FOSL

Fossil Group, Inc. (FOSL)

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Industry: Consumer Non-Durables
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Fossil Inc. (FOSL)

Q3 2008 Earnings Call

November 11, 2008 9:00 am ET

Executives

Kosta Kartsotis – Chief Executive Officer

Mike Barnes – Chief Operating Officer

Mike Kovar – Chief Financial Officer

Analysts

Neely Tamminga – Piper Jaffray

Barbara Wyckoff – Buckingham Research Group

[Eric Tracy – BB&T Capital Markets]

Anna Andreeva – J.P. Morgan

Ronald Bookbinder – Global Hunter Securities

Presentation

Operator

Welcome to the Fossil 2008 third quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Alison Malkin of ICR.

Alison Malkin

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 statements whether as a result of new information, future events or otherwise. If any non-GAAP financial measure is used on this call, a presentation of the most directly comparable GAAP financial measure and a reconciliation of the non-GAAP financial measure to GAAP will be provided as supplemental financial information to this release under the earnings release section on the investor relations heading on Fossil's web site.

Please note that this call is being broadcast live on Fossil's web site. It will be available for replay on the web site under the investor relations heading after the conclusion of the call. And now, I would like to turn the call over to Fossil's CEO, Kosta Kartsotis.

Kosta Kartsotis

Good morning everyone. Thanks for joining us. Also here today are Mike Barnes, our President and COO and our CFO, Mike Kovar. We will give you some detailed information regarding the earnings announcement and then I'll open up the call for questions.

Today we reported strong Q3 numbers in spite of the difficult environment, showing the resilience and strength of the business model. During the quarter, we grew sales 14.3% to $409.8 million. We increased both our gross profit and operating margin by over 200 basis points and reported net income of $36.5 million generating a 25.6% increase in earnings per share.

We experienced broad based growth all across the company with particular emphasis in our key growth initiatives; namely growing the market share of the Fossil brand globally, increasing our international presence and expanding our direct to consumer channels. Our strategy going forward will be to continue to play to our strengths, maximize our core businesses and to be very aggressive in increasing the efficiency of the company during these tough times.

[break in audio] include a 15.4% constant dollar increase in Fossil brand sales worldwide. This increase included solid contributions from our wholesale domestic segment where our business is more developed and double digit growth in our international wholesale and direct to consumer segments. Worldwide, sales of Fossil watches also increased 16.3% on a constant dollar basis.

The strengthening of the Fossil brand has been our biggest initiative the past few years and we are very pleased with the progress. Innovations in design, a more focused point of view, and great affordable products put us in a position for substantial long-term growth.

Considering the fact that this strong performance with a regular price and a mostly sale environment and that Fossil is and always has been a strong value proposition, we feel the brand is well positioned to do well in a rough environment.

Making the case vehicle for the brand image is our direct to consumer business. Retail delivered a solid performance with total sales rising 22.4% during the quarter driven by door expansion and a comp sales increase of 2.7% for the quarter. As it relates to new store openings, our international stores are showing the strongest performance. They are smaller, have higher sales per foot, require less build out costs and have higher gross profits because the prices are slightly higher.

We are putting stores in some of the best street locations around the world and doing very well both in Europe and Asia and communicating the Fossil brand to a much larger audience. The International opportunity is very significant and as a result, we expect two-thirds of the 80 plus stores opening this year will be outside of the U.S.

Moreover, in 2009, we plan to shift the vast majority of accessory store openings to Europe and Asia where we are experiencing a better performance and increasing brand recognition.

We're also seeing tremendous progress in the e-commerce business with a 33% increase for the third quarter. We had a 7.8% increase in web sales in the United States and had strong results from our Germany site that opened in September of last year. Recently, we have opened new e-commerce sites in the U.K., Singapore and Australia.

These web sites coupled with our catalog are great advertising for the brand. Increasingly, consumers are shopping on line before they go into a store and that fact is a big part of our strategy.

On the international front, wholesale shipments rose 12.1% on a constant dollar basis, with Europe up 8.2% and other international markets up 20.1%. We have some of the best brands in the world, great product innovation and a fast turning operating model. Also, our accessory business continues to gain momentum outside the United States. The opening of our retail stores overseas is introducing more customers to our non-watch offerings and this is providing us additional wholesale opportunity.

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