Welcome to Fossil Group 2018 First Quarter Earnings Call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. Please note this conference is being recorded. I'll now turn the call over to Jeff Boyer, CFO. Mr. Boyer?

Thanks, Adrienne, and good afternoon, everybody. As many of you are aware, an unauthorized third-party released our earnings report prior to the market close. We're extremely disappointed this occurred. We'll conduct a thorough review to ensure this won't occur in the future. Early indications are that a financial news organization acts as a non-public staging area for website and scraped this information for their benefit. Upon learning of this incident, we immediately published our earnings release through our normal distribution channel. We apologize for any confusion due to this incident and are taking steps to ensure it won't happen in the future. Now, I'll turn the call over to Allison to read our Safe Harbor statement. Allison?

Thank you. Good afternoon, everyone. Thank you for joining us and welcome to Fossil Group's first quarter 2018 earnings conference call. I would like to remind you that the 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 8-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 can find a reconciliation and other information regarding non-GAAP financial measures discussed on this call in our earnings release filed on Form 8-K and in the Investors section of our website. Please note that you may listen to a live webcast or replay of this call by visiting www.fossilgroup.com under the Investors section. Now, I would like to turn the call over to the company's Chairman and CEO, Kosta Kartsotis.

Thanks, Allison. Good afternoon, everyone, and thanks for joining us today. I will begin with a few prepared remarks before turning the call over to Jeff Boyer, our CFO. Following Jeff's comments, we'll have Greg McKelvey, our Chief Strategy and Digital Officer, join us for the Q&A. We are reporting today that our first quarter results have surpassed the high-end of our guidance. As we stated on our February call, our posture for fiscal 2018 was to plan prudently but operate aggressively in the marketplace. This approach drove better-than-expected results despite continuing disruption in key categories and distribution channels. As we look ahead, we will continue our prudent planning posture but take every opportunity to actively pursue accretive sales opportunity as we focus on becoming a more profitable company. In the first quarter, we had stronger sales performance versus our expectations in three key areas. First, our retail comps and our direct channel, which include our stores and our own e-commerce business, were up 5% globally in constant currency. The Americas region led the way with retail comps in watches up 12%, driven by our Fossil brand wearables. Second, our smartwatch category across our entire brand portfolio grew substantially in the quarter, up 97% on a constant currency basis. This growth was well balanced with all three of our regions, nearly doubling their connected sales versus last year. With this growth, nearly 20% of our sales was in smartwatches. And third, our direct e-commerce business continued to build nicely. Sales in this channel were up nearly 50% in the quarter versus last year. In addition to the first quarter sales upside, we managed other key elements of the business well. Gross margin was 50.5% in the quarter, about in the middle of our guidance range and was about 70 basis…

Thanks, Kosta, and good afternoon, everyone. Turning to our financial results. Our reported net sales for the first quarter decreased 2% to $569 million, while first quarter constant currency net sales decreased 7%. Overall, sales exceeded our expectations, driven by stronger performances in our direct channel. And while our wholesale business continues to contract in the low double digits, our off-price sales in the wholesale channel were modestly higher than expected as we continue to focus on improving our inventory position. Store closures negatively impacted total direct channels sales by over 300 basis points. We have closed 81 stores since the first quarter of last year and ended the quarter with 512 stores, which was slightly higher than originally contemplated when we provided our Q1 outlook in February. Excluding store closures, our direct channel posted a 5% gain with flat store comps and solid increases in our online business driven by growth in connected sales. Our reported loss of $0.99 per share included $0.35 of New World Fossil restructuring charges. Excluding these items, our adjusted EPS loss was $0.64. Last year, our first quarter EPS loss was $1 and included $0.35 impact from restructuring charges. EPS was relatively flat this year compared to last year despite the lower sales volume as we continue to deliver on our New World Fossil initiatives with improved gross margins and lower operating expenses. These operational improvements were offset by higher interest expense and an unfavorable effective tax rate due to valuation allowances and negative impacts from the December tax legislation. Currencies including both the translation impact on operating earnings and the impact of foreign currency hedging contracts, favorably affected the EPS comparison in the first quarter by $0.02. Our watch business declined 6% in constant currency for the quarter. Sales in our traditional watch…

Thank you. We'll now begin the question-and-answer session. Also, please limit questions to one single participant question and then re-enter the queue for additional questions. . And our first question comes from Omar Saad from Evercore ISI. Please go ahead.

Thanks. Good evening. Thanks for taking my question. Good progress on your plan. With wearables really starting to become a much more significant part of the mix, it sounds like you guys are much more confident on the trajectory in that category and your position in the category. Is that a fair characterization? And then as a follow-on to that, if you look at the current offering, the offering you've had over the holiday and you have now in the wearables, what are some of the opportunities to improve that offering? What are some of the feedback you're getting from consumers, what they like about it, what they don't like about it, and anything you can give us on that front from a product perspective, that would be helpful? Thank you.

