Good day and welcome to the Fossil Group Q3 Earnings Fiscal 2014 Conference Call. As a reminder, today's conference is being recorded, and at this time, I'd like to turn the conference over to Eric Cerny, Investor Relations. Please go ahead, sir.

Thank you. Good afternoon, everyone. Thank you for joining us and welcome to Fossil Group's third quarter 2014 earnings conference call. I'd like to remind you that information made available during this conference call contains forward-looking information and actual results could differ materially from those that will be projected during this call. Fossil Group'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, the Company assumes 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. Please note that you may listen to a live webcast or replay of this call by visiting fossilgroup.com, under the Investors section. Now, I would like to turn the call over to the Company's Chairman and CEO, Kosta Kartsotis.

Thank you and good afternoon everyone. Joining us today is Dennis Secor, our Chief Financial Officer. We will begin today's call with some prepared remarks and then open the call to answer any questions you have. The third quarter marked another strong period for our Company. We reported better than expected top and bottom line results, advanced many of the strategic initiatives that we expect will continue our favorable performance in the future, and returned value to shareholders by capitalizing on our strong balance sheet and executing our share repurchase program. As you know, our overarching goal is to consistently deliver profitable top line growth while investing in high return initiatives that can fuel our momentum over the long-term. We believe 2014 is shaping up to represent a year of progress towards this objective. For the quarter, sales increased 10%, reflecting growth across all regions with Europe and Asia leading the way. Europe's solid performance for the quarter reflected balanced growth with all major markets increasing over last year. In our most matured market, North America, we were pleased with the sequential improvement in the growth rate for the region. Clearly our unique assortments, creative designs and compelling brands, all contributed to the performance and positioned us to achieve continued market share gains going forward. Globally, we continued to see the strongest gains in watches and jewelry. Once again, watches led our volume growth, increasing double-digits in our FOSSIL and SKAGEN lifestyle brands as well as our multi-brand watch portfolio. Across category, jewelry delivered the highest growth rate driven by MICHAEL KORS and it reflects our ability to continuously innovate and capitalize on the growing importance of branded jewelry around the world. As we have mentioned previously, jewelry shares many of the characteristics of watches and is a category we…

Thanks, Kosta, and good afternoon everyone. Third quarter net sales grew 10% to $894 million, exceeding our expectations and reflecting sales increases across all of our reported business segments despite a sharp decline in the euro later in the quarter. We exceeded our earnings expectations as strong sales and disciplined expense management offset lower gross margin, as regional mix benefits were offset by outlet promotions. Sales growth during the quarter came from a very strong performance in Europe, a solid increase in Asia and a sequential improvement in the Americas. The FOSSIL brand grew 2% driven by a double-digit increase in watches, partially offset by declines in leathers and jewelry. In leathers, while the total category declined given last year's higher clearance volumes, we are now in a much healthier inventory position. In fact, we continue to experience good reads on the new woman's handbag assortment as the business comped positively in our full-price accessory stores. Jewelry sales in the FOSSIL brand declined during the quarter given our American distribution refinement and significant clearance activity last year in Europe. SKAGEN sales accelerated during the quarter delivering 24% growth. All three regions drove solid double-digit growth with watches delivering the largest volume increase, jewelry delivering the largest rate increase, and we benefited from the launch of our handbag assortment. Our recently remodeled stores in London continued to perform very well and we incorporated many of our learnings from those stores in the two flagships we opened in the quarter. Our multi-brand watch portfolio remains very strong, growing 12% in the quarter with strong performances from key brands while some brands were down. In North America Wholesale, sales increased 6% to $319 million. Our U.S. sales increase drove the region performance and grew as a result of increased shipments to major department…

(Operator Instructions) We'll take our first question from Erinn Murphy with Piper Jaffray.

Congratulations on the quarter. I was hoping you could speak a little bit more about the North American segment. It's great to see some reacceleration there in the third quarter. Could you just maybe parse out a little bit more about what drove that improvement as you went throughout the third quarter and then what are your expectations in particular for this segment as we get into the fourth quarter?

