Fossil Group Inc (FOSL) 2015 Q3 法說會逐字稿

Good day, and welcome to the Fossil, Inc. Q3 2015 earnings conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Eric Cerny. Please go ahead.

Thank you, good afternoon, everyone. Thank you for joining us, and welcome to Fossil Group's third-quarter 2015 earnings conference call. I 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. 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. As you saw, we made two announcements today. I will begin with a few prepared remarks on our third-quarter performance, followed by our announcement to acquire Misfit before turning the call over to Dennis Secor, our Chief Financial Officer, who is joining us remotely today. Following his prepared remarks, Greg McKelvey, our Chief Strategy and Marketing Officer, will join us for Q&A.

For the third quarter, we delivered sales and earnings within our expectations. Given last year's strong third quarter, we knew that comparisons would be tough, and that proved to be the case. From a top-line perspective and in constant currency, overall sales declined 8%. While we are certainly not satisfied with that result, we executed well and delivered solid results in several parts of our business.

Our initiative to drive our own brand is gaining traction, as both Fossil and SKAGEN grew, even amidst the difficult environment. In constant currency, our leathers and jewelry businesses both continued to grow, as they have for the full year, and our digital and omnichannel initiatives drove strong growth in our eCommerce channel. The challenge remains with our watch business, which declined in the quarter. The traditional watch category remains sluggish as tech-enabled devices offer consumers additional choices. Compounding that negative impact is the fact that we are lapping the historical outsize success of the Michael Kors brand. As a Company with significant competitive advantages, we are moving quickly and ramping up innovation and design, marketing and technology, to change the current trend in our business and continue to increase our share in the global watch and accessories market.

During the quarter, the Fossil brand grew 2% in constant currency, with increases in each of our regions and global growth led by leathers and watches. We launched a new Fossil website during the quarter that incorporates compelling brand content and stories, and enhanced customer shopping experience, improved mobile capability, and behind the scenes, a world-class content management system, which is a critical element in support of our omnichannel initiatives. The new website positions us to further build interest in the brand, drive sales through an improved shopping experience, and learn more about our customer and further develop their relationship with the brand.

While not a third-quarter development, last month we launched our first connected accessories product with the Fossil Q product line. This is our first generation of wearable technology products that combines fashion and functionality. We know that customers are interested in technology, and Fossil Q allows us to bring together fashion and function in the assortment. The reaction has been very positive, not only to the product but the entire platform, including the software application developed for users. We distributed the assortment through select Fossil retail doors, and completely sold out the entire production quantity intended for our select wholesale partners.

I want to share a bit more about Fossil Q, so you can appreciate the elements of the offering, and understand our excitement. We created a line of fashionable connected accessories that showcases our design excellence and expert craftsmanship. In the stores now are two styles of watches that are non-display, and two styles of tracker devices, or connected bracelets. The Fossil Q Dreamer and Reveler are designed for both men and women, and our non-display fashion activity trackers that include notification alerts in the form of vibrations and LED lights, with a battery life lasting up to one week. The Fossil Q Grant is one of our top-selling traditional analog watch styles for both men and women, infused with technology that interacts with a smartphone, and notifies the wearer of messages and phone calls from selected contacts through an LED indicator and gentle vibration. This battery also lasts up to a week.

Available at the end of the month, the Fossil Q Founder is our connected watch with display that utilizes Android Wear, and is one of the first digital display watches to offer full compatibility with virtually all smartphones. This product allows the wearer to customize their watch face, as well as other features, while utilizing the Fossil Q app.

The Fossil Q app was designed to be the command center for all of the Fossil Q products. It allows us to uniquely interact with customers, provides important functionality like smart notifications, and allows customers to learn more about themselves from tracking physical activity to counting calories, and can connect seamlessly to other fitness apps that customers might already be using. The exciting thing about the app is the opportunity to eventually carry the functionality across the brands in our licensed portfolio and create a unique, specialized branded experience for the customer. This will enable brands such as Michael Kors and others to compete in the connected accessories category, and to attract new customers.

Overall, for Fossil, a good third quarter, a nice to start to connected accessories in October, and we hope to build on momentum. We look forward to seeing how the assortment performs for the holiday period, and the team is already hard at work on future generations of product.

As for SKAGEN, the brand had another good quarter with constant currency double-digit global growth, and increases in each of our regions. Watches led the performance, and we are also seeing continued positive responses to both leathers and jewelry. We continue to see great potential with SKAGEN through expanded global distribution, fueled by excitement around its unique positioning and design.

Turning to our multi-brand watch portfolio, during the third quarter, our multi-brand watch portfolio was down 11% to last year in constant currency, a disappointing performance, with declines across our three regions, and with a single brand driving the vast majority of that decline. We expected a tough quarter given last year strong performance, the historical strength of the Michael Kors brand, and consumers' gravitation towards technology, we believe we have the best fashion brands in our portfolio, and are focused on driving innovation, including designs, color, styles and now technology to drive growth in this portion of our business. We are enjoying the benefit of having Kate Spade in the portfolio, and the team is working to further develop the assortment so we can fully leverage our distribution platform and expand the brand's presence globally. The team is also focused on developing the Chaps assortment ahead of its launch in early 2016.

In our international markets, we are being faced with near-term macro challenges, particularly in Asia and China. While we believe the same market dynamics that helped drive our significant share gains in the US will play out in the region over time, the current headwinds are impacting our business, as traffic is challenged and economic conditions are volatile. In Asia, we believe the market demographics will eventually move in our favor, given the expected significant growth of the middle class, and we are well-positioned to take advantage of fashion brands emerging to take share from traditional watch brands.

As for Europe, we also continue to see longer-term opportunities as we grow in new markets and add more brands to our existing distribution. For the couple of years, Europe has been a strong driver of growth for us, but those tailwinds have quickly turned to headwinds, and we are now experiencing many of the same challenges we have seen in other markets.

Now, we will shift gears from our third-quarter performance and talk about the market we find ourselves in today, and how we are responding to the challenges and the opportunity. As we discussed last quarter, it's a very dynamic and exciting time in retail, and particularly in our space. With disruption in the market comes opportunity to take advantage of growth and changing trends. It reminds us of the last time we faced stagnant growth, which was in 2008. We regrouped and refocused our efforts on design and innovation, and positioned Fossil Group for strong growth.