Thanks, Omar. As you can see we're getting good traction on wearables overall. Our first quarter sell-throughs are pretty good. We seem to be getting somewhat of a viral impact where the more people wear them, the more they tell their friends about them. We're seeing pretty good sell-throughs on that. So, from our perspective, we've got some great new products coming the back half of the year. A lot of it is more health and wellness oriented, great new technology, new software, the product is getting better and better. So, we think we're in good position for that. In addition to that, our situation with traditional watches, we saw sequential improvement in sell-through during the first quarter that is kind of compelling to us. You also have noticed that the Swiss watch business is getting better. So, there could be some incidental activity going on and just the interest in overall watches. In our experience, when the upper end of a business gets good, we have a follow-on effect from that and watches just like any other cyclical business, it's not good until it is and we're putting a lot of innovation and differentiation into the marketplace as much as possible, telling new stories. So now we're in a position with both traditional watches, with ramping up our innovation and differentiation and also with wearables, we're bringing new products to market, our addressable market is actually much larger. Wearables last year was an $18 billion business, growing to $33 billion in three years. So, we're in a position with tool kit for both wearables and traditional watches, a great global distribution platform including our own distribution plus increasing e-comm and digital capabilities. In addition to that, we have CE (38:13) distribution globally. So, we feel like we're in a pretty good place to follow the customer wherever they go, whether it's traditional or wearables and we're in a good position.

I'd just add, I think there's three takeaways on wearables, specifically. The first is as we mentioned in Q4, the wearables business model that's taken us a lot of heavy lifting over the last two years is now in place and scaling. So, it's a dramatic improvement in product. The advantage supply-chain we implemented largely last year is now unlocking substantially lower cost of goods sold and increasing margins, and then our teams are just executing really, really well across the business. So that's first takeaway. Second is we are delivering yet again another significant step up in product and innovation. As Kosta mentioned, this year, the most dramatic improvement's going to be on fitness and health and wellness features that will be – we had a couple of SKUs last year in Q4. We'll be very broad now in implementation of those across our product suite, which will bring us to parity in – against the market leaders in the wearables space and also allow us to tap into a whole another set of consumers that without those features, we have not been able to reach successfully. And then the third, which is very recent news is both Google and Qualcomm are significantly stepping up their investment behind the category and the support of the ecosystem. Google in particular launched – rebranded from Android Wear to Wear OS by Google, which is giving us two things: It's a significant improvement in the investment in the software experience, particularly on an iPhone but are also rebranding so that using the Google name instead of Android, which is a much better brand association for the iPhone user. And then Qualcomm today also announced the next-generation chipset. I can't speak to many specifics around it, but it's going to be a significant step up also in the product and user experience and better reflect on (40:08) other features.

That's great. That's really helpful. Thanks, guys. Good luck.

Thank you.

And our next question comes from Ed Yruma from KeyBanc Capital Markets. Please go ahead.

Hey, guys. Thanks so much. Just a follow-up on Omar's question. I know that you guys have dramatically changed the launch cadence this year. I guess when will we expect to see products that will ship for the third and fourth quarter? And in terms of thinking about your factory capacity and your ability to meet some of those demands, I guess relative to last year, how would you score kind of your factory availability or your ability to flex kind of close-in demand? Thanks.

Yeah, so timing, it will be about a month earlier than last year so think – see it in broad scale across our formats and channels in August with some early limited-edition launches a couple weeks earlier than that. Same sort of annual significant technology upgrade around that fall timeline is the key there. That should be on an ongoing basis be the cadence that you see. And then we'll be adding brands this year as well. So, you'll see more breadth of our offering to go along with that launch timing. In terms of capacity, we are, I think, going to be in a much better position this year even and better managing supply and demand and then at launch and then also have plenty of capacity to flex up and respond to demand in the back half of the year if we see an even better-than-expected result. So now that we're two to three years in on the supply-chain side, I think we'll just continue to do better.

Great. And one follow-up, if I may. I know that the hybrid is clearly a competitive advantage for you guys but maybe a little tougher for the consumer to understand versus the display screen watch. I guess kind of what progress have you made in educating the consumer on hybrid and how should we think about that longer-term opportunity? Thanks.

Well, as we said before in our own environment, our own stores and e-comm, we continue to see hybrid's doing well and increasing as a percentage of the total. So, we know the product, consumers love it and we also see some viral impact: the more people wear it, the more people want to know about it and then we sell more. So, we do have a number of initiatives in place where over the next several months and years, we want to expand this with new products and ideas, more compelling ways of communicating it. One good thing is that over 50% of our wearables sales are actually online so it opens us up to being able to communicate with videos and other things. So, we do think that long term is a – it's a very significant opportunity that could transform the entire watch business. And that's one of the things that we're putting initiatives in place to really make sure that we're making progress towards that goal.

Thanks so much.

And our next question comes from Anna Andreeva from Oppenheimer. Please go ahead. Anna Andreeva - Oppenheimer & Co., Inc.: Great. Thanks so much. Good afternoon. Two quick ones. First on the SG&A, I think came in a little lower than your guidance. Any timing shifts we should be aware of? And what's driving I guess the big step-up in the second quarter? And as a follow-up, you mentioned off-price sales were a bit higher during the quarter versus plan. How should we think about off-price penetration as we go through the year? And should off-price channel be normalized when you guys think about sales stabilization in 2019? Thanks.