I'll start. We're very pleased to be able to drive acceleration in the American business in the quarter. As we said in our prepared remarks, a lot of that was driven by stronger performance with our U.S. wholesale department store partners as well as sales in the boutiques. So that helped drive sales. Some of that may have been helping to restore some of the inventory positions. As you'll remember, we talked about inventory at the end of the second quarter, but good progress with our teams working closely with our partners, good progress that we're making – you heard Kosta talk about the performance of women's handbag. So we're seeing some continued good strong results there. We still have work to do on other parts of the leathers business, but good traction there. So our goal is to continue the stronger performance in a pretty challenging environment but we're very pleased with the performance.

We've always said that North America would be a slower growth than the rest of the world for us, but having said that, we do have opportunities with – as you see, we just launched Tory Burch, which is doing very well, there's large opportunity in the U.S. for SKAGEN. We do have a long-term opportunity in wearables and we think the FOSSIL business will grow in the U.S. And there is in addition to that a Fashion Swiss opportunity that could manifest itself over the next coming years. So we're still optimistic long-term on the North America, it's just going to be a slower growth rate.

We'll take our next question from Omar Saad with Evercore ISI.

Great quarter, guys, congrats. Wanted to ask my one question on the 10 year license renewal with MICHAEL KORS. Congratulations on that as well. Obviously it's been a great relationship. Can you help us understand maybe some of the underlying dynamics, especially since I think last quarter you had announced the renegotiation, a similar 10 year extension with ARMANI, that one I think had elapsed and then been running kind of month to month for a while, where this one I think was a little bit more preemptive, maybe just help us understand the backdrop there, are those situations really different or is it more of the same?

We were very pleased to sign the 10 year agreement. As you know, MICHAEL KORS has been a fantastic opportunity for us. Our two companies work very closely together. We've got a very strong business in the U.S. It's growing very rapidly in Europe. Asia is a huge potential. There is a follow-on jewelry opportunity that's very significant. Men's is going to grow and become very important, especially as we get larger in Asia. We're building Shop-In-Shops all over the world, could be a significant number of them. There's a long-term opportunity in travel retail and wearable technology will follow on in there also. So we have very close relationship, it's a very significant business for us and them and we felt it was prudent for us to go ahead and get a contract signed, put it in there for 10 years. There's a significant amount of work and investment made on both parties for this and we felt it was better to get the deal signed early and go unencumbered after the opportunity and get back to business. So that's why we did it.

We'll go to our next question from Anna Andreeva from Oppenheimer.

Congrats on a solid quarter, guys. I was hoping we could talk about the FOSSIL brand. You've talked about the initiatives to drive brand awareness there through stepped-up marketing. Maybe share with us the return on invested capital that you're getting and how should we expect the marketing dollars into 2015? And I guess as we look into next year, I think you said directionally to expect [inaudible] deleverage. What are some of the buckets behind that?

As we've said in the remarks and even in the last call, we're kind of at an inflection point where we're taking a very hard look at our SG&A and reinventing as much of the Company as we possibly can, getting as efficient as we possibly can and investing in three big areas. One of those is omnichannel, our ability to do digital retail more efficiently, have it dovetail into our stores, get more customers engaged in the brand. As you know, traffic continues to become more and more of an issue in the United States. So we got a full-on effort in omnichannel really to change the direction of that, to get caught up and ahead in omnichannel and get to customers whether they are shopping on the Internet, et cetera. So that's a very big initiative for us. We also are working on spending additional amounts in demand creation. So there's a small amount of additional money going right now and in the fourth quarter on a test and learn basis and we're measuring very closely the result of that. And then we'll also be making some investments in wearable technology. But the FOSSIL business globally is a very strong and a high profit, high return on capital business. We think we can turbo-charge the sales and take advantage of the investments we've made around the world, including stores and retail locations and all our other investments, we think we can leverage that and drive a higher sales number and profitability. So we feel it's a pretty good opportunity for us and we're going to be watching it very closely on the profitability side.

