Good day and welcome to the Fossil Group Q4 2014 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Eric Cerny. Please go ahead, sir.

Thank you. Good afternoon, everyone. Thank you for joining us and welcome to Fossil Group’s fourth quarter 2014 earnings call. I would 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 a 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 our prepared remarks and then open the call to answer questions. As we look back on 2014, we are pleased to conclude another year of solid sales and earnings per share growth for the Fossil Group. The strength of our diverse business model, our team’s disciplined execution of our strategies and our strong financial position drove overall results within our expectations. We returned value to our shareholders through the continued execution of our share repurchase program, while navigating unfavorable changes in currency at the end of the year. Importantly, we delivered strong results for the year while continuing to invest in the business to fuel future growth. And we drove efficiencies in our operations that position us to deliver solid returns for our shareholders well into the future. 2014 included an 8% top line increase to $3.5 billion, an 8% reduction in our share base as a result of continued execution of our share repurchase program and we delivered $7.10 in earnings per share, an 8% increase over last year. Changes in foreign currency aside, our fourth quarter included increased sales, robust growth internationally, very strong gains in jewelry, operating margin expansion, double-digit increase in earnings per share and was highlighted by continuing strength in our Fossil and Skagen lifestyle brands. That said, we are not entirely satisfied with our fourth quarter performance, particularly as it relates to our North America business. We began 2015 intensely focused on taking advantage of the many opportunities available to us to drive future growth, including enhancing our multi-brand portfolio to drive growth, investing in strategic initiatives to further grow our own brands and developing new categories that we believe can drive…

Thanks, Kosta and good afternoon everyone. Fourth quarter net sales increased 3% in constant dollar and on a reported basis were flat to last year at $1.65 billion. Sales for the quarter were below our expectations as increases in our international businesses and a strong performance in our direct business were offset by a decline in our North American wholesale business. For the quarter, we delivered earnings per share of $3, a 12% increase over last year. Lower than expected sales were offset through expense reductions, which drove operating income growth virtually all of which was consumed by currency headwinds. We benefited from a non-operating gain as well as reduced share base. The Fossil brand grew 3% in constant dollars and was driven by an increase in watches and leathers partially offset by a decline in jewelry. We continued to be encouraged by the performance of the Fossil leathers category, particularly the women’s handbag business, which delivered strong comp results in our own stores during the quarter. Skagen sales grew 19% in constant dollars with strong double-digit growth in watches, an increase in jewelry and our handbag assortment continued to do well following its third quarter launch. Our multi-brand watch portfolio grew 2% in constant dollars with strong performances internationally. In North America wholesale, sales decreased 11% to $356 million and decreased 10% in constant dollars. Our U.S. sales performance accounted for the decline, nearly half of which came from lower off-price and liquidation shipments and the other half from lower shipments to major department stores. Shipments to boutiques, a much smaller business also declined. Our multi-brand watch portfolio saw the greatest volume decline for the quarter followed by leather, which continues to be negatively impacted by a highly promotional environment, while jewelry grew over 20%. While we are disappointed…

Thank you. [Operator Instructions] We will take our first question from Randy Konik with Jefferies.

Can you hear me?

Yes, we can.

Hello, okay, great. Sorry about that. So, I guess, can we talk a little bit, get a little bit more flavor around the disconnect between the wholesale side of the business in North America and the retail side? So, it sounded like your comments suggested that there wasn’t necessarily a sell-through issue in the wholesale channel, but more of a sell-in item. Is that – I mean, based on your conversations with your key partners, are you under the, I guess, understanding, are they trying to destock or maintain conservative inventory posture ahead of the Apple Watch launch in the spring or kind of what are your conversations with your partners kind of telling you about how they are trying to think about inventory levels and thinking about the upcoming launch of that particular watch? Thanks.

