FOSL

Fossil Group, Inc. (FOSL)

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

F4Q08 Earnings Call

February 17, 2009 9:00 am ET

Executives

Allison C. Malkin - ICR

Kosta Kartsotis – Chief Executive Officer

Michael W. Barnes – President and Chief Operating Officer

Mike L. Kovar – Chief Financial Officer

Mark D. Quick - Vice Chairman

Jennifer Pritchard - President of Retail

Analysts

Neely Tamminga - Piper Jaffray

Anna Andreeva - J.P. Morgan

Eric Tracy - BB&T Capital Markets

Robin Murchison - Suntrust Robinson Humphrey

Justin Maurer - Lord Abbett

Presentation

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the fourth quarter and fiscal 2008 results conference call. (Operator Instructions)

I would now like to turn the conference over to Allison Malkin of ICR. Please go ahead.

Allison C. Malkin

Thank you. Good morning.

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. Also, 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 Form 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 through this release under the Earnings Release section under the Investor Relations heading on Fossil's website.

Please note that this call is being webcast live on Fossil's website. It will be available for replay on the website 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 Karsotis

Thanks, Allison. Good morning, everyone, and thanks for joining us.

With us today are Mike Barnes, our President and Chief Operating Officer; Mike Kovar, our CFO; Mark Quick, our Vice Chairman; and Jennifer Pritchard, our President of Retail. We will provide an overview of our fourth quarter and fiscal year results, then give our outlook for 2009. After our prepared remarks we will answer your questions.

Fiscal 2008 represented a year of significant progress for Fossil. The weakening global economy and the strengthening of the U.S. dollar affected us in our most productive quarter of the year. We still achieved record revenues and earnings for the year while advancing each of our long-term initiatives.

Net sales for the year were $1.58 billion, generating earnings of $138 million. This represented a 15% increase on diluted earnings per share over the prior year.

Notable highlights during the year included increasing global demand for the FOSSIL brand, which generated double-digit growth in sales volume. While our retail growth in the core watch and jewelry offerings continued to drive the bulk of the FOSSIL brand business globally, our FOSSIL [inaudible] are becoming a more meaningful part of our business in a number of international wholesale markets.

We also had positive comp store sales within our global store base despite the challenging economic environment. During the year we opened 84 retail stores and closed three outlets and one accessory store. Of the 84 new stores, 79 were our full-price accessory concept, of which 50 were opened outside the United States. At year end we operated 191 accessory stores around the world and our direct-to-consumer channel grew to represent approximately 20% of the overall net sales, up from 17.8% at year end 2007.

On average, our international base stores outperformed our U.S. stores when measured on a four-wall operating profit basis. As mentioned on previous calls, in light of the current economic environment, we have scaled back our plans for new store openings, with a larger percentage of our store openings slated for international locations. Currently, we have targeted 40 to 50 store openings in 2009, with only four or five of these in the United States.

We also increased our international wholesale sales by 9.1% for the year in constant dollars. This now represents 50% of our global sales. For the year, sales rose 6.8% in Europe, while other international sales increased 14%, both in constant dollars.

We also continued growth in our new product offerings. We expanded our global jewelry offerings to include the launch of DKNY jewelry internationally, while continuing the rollout of the FOSSIL jewelry line in the United States. Both businesses exceeded our expectations, even in this difficult retail environment.

In addition, we just recently made our first shipments of FOSSIL men's footwear in both the United States and Germany, and we will start shipping women's footwear in the fall of 2009.

We also ended the year with a strong balance sheet. Cash at year end was $178 million even after investing $106 million to repurchase 3.6 million shares of common stock during the year. Total debt was minimal and we have no outstanding borrowings under our $140 million credit line.

As for the fourth quarter, currency and the weakening economy globally proved to be a significant headwind, but we still managed to achieve sales levels of prior year while maintaining our gross profit margins. In total, fourth quarter net sales were $464 million, up slightly from $463 million in the fourth quarter of 2007. In constant dollars, fourth quarter sales rose 6.3%.

Earnings per share declined 8%, to $0.69 - $0.75 in fiscal 2007 - however on an adjusted basis to last year, earnings per share for Q4 were up $0.09 to $0.84.

Our business model consists of us distributing globally branded, high margin accessories with relatively high inventory turns and short lead times. Our product lines do not change as often as apparel, are not as seasonal, and do not come in sizes, so there are fewer SKUs. This model plays very well in this environment.

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