We'll go next to Rick Patel with Stephens.

I'll add my congrats as well. Can you talk about the margin profile of your licensed multi-brand portfolio? You renewed ARMANI earlier in the year, now you've locked in KORS. As we think about the margins of this portfolio over the next three to five years, is it going to look similar as the last five years, just curious what's going to change if anything?

If you look at the margin profile over the next several years, I mean there is a lot of factors that you need to consider and opportunities and some headwinds. You see that there's opportunities for us as we reduce cycle times, international growth becomes a big opportunity for us, channel mix becomes – so there's a lot of opportunities in the overall portfolio of initiatives that we use to drive margins and the profile of the portfolio is one of those. Each contract has different dynamics, and so you can see some mix changes among the brands, but overall we think that there's opportunities longer-term for us to drive margin expansion, and like I said, the components of the individual contracts and brands are one element of that.

We'll take our next question from Ike Boruchow with Sterne Agee.

Congrats on a good quarter. Dennis, just a quick question on the guidance you gave for the holiday quarter. I'm having a little trouble reconciling the EPS number with the sales and the margin guidance you gave us. Is there something that we should keep in mind for maybe the other segment, on the FX hedges you guys have on, what kind of number that could be, because based on the tax rate the 31% tax rate guidance for the year which you can back into what's implied for Q4, I'm having trouble getting to the EPS range, is there anything else that you can help us with, anything below the line?

What will happen as – just the mechanics of how currencies will operate is that you will see in a weakening euro environment that you will start to see some pressure in the gross margins. That will to some extent be muted by our non-operating income as effectively then in the contract that you had outstanding are in the money, so some of the economic shifts away from gross margins and into the non-operating income. So you need to consider that as you're looking at the impact of those currencies. But along the same lines of thinking about the fourth quarter and how some of the currency impacts may hit, probably equally important to think about how the currencies may impact next year, we talked about that in the prepared remarks, but just to help people start thinking about that if you focus on the euro, some of the pressure on the margins right now are coming from what's about a 7.5% decline in the euro since a quarter ago and we've got about $1.25 billion European business, the majority of that transacts in euro. So as you think about the impact on the operating model, there's two things to consider. When the euro declines as it has, you'll see an immediate decrease in the full P&L as we translate that into U.S. dollars and that starts with sales all the way down to the bottom line, and that's the part in the guidance that you're seeing where we're talking about sales headwinds of 2.5 points. If the euro stays where it is today, that headwind will persist through the first three quarters of next year. And then there's an additional impact which is the transactional side, and that's because our European business, while they operate in euros they buy their inventory in U.S. dollars. So as the dollar strengthens against the euro, their cost of inventory increases, decreasing their margins, though there is a lag on that because you're still working off inventory say in the fourth quarter that you bought in the third and second in a stronger environment. So again you'll see an accelerating impact on the margin as we get into 2015. So just think about that as well, and just to size it for you, while it's still too early for us to talk specifically about 2015, if we were to recast 2014 at the current rates, you probably – there is a lot of estimating and assumptions in this number but you'd get roughly in the neighborhood of about 2 point top line headwind and about $0.30 per share negative impact on EPS. So I suggest you also consider those impacts as well.

We'll go next to Dorothy Lakner with Topeka Capital Markets.

Congratulations on a great quarter. Just to follow up on that for a second, on the currency headwinds assuming the euro stays where it is right now, you would be getting a benefit on the expense side?

Right. You get benefit all because of P&L.

Right, because they are buying inventory in U.S. dollars but expenses are also going to be in U.S. dollars as well?

Correct, yes. And that's the first part of what I said, that's the translation impact, so that wouldn't be the immediate impact of that, but you got to consider on our European business as profitable. So the net bottom-line impact will be negative.