While today's source of disruption in the market is different than it was at that time, our sense of determination, focus, and drive for innovation hasn't changed. With the strength of Fossil Q, we have already proven our ability to identify and fill voids within a trending category, delivering fashion and function that sets us apart from our peers. Currently, technology is emerging as the latest trend in fashion, with a growing interest in wearable technology, inspiring new entrants into the watch base, as well as explosive growth in activity trackers.

Our acquisition of Misfit will allow us to combine our key competitive advantages in design, sourcing, distribution and powerful brands, with a business that is already a recognized player in technology-infused accessories, and possesses a world-class software and hardware engineering team that stays ahead of emerging technology trends. You can find additional information regarding Misfit and their technology platform and the connected accessories opportunity in the slide presentation on our Investor Relations website.

For those of you that do not know Misfit, it is a company that started just a few years ago, and is led by Sonny Vu, a highly regarded thought leader in the wearable technology space. They have a robust product pipeline focused on exciting tech-enabled experiences across multiple distribution channels, including consumer technology, healthcare, enterprise, and wholesale. We're excited to have Sonny join us as the President and Chief Technology Officer of Connected Devices here at Fossil Group, as well of the rest of the team at Misfit.

As we've told many of you, we envision a day when watches and accessories across of all of our brands will be connected devices. With the acquisition of Misfit, Fossil Group will be uniquely positioned to lead the convergence of style and technology, to become the fashion gateway to the high growth wearable technology and connected device markets. This acquisition accelerates our ability to compete in the connected accessories space.

As we expand our addressable market, while leveraging all the design and scale with which we serve the existing watch market, we are very excited about this acquisition for many reasons. First, Misfit's culture and qualities are aligned with Fossil Group. Like us, Misfit has an energetic culture that embraces innovation. Their team of roughly 200 people includes a highly talented engineering group that is focused on new technologies and functionality for accessories. On top of this, Misfit shares our appreciation for design and branding, with the use of color and unique style that surpasses others in the space. And they have a holistic approach to technology that improves the quality of life with the integration of data tracking. We expect to integrate Misfit's technology platform into our Fossil and SKAGEN brands, and have the opportunity to do the same across our portfolio of powerful brands.

Second, Misfit is a globally recognized wearable technology brand in the activity tracker space. As many of you know, the activity tracker space is one of our fastest-growing segments in accessories, given the strong consumer interest in learning more about health, wellness and improving quality of life. We believe some of the headwinds we have been experiencing result from a lack of technology in our core business, and this acquisition will allow us to quickly start turning those headwinds into tailwinds.

Third, we see a significant opportunity to drive top-line growth. We expect to accelerate Misfit's sales growth as we leverage our distribution platform and their pipeline of innovative products. We will also leverage Misfit's scalable cloud and app platform, and its world-class engineering team to develop cutting-edge technology-infused products for our portfolio, beginning in holiday of 2016. Sonny and the team at Misfit will collaborate with Fossil Group to develop new functionality for accessories that is relevant for our brands and customers.

And while in the near-term our focus will be on driving sales growth, we also see margin expansion opportunities longer term from the added scale Misfit will bring to our Company. This is a very exciting development for Fossil Group, and we believe it is a great investment in the future of the Company. Overall, we continue to believe, based on independent forecasts, that the watch category will grow over the next several years. Beyond that, we believe that technology can expand that growth by bringing new customers, those that don't traditionally wear watches, into the space.

Within that category, and with our strategic advantages, the design, branding, and distribution, we believe we are poised to gain share. While recently we believe we have been disadvantaged as the fashion trend in watches is about technology, with Misfit, we believe we are poised to capitalize on today's fashion in a differentiated way that helps consumers enhance their lives. Simply put, we will marry fashion with technology and distribute it, with strong branding across our distribution platform. With that, I'd like to turn it over to Dennis for more comments.

Thanks, Kosta, and good afternoon, everyone. I'd like to start with discussing our third-quarter results, and our outlook for the remainder of the year before going into additional detail regarding the Misfit acquisition. Third-quarter net sales decreased 8%, and on a reported basis, declined 14% to $771 million. While sales, overall, were soft, partially due to the strong quarter we experienced in 2014, they came in at the low end of our expectations.

For the quarter, we delivered earnings per share of $1.19, compared to $1.96 last year. Compared to the third quarter of 2014, this quarter's EPS was negatively impacted by roughly $0.40 due to currencies, and another $0.05 due to our restructuring charges. Our investments to support our strategic initiatives and enhance marketing totalled about $0.19 per share, and the current quarter benefited $0.13 due to a lower tax rate. Fossil sales increased 2% in constant dollars. Leathers and watches grew, while jewelry was flat. Sales for the brand increased in all three regions, with the highest growth in Asia.

The brand drove positive comps in Europe, and a double-digit increase in our global eComm business, driven by higher traffic and improved conversion rates. SKAGEN sales grew 10% in constant dollars, with growth in all three regions. Solid growth in watches drove the business, with increases in leathers and jewelry, as well.

In constant dollars, our multi-brand watch portfolio declined 11% compared to last year, partially due to last year's tough 12% comparison, but also, it is clear that technology is putting pressure on the traditional watch category. Compounding this effect is the fact we have brands in our portfolio that are lapping historically explosive growth.

In the Americas, reported sales decreased 11% to $391 million, a 10% constant dollar decrease. The decrease was driven by watches, as a decline in the category offset modest growth in leathers and jewelry. Across brands, constant dollar sales for the Armani brands, SKAGEN and Fossil increased during the quarter, and we continued to benefit from the addition of Kate Spade New York. The remainder of the brands within the portfolio declined.

Within the region, growth in the retail channel was driven by a strong performance in Canada, which was offset by a decline in wholesale sales. Comp store sales declined slightly, as traffic continued to be down in the region, particularly in markets that benefit from heavy tourism. We are pleased with our eCommerce results, where sales increased across all of our websites. Constant dollar wholesale sales were down to last year, largely driven by US department stores, where the business continues to be soft.

In Europe, a sharp change in trend that we experienced in the second quarter continued into the third, as reported sales decreased 15% to $260 million. Constant dollar sales decreased 3%. Modest growth in jewelry and leathers offset a decline in watches. The decline in the region was driven by the licensed portfolio, offsetting growth in Fossil and SKAGEN, where watches drove the growth in both brands. Within the region, declines in distributor markets and the UK offset slight increases in France and Italy. In the region, growth in the retail channel was driven by new stores and positive comps, including a solid performance in Fossil stores. Our eComm business performed very well in the quarter, with strong double-digit growth supported by more effective investments in marketing.

