Good afternoon, ladies and gentlemen. And welcome to the Fossil Group’s First Quarter 2020 Earnings Call. At this time, all parties are in a listen-only mode. This conference call is being recorded. It may not be reproduced in whole or any part without written permission from the company. Now, I’ll turn the call over Christine Greany of The Blueshirt Group to begin.

Hello, everyone, and thank you for joining us. With us today on the call are Kosta Kartsotis, Chairman and CEO; Jeff Boyer, Chief Operating Officer and CFO; and Greg McKelvey EVP and Chief Commercial Officer. 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 discussed 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 the company’s Form 8-K and 10-Q reports filed with the SEC. In addition, Fossil 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 Fossil’s earnings release, which was filed today on Form 8-K and is available in the Investors section of fossilgroup.com. With that, I will turn the call over to Kosta to begin the formal remarks.

Good afternoon everyone and thank you for joining us today. We hope you’re all safe and doing well. On behalf of the entire Fossil organization, we would like to extend our thoughts to all those affected by COVID-19 and express our sincere gratitude to those on the front lines that are working tirelessly on behalf of us all. Also, the events of this past week have been deeply upsetting to all of us. Our hearts go out to the many people affected by this tragic turn of events. Fossil is fortunate to have an incredible community of associates, partners and customers globally. We are using our platforms and resources to listen, learn and think critically and do what we can to foster greater quality and fairness. Turning now to our prepared remarks, our conversation will focus on the actions we’ve taken in response to the COVID-19 pandemic and how we’re pivoting the business for both the present and future. We’ll also review our first quarter results and provide a high-level picture of current Q2 trends and reopening plans. Since the onset of the COVID crisis, we have acted decisively to protect our employees, partners and communities worldwide, adapt to rapidly-changing circumstances, mitigate business disruption and to strengthen our financial position. Let me provide a summary of the actions we’ve taken to date. In mid-March, we closed the majority of our FOSSIL stores and implemented a work-from-home program globally. We implemented practices to safeguard workers at our distribution centers, including staggered work schedules, heightened cleaning procedures and reduced staffing. We lowered our operating expenses by reducing payroll, furloughing a portion of our employees and cutting other areas of SG&A. We eliminated the majority of our planned capital expenditures for 2020. We proactively reduced incoming inventory to align with current demand. In…

Thanks, Kosta. Before I review the first quarter financials, I’ll begin by outlining the steps we’re taking to manage expenses and preserve cash in response to the COVID-19 crisis. Since mid-March, we’ve made a number of strategic decisions that enabled us to reduce cost, increase flexibility and strengthen our financial position. We have completed discussions to amend our credit facility to provide greater near-term flexibility, which includes financial covenant adjustments through the third quarter of 2021. We expect the amendment will be finalized and filed in the next few days. Beginning in mid-March, we implemented cost cutting initiatives across the business. Specifically, we closed all of our North American stores and the majority of our locations in Europe. We reduced compensation cost by nearly 40% in the quarter through a combination of pay reductions, shortened work weeks, furloughs and reductions in force. In addition, we implemented salary reductions for the executive team and reduced Board of Director compensation. We also significantly reduced expenses across several other buckets, including marketing, travel, professional fees and services and contract labor. In addition to these cost reductions, we’ve also taken several actions to preserve cash and increase liquidity. First, we drew down approximately $100 million under our revolver in late-March to enhance our financial position. At quarter end, we had approximately $33 million of availability remaining undrawn. Second, we eliminated the majority of our planned capital expenditures for 2020, cutting total CapEx spending by nearly 80%. Third, we’ve been managing working capital by proactively working with our vendors and reducing incoming inventory to align with anticipated demand. Lastly, we are working constructively with our landlords and licensing partners to align on the best path forward in the new operating environment. We have significantly reduced our cash outflows and expect to end the second quarter…

Thanks, Jeff. I'm going to start with a few questions that are top of mind for investors and then, we'll turn the call over to Wells Fargo to continue the Q&A. Kosta, what are you seeing from the consumer in the initial days and weeks of reopening both in the wholesale channel and in your Fossil-owned retail stores? And how are you thinking about consumer behavior, traffic and conversion for the balance of the year?