Right, okay. And then just if I could, in terms of just the Fashion Swiss opportunity, I wonder if you could elaborate a little bit on what you've done so far and what we can look forward to as we move into 2015?

As you know, we've been doing BURBERRY Swiss for a number of years. We subsequent to that added FOSSIL Swiss. It's doing well in our stores. The Tory Burch Swiss that's launched this year is doing extremely well. And the strong affinity for the craftsmanship of the Swiss-made is really prevalent in Asia, especially in China. So we feel like we have an opportunity, a long-term, large opportunity to continue to add lifestyle brands, Swiss-made, into the Asian market and especially for the China customer. The convergence of the customers growing [inaudible] numbers, their affinity for watches and jewelry, their affinity for Swiss-made and their affinity for lifestyle brands, we think puts us in a position where it's a very significant long-term opportunity and we will be benefiting from that. We also this year launched ARMANI Swiss. It's doing extremely well and it's going to expand around the world, actually selling well not just in Asia but in Europe and U.S. as well. So that's another big opportunity for us. So we think it's a big, long-term opportunity.

We'll go next to Lorraine Hutchinson with Bank of America Merrill Lynch.

Just wanted to follow up again on the comments around the Chinese business and if you think it's a brand issue or if you think you have the wrong partners or you need more marketing or any strategies longer term to really get that business picking up?

I think it's a continuation of what we've said the last several markets which is, it's just a very complex place to do business and it's probably going to continue to be somewhat choppy in terms of quarter to quarter and year to year. We are as you know having to build our own distribution channel over there. So it's building concessions one at a time in a very fragmented market where there's multiple owners and there is not a consolidated retail environment. So it's just a very complex environment. So we are continuing to move forward, we're building concessions, we are moving along, we are probably going to see some quarters that have outsized growth and some that don't, and we just will continue to do that. The fact remains is that there is literally hundreds of millions of people that are going to join the middle class in the next 10 to 15 years. It's a very compelling long-term opportunity for us and we're building it out and someday it will be very significant, just probably will not be linear growth. Having said that, I mean what you're seeing this quarter in Asia and then really in the rest of the Company is that the diversification broad-based across the Company really helps us do spots like this. We're going to see – if we could get every one of our businesses in every geography and every channel going at the same time, that would be incredible. But as a practical matter, the diversification works for us over a long period of time, there's a lot of step-by-step blocking and tackling, putting building blocks in place, investing in the right way, and we're seeing even what you saw in the last quarter some of the investments we made in the last several years are starting to pay off. We had a very strong growth in India, Australia is very strong, some other parts of Asia are small now but look like they're going to grow, there is a very strong affinity for brands in the region and that's what we do. So we think long-term we're in a good place.

I think what I'd just add to Kosta's comments is the thing that excites us about China is just the raw opportunity that represents just to help size, it's a growing market, it's a watch market that today alone is already bigger than the United States, forecasted to grow at a faster rate than the U.S. But the components of that market, if you look at the mid-tier market where we play, the fashion part of that market is tiny compared to the U.S., it's less than 10% of the market. That part of the market is made up of fashion brands. That number is over 50% in the United States. So we believe that represents a significant opportunity for us as we and other fashion brands invest, as the middle class emerges, as the distribution develops, that's a big opportunity for us and there's similar dynamics in other Asian markets. So we're very excited about the reach and we think the demographics play can be a strong tailwind for us.

We'll go next to Barbara Wyckoff with CLSA.

Congrats, great quarter. Can you talk about the possibility of licensing jewelry to other brands besides those in the watch portfolio, and can you update us on the status of FOSSIL jewelry, and then I have a couple of follow-ups?

