Fossil Group Inc (FOSL) 2015 Q1 法說會逐字稿

Good day, everyone, and welcome to today's Fossil Group first-quarter 2015 earnings conference call. Today's call 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 first-quarter 2015 earnings conference call.

I would 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 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.

As noted in the press release, filed after the close of the market, and in conjunction with this earnings conference call, the Company is providing new reporting segments, reflective of how the Company evaluates the performance of its business. Results discussed today reflect our updated reporting structure, and restated results for 2014 can be found in an accompanying table with the press release issued earlier.

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.

Good afternoon. Thank you for participating in our call. Dennis Secor, our Chief Financial Officer, is also joining us today.

We will begin with our prepared remarks, and then open the call to answer any questions. We're pleased to report first-quarter results today that give us the belief that we are on track to achieve our goals for the year. We continue to enjoy both the operational and strategic benefits of our diversified business model. Once again, our global operating platform and powerful brands served us well, leading to first-quarter net sales and overall performance that were in line with our expectations.

Looking at the business operationally, during the quarter, we continued our leadership in watches, which led our performance. We grew our own brands with both Fossil and Skagen posting solid increases, especially in watches, and we increased our business in our licensed portfolio. We grew across all of our regions, and continued to expand internationally, with a strong performance in Europe. We delivered positive comps in our retail stores, and we continue to invest to drive our future growth, while returning capital to our shareholders.

While there are pockets of our business that remain challenging, we're off to a good start and remain focused on delivering both our nearer- and longer-term objectives. We have spent several decades developing competitive advantage that have us positioned to take advantage of the growing global watch market and accessories markets. Our expertise in design and creativity, combined with our operational competencies, including our supply chain and global distribution capabilities, enable us to partner with the best brands in the world, and help each of them reached their full potential, growing our global footprint in watches and fashion accessories.

We are focused on preserving our business in developed markets, and replicating that great success in newer markets, where our potential to gain market share is substantial. We have built a strong and scalable operating platform, capable of leveraging our great strengths in design, manufacturing and distribution.

In the first quarter, we made progress on the key areas of strategic focus for us, that we outlined on our Investor day in March. As we shared on that day, we feel very strongly about the Company's future, and our ability to extend our leadership position in the growing watch and accessories markets. Growing our own brands, Fossil and Skagen, enhancing our digital capabilities, and bringing to market compelling connected accessories are all critical elements of the strategy, and we advanced our cause in the quarter.

For the Fossil brand, in like-for-like currencies and calendar, we grew the brand 6% for the quarter, with increases in all of our regions, and solid growth in watches and leathers. While we are still not yet where we want to be with the brand, we're seeing encouraging sell-out trends in our American wholesale business in both these categories, and strong acceleration in Asia, where we believe we are gaining traction and building brand awareness.

We continue to focus our efforts in marketing to build awareness to ignite the Fossil brand. And while it's still early, we remain encouraged by the results, including delivering positive comps across our global fleet of retail stores. We are continuing to build our analytic capabilities to help focus our investments in the brand, to drive a stronger returns both for this year and beyond.

For Skagen, the progress we are making is very encouraging. Like-for-like Skagen sales increased more than 20%, with solid double-digit increases in all regions. Watch performance led the business, and we are also seeing positive responses to both leathers and jewelry. We continue to see great potential with Skagen, as we further develop the brand and expand the distribution globally.

In digital, our goal is to build world-class capabilities over the next two years. To remain competitive and relevant, we have to enhance our digital experience, creating a better connection with our customers and evolving to meet the needs of today's consumers. In the quarter, we made excellent progress in extending our social presence and improving our CRM capabilities to communicate with customers in a more targeted way.

Our goal for the year is to further enhance the customer experience with a redesigned website optimized for mobile and a roll-out of tablet devices to all of our full-priced stores in the United States, in order to support sales and our CRM efforts. We are also investing in key foundational components, like order management and point-of-sale systems, to further extend our omni-channel capabilities.

When it comes to connected accessories, we feel very strongly about both our progress and our prospects to be a strong catalyst for growth in the category. There is a lot of consumer interest in this space and a wide diversity of perspectives on the role that smart watches and other connected accessories will play in the market. With our partnerships with Google and Intel, coupled with our ability to create fashion at scale, we believe we have a significant opportunity as the convergence of fashion and technology enables us to bring a compelling tech-enhanced accessories to the consumer. We continue to make progress, and we look forward to launching later this year, with Fossil product in stores for holiday 2015.

At the core of our objective, is to leverage what we do best, and to extend our leadership position in watches. With our strategic advantages in design, production and distribution, our objective is to gain share in the global watch market. In February, we added Kate Spade New York to our portfolio, and began shipping the product in March. This is an emerging brand with global appeal, and we are looking forward to further developing the products and the distribution over the next few years.