Okay. Well, first of all, keep in mind, it’s just one quarter and we did have increases for the full year. Also keep in mind in the third quarter of last year, we actually had a 9% increase in watches in the United States, so some of this may have been building stock for Christmas. We also know as we mentioned is that the sellout comp percent in our wholesale partners in the United States was not – was slightly negative down, but not down as much as our wholesale shipments. So, having said all that, there is a lot of moving parts going on. The market is I think in the United States still – we still think it’s a very important category for the stores. It’s very extremely profitable. There is a lot of activity going on. We are launching Tory Burch and we are expanding to more doors. Kate Spade is already in there, but we’ll be expanding it. We are hopeful to put some wearable technology in the space this 2015 that could spark interest and bring more people to the counter. But as far as the watch trend is concerned overall, the Euromonitor says that in the United States and globally the watch business still grew at 4% last year. They are expecting it to grow 6% for next several years. We think we are in position to continue to gain share in a growing market and we will keep pursuing that with as much innovation and branding and ideas as we possibly can.

We will take our next question comes from Erinn Murphy with Piper Jaffray.

Great, thanks. Good afternoon. I was hoping if you could maybe speak a little bit more about the need to focus deeper in China in some of the investments you are making there and just how you think over time you can leverage the brand portfolio that you have to really further grow that business? And then I have a follow up for Dennis.

Well, in China, the market, the retail environment as you know has been somewhat choppy over the last couple of quarters or so. We are still continuing to pursue new initiatives, new locations. We do have some new management in the region, which we are very excited about and we think we are well forward. But having said that, it’s a very difficult, complicated market and we expect it will be a very significant opportunity for us long-term. So, we are continuing to pursue opportunities and build out the infrastructure and we are sure that it will be some day a very significant business. In the meantime, it’s not going to grow quarter to quarter in a linear fashion, it’s going to be somewhat choppy we think and we will continue to pursue it.

Okay. And then Dennis, from an FX perspective, when you look at that $1.20, can you just help us think about two different aspects of that? One, how are you hedged currently and when do those start to roll off and start to adopt from a transactional perspective, the significant deceleration we have seen in the Euro? And then secondly, can you just speak to any of the impacts that you are seeing from your Swiss headquarters right now, just given the rapid appreciation of the Swiss franc? Thank you.

So, yes, let me just step bank and kind of give you a view of the overall currency environment here. We talked about the $1.20 headwind. Roughly, half of that will come from translation. That means as we are translating our foreign earnings into U.S. dollars, each line item on the P&L obviously translates into a lower amount. So, when we consolidate all of that into U.S. dollars, that all combines to represent roughly half of that headwind. So, that’s the part that we don’t hedge. Now, the other half of the $1.20 relates to the transactions in our foreign subs by inventory, primarily in U.S. dollars. So, as the dollar strengthens, their cost of goods goes up and obviously their margins are reduced. Now, we do hedge that exposure with foreign contracts based on our order estimates obviously with the greatest visibility in the very near-term. Our program runs roughly over 18 months and we dollar cost average into the rate. So, the hedging offset is highest in the near quarter up to roughly two-thirds and then tails off over time averaging just under about a half of a full year offset as we head into 2015, so that help offset the impact, although remember the offset is recorded below the line in other income. So, that net impact is other half of the $1.20 headwind. Now, in addition to forwards, we have already implemented price increases from last year with more to come very soon. And we are still working on more later in the year. So, obviously their success will depend on market conditions. So, we can’t yet predict the full impact. However, if you combine our contract hedges along with the price adjustments we are planned and combined, they would virtually offset the full P&L impact, not the margin rates, but the transactional P&L impact of the strong U.S. dollar at those rates. So, that’s the overall currency environment. Then with respect to the Swiss franc, we are fairly automatically or naturally hedged with that and as much as much is our Swiss franc expense base roughly aligns with our revenue base.

We will take our next question from Oliver Chen with Cowen & Company.

Thank you. Regarding the lower shipments, what’s incorporated in your outlook in terms of how the retailers may act in terms of their inventory management? Will that trend continue and what do you include in your guidance? Also, could you just speak a little bit to wearables, are all your brands going to embrace this and do you think the route to market will be similar? And I know you have changed pricing in the past and sometimes you have gone too far in pricing. So, what gives you confidence that you can have some enhancement and which parts of your portfolio may have better inelasticity to pricing enhancements there? Thank you.