In Asia, reported sales decreased 19% to $120 million, while constant dollar sales decreased 10%. Growth in leathers offset a decline in watches and a slight decline in jewelry. Strong growth in India was offset by declines in most markets in the region, including Korea, Hong Kong and China, where general economic sluggishness and changing travel patterns continue to impact our business. Michael Kors, Fossil and SKAGEN were our strongest performers, with each of the brands delivering increases. Comp store sales decreased in the region.

Before we move past sales, let me pause and provide some additional context. To reiterate Kosta's point, we are not satisfied with our top line. As you can see from our announcements today, we are committed to investing to drive growth. The data we collect suggests that very recently the watch category has declined with what we believe are two root causes: First, tech-enabled watches are clearly impacting traditional watches. Some of that may be temporary, but the data clearly support that. Second, the huge success that the Michael Kors brand had in driving interest to the category has not yet translated to other brands. It is a phenomenon that can obviously affect our results, but also masks our overall performance.

On a year-to-date basis, excluding Michael Kors, our watch business is roughly flat in constant dollars, and we believe out-performing the overall category. Our independent research shows that apart from Michael Kors, we are gaining share in the US watch market at price points under $1,000, and we believe we've got the best set of brands to drive share gains in the future. Again, we are not satisfied, and we remain committed to driving growth, but we believe that despite the current challenges, we have been able to maintain and advance our leadership position.

Moving back now to the quarter's results. In the quarter, gross profit decreased to $418 million, and gross margin declined 270 basis points, to 54.2%. The decrease was primarily driven by changes in foreign currency. Excluding the currency headwind, gross margin actually expanded during the quarter, mainly due to our pricing initiatives and lower product costs, partially offset by Mark Downing clearance activities.

Third-quarter operating expenses decreased 3% to $342 million due to the impact of changes in foreign currency, and included $3 million for restructuring programs that we announced earlier. As planned, excluding the impact of currencies and restructuring, operating expenses increased slightly due to increased marketing and advertising investments, investments to support strategic initiatives, and new store expenses associated with 2014 store openings. Infrastructure expenses were down compared to last year. Our third-quarter operating expense rate was 44.3%, compared to 39.6%.

Operating income decreased to $76 million, including a $33 million unfavorable currency impact and our operating margin decreased to 9.8%, including a 330 basis point headwind from currencies. Higher marketing and strategic investments, greater retail mix, deleverage on fixed costs given the sales decline, and restructuring charges, offset by constant dollar gross margin improvements, accounted for the other changes in operating margin. Interest expense increased to $5 million, given our higher debt levels. Third-quarter other income increased $5 million to $7 million, due to net gains on foreign currency contracts and account balances. Our effective income tax rate for the third quarter was 22.3%, lower than last year's 30.6%, due to the favorable impact of foreign tax credits recognized during the quarter. Third-quarter net income decreased to $58 million, largely due to lower sales in operating income, partially offset by lower taxes.

Now, turning to our cash flows and balance sheet. For the quarter, our operations consumed $28 million of cash, versus providing $42 million a year ago. We drew down a net $113 million on our revolver. We invested $21 million in CapEx and $12 million to repurchase roughly 200,000 shares of our common stock at an average price of $69. We ended the quarter with $829 million remaining on our repurchase authorization. We ended the quarter with $302 million in cash and $807 million in debt.

Third-quarter ending inventory totaled $746 million, a 7% increase compared to last year, given lower demand this year. Our inventory growth is primarily in our better selling brands, and we have adjusted our receipt plans to reflect changing sales trends. We also are working to reduce our Swiss inventory levels, which are higher than planned, given sluggishness in certain markets like Asia. Accounts receivable decreased by 17% to $330 million, and wholesale DSOs were in line with the prior year. Depreciation and amortization expense totaled $20 million for the quarter.

Now, let me share with you our updated outlook for the rest of the year. The bulk of my analysis will exclude the impact of currencies, restructuring charges, and Misfit transaction costs. I will provide the related GAAP numbers at the end, which will include those items. Given our expectation that the Misfit acquisition will close late in the fourth quarter, we don't expect the impact on our operating results, other than the transaction costs, will be material. After that, I will talk about the acquisition of Misfit, and how we see that affecting our sales growth, operating results and capital deployment over the next few years.

Let's start with the rest of 2015. As a reminder, the factors that we have always anticipated would affect our 2015 results have materialized and have not abated. In fact, some have intensified since last we spoke. The US dollar continues to be relatively strong, putting pressure on both top line growth and margins.

The phenomenal historical success of probably the hottest fashion watch brand ever, Michael Kors, is affecting our year-over-year comparisons. It is clear that wearables on the wrist are here to stay, giving our existing customers new choices, while also expanding the population of new people, mainly millennials, who want to wear something on their wrist. We think that's affecting the category as a whole in the immediate near-term, but it provides us a huge opportunity over time.

Over the last quarter, we also saw a sequential change in each of our regional businesses, with category pressures intensifying uniformly. In the Americas, with continued category softness, we expect wholesale partners will manage inventory levels tightly, impacting fourth-quarter receipt plans. On our last call, we reported that we had not anticipated the significant slowdown that we experienced in the second quarter in Europe.

In addition to many economic factors that are weighing on the region, we now believe that many of the same factors that are affecting the category in other regions are impacting our European business, especially in the wholesale channels. There are still several markets where we continue to see significant white space opportunities, but markets like the UK and the Middle East have been challenging, and we now expect that trend to continue in the fourth quarter.

Finally, in Asia, while there are pockets of strength like India, which continues to be a big long-term opportunity, most markets continue to be sluggish, and our third quarter business did not materialize as we had planned. While there are headwinds in our business, we continue to be pleased with our progress on Fossil and SKAGEN, and look forward to a holiday period supported by the marketing investments we have been making to continue to build and drive traffic both to stores and websites. We are very excited about the launch of our Fossil Q wearables. The response from customers have been encouraging, and we're excited about the buzz that these great products have created.

Given those factors for the fourth quarter, we are expecting constant dollar sales to decline between 2% and 11%. Excluding the impact of last year's extra first quarter week, this would result in a full year sales decline between 1% and 3.5%. We are planning constant dollar gross margins flat to slightly down in the quarter.

Our price initiatives continue to drive improvements in our margins, though we have now anniversaried some of our initial price increases, so the benefit will not be as strong as we have seen in recent quarters. The change in trajectory of our international businesses, where margins are stronger, will offset some of that benefit. Also, given the softness in the watch category, we also expect we may need to invest to help traffic and move inventory during the key holiday period. Overall, for the full-year, we expect a modest expansion of constant dollar gross margin.