Additionally, last month, we partnered with the Ralph Lauren Corporation to develop watches under the Chaps label that will further enhance our portfolio. The Chaps label complements our multi-brand portfolio with opportunities for new price points and distribution channels. We look forward to leveraging our competitive advantages to help expand the brand's global footprint. We're working with all of our brands to help them achieve their full potential and drive global growth by leveraging our operating platform and competitive strengths.

During the first quarter, on a like-for-like basis, our multi-brand watch portfolio grew 3%, with the strongest growth in Europe. We believe our international markets represent a great opportunity to gain share and to benefit from global category growth. We saw growth across Michael Kors, Armani, Diesel, and continue to benefit from the launch of newer brands like Tory Burch.

Looking our results regionally, we continue to benefit from the diversified geographic model, with each of our regions growing on a like-for-like basis during the quarter. This includes the Americas, where we grew by 3%, a sequential improvement from last year's fourth quarter. Our retail business continues to improve, with positive comps across the fleet.

While wholesale sell-in increased, US department store sell-out trends were mixed, with some brands accelerating, while others have not been as strong. There's a lot of disruption in this market right now, with new entrants and existing brands that are maturing. While we do see growth from other markets like Latin America, our focus is on our US wholesale business is to protect the significant share that we have built over the years.

Europe continued to be strong for us, with a 9% increase with solid performances in our larger markets, such as Germany and the United Kingdom. We continue to see whitespace opportunities to grow in new markets and to add more of our brands to our existing distribution. In Asia, sales grew by 4%, and while we experienced stronger performances in markets such as Japan, Australia, and India, we are working hard to address opportunities to ignite growth across the region.

Our infrastructure investments are largely in place, and now we are focusing our resources on increasing brand awareness and adding distribution to advance all of our brands in the region. While the Asian watch market is the largest and fastest-growing globally, it remains dominated by traditional watch brands and higher price points. We remain confident that as the middle-class emerges in key markets like China, we are well-positioned to benefit from the same market dynamics that helped drive our significant share gains in the United States.

So with the first quarter behind us, we feel we are on track. We remain confident in our strategies and are focused on building our brands, developing digital, and advancing our connected accessories, and in an advantaged way. We are restructuring our operating model, and shifting our investments away from infrastructure, towards direct growth-driving initiatives.

And while there are challenges, especially in the near term, we are very excited about the long term. We operate a very diverse business model, with many levers of growth. Our operating model gives us opportunities for leverage and efficiencies to drive growth, and our strong financial position gives us access to the fuel that we need to drive our business and to deliver solid returns.

We continue to expect that 2015 will be another year of progress towards our overarching objective, which is to deliver sustained growth and solid returns for our shareholders over the long term. And now, I will turn it over to Dennis for more comments.

Thanks, Kosta. Good afternoon, everybody. Before I get into the numbers, let me first address our reporting segments. Over the last couple years, we've realigned our operating structure. Strategic and brand directions are set centrally, and regional management is now fully empowered and responsible to drive those strategies and brand directions across all brands and channels within their regions.

In the past, our regional teams managed just their wholesale businesses, while the retail business was managed globally. We feel the current structure will be far more effective in developing our business, particularly as consumer shopping habits continue to evolve. In addition, in our prior reporting, inter-company profits and factory operations were reported based on their region of production, which is primarily Asia, rather than in the region where the products were sold.

With the implementation of our new reporting systems, we are now able to extract discrete financial information that aligns with our operating structure and is more consistent with how we evaluate our business performance. In our earnings release, you will find a table with 2014 results restated under the new segments, including operating margins across our three regions, reflective of all channels of distribution. Costs that support company-wide rather than region-specific activities, such as brand management, design, global marketing expenses, among many others, are reported within corporate costs, independent of where those expenses are actually incurred.

With that, let me now address our performance. There are several factors that will make understanding our performance, relative to both last year and our expectations, challenging: currency headwinds, last year's extra week, and the timing of expenditures. As we go through this report, I will isolate these factors, recognizing that this is not a precise science, particularly the impact of the extra week.

The headline for our total first-quarter performance is that both sales and earnings per share came in generally in the middle of our range of expectations. Against those expectations, further currency headwinds pulled our sales numbers down, while net expense deferrals increased our earnings. On a like-for-like currency and calendar basis, first-quarter net sales increased 5%. On a reported basis, sales declined 7% to $725 million, with stronger currency headwinds than we expected, and last year's extra week representing a 5.5 point headwind.

For the quarter, we delivered earnings per share of $0.75, compared to a $1.22 last year. This quarter's EPS benefited by roughly $0.12 versus expectations, as some planned marketing, fixturing and display costs moved later in the year, while some restructuring activity was completed earlier. Against last year's EPS, this quarter's result was negatively impacted by roughly $0.13 due to currencies, and another $0.16 due to our restructuring charges.

