FOSL

Fossil Group, Inc. (FOSL)

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Fossil, Inc. (FOSL)

Q2 2012 Earnings Call

August 9, 2011 9:00 am ET

Executives

Allison Malkin - ICR

Kosta Kartsotis - CEO

Mike Kovar - CFO

Mark Quick - Vice Chairman

Jennifer Pritchard - President of Retail

Analysts

Amanda Sigouin - Jefferies & Co

Neely Tamminga - Piper Jaffray

Omar Saad - ISI Group

Barbara Wyckoff - CLSA

Kelly Hauser - BB&T Capital Markets

Presentation

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Fossil Incorporated Q2 Earnings Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Tuesday, August 9, 2011.

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

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 on 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 direct 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 you may listen to a live webcast or a replay of this call by visiting Fossil's website and then clicking on Investor Relations at the bottom of the Home page and then on Webcast.

Now, I would like to turn the call over to Fossil's CEO, Kosta Kartsotis. Kosta?

Kosta Karsotis

Thanks, Allison. Good morning everyone, and welcome to our call covering Fossil's second quarter results. Joining us today are Mike Kovar, our CFO; Mark Quick, our Vice Chairman; and Jennifer Pritchard, our President of Retail. Mike will provide a detailed review of our financial results later in the call while Mark and Jennifer will be available for questions at the conclusion of the prepared remarks.

We were pleased to announce earlier this morning the double digit sales increases across all of our geographies and categories as well as through our own retail stores allowed us to achieve a second quarter sales record. As a result, our $0.80 per share earnings for the quarter significantly both surpassed our previous earnings guidance. The second quarter sales increase of 35% represented the fifth consecutive quarter of at least 25% top line growth.

The Fossil brand is continuing to show strong growth and we are in what we believe to be the early stage of the strong watch trend, which is driving watch sales increases on a global basis through our wholesale, retail and ecommerce distribution channels. Our intense focus on design, innovation and brand development, combined with the ongoing success of our global expansion continues to provide us with a powerful formula for growth.

During the quarter, watches again lead our performance rising 32% in constant currency. Our emphasis on newness, new materials, new ideas and unique designs are allowing us to capitalize on the increasing importance of the category around the world. During Q2, Fossil watch sales grew by 13% while other noteworthy increases included Marc by Marc Jacobs which rose a 156%, Armani Exchange 136% and Michael Kors 91%. All our watch brands experienced double-digit growth.

On an aggregate dollar volume increase, Michael Kors and Fossil were the two largest contributors. The Michael Kors watch brand continues to surpass our expectations. The brand is maintaining a strong momentum in North America, is just beginning to expand into Europe, and is still small but showing huge potential in Asia. By the end of the year, we expect Michael Kors to reach an annual sales volume level of approximately $300 million, representing a more than $100 million increase over the prior year.

While Armani exchange and Marc by Marc are still in their early stages of their growth, we are experiencing similar trends in these two brands that we saw in the Kors business early in its stages.

These new and developing watch brands, in addition to our core brands, and coupled with the strength of our design, product development, and supply chain teams, and anchored by our global distribution platform serve as the foundation for our continued profitable market share growth.

In addition to solid increases in our watch business, sales of Fossil accessories grew 22% resulting in an overall Fossil branded sales increase of 17% during the second quarter. Sales in the accessories category will lead by a 44% increase in women’s bags; a portion of the growth is due to an increase in our [Averagina] retails and primarily a result of introducing a growing selection of higher quality details and fabrications. We believe the handbag category will continue to benefit greatly from increase in the awareness of Fossil as a lifestyle brand.

Our overall leather category also continues to make significant headway in Europe and Asia, increasing 64% and 39% respectively during the second quarter and providing a glimpse of the growth opportunity in that category.

The other significant contributed to sales growth in the second quarter was our direct-to-consumer business, consisting of our own retail stores and ecommerce sites. Our own stores delivered another outstanding performance; with a global comp store sales growth of 22%, on top of 15% increase in the second quarter of last year. It represents the 13th consecutive quarter of comp increases, and the 7th consecutive quarter of double-digit comp increases.

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