For the fourth quarter, we are planning with a higher expense rate, driven mainly by the investments we are making in marketing and in our strategic initiatives, and these will account for nearly half of the rate growth. The rate will also be affected by last year's fourth-quarter reversal of performance compensation accruals, and the impact of this year's lower sales on our fixed infrastructure. Overall, we expect our full-year expense rate will be higher, mainly due to the strategic investments, along with the impact of stores that we opened in 2014. Given these factors, we are planning adjusted fourth-quarter operating margin in the range of 12% and 15%, and full-year adjusted operating margin in the range between 12.5% and 13.5%. In constant dollars, we estimate that fourth-quarter adjusted EPS would be in the range between $1.40 and $2 per share, and full-year constant dollar adjusted EPS would be in the range between $5.60 and $6.20 per share.

On a reported basis, we anticipate fourth-quarter sales to decline in the range between 7% and 16%, and full-year sales to decline in the range between 8% and 10.5%. We expect reported fourth-quarter operating margin in the range between 8.5% and 11.5%, and full-year operating margin in the range between 9% and 10%. We expect reported fourth-quarter EPS in the range between $1.05 and $1.65, and full-year EPS in the range between $4.15 and $4.75. These reported amounts include restructuring charges of $24 million or $0.35 per share for the full year, of which $2 million or $0.03 per share will be recorded in the fourth quarter. They also include an estimated $8 million or $0.12 per share for Misfit transaction costs, which will also be recorded as an operating expense in the fourth quarter.

We are planning with the fourth quarter tax rate of 31%. Given the lower tax rate in the third quarter, we are now planning the full year with a tax rate of roughly 28%, and we now expect annual CapEx to be approximately $90 million. Our guidance continues to include higher interest costs due to increased debt levels, and additional share repurchase more in line with our third-quarter activity.

Now, let me share some additional perspective on Misfit, and how we see this opportunity impacting our financials and capital deployment over the next few years. There is plenty of growth still left in traditional watches, where we have a clear competitive advantage, but there are customers, mainly millennials, who don't wear watches, because watches don't give them the functionality that they want, and that's tech. Then there is the wearables market, estimated to grow at a 36% CAGR, to $45 billion by 2019. Despite that enormous growth, we believe there are consumers who won't participate in connected accessories because it doesn't give them what they want, fashion and design across the brands that they love.

We believe our acquisition of Misfit, with the scalable tech platform it brings and the world-class engineering team it brings, fast-forwards Fossil Group to be the one Company that can drive the convergence of the growing watch and wearables markets, with all of the necessary capabilities to compete. Design and innovation, global distribution and operating platform, world-class supply chain and scale to drive the right economics, a leading-edge tech platform and app experience, and the best lifestyle brands that consumers love.

There are and will be companies who can design great products, but who lack the scale that our production volumes of nearly 30 million watches a year create. There are and will be companies who design great products at scale but they lack the breadth of our portfolio of 16 lifestyle brands. There are and will be companies who produce big volumes of tech products, but they lack the design and style that so many consumers demand. When we do that analysis, we believe that we are uniquely positioned in this market and set up to win like no one else can.

The integration of technology into watches is the next innovation in the evolution of the category, and we believe we can, once again, do what we did to the functional watch category, grow and gain share, by elegantly and seamlessly blending design and brands with function. We believe that this acquisition can be the catalyst to reverse our most recent trends, to quickly restore growth, and has the potential to drive strong growth beyond what we might have imagined just a couple of years ago.

It will not be easy, and it will require additional investments. This is arguably one of the hottest consumer trends right now, and now is the time to invest in marketing and building awareness for our brands and amazing new products. That's what we plan to do in 2016.

While we expect the acquisition will drive growth next year, beyond growing Misfit's roughly $30 million 2015 revenues, we expect earnings and margin dilution for next year. It will also not be until the second half of next year that we can bring products to market that leverage the Misfit platform. These assumptions assume a relatively stable currency environment, so 2016's earnings, unrelated to acquisition of Misfit, would not benefit from the significant non-operating currency gains that 2015's earnings did.

As we move past next year, we'd expect growth to accelerate, as we bring more brands onto the platform. As that growth accelerates, we do expect to see downward pressure on gross margins, as wearables become a larger part of our mix. We also expect that accelerated growth will provide an opportunity for infrastructure leverage that can begin to restore sequential earnings growth.

Now, let me discuss briefly how we think of this transaction in terms of our capital structure and deployment. As we've always said, our top priority for capital deployment is to drive growth, to deliver value to shareholders, and this fits that priority perfectly. At the purchase price of $260 million, including transaction costs, it is a similar size deal to our SKAGEN acquisition in 2012. While we're still very pleased with SKAGEN, the Misfit acquisition will play a much broader strategic role in driving growth. It does give us a brand that is native to the wearables space, and we believe we have great potential to drive that brand growth by leveraging our global distribution and operating platform.

Beyond that though, the capabilities and speed that it brings, we believe, can be an enormous catalyst to drive growth across our entire portfolio, and deliver even greater value to shareholders. Investing in share repurchase has always been important, though secondary vehicle, by which we deliver value to our shareholders. We will finance the acquisition, which represents a little more than one year of free cash flow, through a combination of bank debt and repatriated international cash. It does bring our leverage ratios to levels where we have not historically operated, though we believe still with ample liquidity to fund our operations, capital needs, while leaving some dry powder to be opportunistic. Our near-term strategy then will be to prioritize our free cash flow to restore leverage ratios to more recent levels, likely limiting near-term share repurchases to levels sufficient to offset dilution from annual employee equity activity.

To close, Kosta said it best in today's earnings release. We remain confident in our long-term strategy. We believe the substantial capabilities we acquire with Misfit and the many opportunities it creates, combined our diversified business model, our solid financial position, and cash flow generation, set us up to win over the long term, and drive value for our shareholders. We are very excited about our future. With that, I'll turn the call back to the operator for your questions.

(Operator Instructions)

Erinn Murphy, Piper Jaffray.

Great, thanks, good afternoon. I was hoping you could talk a little bit more about the wholesale dynamic in North America. You talked about your retail partners managing inventory very tightly right now. How much are they shrinking the open to buy dollars on the overall watch category? That would be my first question, and then I have a couple follow-ups.