While like-for-like sales growth and a lower share count favorably impacted the year-over-year comparison, these were more than offset by higher marketing expenses, even considering the deferral I just mentioned, as well as the impact of store and infrastructure investments made late last year, that we have yet to anniversary. The EPS impact of last year's extra week was minimal.

Like-for-like Fossil brand sales increased about 6%. Solid growth in watches and leathers more than offset the decline in jewelry. The business increased in all three regions, and we continue to be encouraged by leathers, where women's handbags delivered solid comps in our retail stores.

Like-for-like Skagen sales grew 24%, with 20%-plus growth in all three regions. Strong double-digit watch growth drove the business, with solid increases from our newer and smaller leathers and jewelry businesses. Like-for-like sales growth from our multi-brand watch portfolio was about 3%, with the strongest performance from Europe.

In the Americas, reported sales decreased 4% to $367 million, while like-for-like sales increased about 3%. The growth was driven by strong gains in branded jewelry, especially Michael Kors jewelry, as well as a modest increase in our leathers business, as the watch business was roughly flat.

Like-for-like sales for the Fossil Skagen and Michael Kors brands increased in the quarter. The increase was driven mainly by our retail stores, where the comp store sales increased modestly, with conversion improving due to compelling promotions in the outlet channel. Traffic in our American stores remained down.

Like-for-like wholesale sales increased slightly, as international increases offset declines in off-price selling and US department store sell-in. Sell-out data from our department store partners, where we have planned the business down this year, did show a decline from the consistent quarterly trends from last year. Sell-out in watches continued to improve sequentially, for both Fossil and Skagen, while Michael Kors declined.

We continue to drive increases in our owned e-commerce business, and our wholesale partners tell us that they are seeing strong sell-out increases on their owned sites as well. In Europe, reported sales decreased 10% to $234 million, while like-for-like sales increased 9%. Continued expansion of our watch business drove the growth, while jewelry, still a smaller business, increased sharply, with a very strong growth rate. Our leathers business also posted a modest increase.

We continued to see strong performances in very established markets like Germany, France, and the UK, which delivered the strongest increases in the quarter. Both Fossil and Skagen expanded in the quarter, with particular strength in watches. Within the licensed portfolio, Michael Kors, Armani and Diesel increased, while DKNY was weaker. Comp store sales increased modestly in the region, with increases in both our full-price and outlet stores.

Our reported Asia sales decreased 7% to $124 million, and on a like-for-like basis, they increased 4%. Watches, leathers, and jewelry all grew in the quarter. Japan, Australia, and India were our strongest performing markets, while we continued to see weakness in South Korea, and our distributor business was down.

Fossil was our strongest performing brand, and Michael Kors increased, as did Skagen. Each of these three brands posted solid double-digit gains. Our business with the Armani brand declined in the quarter. Comp store sales decreased modestly in the region, with the strongest performance coming from the outlet channel. Like-for-like concession sales increased during the quarter, driven by new doors, while concession comps overall were down.

In the quarter, gross profit decreased to $401 million, and gross margin declined 180 basis points to 55.3%. The decrease was primarily driven by the headwinds resulting from the strong US dollar. Aside from that, favorable regional distribution mix, along with these favorable impacts from the initial price increases we took late last year, roughly offset the impact of promotions, where we adjusted our strategy later last year mainly with Watch Station outlets here in the United States.

In the quarter, operating expenses increased 2% to $345 million, which includes a $12 million restructuring charge to optimize our store fleet and our operating structure. Operationally, our expense increases were focused on marketing and brand-building activities. Expenses were also impacted by this year's earlier Basel Fair, as well as by the store and infrastructure investments made early last year, which we had not yet anniversaried.

With last year's pivot away from store and infrastructure investments, we expect these headwinds will abate as we move through balance of this year. These areas of expense growth were partially offset by the impact of the changes in foreign currencies, last year's extra week, and a reduction in corporate back-office expenses.

First-quarter operating expenses were lower than we had initially planned, as some advertising investments, along with the deployment of fixturing and displays, were moved into later in the year. We also completed the closure of one store earlier than planned, which increased the quarter's restructuring charge. Our operating expense rate was 47.5%, compared to 43.6% last year, due principally to the factors I just described, other than currencies, which don't significantly affect the overall expense rate.

Operating income decreased to $56 million, including a $16 million unfavorable currency impact. Operating margin decreased to 7.7%, compared to 13.5% last year, due mainly to the impact of the restructuring charges, operating expense increases, and currencies. Restructuring charges create a 170 basis point headwind on operating margin, and the impact of currencies was 150 basis points.

