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Q3 2012 Earnings Call
November 06, 2012 9:00 am ET
Allison C. Malkin - Senior Managing Director
Kosta N. Kartsotis - Chairman and Chief Executive Officer
Michael L. Kovar - Chief Financial Officer, Chief Accounting Officer, Executive Vice President and Treasurer
Jennifer L. Pritchard - President of Global Retail Division
Ike Boruchow - JP Morgan Chase & Co, Research Division
Amanda Sigouin - Jefferies & Company, Inc., Research Division
Anna A. Andreeva - FBR Capital Markets & Co., Research Division
Rick B. Patel - BofA Merrill Lynch, Research Division
Omar Saad - ISI Group Inc., Research Division
Neely J.N. Tamminga - Piper Jaffray Companies, Research Division
Oliver Chen - Citigroup Inc, Research Division
Dorothy S. Lakner - Caris & Company, Inc., Research Division
John D. Kernan - Cowen and Company, LLC, Research Division
Lizabeth Dunn - Macquarie Research
Barbara Wyckoff - CLSA Asia-Pacific Markets, Research Division
Previous Statements by FOSL
» Fossil's CEO Discusses Q2 2012 Results - Earnings Call Transcript
» Fossil's CEO Discusses Q1 2012 Results - Earnings Call Transcript
» Fossil's CEO Discusses Q4 2011 Earning Results - Earnings Call Transcript
Allison C. 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 statement, 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 webcast under the Connections heading.
Now, I would like to turn the call over to FOSSIL's Chairman and CEO, Kosta Kartsotis.
Kosta N. Kartsotis
Thanks, Allison. Good morning, everyone. And joining me today to discuss our third quarter results are Mike Kovar, our CFO; and Jennifer Pritchard, our President of Retail.
First, we want to thank and to express our thoughts and support for all those impacted by Hurricane Sandy. We wish a speedy recovery to all those affected.
Our third quarter net sales of $684 million represented a 10% increase from last year in constant currency. These sales results were a bit lower than we had projected as our overall sales in Europe ended the quarter down year-over-year. However, we were able to surpass our earnings guidance due to strong double-digit growth in both our direct-to-consumer business and our Asia-Pac wholesale business and support it with strong expense management and an improved gross margin versus our expectations.
Our adjusted earnings per share of $1.28 represents a 17% increase over the prior year quarter. Globally, watch sales increased 15% in constant currency, including SKAGEN, which represented 5% of the increase. This marks our third year of double-digit increases in Q3 watch sales, following a 20% increase in 2011 and a 49% increase in 2010. Solid gains across our FOSSIL and multi-brand watch portfolio resulted in increased market share and showed the strength of our brands and the resilience of our operating model.
Our non-watch related sales decreased 3% in constant currency. The different sales was primarily the result of our relaunching of the FOSSIL jewelry business and some challenges in our leather business. As we have discussed in prior quarters, we are repositioning our global jewelry assortment to align this offering with the brand aesthetic of the overall FOSSIL brand. While the results of the reintroduction of the line in our own stores this quarter are very positive, we are still transitioning in line in our wholesale accounts during Q3, as we prepare to relaunch this into the channel in Q4.
As a result, our wholesale sales continued to diminish during the majority of our third quarter and negatively impacted sales. With early sales results positive, we expect to see sales growth improving in the category as we continue our global rollout at wholesale in Q4.
On the leather side of our business, as we identified earlier in the year, we missed on leather sales by not moving quickly enough or deep enough into the trend towards color. Our vintage offerings, with strong earth-tone colors, have played well for us in the last couple of years. However, we did see a significant shift toward color in the spring this year, and we missed some opportunity here.
We also noted a drop-off in sales as we increased overall pricing, resulting in not enough depth at our operating price point levels. We have addressed these -- both of these issues and are expecting improving trends in our wholesale channel in early 2013.
With growth in our global watch sales and a slight decline in our alarm watch categories, overall wholesale sales increased 7% in constant dollars and just under 3%, excluding SKAGEN-branded sales.
In North America, constant dollar sales increased 6% or 1%, excluding SKAGEN, primarily on the strength of our watch business. Across geographies, U.S. sales rose 5%, Mexico grew 26% on a small base, and Canada was essentially flat against the prior year. Negatively impacting our U.S.-based wholesale sales during the quarter was a tendency from some of our wholesale partners to push inventory receipt out of the third quarter and into the fourth quarter. As a result, our October wholesale shipments in the U.S. were up 20% over last year. While we don't expect this type of growth for the balance of the quarter, we do believe we will see a much improved performance compared to our third quarter results.
Also, in early October, we purchase the remaining 47% interest in our Mexico joint venture, which will enable us to fully maximize the opportunities we've seen in this rapidly developing region.