As you saw, we are growing very quickly in jewelry and our thesis has been that the jewelry business is actually much larger than the watch business globally, it's just got a smaller component of it that is actually lifestyle branded, and we expect that to change dramatically over the next several years. So we're ramping it up pretty quickly. We have a strong portfolio in place right now with the FOSSIL, KORS, SKAGEN, EMPORIO ARMANI, DIESEL. So we have a lot on our plate right now. We're expanding the production as much as we can and we're getting prepared for a much larger business and potentially we'll be adding additional licenses. As we've always said, jewelry is very similar to our watch business, largely the same characteristics in terms of timing, margin, same distribution channel, it's actually a way of leveraging our entire global infrastructure and it's lifestyle branded and it fits into our global profile. So one way to look at it is if the potential size of the Company with just watches is X, with jewelry it's X+ and that's the way to look at it, but it is a long-term opportunity for us.

We'll go next to John Kernan with Cowen & Company. John Kernan - Cowen & Company: Congrats on a nice quarter. Just to circle back to MICHAEL KORS, can you update us on, one, how the brand is performing in Europe both from a watch and jewelry perspective, how big you think that business can be relative to what it already is here in the U.S.? And then can you just confirm that the economics behind the KORS licensing agreement haven't materially changed?

In terms of Europe, the business is growing very quickly in Europe, both watches and jewelry, and it looks like it's going to be a very significant business. And I would say the same thing about Asia, even though it's a relatively small business now. And in terms of the economics of the deal, it fits very well into our business model and where we are focused on, focusing on the business and growing it and putting major distribution around the world and monetizing the opportunities that's in front of us.

We'll go next to Matt McClintock with Barclays.

Congratulations on the quarter. As a follow-up to Erinn's question earlier, you highlighted the boutique market, and I've never really heard much about that channel. Can you talk about what's going on in that channel, is that really just replenishment growth that you're seeing there or are you actually getting new distribution maybe from new brands or other brands?

That's typically the owned stores that our licensed partners operate themselves. So we sell into those stores and as they add distribution that gives us additional distribution to fill in. But we did say on this last call was that part of our business was affected by holding very tight inventories in that channel and our teams here work very closely with their teams to really do everything we could to help drive sales and maximize the opportunity, and that we believe drove some of our strong performance in the third quarter.

We'll go next to Ed Yruma with Keybanc Capital Markets.

Congrats. Just maybe more specifically as a follow-up to a question earlier, how should we think about that other line? I know you gave some of the puts and takes for FX, both top line and margin, in the quarter and how we should think about next year, but specifically in other line as your hedges change how do we think about the impact in 4Q on that other line?

So the big item down there will be interest charges, and as we take on more debt you'd naturally expect to see more interest expense down there. But generally the way you should think about that, and it's not a perfect science, but as the dollar strengthens, as we're seeing now in the very near term, you probably see gains as the contracts that we have are in the money and that would help mitigate some of the reductions that you would see in the gross margin line. So that's probably the best way for you to sort of gauge directionally – trying to get the size is a function of how many contracts we have, there's also some accounting translation of balances that you wouldn't see, but directionally that should help inform whether it should be growing or declining and if it should be positive or negative.

We'll go next to Randy Konik with Jefferies. Randy Konik - Jefferies & Co.: Can you give some perspective on, I guess MICHAEL KORS is such a material piece of the business, do you envision the percent of sales to be different for MICHAEL KORS in Europe and Asia versus what it is now I guess overall in the Americas, and if so, why? And in Asia, given what you said about the Chinese consumer, are you kind of thinking that Asia can't really get to a third of the Company's sales, and if not, do you think Europe picks up that slack? And then lastly, on the SG&A, I just want to be clear that are you saying we are now at the inflection point in SG&A where SG&A will lever on an ongoing basis not just through the fourth quarter but through 2015 calendar and years to come?

So with respect to KORS, we haven't disclosed publicly beyond what we had in the 10-K, but what I can tell you, the business has been strong, gaining traction internationally and we see – as Kosta alluded to, we see opportunities here, particularly as we grow the men's categories with them and jewelry, we see opportunities internationally as well. But overall we see opportunities internationally for the entire business. So when we think about long-term where the growth will come from, it starts with our international businesses, and as we grow the business we expect the least growth coming from the American region.