Interest expense increased slightly to $[4] million, given our higher debt level. First-quarter other income, which principally relates to foreign currency contracts and balances, for the quarter was $7 million, higher than we had expected, given the further strengthening of the US dollar. Our effective income tax rate for the first quarter was 31.3%, similar to last year's first quarter, and we are planning the full year at about 31%. So first-quarter net income decreased $28 million, as like-for-like sales growth was offset by operating expense increases, restructuring charges, and the impact of currencies.

Now, turning to our cash flows and balance sheet. For the quarter, we generated operating cash flow of $86 million, versus $97 million a year ago. We drew down a net $13 million on our revolver. We invested $17 million in capital expenditures, and $115 million to repurchase 1.3 million shares of our common stock at an average price of $88.

We ended the quarter with $944 million remaining on our repurchase authorization. We ended the quarter with $237 million in cash and $645 million in debt. First-quarter ending inventory totaled $631 million, a 5% increase over last year.

In constant dollars, the growth rate was roughly 14%. Accounts receivable decreased by 8% to $[266] million, and wholesale DSOs improved by roughly 5 days. Depreciation and amortization expense totaled $22 million for the quarter.

Moving now to our outlook. First, to restate our earlier message, with the first-quarter results generally in line with our expectations, other than the timing of our marketing investments, our annual operational outlook remains largely unchanged, as do our strategies. We continue to expect to generate leverage from our operating structure and use that capacity to invest in our long-term growth.

Our priorities remain unchanged, to invest in our owned brands, Fossil and Skagen, to invest in building our digital platform, and enhancing the online experience of our customers. To invest in connected accessories and leverage the partnerships that we are building to bring fashion to the space, and of course, to use and optimize our portfolio of lifestyle brands to extend our leadership position in the growing global watch market.

As we said before, nearer-term challenges remain. Newcomers are entering our market, and managing the natural ebbs and flows of the brands in their lifecycle is an imperfect science. Consumer shopping behaviors are changing at an unprecedented rate, and we continue to be cautious in the United States. This is our most developed market, and we are actively engaged in protecting our position, seeking new opportunities for growth, and working to replicate our great success here in international markets.

With these nearer-term challenges, we see even greater longer-term opportunities. Kate Spade New York brings another of the world's hottest fashion brands into our portfolio, and it can be a powerful weapon to preserve and gain share. We are well-positioned to take advantage of favorable market demographics to expand the penetration of fashion brands in growing international markets.

Our research supports significant growth opportunities for both Fossil and Skagen, and we are focusing more targeted investments to support this. There are both near- and longer-term opportunities to leverage our full-brand portfolio to grow in our well-developed global distribution, and we see levers of such as price to drive top-line growth. We are seeing success with our initial price adjustments and are implementing more that will roll out later in the year.

The only significant change to our outlook for this year relates to foreign currencies. While the US dollar strengthened further in the quarter, it has weakened significantly in the last couple of weeks, and we are updating our outlook to reflect that volatility, using a range that roughly aligns with our initial 2015 guidance rates on the high side, and more current prevailing rates on the low side.

So with respect to sales, we continue to expect full-year sales growth in the range between 3% and 7%. This excludes the impact of last year's extra week, a roughly 1.25 point headwind, as well as currency headwinds, which based on our assumptions, would range between 5 and 6 points.

We see opportunities for current sales trends to improve modestly in the middle quarters, as we benefit from the addition of Kate Spade to our portfolio. We expect the bigger opportunity for a more accelerated growth rate in the fourth quarter, as we anniversary last year's performance, and also benefit from the step-up in marketing investments, which are targeted for the second half of the year to support the most important selling season.

For the second quarter, we expect constant dollar sales growth in the range of 4% to 6%. We expect currency headwinds on sales to be most severe in the second quarter, roughly 6.5 to 7 full points, begin to lessen in the third quarter, and diminish even more in the fourth quarter, though certainly still significant. Based on these assumptions, for the full year we now expect reported GAAP sales in the range, between a 1% increase and a 4% decrease, and for second-quarter reported GAAP sales to decline between 0.5% and 3%.

With respect to gross margins, excluding the impact of currencies, we continue to anticipate gross margin expansion, driven by continued favorable international mix, along with our pricing and margin enhancement initiatives. We expect the greatest opportunity for expansion will come in the second half of the year, when more of our pricing changes will be implemented, and as we anniversary last year's handbag liquidation, and the outlet promotion strategy which we implemented later last year.

Based on our currency assumptions, the currency headwind on gross margins, which we estimate in the range between 2.5 and 3 full points, should generally follow the same quarterly pattern as sales, though roughly one quarter delayed, as currencies first impact inventories, and only affect margin once the products are sold. So we would expect the third quarter to absorb the greatest gross margin decline. We also expect the offsetting non-operating gains related to our foreign currency contracts, should roughly mirror the currency impact on gross margins, but will also be impacted by the underlying sales volume, which is highest in the fourth quarter.