Yes. So, with respect to the general assumptions embedded in the guidance, we look at the trends coming out region by region coming out of ‘14 with assumptions that those trends roughly continue. We still assume as Kosta mentioned the Euromonitor data, where we understand with respect to watch category growth, we see continued international growth opportunities for share gains there. Fossil has been on a great trend recently positive comps coming into the year improving wholesale trends with wholesale partners. Skagen grew double-digits accelerated towards the back half of the year, branded jewelry, leathers have been trending well for us, new brands. So, there is a lot of tailwinds in there. There is also some risks we talked about new entrants into the market in North American continues to be a little bit choppy for us and you are constantly managing, ebbs and flows in portfolio. So, we have tried to do our best to gauge the sum total of those risks and opportunities in the range that we provide you. As we have said before, we don’t – we are not providing guidance to try to do anything other than give you a range of what we think some reasonable possibilities and outcomes are.

And as far as wearables goes, what we are doing basically is building a platform for ongoing growth in the category. So, we are looking at both display items like the smart watches, but also non-display items like jewelry and potentially bracelets etcetera. And we think eventually it will probably impact all brands. One way to look at this is if we have a business in wearable technology that involves fashion with some technology whether it’s sensors or communications, theoretically potentially some day every watch we make that have some type of technology on it. So, I expect at some point all our watches will have enhanced technology whether it’s sensors communication, it could be apps in the community involved as well. And that’s really the approach we are taking. So, as I said, we will be shipping something later this year. The Kors Group has actually been leading on this area and have been – brought a lot of discussion to us about wearable technologies are working closely with them and we are in discussions with all our other brands about the appropriate time to bring out some products.

We will take our next question from Rick Patel with Stephens Incorporated.

Thank you. Good afternoon, everyone. Can you talk about the promotional environment for watches in general? I know that demand has been a bit choppy in the U.S. So, are you seeing elevated promotions continue early in new year and what’s your outlook for the rest of this year? And then secondly, a question on inventories, they seem to be up a bit more than your anticipated sales growth. Can you provide some context there? Is it heavy in certain categories or brands? And should we expect sales to off-price retailers to be elevated in the near term as you address that? Thanks.

First of all, on the promotional activity, watches is one of the least promotional categories of fashion products in the United States and we like it that way and we have been doing everything we can to inspire an ongoing trend with that. We actually think in the fourth quarter last year there was actually less promotional activity than it was in the prior year. So we are pleased with that trend. And we look forward to continue to keep those at a regular price. And you also keep in mind that mostly a regular price business margins are very high for those stores, averaging retailers are very high and we want to continue to fuel it with new brands and ideas and innovation and technology that’s really our idea and we think we can do that. On the inventory side when we look at both the inventory in our wholesale partners’ stores and also our own inventory, we think we are in good shape. We ended up in our own inventory slightly up, but that was mostly because of the sales mix. But as a practical matter Chinese New Year is coming in and our global planning organization will absorb that and we will keep going. Also keep in mind that we have a good part of our inventory especially in watches, on quick response items, so it’s really just the process of managing the ebb and flow of quick response items so we should be able to work through it pretty quick.

And we will take our next question from Ike Boruchow with Sterne Agee.

Hi. Thanks for taking my question. Two quick ones, Dennis on the guidance for Q1 in the fiscal year, you gave us sales, I know you would commented you don’t expect North America wholesale to grow, can you tell us what’s embedded for North America wholesale for Q1 and for the fiscal year. And then also run the restructuring, should we be modeling store closures as we model out the next 12 months for the DTC segment? Thanks.

Yes. So generally, we didn’t specifically guide to regional sales growth. I think the best way to look about it is generally we assume the trends continue coming out of ’14, the full year trends. And we also typically and you would see that in those numbers we would expect the regions to act and grow relative to their own level of maturity. So the international businesses drive the most growth for us. Europe has been very strong. Asia has been growing in double-digits. And North America is the region where we are not anticipating wholesale growth, very encouraged by the retail comps. Also we are going to see those trends continue. With respect to store closures, we –what we have said is that we are opening a net 10 stores most of those stores will be overseas. In fact we should operate with fewer stores by the end of the year here in North America. So most of the – or all of the growth will be international and we will execute some closures here that’s also what some of those costs and those restructuring charges will facilitate.

