FOSL

Fossil Group, Inc. (FOSL)

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Fossil, Inc. (FOSL)

F2Q08 Earnings Call

August 12, 2008 9:00 am ET

Executives

Allison Malkin - Integrated Corporate Relations

Kosta N. Kartsotis - Chief Executive Officer, Director

Michael W. Barnes - President, Chief Operating Officer, Director

Mike Kovar - Chief Financial Officer

Analysts

Neely Tamminga - Piper Jaffray

Brad Stephens - Morgan Keegan

Barbara Wyckoff - Buckingham Research Group

Ronald Bookbinder - Global Hunter

Anna Andreeva - J.P. Morgan

Bill Baldwin - Baldwin Anthony & McIntyre

Presentation

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Fossil 2008 second quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Allison Malkin with ICR. Please go ahead, Madam.

Allison 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. 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 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 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 would like to turn the call over to Fossil's CEO, Kosta Kartsotis. Go ahead.

Kosta N. Kartsotis

Thanks, Allison. Good morning, everyone and thanks for joining us. Also here today are Mike Barnes, our President and COO, and our CFO, Mike Kovar. This morning, we will provide you with an overview of our second quarter results, as well as our outlook for the balance of the year. At the conclusion of our prepared remarks, we will open for questions.

We are pleased to report record second quarter results. This performance clearly demonstrates the strength of our business model. Our diversified global distribution of high margin accessories gives us a significant long-term opportunity. The combination of great brands and innovative product development, executed with cost and inventory discipline, puts us in a position to perform reasonably well despite difficult economic conditions in several markets worldwide.

Specific highlights of the quarter included net sales of $353 million, a gross profit margin of 53.9%, and earnings per share of $0.36, reflecting a 71% increase from $0.21 last year.

Our performance was driven by key growth initiatives, including our direct-to-consumer and international businesses. Our direct-to-consumer segment enjoyed a terrific performance, recording sales growth of 25% in the quarter, with total comp store sales rising 4.2% ex currency.

Our global accessory store comps were 2.7%, which included a 5.1% increase in the United States, which is on top of a 5.6% increase in Q2 last year. The momentum we are experiencing in this segment indicates that the innovative styling in our watch and accessory lines is resonating with consumers around the world and that the infrastructure we’ve been building to support this initiative is paying nice derivatives.

We are also seeing that these trends are continuing into the early part of Q3. As a result, we are maintaining our pace to open between 80 to 85 stores this year, with more than half of these outside of the United States.

On the international front, we experienced net sales growth of 9.5% ex currency, fueled by a 21.4% increase in our other international segment. We are making excellent progress in advancing our wholesale business in the Asia-Pacific region and are experiencing solid growth with our distribution partners around the world.

While our European wholesale business reflected a slower growth rate of 2.9%, we are confident that we will see some improvement during the second half of the year.

One factor that will help us internationally is that our accessory business continues to gain momentum outside the United States. The opening of our retail stores overseas is introducing more customers to our leather products and this is giving us additional wholesale opportunities.

For example, we have established a successful men’s leather business in our U.K. department store and they are now testing women’s leather. We are also doing leather test in both Australia and Japan. We also have a solid and growing business in Germany in leather goods.

Another bright spot is the fact that the Fossil brand increased in sales 13% ex currency during the quarter with all categories combined. In addition, our Fossil watch comps within our own retail stores were in the plus 15% range during Q2. These results are very promising as we enter the more seasonal second half of the year with an improved assortment and more focused branding efforts. The brand is continuing to gain momentum worldwide and this is again a significant long-term opportunity.

We also have a number of new initiatives that we believe will further advance our long-term growth opportunities, including we are very excited to announce today that we have signed a licensing agreement with DKNY for jewelry that will launch in Europe in Q3 of this year. As you know, our jewelry business is very strong in Europe and there is an appetite there for branded jewelry. We also have a very successful DKNY watch business in Europe, so we expect the jewelry to be very successful relatively quickly.

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