Regarding expenses, with the first quarter now behind us and given our sales expectations, we continue to expect to generate leverage from our overall infrastructure and store expense base, including some initial benefits from our restructuring efforts. We expect the total annual expense rate to increase year over year, given the additional $35 million or $0.50 per share that we plan to invest this year to support our marketing and brand awareness activities, our digital strategy, and to develop connected accessories. The concentration of these investments will occur during the second half of the year to support the key selling season.

We expected to incur about $8 million, or roughly $0.11 per share of this year's $25 million in restructuring charges in the second quarter, as we enhance our operating structure. Given these factors, along with this year's earlier Basel Fair, which already impacted the first quarter, we are expecting our overall second-quarter expense rate to decline slightly.

Given these assumptions, we continue to expect full-year adjusted operating margins, excluding both the impacts of currencies and the restructuring charge, in a range that is roughly flat to down 80 basis points. Including our currency assumptions, we now expect full-year reported GAAP operating margins in the range between 11.5% and 13%. For the second quarter, we expect reported GAAP operating margin in the range between 8% and 9%, and adjusted operating margin in the range between 11.5% and 12.5%.

Given all these factors, along with continued share repurchases, we continue to expect reported GAAP full-year earnings per share at $6.05 on the high side, and given our updated currency assumptions, at $5.25 on the low side. This includes a net unfavorable currency impact between $1.20 and $1.40 per share, and a $[0.35] impact related to structuring charges. On a constant dollar basis, excluding restructuring charges, adjusted EPS would be in the range between $7 and $7.60.

For the second quarter, we expect reported GAAP earnings per share in the range between $0.80 and $0.91. This includes a net unfavorable currency impact of about $0.27, and $0.11 related to restructuring charges. We now expect capital expenditures between $110 million and $120 million.

Our plans support fewer openings of stores and a shift towards investments to build our digital and CRM capabilities, as well as incremental shop-in-shops. So now, I will turn the call back over to the operator for your questions.

(Operator Instructions)

We will take the first question from Randy Konik with Jefferies.

Great. Thanks a lot. I just wanted a little more clarification on your comments around wholesale channel distribution, your sell-in versus sell-through. It sounds like you said your sell-in improved on a sequential basis versus the prior quarter, yet your sell-through was a little mix.

I just want a little more expansion of what your partners are seeing there and why is the sell-through mixed from your perspective? Is it mixed by brand in the department store channel distribution? Lastly, when you say you want to focus on -- in the US wholesale channel protecting your market share, what do you mean by that, and what actions do you think you have to take to protect that share, if any? Thanks.

To begin with, I would caution you to remember that on a quarter to quarter basis, it's hard to tell exactly information about sell-in and sell-through because we are not direct to retail. Having said that, we mentioned about fourth quarter last year that are shipments to stores were -- they were negative. And our retail sell-out during that quarter and our wholesale partner was not as negative. So I think we are saying now is we are seeing the reverse in the first quarter as our sell-in to those accounts in the first quarter was actually better than their sell-out. Part of that could be we shipped less in the fourth quarter last year and so if you balance it on two quarters put together, it may not be an impact at all. I would caution you to look at the entire year when it's done, and you'd probably get more information from that.

Our focus really is, obviously the market's in a very disruptive phase. We're seeing -- in our wholesale partners in the United States, we actually are seeing, as we mentioned, their declining business there. Keep in mind also that first quarter is a relatively small part of the year. We still expect, and always have, is that 40% of the retail sales in watches happen in the fourth quarter.

So, but having said that we're seeing declines in there, and also there's a lot of disruption. Obviously there's a new entrant in the market. We're not sure if there's a some impact on the consumer side. We'll see what that new entrants products look like, et cetera, but they are yet to be seen. So our mission is, really, we have a big share in the market, we've got a lot of initiatives in place to continue to grow the US market.

And we are seeing strong -- we're seeing growth in Fossil and Skagen, and we will have accelerated demand creation activities as well as our omnichannel activities in the back half of this year that we think can continue to grow those faster. We still obviously have, Kate Spade is new to the market. Tory Burch started in the fourth quarter last year, so we've got three-quarters of a year to start that. Both those brands like they have significant long-term potential. We also are looking at launching wearable technology in the back half the year in the fourth quarter, we think that can add some fuel to the fire in the US. We are being very aggressive in the US, and we think we have some initiatives in place to fuel growth.

Next we'll hear from Omar Saad with Evercore.

Thank you. Good afternoon. On the question that, to fall on Randy's question on the market share, to be clear, is the strategy for the US market which is your biggest market, your most mature market when it comes to the watch portfolio, is the strategy to protect market share by bringing in these new licenses, things like Kate Spade, Tory Burch, Chaps sounds like is a pretty new development. And how do you balance that versus strategies to grow the market as the market share leader? How do you think about growing the market and the possibility that the market share leader could garner significant gains if you can get the watch category as a whole going? Or is it basically mature at this point?