And we will take our next question from Omar Saad with Evercore ISI.

Thanks. Good evening, you mentioned several times kind of 2015 being a transition year, kind of shifting from distribution – I am sorry infrastructure building mode to more of a growth mode Asia, China to kind of exploring the Fossil brand and Skagen brand opportunities to extend those brands, the smart watches you got a few different partnerships, you have got some new brand that you have signed licenses with, but help us understand in the context of this the U.S. kind of core multi-brand watch number this quarter, I know it’s just one quarter, but help us understand that’s kind of your core most profitable business the multi-brand watch platform, are we getting ahead of ourselves and focusing a little bit too much on the growth or how do you ensure that core business remains stable, remains profitable, remains steady, what are your strategies around that, I guess both in U.S. and Europe I think both are big businesses? Thanks.

Well, again we had a 9% increase in the third quarter and all along we have said that the U.S. business is growing dramatically as you know over the last 5 years. The stores were doing in a lot of cases multiples what they were 5 years ago, so all at higher – much higher revenue in our retail. The business has really been incredible, high margin, high impact, there is a lot of awareness of watches, people love them. The efforts we have had in other companies with branding and innovation has really been well received, had really high retails relative to apparel which has had deflation. So it continues to be a great category, but the business is very significant and it’s been one quarter where we had a tough quarter of wholesale. We did see that the department stores having – they were slightly down not and especially with our products, we don’t what they were totally, but not a precipitous fall, but we still think that with all the things we have in place, Fossil and Skagen still continue to grow as we mentioned, Tory Burch is just in a small number of doors United States will grow, we think we can expand Kate Spade and the rest of our portfolio. We do have – there is a lot of opportunity with us putting more ideas and more brands and continue to make the category grow, especially if you consider that wearable technology can have a play in that. So, there is a whole bunch of activity going on that we think we will continue rather, but having said that, our biggest opportunities are outside the United States.

We will take our next question from Matt McClintock with Barclays.

Hi, can you hear me guys?

Yes, we can.

Thank you. Good afternoon, everyone. So, just follow-up to Omar’s question, Kosta, you have been making a lot of investments in the company over the last couple of years, I would say, probably two, in terms of infrastructure. How does the advent of wearables change the way you think about those investments? And given that you are thinking wearables could potentially impact all of your watch brands, should we expect the investments now to shift into a different category of wearables, etcetera than probably from where you were investing before distribution, infrastructure or things like that? Thanks.

Well, we think, we – by investing in wearable technology it enables us to leverage the global platform we have. We sell 30,000 points of sale probably. We have a number of brands and access to more. We have a big share – at least mind share in the marketplace. And we think you have the capability of bringing convergence of fashion and technology together. So, we can make great looking products that have the emotional attachment to customers that love brands, but also have a little extra functionality. And if you look at from our perspective, the huge amount of spending going on in technology products, so the phone, cell phones, iPads, cell service etcetera, if you look at the huge amount of spending going on in that category and the watch business is relatively small. It’s just a small percentage of that spending, drops down in the watch business, because they could have a dramatic impact on the growth of the category and make it more relevant. And we think we are sitting right at the middle of something that could be much larger. So, there is a lot of moving parts. We are very excited to be investing with our partners with the Intel and Google and others on coming up with new ideas to engage customers, have communication vehicles and really enable customers to make their watch and their wearable technology more relevant to their lives. I think it puts – makes the watch category much more relevant, especially when you consider a Millennials largely have grown up without watches. They have a cell phone when they grow up and they don’t necessarily have more watch, but now with the branding and technology coming into play, we think we have got a big opportunity.

And we will take our next question from Dorothy Lakner with Topeka Capital Markets.

Thanks. Good afternoon, everyone. I just wanted to circle back on the new brands that you have. Tory Burch, I know you said is in just a small number of doors, so I just wondered how we should think about how that brand will expand this year. And then Kate Spade you have talked about an immediate impact on sales. If you could just provide a little bit more color on where they are, what kinds of things you think you can add to the brand at this point? Thanks.