We'll go next to [indiscernible] with Macquarie.

On the wearables front, I understand we are in the very early innings with this new initiative. With that said, there's a lot of debate out there about the longevity of wearable batteries. I was curious to get your thoughts on that front. Should we expect smart watches to get charged daily, weekly or monthly? And then with Tory Burch, I was curious to know if there was any overlapping synergies between Fitbit and Fossil, with Tory Burch suddenly partnering with Fitbit. Any color would be great.

One thing that's happening very quickly with all the huge amount of interest in wearable technology is that all of the technology is going to get better, it's going to get smaller and more robust, it's going to be less expensive and battery life is going to get longer. So I think for right now the comments from a lot of people are that you have to charge the batteries up every day, but over time that will change. So actually it's very interesting to see the huge consumer interest in wearables and we think anything that has that much discussion about watches is good for us, especially considering that a lot of people don't wear watches, especially millennials maybe have never worn a watch because they grow up with a smartphone. So we think that all this interest in wearable technology is positive for us long term. Our mission is to add fashion and branding to it. We do think that the traditional watch business will continue to grow and we are going to gain share, but as the technology gets better we think that we can add more and more technology to our products. So we think our position, especially with our partnership with the Intel and Google, we're in a place where we can bring well-designed branded smart fashion accessories to market wherever the technology goes, and we think it's an additional opportunity to us over the long term. So we are getting in position to put some products in the market next year. So we think we're in pretty good shape. In terms of Tory and Fitbit, they have a product out in the market that's doing very well. So we are also looking at potential long-term opportunities for all of our brands including Tory Burch. So we are in discussions with them also.

We'll go to Randy Konik with Jefferies. Randy Konik - Jefferies & Co.: So I just wanted to follow-up on the other parts of my question which were, on SG&A, are we at a true inflection point for the business where we're going to see SG&A leverage not just in the fourth quarter but in '15 and calendar '16 and beyond? And with Asia, given your comments on China, et cetera, do you foresee Asia not being now a third of the business but maybe Europe picking up that slack, can you just comment on that?

So let me start with expenses. It's too early for us to comment specifically on what we think '15 and '16 are going to look like and we will in February be able to share more with you about that, but I think where I would assess the businesses today is that a lot over the last couple of years, three years, we've been investing a lot in infrastructure and putting regional structures in place, and to some extent that was playing catch-up because the Company four and five years ago was on this massive growth curve and we needed to get structure in. It's a much different thing to run a $3 billion company than a $1 billion company. So I would say that not in absolute terms but by and large we are certainly in the later innings in terms of really finishing the structural work. There are pockets where we need to build capabilities, but the organization has really been focused on optimizing the rest of the structure. So later innings there and that provides us the fuel to drive and invest in more growth related initiatives like the acceleration of Fossil and investing in omnichannel wearables, all of the things that we think are big drivers and important to us achieving our long-term strategies. In terms of growth rates, I think we see lots of opportunities to grow the Asian market. For us the strategy is not just China but take a lot of markets that share very similar market dynamics that we think we can take advantage of, where watch brands still dominate and where there is an opportunity for fashion brands to gain a greater share. So we see markets, Kosta mentioned, India, Japan, Australia, those are all markets that we think we have opportunities, and the great position that we are in is we have made investments in all of those markets. So we are well poised to pivot and move to where we think the growth is going to be. Each market will play out differently but we really think we're well-positioned and have made a lot of great investments that we'll be able to reap the benefits of.

And that does conclude the question-and-answer portion of today's conference. I would now like to turn the call back over to our presenters for comments and closing remarks.

Thank you very much for your participation today, your interest in the Fossil Group. While it's early November, we want to wish everyone a happy and prosperous holiday season and we look forward to speaking to everybody in February. Thank you.