We haven't seen a significant pullback on the inventory flow. It looks to us, when we analyze it, it looks like it's relative to the sales, which obviously the trend is down. But the inventories look to be in good shape for us for the back half of the year, and we'll move forward from there, but we don't see any significant pullback.

Okay, if I look at your sales guidance for the fourth quarter, is that all sell through rates decelerating to that range? Is there an assumption that there is effectively no reorders, or something else more draconian than that in the fourth quarter guide? I'm trying to understand that dynamic.

We experienced in the third quarter, sequentially, we saw a slowdown in each one of our businesses. We believe that, given where we are, that we could see some tightness everywhere. Europe is actually the largest change in the way we've been thinking about the fourth quarter from where we were before.

We've lowered our expectations to accommodate the fact that we think that the fourth quarter could not be as strong as we had anticipated going in. We always operate with a relative limited visibility, so a lot remains to be seen. Most of the business is done in the second half of the quarter. We don't operate with backlog, but we have left a fairly wide range to accommodate lower sell-in and sell through.

Okay, and last question, on Michael Kors, you did highlight that a number of times in your prepared remarks, just on comping the pretty tough comp from last year. When do you think we officially cycle that? How much more pruning or right-sizing up that brand needs to happen? It does seem, and to your point earlier, that Europe is now starting to go through that reset on the brand? Curious how you think about that over the next 12 to18 to 24 months?

Like we said, we're going through some pretty tough comparisons, mostly in the US and Europe. In the meantime, we're ramping up a lot on automatics, we're adding additional assortments and locations for jewelry, we're building more shop in shops. Asia is still in its infancy for Kors, so there is a lot of opportunity there. The big opportunity over the next couple years is going be adding wearable to this. We think it could turbo-charge that business quite a bit.

In addition to that, I would say that the Michael Kors business is still extremely productive, our most productive brand, they're very powerful globally. We expect business will probably settle a bit. For a while, well get wearables in there, next year. Then we will set it up for more long-term growth.

It's a very strong global brand. It's unique in the world and it's a great brand and one we're very pleased to go battle with over the long-term.

Okay. Thank you. I'll let someone else jump in.

Omar Saad, Evercore ISI.

Thank you, good afternoon. Wanted to follow up on my first question on wearables piece, a lot of stuff going on there. It's obviously a really tiny percentage of your business now, but you mentioned there's some data that you are seeing that gives you a lot of confidence in this. Obviously enough confidence to make a sizable acquisition. Help us understand, A, where you're getting the confidence to make this kind of bet on the wearables piece, and then maybe more details around Misfit specifically, the app platform versus the hardware side, what the key ingredients are there that you can leverage in your existing businesses?

This is Greg McKelvey. In terms of the confidence in the size of the category, I think first is, we're seeing the market develop. Where it's increasingly clear to us that wearable technology is and will be a large growing category, there's projections out there that are putting it at about $45 billion in the next four or five years, with roughly two-thirds of that being wrist-worn. That would put the size of that market at roughly the same size of the under $1,000 global watch market.

We believe that all three categories that make up that market, which would be activity trackers, smart watches with display, and the third being smarter watches, integrating technology similar to what you'd find in an activity tracker into the same type of watchers we sell today. All three of those are viable products that we see actually our Fossil Q launch being very successful with. We are going hard at that. We see the markets developing, and we have a position to play in that.

With Misfit, we have learned a lot the last couple years in developing product and bringing it to market for Fossil Q. We believe we are now in a connected age where apps and cloud services are effectively now part of product and an extension of brand, and that needs to support and mirror our business model of today, so meaning multi brand, fashion and design driven, and globally scalable. It's so integral now to product and brand development, that it's really too important to outsource that to somebody else.

We want to own that customer experience, own the platform, and be able to get to market much more quickly. And then as we scale it across the breadth of our portfolio of brands in 20 languages in 115 countries, just the pure economics of scaling our product size, breadth, number of brands, across the fixed cost of the development of that platform, makes for much more attractive margins, ultimately, than we'd get if we fully outsourced it.

And I'm sorry, I would just add one other thing. Misfit, specifically, they have got a very talented team that has spent the last four years solving some of the hardest problems in wearables, including battery life. Their platform has already, because they've got -- is already supporting multiple brands, given their partnerships with Swarovski and Victoria's Secret and others. They are global, especially with strengths in the US and in Asia, which is important to us.

That got an 18-month pipeline of products and innovation that we're going to be able to extend not only into the Misfit brand, but into the full breadth of our product portfolio and brand portfolio. It's a digitally native brand, as we discussed on the call as well, that allows us to get into consumer electronics, and healthcare, and enterprise and other channels we are not in today. A significant opportunity to expand our addressable market.

It's clear to us that wrist devices are selling, they're in terms of trackers and also in new entrants in smart watches. You could say for our overall watch business, that we have a fashion miss, which is we don't have technology across our platform. There seems to be, in just the general watch business, that people are maybe waiting to see. They're looking for technology, they're not sure. In the meantime, wrist devices with technology are selling extremely quickly.

We think that one of the most important fashion trends right now in the industry is this huge interest on the consumer side of the convergence of fashion and technology. We are moving very quickly to make sure that we can scale technology in many different ways across our platform.

As we mentioned, not just in Android display smart watches, but across our entire platform of devices and watches, putting sensors, and connectivity, et cetera. We think at some point, everything we will make one have some type of chip in it that will add additional functionality, and not at a lot of additional cost, because of the fact we make 50 million pieces of accessories a year is going to enable us to scale it across our entire organization.

It's all the stuff we talked about in the past. One thing is, millennials are clearly over spend on technology. There's a -- seems to be a slowdown in consumer activity overall, but one thing is clear, is consumers are still spending on technology, and we think that continues.

We also know that from our past, consumers will spend on additional functionality. A lot of our growth over the last five years have come from us adding chronographs and other technical features at a higher average retail, and consumers are very willing to spend it, and that's one of the things we're going to be putting in there.

The other thing to remember is the watch industry is fundamentally a small business, about $65 billion globally. The projections on the wearable business are that it's going to grow very quickly, and at some point, it will be the same size as the watch business. If you look at the trillions that's being spent on technology right now from all different types of cell phones and service and games, et cetera, a small percentage of that spending comes into our accessories, it can make a huge impact on.

That's what we're working fur. This acquisition also gives us the ability to innovate and differentiate us from our competitors. We're going to be able to put products on the market that are unique and special, and address people's lives in many different ways. It's going to be a very unique and long-term opportunity for us to differentiate and to innovate, like we do in the rest of our Business.