Well, we're obviously watching the consumer very closely. And as we've opened some of our stores throughout Europe and the United States, we're seeing traffic down about 50%, which is what we expected, and we got that from looking at our stores that reopened in Asia. So initially, they were running about 50% traffic, but the surprise has been that our conversion rate has actually been much higher. So we're down 50% in traffic and down 20% in sales so far. So, so far so good. Part of that, it seems like there is some pent-up demand and the customers who are coming in the stores are motivated to buy and the conversation rates are high. We also are inspiring additional sales by having more promotional activity than normal in those stores too. So we're watching that closely as well. And we're also seeing [Audio Gap] this pattern in our wholesale partners as well and around the world. So we're hearing similar things. So we'll see how that plays out over the next several weeks and months. That said, for the second half of the year, we're still planning very conservatively. And we're expecting traffic and sales levels to remain soft, due to both the uncertainty of the health crisis, but also the recessionary pressures we're expecting. So there is still a lot of unknowns, and we're looking forward to a more normalized environment.

Thank you. I appreciate that. Jeff, could you tell us how should we think about liquidity and cash burn for the remainder of the year?

Sure, Christine. The organization has done a great job reducing the cost structure, expenses and cash outflow in this quarter, which is really an unprecedented quarter in terms of how business operations have changed. Our net operational cash flow, really the cash receipts and the cash payments from just operating the business is actually expected to be relatively flat this quarter. The majority of our cash outflow in Q2 is really for financing reasons. It's primarily for the paydown of our revolving credit balance that's outstanding. As we work inventory levels down, the revolving balance is coming down, so we're paying that down. Given the near total shutdown we've experienced in the first several months of this quarter, we believe that this quarter is going to have the most significant operational impact. As I just told you, the operational cash flow has been pretty good. So we've managed through this in pretty good shape in Q2. As we begin to reopen stores in the second and third quarter and assuming there aren't -- there is a second wave with additional closures, we do expect to see a stabilization in our cash utilization and usage in the second half. And then, we will have net positive cash generation by the time we get to the fourth quarter.

Great. Thank you. One final question for Greg. What are your thoughts on e-commerce performance during this period? And what it means for Fossil’s digital transformation?

Thanks. Over the last several years and we’ve all been witnessing the shift in consumer shopping to online channels, driven by both convenience and value. And in response, we’ve been aggressively building out our capabilities and developing our digital channels. For us, we’ve been going after online sales in three distinct channels. The first is our direct-to-consumer ecosystem, which includes our own branded dotcom websites and the platform capabilities to drive online sales like digital marketing, technology platform, CRM, et cetera, but also the platform -- and how the platform integrates with our store network through loyalty programs, buy online pickup in store and virtual shopping experiences with our store associates, endless aisle in the store, all of which together create an exceptionally strong digitally-enabled direct-to-consumer ecosystem across online and brick-and-mortar environments for us. The second is 1-in-3P. So first-party and third-party marketplaces. So, this includes Amazon, Tmall and JD.com in China; Zalando in Europe; Flipkart in India and many other emerging marketplaces. Success with these partners is more about understanding and optimizing algorithms than it is selling fashion that we’ve historically done. So it’s taking time to really build that capability and start to scale these businesses, but we’re really hitting our stride, invested heavily over the last few years. And it’s just at the right time I think paying significant dividends. And then, the third is wholesale.com. So, we have great traditional brick-and-mortar partners across the world that are aggressively making the pivot to digital. And we’re very well positioned to help them on their journey given our capabilities. And I think this in total will strengthen our total online and offline relationship with them as a result. So now with that as the backdrop and then the impact from COVID and the closing of our and our…

One additional data point I'd add is that this year, 50% of our sales, 50% of our entire company sales will go through some of e-commerce sides, either our own e-commerce, about pure-play or wholesale.com. So it shows that we're in position for future long-term growth as digital becomes more important.

