenheimer.

Thanks so much. Good afternoon. Thanks for taking our question. I guess a follow-up on the previous question, the thinking with Kate Spade addition. How do you guys balance just the development of in-house and licensed portfolios so not to cannibalize some of the existing brands? That's our first question.

And just to follow up, what drove the acceleration in Direct-to-Consumer in the fourth quarter? Did you say watches comped positively in North America, and how did outlet perform versus mall-based stores? Thanks.

The first question in terms of Kate Spade and the way we look at it, first of all, our biggest objective is to grow our own brands, so Fossil and Skagen, and they continued to grow nicely last year. One thing I would mention specifically about Fossil is that we did start accelerating our expense -- our expenditures on marketing, especially on digital and social, last year, and we did see a result in that, both in our own stores, and that's why the DTC number that you mentioned went up. We actually in the month of -- the fourth quarter we actually had the best quarter we've had in some time, and our metrics show that a lot of that was due to the relatively small amount of money we spent on additional advertising last year. And as we mentioned, we're going to accelerate that this year. We also will have -- we are investing a lot in omni-channel and CRM capabilities that will enable us to accelerate those marketing investments. So we think we are in a really good place on the Fossil brands.

Having said that, we do -- in our portfolio, our mission is to have the biggest and the best brands in the world, the ones where investment in store growth is going so we can continue to grow our share of the watch business. So Kate Spade fits really well in that. We think it's going to have a significant long-term potential, but that's really our mission is to make sure that we have in our portfolio the best brands in the world and the ones where the most investment will go behind them.

And then just on the cost of the fourth-quarter comps, we were positive in watches, leathers, jewelry, all those comped positively and we were up in both outlets and in full price accessories.

Simeon Siegel, Nomura.

So you've renewed two partnerships. You've announced a new one. You're entering the wearable space. Do the economics or costs change in any way going forward across the portfolio?

And then Dennis, just two quick modeling questions. I apologized if I missed it. Did you give a reported gross margin guide for the full year and the first quarter? I know you gave constant currency. And along similar lines what's the implied other income line within that guidance? Thanks.

Let me take the second part first. I think under -- below the line since given where the contracts are, you should expect to see some gains below the line, given our hedge position, so -- and where the dollar is though should drive gains as we move through the year.

With respect to the changes, we've gone through our strategic planning process and as we look out over the next foreseeable horizon, we don't see significant changes in our overall business model. I think that's -- we can talk, we will talk, I don't know if you'll be here in a few weeks, but we will give you more visibility in how we are thinking about the near term and what some of the puts and takes will be. But that's something that we can share more in a couple of weeks.

One comment I will add about the economics of wearable technology, one of the exciting things about wearable technology is that over the next couple of years as technology gets better, battery life is going to be better, the size of the object in regard to functionality is going to be better and the economics will be better because as the quantities grow, then the costs, etc., come down pretty quickly. So that's partly why we think it's a very compelling long-term opportunity.

That concludes today's question-and-answer session. At this time, I would like to turn the conference over to Mr. Dennis Secor for any additional or closing remarks.

We would just like to thank you for joining us today and for your continued interest in the Fossil Group and we look forward to speaking with you again when we hold our next quarterly conference call in mid-May. Thank you very much.

That does conclude today's conference. Thank you for your participation. You may now disconnect.