Good afternoon, ladies and gentlemen, and welcome to the Fossil Group Third Quarter 2022 Earnings Call. At this time, all parties are in a listen-only mode. This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company. Now I'll turn the call over to Christine Greany of the Blueshirt Group to begin.

Hello everyone and thank you for joining us today. With us on the call, our Kosta Kartsotis, Chairman and CEO, Jeff Boyer, Chief Operating Officer; Sunil Doshi, Chief Financial Officer; and Greg McKelvey, EVP and Chief Commercial Officer. I would like to remind you that information made available during this conference call consists of 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. During today's call we will refer to constant currency results. Please note that you can find a reconciliation of actual results to constant currency results 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'll now turn the call over to Kosta.

Thanks Christine. Good afternoon, everyone and thank you for joining us today. We delivered third quarter results in line with expectations and will continue to be a volatile and dynamic global operating environment. Net sales of $436 million decreased 5% on a constant currency basis while adjusted operating margin came in at just over 5%. Our results largely reflect a continuation of the high level trends we saw in the second quarter. Specifically, ongoing COVID policies in Mainland China continue to pressure sales in the quarter and wholesale inventories remain elevated although lower than Q2's peak level. The record strength of the US dollar impacted our top line by over 600 basis points and affected adjusted operating margins by 190 basis points. Remember that 65% of our sales are outside the United States and finally, record global inflation continues to weigh on the confidence levels of our consumers and wholesale partners. While the level of macro-driven factors significantly impacted our overall financial performance, during Q3, we saw encouraging results from our strategic initiatives. Our digital initiatives are having a positive impact across our direct-to-consumer channels. Improved operational, marketing and analytical capabilities are driving broad-based improvement in traffic and engagement. In Q3, website traffic was up across our global websites and revenue was up versus Q3 of last year. Our digital marketing efforts are also driving improvements in engagement metrics leading to better customer lifetime value. We have also leaned further into social commerce capabilities, particularly in China, which has partially offset the significant declines we've experienced in that market since the onset of COVID. Building out our social commerce capabilities is important as we see the potential for significant global growth in this channel for years to come. Progress in our Fossil brand strategies is also encouraging. Globally in Q3,…

Thanks Kosta and good afternoon, everyone. I'll first start with the review of our third quarter results and then provide an update to our full year outlook. While top line trends were challenging, better event management helped us achieve adjusted operating margins that were in line with our expectations for the quarter. Net sales came in at $430 million down 11% year over year and adjusted operating margins were 5.3%. In constant currency, net sales were down 5% and adjusted operating margins were 7.2%. At a high level, three things are worth noting about the quarter; first, FX rates were more impactful to our results in Q3 versus prior quarters. In the quarter, FX rates contributed 610 basis points of headwind on our top line and were about 100 basis points greater than our expectation at the beginning of the quarter. The record strength of the dollar relative to other currencies also impacted our operating margins by approximately 190 basis points, primarily in gross margins. When thinking about the FX impact on our operating margins, it's important to remember that approximately 65% of our revenue comes from outside the US while 55% of our expenses are based outside of the US. And as a reminder, our hedging programs are designed to hedge a portion of our transactional US dollar based inventory purchases and not our underlying operational cash flows. The second factor of note, our constant currency sales decline of 5% continues to be most notably impacted by sales declines in Mainland China where COVID-driven policies and travel restrictions have impacted our demand. In the quarter, sales in Mainland China were down 44% versus last year. Excluding the sales decline in Mainland China, our total net sales in constant currency were flat versus last year. Third, Q3's net sales benefited…

Thanks Sunil. Let's move to some questions. I'll start with Kosta. Can you please take us through your view of the watch category at a high level and then talk about how Fossil's performance stacks up relative to what's happening in the market?

Well, there continues to be a lot of change in the overall watch market. The Swiss watch business continues to be strong and the upper end of our price points are actually selling better than the lower prices. So we're seeing that in Michele, which is showing strong growth overall and in our Zodiac brand, and we're seeing it in the upper end of styles of cores, which are around the $500 price point. And we're also seeing it in Fossil where our new elevated heritage product is doing extremely well. In smart watches, trends have been challenging with softer consumer demand. Overall, the Fossil brand is doing very well, especially in our DTC and we expect this to continue as we implement the additional digital capabilities over the next few months. India continues to be very strong for us and is a significant long term opportunity. China is still difficult, but our indications are that we're holding share in the market. Meanwhile, we are testing new channels and digital methodologies in China and are in a position for growth when the market stabilizes, but the long term opportunity is obviously very significant.

Great, thank you. Kosta. Over to you Jeff; Kosta mentions that the team is sharpening its focus on capturing efficiencies. Can you talk to us about how you see that unfolding in 2023 and where you might be looking for opportunity?

