FOSL

Fossil Group, Inc. (FOSL)

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Fossil Inc. (FOSL)

Q1 2008 Earnings Call

May 13, 2008 9:00 am ET

Executives

Allison Malkin - Investor Relations, ICR

Kosta Kartsotis - CEO

Mike Barnes - President and COO

Mike Kovar - CFO

Analysts

Brad Stephens - Morgan Keegan

Barbara Wyckoff - Buckingham Research Group

John Curti - Principal Global Investors

Ronald Bookbinder - Global Hunter

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Fossil 2008 First Quarter Earnings 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)

I would now like to turn the conference over to Allison Malkin with the ICR. Please go ahead, ma'am.

Allison Malkin

Thank you, 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 report 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 of 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’d like to turn the call over to Fossil’s CEO, Kosta Kartsotis.

Kosta Kartsotis

Thanks Allison. Good morning everyone, and thanks for joining us. Also here today are Mike Barnes, President and COO, and our CFO, Mike Kovar. We will give you an overview of our first quarter results and then give some additional insight into our operations and our outlook for the reminder of the year. At the conclusion of our prepared remarks, we will welcome your questions.

During the first quarter, we continued to experience solid growth. The strength of our global distribution network and diverse product offerings, along with the benefit of the favorable changes in the exchange rates, more than offset the impact of a challenging retail environment in United States. As a result we reported record sales and earnings, surpassing our original guidance.

Specifically, our first quarter results included net sales growth of 17%; gross profit margin at 54.5% represented a 330 basis points increase from last year; operating margins of 14% of net sales, and diluted earnings per share of $0.43.

Our overseas business, which generates more than half of our sales, continued to build on its market share gains. We experienced solid growth for the Fossil watch business in both Europe and Asia, with wholesales shipments growing at 17% ex-currency. And we continue to make progress in expanding our accessories businesses outside United States.

Global net sales from licensed brand watches also increased by 16% ex-currency during the quarter, and represented approximately 33% of our consolidated sales. We continue to see double-digit sales growth in many of our larger more penetrated business as well as in newer businesses such as Kors and Marc Jacobs. Both are performing very well and adding doors globally.

As to our direct consumer businesses, we are pleased with the progress we made during the first quarter. We have increased our global retail infrastructure and believe we are well-positioned to achieve our targeted 80 to 85 door growth this year. The new stores look great and serve as a great platform for us to showcase the Fossil brand worldwide and to build significant brand awareness.

Our history tells us that this increase in awareness will also fuel our wholesale sales. Our Fossil accessory stores experienced positive comps in Europe and Asia. Our U.S. accessory store comps were impacted by a challenging environment in the United States, but we have seen a promising improvement in April and in early May.

In our outlet store concept, which is predominantly in United States, increases in gross profit margins more than offset a slight decline in comp sales. On the balance sheet we ended the quarter with cash balances of $205 million. The company's cashflow allowed us to repurchase nearly $2 million shares of Fossil common stock over the last 12 months and still increase yearend cash balances by 38%.

We are also pleased to raise our guidance for the year, which Mike Kovar will detail later in the call. While we anticipate there will still be some headwind in the United States, we are in the position to benefit from our diversified global business model. And now I would like to turn the call over to Mike Barnes to review our sales highlights in more detail.

Mike Barnes

Alright. Thank you, Kosta. Good morning everybody. I'll start with a review of our domestic businesses. Domestic wholesale watch shipments increased by about 6.7%. This growth was driven by our mass market, licensed watch and Michele brand, and partially offset by a sales decline in Fossil and Relic watches. Mass market watches saw shipments rise 69% in the first quarter, benefiting from Wal-Mart's promotional program commencing in first quarter this year, compared to the second quarter last year.

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