If I could add one more thought to that, we absolutely remain at the core of the traditional watch market, but what this allows us to do is really to be all things to all people on the wrist. Whether its design, fashion, style, or brands or now tech and the additional functionality and that community that brings, we think that we have the products to merge that together, and we can do it in a way that nobody else can.

If I could bring the wearables conversation, to line it up with the Michael Kors conversation. Do you think that female 20-year-old to 40-year-old, Michael Kors fashion watch consumer, that had been buying watches, has now switched and is buying FitBits and Apple Watches? Or do you think she's on the sideline because she's waiting to see what's going to happen to the space, or was there a lack of newness and innovation in new products for her within the Michael Kors line, that the majority had enough products and styles? Help me understand what you think was going on between wearables and Michael Kors, specifically because it's so big, and was such a big growth driver.

Excellent question. What we've seen from Kors is a huge audience of Kors fans out there, that over the last 10 years have fallen in love with the brand and have bought Kors products, and the overall look of that is what we would call boyfriend. So it's a men's watch on a woman. Most of those customers, a lot of them have multiples of those watches.

I would say one thing we haven't done, which we are working on right now is we haven't innovated off of that idea fast enough, and you're going to see a whole new assortment of Kors watches next year, even before the wearable technology comes in. We're going to totally change the look, it's more modern, simpler, et cetera. There's a totally new look for, to give the consumers, the Kors fans, a reason to buy another watch.

But clearly when we put the wearable technology in there, and we put -- when Michael Kors himself gets behind it, and the entire power of that organization is talking about technology and how can it fit with the Kors lifestyle, et cetera, we think its another catalyst for another phase of growth. I think that's the idea of technology injecting with fashion is so relevant today, especially with the millennial customer, we think it's going to fit and dovetail perfectly in with our long-term Michael Kors strategy.

So to summarize, you think it's a combination of lack of the wearable technology, but also maybe a little bit of lack of newness and innovation?

Absolutely.

Thanks for all of the information.

Rick Patel, Stephens Inc.

A couple of questions. First on Fossil Q Founder, does that have the one-week battery life, as well, or is that just the Fossil Q Grant that you were referring to? And then secondly, any color on the pricing of Fossil Founder, and perhaps the economics of it? Since you're partnering with Google and Intel, I'm curious about how each unit sold is going to impact sales and profitability. Dennis, I think you mentioned the negative impact of lower margins, but any way to frame that quantitatively?

This is Greg. The Q brand has a week or more battery life. Q Founder will have a day to two days, depending on use. Price points on Q Founder are $275 to $295, and then Q Grant is $175 to $195.

In terms of economics, we don't release margins on these products. I would say that, compared to where the growth that we are expecting for Gen 2 and Gen 3 over the next 12 and 18 months, we're going to see a heck of a lot more unit volume and margin expansion, as we go into next year.

I'd still call Generation 1 our first foray into the market. Limited inventory risk that we took in Q4, as we're starting to see how the products perform, but we are -- we're getting app store, both on Apple and Google app stores, very good scores. It's performing very well at both wholesale and our own direct to consumer channel. We're going to start to step into more volume as the holiday season goes on and early next year.

And on the margins, Greg is right. We're not giving specific details. The volumes in the fourth quarter are relatively low. The way we think about this going forward into the future is that we do expect, as it becomes a larger part of the mix, that should drive some downward pressure, just because the category historically has not been as strong margins as we yield.

On the other hand, as we scale, there should be some opportunity for the scale economics to kick in and help offset some of that. Over time, the way we think about it now, is we would expect some general margin headwind. Having said that, Kosta alluded to this, as we add innovation to products, there's an opportunity for us to claim greater price and drive AUR. All of that remains to be seen, but if you're thinking about next year, this should probably give us a little bit of margin headwind.

And one thing, just in the tech industry and especially with the expertise we're going to gain from Misfit, everything is going to get better. Battery life is going to get better, chips are going to get better and less expensive. The objects are going to get smaller, and we'll be able to put, next year or shortly thereafter, women's smart watches out there, our Android smart watches at some point, probably next year, will be untethered, which means don't need your smartphone with you.

All of this is going to get better, especially with us having the expertise to be an innovator and be on the front edge of all this technology, and working with partners, et cetera. We're going to be able to bring more compelling products that will look better, feel better and margins will be better. We'll be able to add a lot a function to fashion, without a lot of intrusiveness. We're going to be in a pretty good position.

And as you roll out wearables, are you going to have to augment your display cases in department stores and jewelry stores, versus what you have for analog watches? And if so, how should we think about the impact it's going to have, either on depreciation or expenses or CapEx?

We've already done that. If you see the Q presentations in both our stores and also in department stores, you will see we've added some in case, and top of counter and some other display. As a matter of course, we refresh those underway on an ongoing basis, so I wouldn't say it's any additional cost. Generally, it's more just changing from one thing to another. It is going to be part of it, but it shouldn't be a big expense.

The other thing I would add is this is also a big part of the value of the Misfit platform. Their technology is built on replaceable coin cell or watch type batteries, so their whole software runs on this. What that allows us to do is very quickly scale both smarter watches and activity trackers, that use those coin cell batteries across our global sales organization, across all channels, without having to worry about putting power and expensive fixtures in place. It gives us speed and much lower cost in operating expense, and in CapEx.

Thank you. Good luck this holiday.

Simeon Siegel, Nomura Securities.

Sorry if I missed this, but is the goal of Misfit to take the place of Intel and Google for all the connected devices? If that is correct, what happens to the devices you have in the interim? Then Dennis, can you just talk about the conflicting factors mentioned in the press release of pricing initiatives versus the higher markdowns that we had on this quarter's gross margin? Thanks.

This is Greg. I would take the first one.

In terms of our technology partnerships, Intel and Google, who are both of our announced partnerships, they have been fantastic partners and will continue to be partners with us. The Misfit acquisition is really about owning the cloud and the app platform, given how integral it is now to product and brand and customer experience.

We will own that part of the customer experience through the app and cloud, but we will continue to partner with the leading technology companies across the world, to continue to build the right ecosystem of partners and compete in the space. The best hardware providers, the best contract manufacturers, the right ecosystem, cloud partners, whether that's music or fitness or what have you. It still takes an entire ecosystem. This has just about us owning the cloud and app platform that is now part of product and brand.

