FOSL

Fossil Group, Inc. (FOSL)

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Fossil, Inc. (FOSL)

Q4 2011 Earnings Call

February 14, 2012 09:00 am ET

Executives

Allison Malkin - ICR

Kosta Kartsotis - Chairman & CEO

Mike Kovar - EVP, CFO & Treasurer

Analysts

Randy Konik - Jefferies & Company

Ike Boruchow - JPMorgan

Neely Tamminga - Piper Jaffray

Omar Saad - ISI Group

Oliver Chen - Citibank

Barbara Wyckoff - CLSA

Rick Patel - Bank of America

Ana Andreeva - FBR

John Kernan - Cowen & Company

Jane Thorn Leeson - KeyBanc Capital Markets

Presentation

Operator

Good day ladies and gentlemen, thank you for standing by. Welcome to the Fossil, Inc. fourth quarter and fiscal year 2011 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 recorded today Tuesday February 14, 2012.

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 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 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 a 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 Investor Relations and select webcast.

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

Kosta Kartsotis

Thanks, Allison. Good morning everyone and welcome joining us today to discuss our fourth quarter and full-year results from Mike Kovar, our CFO; Mark Quick, our Vice Chairman, Jennifer Pritchard our President of Retail. At the conclusion of these remarks, we’ll open the call up for your questions.

The fourth quarter concluded a very successful year for the company. We experienced double-digit sales gains across all of our business segments and all our principle brands and product categories. We believe these results demonstrate the ongoing success of our two core businesses, the overall Fossil brand and our multi-brand watch business.

Our direct to consumer channel had a great holiday quarter, sales growing 23%. We continue to experience strong comp store sales while growing the global store base to just under 400 locations by yearend. In fact Q4 represented our third consecutive holiday quarter of double-digit comp store sales growth.

Our ongoing innovation to design an imagery coupled with our owned distribution models allows us the opportunity to present powerful and consistent branding, compelling product offerings and superior financial results while gaining market share on a global basis. In particular, 2011 included several significant milestones. Total sales topped $2.5 billion increasing by over $500 million during the year. The sales of Fossil branded products surpassed $1 billion coming in just shy of $1.2 billion for the year. Our multi-brand watch business grew to over $1.8 billion with both Michael Kors and the Armani brands exceeding $300 million and we made significant inroads into establishing a much larger infrastructure in Asia that will serve as our base for growth in that region.

The Fossil brand continued to make significant progress during the year increasing 19% in constant currency, lead by a 20% increase in watches and a 31% increase in leather sales. As we present the image of American vintage with more authenticity and clarity, the brand continues to grow in important around the world. With increasing focus on fewer, better told stories and platforms have given us the ability to give a richer brand experience at the point of sale.

We believe we are in the early stages of this process and that there is a significant global opportunity in front of us as the Fossil brand becomes even clear and more aspirational. The brand is strong in both men’s and women’s side of the business and works all over the world. As we expand around the globe, our positioning as an accessories-based lifestyle brand gives us huge advantages as these categories carry higher margins, have shorter lead times and have less Obsolescence along the categories. It is a much simpler business to operator especially on a global scale.

Our comp store sales had another strong showing and we were up 14% for the quarter with North America up 16%, Europe up 8% and Asia up 21%. It was our ninth consecutive quarter of double-digit growth which shows the ongoing improvement in the overall brand and customer experience in our stores. For the year, global comps rose 17% on top of a 19% increase last year with a similar performance regionally to that of Q4.

We have made solid progress in improving the productivity of the store base over the last four years, evidenced by the expansion of our four-wall operating margin. With our stores performing well across all regions and with our metrics improving, we believe we’re still in the early innings of a rather large, multi-year retail growth opportunity.

In 2012, we will continue to focus on increasing on the productivity of our existing stores while we also accelerate our store openings. We currently expect to open 70 to 75 new stores with equal distribution between United States and international markets, while closing approximately 18 doors.

We will focus on opening accessory stores, wallet stores and watch station stores. Our global real-estate team is well ahead of where they were at this time a year ago. As of today, we have commitments to 49 locations for 2012, including 21 signed leases. Turning to our multi-brand watch business, sales were up 20% in the fourth quarter and 27% for the year. This impressive growth follows 40% increases in both the fourth quarter and full year last year.

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