On the sales side first, on the off-price, it's still – off-price in terms of our total enterprise sales is under 10%. It had good growth in that channel overall for us, but it wasn't overly strong. I think you'll see that continue. It continues to be good liquidation channel for us, a good sales channel, so we continue to have that in 2018 from a plan standpoint. Probably a little too soon to say about 2019, haven't really gotten to what that plan looks like on 2019. From an SG&A perspective, we did have good performance in the first quarter on controlling cost, (44:33) we thought we'd be at. We continue to have good benefits from our New World Fossil initiative, both on the margin side as well as on the cost side. That will continue as we go into the second through fourth quarters at roughly the same rate overall. So really no fundamental changes. Really getting the same kind of leverage that we saw in the first quarter through the rest of the year because of our cost savings initiatives, both from New World Fossil and just general belt-tightening. Anna Andreeva - Oppenheimer & Co., Inc.: Many thanks. Best of luck.

Thanks.

And our next question comes from Ike Boruchow from Wells Fargo. Please go ahead.

Hey. Good afternoon, everyone. So, I'll focus on the wearable category as well. Jeff, in the back half of last year, I think you took some inventory reserves on some slow-moving inventory that I think you expected to sell earlier this fiscal year. Can you maybe just help us understand how much of the wearable revenue growth in Q1 was driven by liquidating this carryover inventory versus what the go-forward wearable category growth rate was? And then I think on the last call I think that you had talked about a 20% to 25% wearable growth rate for this year. Is that still the plan or is there any change to that outlook, or how should we think about the growth rate for the year?

I'd tell you the growth rate, probably trending a little bit more towards the top-end of that range. We said 20% to 25% and we're probably about in the middle, but we're probably trending a little bit more towards the top-end of the range from a growth rate overall. From a liquidation standpoint, we are moving through that, let's say, in the first quarter. We didn't have a substantial amount. We were continuing to move through at a pretty good price point overall on it. We're really going to go through more of the liquidation phase as we get into the second quarter and really the third quarter is really our big liquidation. Think about our volume picks up significantly. We're trying to manage the margin realization on that product. We could have moved through more of it through some channels, we took the opportunity to move through it at a more modest pace as we went throughout the first quarter and so we'll continue to sell through it in the second and third quarter. So, I wouldn't say it's overly measurable number in Q1 that really drove the wearables number. That's really the underlying base business doing well.

Okay. And you feel comfortable with the inventory? You don't think there's any more reserves that need to be taken on that inventory?

No, we feel very comfortable with the reserve we took last year.

Got it. Thanks, Jeff.

Yeah. Thanks, Ike.

And the next question comes from Dana Telsey from Telsey Advisory. Please go ahead.

Hi. Good evening. As you think about the wearables business and the margin on wearables and given that you're distinguishing whether it's the sports watch category, whichever type, is there a difference in the margin profile? And where do you expect the business to go in terms of percentage of sales on wearables?

I think we're on record of saying that we think the smartwatch display category at a sustainable level should be 45% plus gross margins. I don't think we've given guidance this year on where we're going to be. And then hybrid should be over time more like a traditional watch margin. So that's the way to think directionally where we're headed. We feel like we've got line of sight to that and I think are executing pretty well.

And then on as you think about the percentage of the business becoming wearables over time, how do you see that?

Well, we're going to find out. We're in position now with great capabilities for both the traditional and wearables. It's interesting that there's significant demand out there for wearables, business growing extremely quickly. It's an aspirational female customer, largely, which is our customer. They're very interested in the whole idea of connectivity and new innovation, so the potential's very significant. We have something like a 5% or 6% share globally of the watch business. If we get that of what's expected to be in wearables, a $33 billion business in three years, it could be a very significant business for us. So, we'll play it out. We'll see what happens. We're in a position where we're going to do as much as we can with innovation, design and execution on both traditional and wearables. We've got great new product ideas coming out and we'll follow the customer wherever they take us.

Dana, on your mix question, it's always a little bit difficult to forecast because it relies on your forecasting, not only the growth in wearables, but also what happens in traditional watches. You can tell in the past two, three years we've grown to almost 20% of our mix is wearables product on it. So, you think about that, that's 5% to 10% mix growth or shift over the past three years. So just extrapolating that, you can do it about as well as we can. It's probably a similar amount of mix shift, between 5% and 10% over the next three years. So, you go from 20% to 25%, 30%, to 30%, 35%. So, it's going to kind of build and grow. It will be a third of our business going to maybe 40% of our business. The tough call is going to be exactly when, when will you get to those higher penetration points.

And I would just add, too, our mission here is to get to a net growth business in watches in total, which is traditional and wearables, and that the margin profile in wearables, even for display, although lower on a percent basis, it's a much higher average unit retail. So, your gross margin dollars per unit are actually equal to or higher than traditional watch here in the not too distant future. So, we're not as concerned about a unit shift.

Thank you.

I'll now turn the call back over to management for final remarks.

Okay. I want to thank, everybody, for joining us today. We look forward to speaking with you when we report our Q2 results in August. Thanks, again.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for your participation and you may now disconnect.