Good question. If you look at the last five years and how much the US Department store business especially has grown in watches, because we have been very disruptive bringing new brands to market at higher retails, more features and functions, more innovation and new ideas, and it really created a lot of growth at really high margins in the department stores. So we're in a transition phase right now where our objectives really are to continue to grow the existing businesses we have. We have a lot of new product initiatives in place that we think can fuel that. And we do have a lot of interest in wearable technology. We think we are in a situation where consumers are very, very interested in this convergence of fashion and technology.

Our objective is to put some of the technology, which could be notifications, sensors and other types of activities in our watches that could add value. When you leverage this across the large-scale -- the large numbers of units that we have, we could be in a situation where we could add a lot of value to the products with not a lot of expense and have another series of disruptive growth in our business and really change the market in the US. That's really what we are working towards.

We think it's quite a significant opportunity are we looking at it from that perspective. We do think that we have an opportunity to bring new ideas and compelling products that are tech enhanced that millennials will embrace. And again, keep in mind millennials largely have not been wearing watches because they grew up with cell phones and obviously, they are very interested in technology. And we think it could be a long-term opportunity for us.

From Nomura Securities, we'll hear from Simeon Siegel.

Thanks. Good afternoon, guys. Recognizing I'm probably misreading this, there's a lot of fun to go through over there. I think if I'm reading the press release correctly, the new margin structure has the US as the highest operating margin and Asia as the lowest. Correct me if I'm wrong, but could we talk about for a minute why that is? I think the US has the most stores which also has the lowest margin and also was the previous the lowest wholesale margins. Any color you can provide there and maybe the right way to think about the new geographic economics, the right way to think about the go forward margin opportunity would be helpful. Thanks.

Sure. To way you've got to try to understand the previous reporting structure to this one, before you had all the intercompany profits sitting in Asia. So now we've redistributed those to the actual underlying selling region. We've also been able better to differentiate some corporate costs that were sitting in the US wholesale business. Now those are really corporate activities. So at the end of the day now, and you see also the impact of taking the direct businesses and reallocating those to the underlying geographic regions.

So, you've got the Asia region is the smallest of our regions. It's about one-third size of the overall US or American business with a fully developed infrastructure there that provides significant amounts of opportunity for leverage over the long-term, but it has to grow to ultimately fully absorb the cost of that infrastructure. So is the margin structures are different in each of those businesses. In Asia, you've got higher gross margins, but you also have a much heavier concentration of concessions, which carry a significant amount of expense as well.

So again, we've realigned that, we've absorbed of the direct businesses into those regional structures aggregated the corporate costs, those costs that solely relate to central expenses and reported it that way with the biggest opportunity for margin gains as the fastest -- long-term fastest-growing region could be Asia as a fully absorbs all the fixed costs.

And so just thinking through going forward, so what is the implication as you continue to expand Asia and Europe as well on the margin? How do you view the margin holistically?

The margin holistically we view as there opportunities across the whole organization to leverage our infrastructure. Strategy we shared on our investor day a couple -- two months ago. Was to create or use that capacity that we create in all regions and then redeploy that to drive topline initiatives across all our regions with the biggest being in Asia over time. So, our goal right now, again, as we shared on that call, was that we see the biggest opportunities for us and very compelling opportunity is to invest in growth in where we are in our lifecycle, we think that's the appropriate way for us to manage our operating structure.

Great, thanks a lot. Best of luck for the rest of the year.

Thank you.

Next we'll hear from Rick Patel with Stephens Incorporated.

Thank you. Good afternoon, everyone.

Good afternoon.

Can you talk about the indications for interest of wearables you plan to roll out later this year? What do your big wholesale accounts think about this? And do you anticipate staying on the same shelves that you are in right now for department in jewelry stores where you get incremental shelf space? Just help us think about the rollout.

As we have been talking about, we're going to launch some products late this year. And it's not going to be a significant numbers this year, but as I mentioned before, there's really a huge amount of consumer interest on in this whole idea of the convergence of fashion and technology. One other thing to keep in mind is the department stores are very interested in this because they perceive there to be a consumer demand. But there's another issue here also which is, if you look at the watch business is about $65 billion globally, relatively small industry. Whereas the tech industry, which includes smart phones, cell service, iPads, all the activities going in the technology world, the spending in there is huge.

Just a small percentage of that spending and interest comes in the watch business. It could have a huge impact on the watch business and make it much, much larger. A lot of that spending, or most of it, is not happening in a department store where our customers are. Our mission is really in a disruptive way to bring some of these technologies and ideas to the brands and enable us to add additional functionality at not a lot of cost. Could make the watch category more relevant, it could bring a significant amount of sales into the channels that we sell to. That's what we are working on. We think it is a pretty big opportunity.