Well, in Tory Burch, as you know we launched last year and it’s typically when we launch a new brand. We startup slow with small number of doors, expand it slowly based on demand and sell-through, wait till we get the operating model correct and then we expand it. So, most of our license businesses we have started have been relatively small for the first couple of years until we were ready to expand it. And I think Tory Burch will be the same situation. We are seeing a great response. We are learning a lot. I mean, the brand is unique and we think it’s going to be terrific. So, we are very excited about that. Kate Spade is – it is an existing business. They have been doing watches themselves. They have done a great job. They have got a good business with a strong point of view and we are very excited to work closely with them. Since it’s an existing business, it already has space etcetera, so we will be able to add on that and add additional doors globally and really expand it. So, it’s a – you could say it’s a bit little bit further along in the process of inventory purchase, because it’s been around for a couple of years and that’s we think a good thing for us and we will look forward to working closely with them.

And we will take our next question from Anna Andreeva with Oppenheimer.

Great. Thanks so much. Good afternoon. Thanks for taking our question. I guess a follow-up on the previous question, the thinking with Kate Spade addition, how do you guys balance just the development of in-house and licensed portfolios, so not to cannibalize some of the existing brands, that’s our first question. And just to follow-up what drove the acceleration in direct to consumer in the fourth did you say watches comp positively in North America and how that outlet perform versus mall-based stores? Thanks.

Well, the first question in terms of Kate Spade and how – the way we look at it. First of all our volume biggest objective is to grow our own brands, so Fossil and Skagen and they continue to grow nicely last year. One thing I would mention specifically about Fossil is that we did start accelerate in our expense – our expenditures on marketing especially on digital and social last year. And we did see a result in that both in our own stores and that’s where the DTC number that you mentioned went up. We actually in the month of – fourth quarter we actually had the best quarter we have had in some time. And our metrics show that a lot of that was due to the relatively small amount of money we spent on additional advertising last year. And as we mentioned we are going to accelerate that this year. And we also will have – we are also investing a lot in omnichannel and CRM capabilities that will enable us to accelerate those marketing investments. So we think we are in really good place on the Fossil brand. Having said that, we do in our portfolio, our mission is to have the biggest and the best brands in the world, the ones where investment and store growth is going so that we can continue to grow our share of the watch business. So Kate Spade fits really well in that. We think it’s going to have a significant long-term potential, but that’s really our mission is to make sure that we have in our portfolio the best brands in the world and ones where the most invest will go behind them.

And then just on the comps, the fourth quarter comps we were positive in watches, leathers, jewelry all of those comped positively and we were up in both outlets and in full priced accessories.

And we will take our next question from Simeon Siegel with Nomura.

Thanks. Good afternoon guys, alright. So you have renewed two partnerships you have announced the new line you are entering, wearable space I guess do the economics or costs changed anyway going forward across the portfolio. And then Dennis just two quick modeling questions I apologize if I missed it did you give a reported gross margin guide for the full year and first quarter I know you gave constant currency and along similar lines what’s the implied other income line within that guidance? Thanks.

Let me take the second part first. I think under – below the line since given where the contracts are you should expect to see some gains below the line given our hedge position so and where the dollar is though should drive gains as we move through the year. With respect to the changes I mean we have gone through our strategic planning process and as we look out over the next foreseeable horizon, we don’t see significant changes in our overall business model. I think that as we can tell – we will talk as I don’t know if you will be here in a few weeks, but we will give you more visibility on how we are thinking about the near-term and what some of the puts and takes will be. But that’s something that we can share more in a couple of weeks.

One comment, I will add about the economics of wearable technology, one of the exciting things about wearable technology is that over the next couple of years as technology gets better, battery life is going to be better. The size of the objects in regard to functionality is going to be better and the economics will be better because as the quantities grow then the costs, etcetera will come down pretty quickly. So that’s probably why we think it’s very compelling long-term opportunity.

That concludes today’s question-and-answer session. At this time I would like to turn the conference over to Mr. Dennis Secor for any additional or closing remarks.

We would just like to thank you for joining us today and for your continued interest in the Fossil Group. And we look forward to speaking with you again when we hold our next quarterly conference call in mid-May. Thank you very much.