In terms of the margins, the pricing, generally speaking, the pricing adjustments that we've made, we have seen the margin yields that we were anticipating for the year. Sales have not materialized as we had expected, so inventory levels, as you saw, are certainly higher. We will be likely then moving more inventory through different channels. That would put some pressure on the margins that we've included in the guidance, but to manage our inventories at appropriate levels.

So the higher markdowns are on different product then you were able to take the price on?

Yes, it's different product. I also mentioned that we're a little heavy in Swiss and will likely invest a little there, to make sure those levels of inventory are appropriate.

Great. Thanks a lot. Best of luck for holiday.

Lindsay Drucker Mann, Goldman Sachs

I wanted to just get context around your outlook for smarter accessories and watches versus traditional ones? And given some of the headwinds you've cited for millennial consumers and their acceptance of traditional watches and embracing digital ones, how we should think about the risk to your traditional watch sales for next year? Thanks.

I think our view is that we are at a point now where this is a natural evolution. We see these markets coming together, where those who traditionally have not participated in the traditional watch market, they are now more accessible to us, because we have the ability to add tech to the product. We are, as I said a few minutes ago, I really think the way we view this is that we've now got the best of both worlds, in that we can be all things to all people on the wrist. If to the extent you are a customer for whom design, fashion, style, branding matter, and you're not interested in tech, we still are advantaged there. This expands another arrow in our quiver, to attack an additional market, and go after additional consumers.

I would add another data point for you. Remember, 65% or 70% of our revenues today are female fashion-conscious customers. The smart watch market, in particular, today, is still male-dominated.

Females are playing in the activity tracker space. It's really not replacing for female fashion conscious customers anyway. Smart watches are not having a large overlap today. We see, however, an opportunity for all three of the categories that we're going to be bringing to market, to support and drive growth with the customer, that core customer.

Got it but as we think about the speed at which you can scale these new platforms, and have to build them and some of the lead times, should we be thinking about your North American business as one that can, given some of the headwinds you talked about in the traditional category, should we be thinking about that as a business that can grow next year? Are you anticipating further revenue pressure?

We haven't yet guided 2016. The way I would think about it is the acquisition itself, provides us for opportunities for tailwinds for growth for next year. Misfit by itself, our ability to accelerate that growth through our own distribution sales force, and our ability to leverage our platform, the Misfit platform across some of our brands.

That will be later in the second half of the year, and it won't include all of the brands on the platform next year, but there will be tailwinds there. Fossil and SKAGEN, we see as tailwinds in 2016. Every region those brands are growing in, we are seeing benefits from the marketing investments that we are making and our omni investments are also yielding dividends. Our e-commerce business has been up. There's a lot of tailwind going into next year.

What remains to be seen is, what are the -- and we really need the fourth quarter, to get better informed about this. What are the category trends? How is the consumer feeling? Economic trends? Brand trend? We will learn more through the fourth quarter, but we see a portfolio going into next year that includes a number of tailwinds, including this acquisition, will provide many of those.

Great, thanks so much.

Oliver Chen, Cowen and Company.

Kosta, what you think are the near-term differences that you can make to stimulate demand? I know that the sell-ins are mostly done for the holiday season, but as we look to spring, are you going to have a radically changed assortment across all of your brands, including Kors? Or is Kors the main focus for transformation? The watch market, did it also decline double digits? I'm curious about how the market moved, versus your constant currency results?

Yes, actually, we're moving very quickly across our entire spectrum of products with innovation and new materials, new ideas and changing as much as possible, changing point-of-sale. If you see our Fossil store, for example, and you saw we've been pretty good results in there, we've totally changed the way we have our presentations done. The product looked great, and we're showing some pretty good increases relative to the market.

This is a typical pro forma for us. When times get tough, we innovate like crazy and put more designs in there, take some chances, et cetera. And typically during tough times, we come out of it with pretty strong growth. Our operating model is really built for resilience and flexibility, and our inventory turns are faster than the rest of the market. Our design innovation is better and quicker. Our resources are broader and have a larger scale.

Just to give you one example is that, globally, we use -- most of our business is done through our own wholly-owned subsidiaries where our competitors largely use distributors. When times get tough, distributors pull back on inventory investment, et cetera. We just keep going. This is a time for us to get stronger, take more share, while we're moving very quickly to disrupt the market with new innovation, with technology and new ideas, et cetera. We think we're in a pretty good position over the next couple of years. We think it'll play out pretty well for us.

And then on the US market, the data that we collect, independent data, covers not all, but a substantial part of the market, about 40% of the US market at our price points. As we mentioned on the call, when exclude the impact of Kors, we see our watch business outperforming the US market in the third quarter at our price points.

Okay, best regards for the holiday season and next year.

Ed Yruma, KeyBanc Capital Markets.

First, I know historically, you haven't provided markdown support for your wholesale providers, but what do you or can you do at a time like this, where sales trends are deteriorating pretty meaningfully? Second, I know you've talked about wearables having a lower margin profile. Maybe a little more color, and I know this is changing with your acquisition. Thank you.

One advantage also on our operating model is that watches and accessories are not typically -- there's not a weather-related component to it. There's not a lot seasonality. It's not like swimwear and shorts and outerwear, et cetera, so the margins that retailers get are relatively high, and it's not typically been a big part of our ongoing business model. We don't expect that to change dramatically.

As far as the wearables, as we've been talking about, we have a lower gross margin now, but we think over a long term, as quantities come into play and we scale this across our platform, that we can actually have a situation where we are able to increase that over time. Just looking at Moore's Law, chips get less expensive and more robust, and we think that will play out with us, especially with our quantities and how we are going to go to market, and especially also with us having the expertise to develop this ourselves, rather than to have to rely on third parties largely to do most of it.

The other aspect of longer term, as you think about the margins, even to the extent that our gross margins are modestly expanding, or even if they are still creating a headwind, we think that there is an opportunity to leverage the entire infrastructure and the platform across all of our brands in distribution. The provides us a lot of power to drive operating margin expansion over time. We won't see that immediately, because we're not getting all of the benefits of leveraging the platform over the portfolio, all the way in 2016. But over time, we think that could be significant.

Got it, and one follow-up, if I may. You mentioned that FX, obviously, and some of the hedges you have won't be working in your favor next year. Is that simply looking at that other income line and assuming that goes closer to zero? Thank you.

That's right. It's exactly right. You won't have the benefit of those contracts, because most of those have run now.

Thanks so much.