Terrific. Thank you. Kosta, Jeff and Greg. Now, I'm going to ask the operator to open the line of Ike Boruchow at Wells Fargo to ask some additional questions to the team.

So I know you guys are in a tough spot from visibility and you're not able to offer guidance, but I was going through the 8-K of this presentation in there, it's got a lot of details. On 3Q and 4Q, it looks like your revenue outlook is for decline of 40% and 30%. I guess my question on that is, is that based on your backlog, is that based on your wholesaler conversations? I'm just kind of curious what, where those expectations is going to come from.

Yeah. First comment is, it's important to note that, that presentation is really for refinancing purposes as we state on that. So not only made for investment purposes, but that said, what I would tell you is, that's an estimate of store traffic and consumer traffic in the category effectively being down a bit more than that with online business and digital business being stronger. So it's just an expectation of it. In general, I would tell you it's a generally conservative outlook really in order to ensure we could develop to go through a refinancing discussion for revised covenants.

And then just something else in the presentation, not numbers or guidance, just the detail I wanted to understand. I think you mentioned in that, that the license royalties are currently under negotiation. I'm talking about payment and arrears versus prepaid. Just can you help me understand in maybe a little better detail what exactly is taking place on that front? What exactly these negotiations are?

We have agreements with our licensors for different payment streams on different basis. And in certain cases, there are oftentimes minimums and as you can appreciate, those minimums are out there to help drive healthy performance on our part to drive the business overall. They were established many years ago when the business was really different in terms of channels and how they outperformed. So, we're in discussions with them to discuss debt structure of the [indiscernible] overall also, as well as the timing in terms of the payment. So, really most everything revolving around our licensing agreements, we're having discussions with our key partners. Very constructive, we've been very successful with these partners. They've benefited greatly over the years. So we love the partnership and the discussions. So we continue to have those and we'll have those probably for the next few weeks and months.

And then, there is big picture. Last question, your store count today relative to where maybe you expect it to move in the coming year or two, just as retail continues to evolve very, very quickly. Just any thoughts on maybe the store count in the U.S. and then globally?

I can't tell you specifically by region. I'll say at high level, we've had strategic discussions. We had conversations about moving from the brick-and-mortar model that we are in right now to a more digital model, but still stores are really important and having really productive stores around the globe. But there would be some contraction probably getting below the 400-store mark. With the evolution we've seen, with the great growth we've had in digital, it's probably force that evolution faster than a number of years down the road. So we think that reduction won't be just as to a 400-store chain. It could be in a 350, but we're still going to have sizable number of stores around the world. Full price stores, outlet stores, we think they're a great presence overall and we are finding that they work very holistically with the online business on it from an omnichannel perspective.

Yes. And the way our digital initiatives are set up is that they are not only driving e-commerce, but driving traffic to our stores. So it's an ecosystem approach, so we think kind of have a smaller number of, smaller stores that are highly more productive driven by e-commerce and all the other things go with it, which is buy online pickup in store, curbside, everything else. So we're pretty interested in the future for us as we migrate to a more DTC and digital model and what the benefits could be to our entire profitability as a company, not only that, but our use of inventory, our SKU counts, our cash conversion cycle, I mean there's a lot of benefits in all of that.

One thing I would add to that. Just from a portfolio standpoint. Our portfolio, I would say, is fairly fresh in terms of expirations, meaning we have a fair amount of stores that are coming up for expiration over the next two years. So that gives us a lot of flexibility in terms of, as Kosta said, there may be, the number of stores may not change as much, maybe the size and location might. So it really gives us a chance to reestablish and reset the store portfolio base to be as productive as possible and as efficient as possible with limited amount of exit cost long-term.

Got it. Thanks guys.

Yes.

And this concludes the question-and-answer session. I'll turn the call back over to Kosta for final remarks.

Well, we want to thank everyone for joining us again, and we'll speak to you again at the end of the third quarter. Stay safe everyone.

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