Sure. Christine. There are four main areas of focus for our ongoing efficiency efforts as we exit this year and we enter 2023. One, inventory and SKU productivity, two, freight and distribution efficiencies, three store portfolio profitability and fourth overall spending optimization. Regarding inventory productivity, we are reducing the breadth of our SKU base by about 30% in traditional launches beginning in 2023 as Kosta mentioned previously. At the same time, we are also shortening the lead times on our most productive SKUs in this category. These efforts will help improve our forecast accuracy, better meet consumer demand and reduce our overall product costs. Our second area of focus is freight and logistics. Given the combination of recent supply chain disruptions and the small cube size of our products, we currently ship about 90% of our product via air freight. We are seeing reductions in air freight and ocean rates, which is an indication that supply and demand are becoming more balanced and rates should continue to contract in 2023. In addition, as the Ocean Freight channel normalizes, we have opportunities to move a portion of our inbound to this more efficient logistics channel. Third, we continue to analyze our store base to improve our DTC channel profitability. This year, fiscal '22 we will close about 36 stores or about 10% of our store base, further reducing our direct channel operating expenses and our store optimization program will continue into next year. We have a significant number of natural lease expirations coming up next year and expect to take advantage of that opportunity to rationalize another 15% to 20% or so of our store base focused on low performing stores. This action will further reduce our direct operating expenses. And fourth, we continue to rationalize our overhead spending levels through a combination of simplifying our organization structure as well as moving support functions to lower cost locations such as India, where we currently have about 400 associates located in our global business services center in Bangalore.

Terrific. Thank you, Jeff. Greg, could you please elaborate on the progress you've made on the digital roadmap this year and talk about some of the strategic initiatives planned for 2023?

Absolutely. you've heard us share previously in 2022, we focused on three core pillars within our digital journey. First is shoring up our direct-to-consumer foundation. Second is building a marketing analytics powerhouse, and third is enabling our teams to transform through digital tools and education. Within the first pillar shoring up our DTC foundation, we have put a ton of work in improving our sites in meaningful ways for our consumers. This includes things like reducing how long consumers have to wait for our sites to load, improving onsite navigation and filter functionality and enhanced product sets and displays. Excitingly, we have also recently added Klarna as our global payment partner, offering our consumers even more ways to buy and pay online. Within pillar two, from a marketing and analytics perspective, we've seen incredible growth in social commerce. In China, for example, social selling is driving nearly one third of all sales in some of our biggest brands and we're leaning into this innovation in North America as well where we've integrated live commerce capabilities into fossil.com and have completed over 15 shows this year. This includes a recent Harry Potter collaboration hosted by cast mates from the films and the marketing work hasn’t all been front end. As you've heard Kosta share, we've also just launched our new consumer data platform. This is important because for the first time we have a unified source of data across all segments and channels to more effectively target and personalize our content and offers to consumers. This unlocks a huge opportunity for us in the CRM space where we are particularly excited about getting insight into consumer behavior prior to the behavior happening, as well as the ability to better engage our active and lapsed consumers. Last but not least, it continues to be very important for us to bring our employees along with us in this digital journey. In addition to creating opportunities for our consumers, we've also invested on our teams, growing our footprint, over 120 digital experts globally, enabling agile development processes, activating A/B testing at scale across sites and marketing channels as well. So as we look to next year, expect us to drive return on investment from all of these recent investments we've made this past year and build on those successes, deepen personalization and continue to innovate around how and where we participate in the ever evolving digital ecosystem.

Thank you, Greg. We'll wrap up with a question for Sunil. We're seeing inventories continue to grow faster than sales. What are you doing to improve turns and how should we think about working capital levels in Q4 and into 2023?

Thanks, Christine. Yeah. Our inventory levels and those at our largest wholesale customers are a key focus for us. As we mentioned, our inventory levels at the end of Q3 were up 14% versus last year, which is too high relative to our sales forecast. While the inventory levels are higher than we would like, our business model carries less seasonal risk than many other apparel or accessory brands. That said, we are focusing on a few things heading into Q4 and into 2023. First, with seasonally higher demand levels in many parts of our global distribution channels, we will lean more into temporary promotions to sell down select inventory throughout our global distribution network. Second, we're working closely with our factory partners on several initiatives to reduce manufacturing lead times, which has resulted in many of our core product operating on shorter lead times. That allows us to place orders later and closer to demand signals and recalibrate our inventory ordering levels. Third, as Jeff mentioned, we have reduced our active SKU assortment, which helps us drive better turns in our overall assortment. The combination of these activities lowers our overall expectation for working capital needs with material drops in inventory levels versus Q3 levels as we wrap up the fourth quarter and as we head into the first quarter. Longer term, we think these initiatives should lead to lower structural levels of working capital in the model and improve cash flow.

Terrific. Thank you. I'll just turn it back over to Kosta to close us out with some final comments.

Well, thanks for joining us for this call and we look forward to speaking with you again early next year for our Q4 call. Thanks very much.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.