Fossil's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Fossil, Inc. (FOSL)

Q2 2012 Earnings Call

August 7, 2012 9:00 AM ET


Allison Malkin – IR

Kosta Kartsotis – Chairman and CEO

Mike Kovar – EVP, CFO and Treasurer

Jennifer Pritchard – President, Retail


Barbara Wyckoff – CLSA

Oliver Chen – Citi

Shreya Jawalkar – Jefferies

Ike Boruchow – JP Morgan

David Wu – Telsey Advisory Group

Neely Tamminga – Piper Jaffray

Rick Patel – Bank of America Merrill Lynch

Omar Saad – ISI Group

Anna Andreeva – FBR Capital Markets

Liz Dunn – Macquarie



Ladies and gentlemen, thank you for standing by. And welcome to the Fossil, Incorporated Second Quarter Fiscal 2012 Earnings Conference Call. Prior today’s recorded presentation, all participant will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

I will now hand the conference over to Ms. Allison Malkin of ICR. Please go ahead ma’am.

Allison Malkin

Thank you. Good morning, everyone. Before we begin, you should be aware that during this conference call certain discussions will contain forward-looking information. Actual results could differ materially from those that will be projected during these discussions. Fossil’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, Fossil undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.

If any non-GAAP financial measure is used on this call, a presentation of the most directly comparable GAAP financial measure and reconciliation of this non-GAAP financial measure to GAAP will be provided as supplemental financial information to this release under the Earnings Release section under the Investor Relations heading on Fossil’s website.

Please note that you may listen to a live webcast or replay of this call by visiting Fossil’s website and then clicking on About Us at the bottom of the home page, and then on webcast under the connections heading.

Now, I would like to turn the call over to Fossil’s Chairman and CEO, Kosta Kartsotis.

Kosta Kartsotis

Thanks, Allison. Good morning, everyone. Joining us today in our Dallas office to discuss our first quarter are Mike Kovar, our CFO; and Jennifer Pritchard, our President of Retail.

Our second quarter net sales of $636 million represented an 18% increase from last year in constant currency. These sales results were higher than consensus estimates, even though we saw increasing currency headwinds during the quarter.

In addition the company delivered double-digit sales growth across all of our business segments. Please also keep in mind that last year our sales increased in the second quarter was a plus 35%. As a result of our broad based sales growth coupled with a gross margin and expense leverage that has surpassed our initial expectations our reported earnings per share of $0.92 significantly beat our guidance and represented a 15% increase over the prior year quarter.

At just less than $3 billion in sales projected for 2012 we’ve nearly doubled our top line in just three years time. Our aim has been to develop great product, augment our global infrastructure and a faster growth across our multiple channels of distribution, while continuing to deliver above average returns to our shareholders.

Our efforts in these areas continue to deliver positive results during the second quarter with specific highlights including sales growth acceleration across each of our wholesale business segment; continued growth in the sales of our Fossil brand and our multi brand large portfolio; positive contribution from the Skagen brand, which we acquired at the start of the second quarter; and the maintenance of a strong financial position.

In constant dollar sales growth North America sales rose 18% or 13% excluding Skagen primarily on the strength of our Watch business. All markets within North America reported solid results with the U.S. delivering 15% growth, Mexico 65% and Canada 23%.

Our wholesale business was challenging during the quarter due to some product mixes that we have identified in our correcting. Handbags in our own stores was plus 11% and we feel we have a large opportunity going forward. Jewelry also contributed to growth in the region, as the continued rollouts of Michael Kors jewelry more than offset the decline in our Fossil jewelry line, as we reposition the category for the launch of our new assortment this fall.

In Europe, constant dollar sales exceeded our expectations with a 14% increase or 7.5% excluding Skagen. This included solid growth in Northern Europe, partially offset by a challenging sales environment in Italy and Spain. Although the current macro environment remains challenging, we are still expecting this region to be a part of our sales growth for the second half of the year, albeit at a lower rate. Long term, we see strong opportunities for market share gains throughout Europe as we look to expand our existing own distribution footprint and take advantage of the strong appeal of the Fossil – of the Skagen brand in the region.

Our wholesale business in Asia increased 29% during the quarter, 4% of which was attributed to Skagen. Our business in China more than doubled during the quarter and while still small in scale, we are making a significant amount of progress in positioning our multi-brand watch business in the market. We also experienced accelerated growth in Japan and Korea during the quarter, and Asia continues to represent our largest growth opportunity, and we’re continuing to build our infrastructure there to support a much larger business. Over the longer term, we expect operating margins in the region to expand as we monetize the investments we are currently making and accelerating the opening pace of high return and high margin concessions.

Additionally, over the last several years, there’s been a large whitespace developing in Asia for watches and accessories, as luxury brands continue to elevate prices due to the strong demand for these categories. Specifically for watches, as the prices and demand have risen for Swiss watches has created a large opportunity for our products in the region. We believe the robust appetite for accessories coupled with the developing white space is a significant opportunity for both the Fossil brand and for our multiband watch portfolio. Fossil brand sales rose solidly during the quarter led by the other business which rose 11% primarily related to store expansion and watches, which grew 7%.

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