Thanks very much.

From Topeka Capital Markets we'll hear from Dorothy Lakner.

Thanks. Good afternoon, everyone. Just wanted to go back to the North American wholesale business a minute. Just ask I guess maybe a bit of a philosophical question. Where do you think this is going? You talked about some newer brands. The Chaps with Ralph Lauren, Tory Burch, obviously, is still very small. Kate Spade.

You haven't even gotten to putting your own product in the stores, as well as renewed strength in Fossil and strength at Skagen. So, what has to happen to that business, do you think, to make it better? Does the space needed to shrink? Just what do you see your partners doing and what are you advising them to do?

Well, we have a lot of leverage to pull across all our brands, and we have a lot of product initiatives in place in every brand. A lot of ideas about how we can change the customer experience at the point-of-sale, enhancing the presentation better, more storytelling. In addition to some enhanced brand building around Fossil and Skagen and the new brands that we have. We think we have a lot of ammunition.

Having said that, I look at the first quarter, sales were down at department stores. There is obviously a big new entrant into the category. We're not really sure a second what impact that will have on the overall watch market. We do think that long-term, as I mentioned, I think it's a net plus for us and could be a significant advantage for us. But we are looking at the entire market and how we can gain share.

The Chaps opportunity, I think is one where if you look at the market -- the watch market globally, over the last several years, as we put more features, function, more innovation, we've raised the average unit retail across all our brands from Fossil all the way up. We do have a sense that it's created -- because we've elevated all our price points, so that there's created some whitespace below most of our brands in a more value way. So there is some distribution we sell to in the US and globally that has been disadvantaged because they don't have access to all those brands that they have been disadvantaged. And there's a pretty big opportunity.

If you look at the value channel and if you look at their watch business, they are very underpenetrated compared to stores that are moderate department stores and above, just because they don't have access to brands. Part of the Chaps opportunity is for us to bring energy, design, innovation, and branding to stores that may not have the potential to get other brands, and it could be a pretty big opportunity for us to round out our portfolio and to give us additional market shares. That's what that's about.

But we're in general being very aggressive with the US market. We continue to believe that we can make it bigger and grow all our brands and take share over time. And we do expect that the -- expectations are still that the market will grow. Over the next five years we've seen indications (technical difficulty) it is going to grow single digits. That's before the wearable technology entrants are in there. We're not sure exactly what the markets going to do, except that we are going to be very aggressive and go after it.

Great. Thanks.

From Piper Jaffray we'll hear from Erinn Murphy.

You guys talked about taking price. Can you elaborate more what you've done thus far across the portfolio, either by brand or by region? And then I guess within the gross margin assumptions for the year, what are you including for the pass-through of price increases? Thank you.

We have, as we mentioned, have taken price increases -- moderate price increases across all our brands globally. Obviously focusing especially on Europe where the euros quite a bit different than it was. And we have taken some of those early this year. There's another round of that going later this year, we are watching it very carefully. So far we've seen positive results from our price increases, and we'll see how it goes out the rest of next year.

In terms of margin expectations, assuming that they continue to perform as we anticipate, you'd start in the first quarter and we would expect to see a build of a tailwind as we move through the year.

Dennis, is that in the guidance as you see into today?

We've made that assumption, right.

Okay. Thank you.

You bet.

Next we'll year from Ed Yruma with KeyBanc Capital Market.

I was wondering if you have a little more color on the other income line. I know that that's where a lot of the hedges fall. So should we assume that, that flows in accordance with the FX impact, and what quarter should see the biggest benefit there? Thank you.

Sure. That should follow the trend -- that should roughly mirror -- not necessarily to -- in fact, not to the same extent, because we don't fully hedge. But that should roughly mirror the growth margin impact which in my prepared remarks, I said would build, based on the currencies assumptions, would build and likely peak the third quarter and then began to tail off. The only thing to think about is though, you've got to -- it is a function of volume as well-in the fourth quarter. So even though the fourth quarter headwinds will not be as a significant, you should still expect a fairly impactful impact on the bottom line -- or below the line.

Great, thanks so much.

You bet.

From Goldman Sachs, Lindsay Drucker Mann.

Thanks. Good afternoon, everyone.

Good afternoon.

I was hoping to get a little bit more clarification on what your sell-throughs have been. I understand that it's obviously going to have some volatility quarter to quarter and that there's probably an overhang from the Apple watch launch. But with the assumption that shipments ultimately catch up to what your sell-through is, can you help us understand what the run rate 4Q, 1Q sell-through has been at department stores where you have visibility? And also how much department stores make up of your total US wholesale business?