Ike Boruchow, Wells Fargo.

A quick one on your Q4 sales guidance. When you look back, historically, you have guided within a range of 2 points, this year, it's 9 points. If you can give us more detail about the visibility that you have, historically, you have had some predictability there, and just the ongoing discussions with your wholesale partners, maybe region by region? Just trying to understand the sell-in, sell-out dynamic that you are dealing with day-to-day right now.

As I said before, what we don't have is a lot of visibility. We don't operate with backlogs. What we do is we analyze our business in a lot of different ways. We look at it regionally, by category, by brand, I did say earlier.

The biggest change in the way we're thinking about fourth quarter comes from Europe, where going into this last quarter, we had seen one quarter of less favorable performance, following about seven or eight of very strong double-digit source or so growth coming out of Europe. The trajectory changed there fairly quickly, so we have adjusted our expectation. We're coming off a down 7.5 third quarter up against a 10. We provided a wide range to reflect a relatively choppy environment right now that's difficult to predict.

We want to be able to accommodate in our range the deteriorating trends. The second quarter we saw a step down from Q2 going into Q3. Most of the business in the fourth quarter happens in the back part of the quarter. It's going to be largely dependent on reorders, and how our wholesale partners are looking to manage their inventories at their year-end.

Got it. Dennis, when you said the acquisition was -- I think you said it was dilutive to 2016. Was a dilutive to your margins, or dilutive to your EPS? I just want to make sure.

Both.

Got it. Thanks so much.

Our next question from Anna Andreeva, Oppenheimer.

To Dennis, an earlier comment about needing to invest in the business. Can you maybe talk about the puts and takes on the gross margin versus SG&A lines? As we think about 2016, could next year be a down earnings year for Fossil, given some of the investments?

Also a question on the store footprint. You have been adding new doors at a pretty healthy clip. Should we expect that to change, as the focus shifts towards wearables? Any opportunity, additional opportunity to close doors? Thanks.

Again, in terms of growth, thinking about next year, a fairly near-term lens on this. I would expect, because of the nature of wearables, we would expect to see some modest headwinds in the gross margins. In terms of the way we are planning the expense line, we have been holding infrastructure tight. We think that is the way we're going to manage 2016.

We've actually been operating with very limited store growth, and we would expect to continue to do that into next year. One thing that we have to work through, that we don't have yet is just what are the purchase accounting applications of the Misfit acquisition, and how that will likely affect the expense line.

But what we believe is this is the hottest category right now, and now is the time for us to invest. We're seen traction from the investments that we're making and Fossil and SKAGEN and omni, and we intend to continue to do that and really drive the top-line. Again, we talked about on last call, or the last question, rather, currencies are going to impact our earnings, because in 2015 you really saw it in the operating margins. But the earnings were lifted up because we had the non-operating contract supporting it below the line.

Now, in 2016, we're going to be anywhere from 1.5 to 2.5 years outside of when the dollar really started strengthening. The contracts only buy you time, and now that has been neutralized. Even at the base business, all other things being equal, the currencies, because of the lack of those non-operating gains, are going to create earnings headwinds.

Heather Balsky, Bank of America.

I was wondering if you could talk about how you were thinking about your SG&A investments next year, outside of marketing around the wearables. Especially, if you do see greater than expected sales weakness in the fourth quarter, would your plan to be invest more in marketing to drive awareness, to drive traffic?

That is where -- as I just said on the last -- the framework for us for next year's whole infrastructure of stores tight, but invest where we are seeing returns. We are seeing returns in Fossil and SKAGEN. In the third quarter, those brands were both up, and there's not a lot of brands that are able to drive growth in a pretty challenging environment. Where we are seeing returns, we expect to invest.

Omnichannel is another investment where we are seeing good, solid returns on our e-comm business, and those are the areas we're going to invest. Again, wearables is hot right now. This is the time for us to be investing in it, and that's the way we are approaching 2016.

I have a couple of more points on top of the marketing investment. We are investing, based on last year's, the results in very targeted ways, largely digital, and almost all traffic driving. Very good returns, more short term focused, and it gives us the ability also to quickly respond to the effectiveness that we are seeing.

And then on omnichannel investments, we have some pretty good leading indicators so far on the investments paying out, not just in the traffic and conversion improvements that we are seeing online, but L2 recently came out with smart ports that put us as a top mover in the space, compared to the rest of the fashion peer set, and initiatives that we're deploying now are just going to continue to drive momentum there. On the social side we're seeing a lot of momentum as well, with pretty significant follow-up growth and sentiment. Those all give us a lot of confidence that the investments are paying out, and will continue to compound as we go into next year.

Okay, and then separate question in terms of your direct performance. I was wondering if you could quickly tell us how outlet performed compared to your full price channel?

I am remote today, I don't have those data in front of me. Maybe somebody can grab that and I get to that to you in a second.

Thank you. That's it.

Operator, if you want to move to the next question and we can come back to that.

Laurent Vasilescu, Macquarie.

Could you provide a bit more color on the composition of the inventory by product category? Should we assume watches are up high single to low double digits year over year? And if that's the case, what is the exit strategy you are looking for? Where do you think inventories will stack up for next quarter?

Yes, the inventory, our inventory was up 7%, which is obviously outpacing the sales growth in the business, higher than we planned. The growth is primarily in our strongest-selling brands, but as you have falling demand, just given lead times, it takes a while to turn through it. We see most of that as a timing issue that we ultimately can work through. I did mention earlier that we are a bit heavier, given the performance in markets like Asia on our Swiss inventories, and we are working through those as well.

Can you talk about the intellectual property you acquired with Misfit? And also, what is your current R&D rate as a percent sales? How should we think about step up functions for that, for next year?

In regards to Misfit, and the IP, as we talked about earlier, this is a unique platform in both cloud and app, and the ability to have an engineering team that really is driving our product platform, so it's multi-brand. It connects to the Internet of Things and communities that our customers care about. Basically, their low power management platform, that's built on watch technology or watch non-rechargeable batteries, coin cell, fits very well with our road map and the technology we're trying to bring into our watches.

Thank you very much. Best of luck.

On the earlier question, our comp was driven more by the outlets, which were slightly up. The full price stores, slightly down.

That does conclude our question-and-answer session. I will turn the call back to the speakers for any additional or closing remarks.

Thank you, very much, for participating in the call today. We look forward to talking to you after our fourth-quarter call in February. Thank you, very much.

That does conclude our conference. Thank you for your participation.