Well, we don't give exact numbers. What we'd said on our fourth quarter is that our sell-out was not as bad as our sell-in, and we are seeing the reverse in the first quarter. Other than that, we are not giving any numbers or statistics. And quite honestly, there are so many moving parts to it, it is really difficult for us to even ascertain exactly where they are and what's with a happen the rest of the year and pipeline fill and reverse pipeline fill. You could spend a whole quarter trying to study what happened. At the end of the day, it doesn't make that much difference because something else will change.

Our goal is to really -- particularly we've had -- last year as an example, we've had a lot of volatility on the sell-in. So we use it as another bit of data help people understand the overall performance. But in a thin window of time, it's a data point. It's not something that we interpret as a trend. We just want to share and characterize what we are seeing.

Is it fair to say, though, I think you said this before, I want to make sure, that sell-through has been negative fourth quarter and it got a little worse -- it got worse in the first quarter sequentially?

Yes, it was fairly consistent throughout last year on a quarter to quarter basis. And so far in the first quarter the data deteriorated a little bit with -- we highlighted the biggest brands and noted, too, Fossil and Skagen have continued to improve.

Okay. Thanks.

You bet.

From Cowen and Company we will hear from Oliver Chen.

Thanks a lot. Regarding the organic -- the constant currency North America, it is difficult to line up the quarters. Should we expect this to inflects negative and positive as we think about the rest of the year? As it feels like on the retail side retailers could continue to be tightening their inventory. And on the wearables paradigm, is your average unit retail at the Fossil banner going to be the same $100 to $200 range? And as we look at the back half, is that sell-in going to occur on the wholesale side as well? Thank you.

We didn't specifically, in terms of how we're thinking about the year and the trend. We did and continue to plan the department store business I think reflective of where we are in the cycle. And we are not expecting growth coming from department stores or overall in the United States. We're continuing to expect favorable trend in our retail business, and we are making continued investments to support that, particularly into the holiday season. And the -- we're also seeing growth coming from international markets in the Americas. Latin America was strong, Canada was strong. We're not expecting the growth. And certainly the performance that we said, the overarching message of the first quarter is that the business is roughly performing the way we planned it.

On the wearable side --

What, Dennis? Are you just saying negative, then? You are saying negative for the first year constant currency North America wholesale?

We didn't give -- what I'm saying is we didn't give specific a guidance, but we are planning, both department stores, we are not expected to see growth there in the United States.

Okay. Thank you.

And on the wearable side, there is a small assortment of items from jewelry, which is bracelets up to watches, and price points will be in the (technical difficulty) $300. So it's an assortment of products at different prices.

And that benefits the wholesale side, Kosta, just to be clear?

Yes, our retail stores and wholesale.

Okay, and the Fossil brand, not Kors or Fossil brand?

Fossil brand will be this year. We will have a suite of products for Kors next year and other brands.

Okay, thanks for the details. Appreciate it.

From Sterne Agee CRT we will hear from Ike Boruchow.

Dennis, on the restructuring cost, in Q1 -- I'm sorry if I missed this, what exactly does the $12 million represent in restructuring? And does that $0.13 hit that took place in Q1, and you're guiding $0.11 in Q2, how does the remaining $0.11 in restructuring split between Q3 and Q4 for the fiscal year to get you to that $0.35?

In the first quarter, what we -- it's mostly some reorganization of building and optimizing our structure here, as well as the closure and repurposing some of our retail stores. Actually, we got more done in the quarter than we had planned, so the charge was a little larger. And then the remainder should -- we should be done probably mostly by the end of the third quarter. There might be some lingering impact into the fourth quarter. But the lions a share is the first half and some in the third, a little bit in the fourth.

Got it. Thank you.

You're welcome.

Next we'll go to Barbara Wyckoff with CLSA.

Hi, everybody. Can you talk about the timing of Chaps? Can we assume that is next spring or this year? And the traffic and conversion in e-commerce and mobile channels, can you comment on that with improving capabilities this year versus last?

Chaps will be out next year. As you know, a strong brand. It does have some international component to it, and we are looking forward to working closely with them and helping build a brand and creating a great product and taking it to market. So, we are very excited about that.

Our e-comm business, we don't have our metrics in front of us right now. So, we would say that the e-comm business, we are continue to grow it, we have a lot of initiatives in place based around our omnichannel capabilities, our CRM et cetera and how that fits in with the stores. And as we mentioned, we're putting the iPad in our stores in the next couple of months, so we are expecting a more robust activity over time on the website.

Okay. Thanks.

And ladies and gentlemen, that is all the time we have for today's questions. At this time I would like to turn the conference back over to Mr. Dennis Secor for any additional or for closing remarks.

Sure. Thank you, everybody, for joining us today and for interest in the Fossil Group. I look forward to speaking again with you when we hold our next quarterly call in mid-August. Thank you very much.

And with that, ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.