Fossil Earnings Call Insights: Resource Allocation, Europe and Asia

On Tuesday, Fossil, Inc. (NASDAQ:FOSL) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

Resource Allocation

Omar Saad – ISI Group: I guess my question would be I know it’s one quarter, but given kind of this little bit of change in trend in the business, we see this continued strength in the watch business, the license watch business, even the FOSSIL brand watches are up double-digit, how do you think about resource allocation as you look out over the next year, the next three years, the next five years, building this business long-term as you kind of choose between the FOSSIL lifestyle brand strategy and the watch strategy which clearly seems to be working for the existing licenses you have and any potential licenses you have in the future?

Mike L. Kovar – EVP, CFO and Treasurer: Well, we still believe we have a rather large opportunity in both of our core businesses, so if you look at FOSSIL business during the quarter part of what happened, there was some product in our reformulation of the jewelry business. As you might remember, we had two separate jewelry assortments, one in Europe and one in the U.S. and what we’re doing basically is making one global assortment. The transition of that impacted our sales, especially in Europe where the sales are much larger in jewellery, more deeply penetrated market, so it impacted our Europe sales and also our comps over there. So if we look at FOSSIL and we look at the growth of it and we look at the aspirational nature of it, and the fact it works all over the world and we have stores all over the world, you look at our comps in Asia, which is very encouraging, plus 18% and we still at the end of this year I think we’ll only have 290 regular price FOSSIL stores, so still rather underpenetrated if you look at our big global lifestyle brand. So we still think there’s a bunch of runway ahead for FOSSIL and then obviously in our multi-brand watch business, it’s pretty large, long-term opportunity for us to continue to build out the infrastructure, especially in Asia and if you look at just the hundreds of millions of new people join the middle class in Asia, that’s basically our FOSSIL customer and our multi-brand watch customer. So we think there’s a very large opportunity out there that we’re building into. If you look at those two businesses and the new shared services around the world for us it’s a very compelling business model and we think that long-term it will help us penetrate those new markets in Asia, even more efficiently than you might if you just had one brand.

A Closer Look: Fossil Earnings Cheat Sheet>>

Omar Saad – ISI Group: Could you just quickly touch on the U.S. slowdown a little bit, is it – you’re seeing destocking at the retail level and the wholesale side of the business?

Mike L. Kovar – EVP, CFO and Treasurer: First of all, our first quarter is the smallest quarter of the year and came off of pretty large and significant increases over the last couple of years, in a somewhat dynamic and disruptive environment, it doesn’t always match up shipment this quarter versus last quarter etcetera. But all in all, this retail sales of watches and FOSSIL brand in U.S. continue to be very strong and we are very bullish on the long term impact that it will make on our company and we think we are going to continue to gain market share in the U.S. and we think there is a big amount of runway ahead of us.

Europe and Asia

Ike Boruchow – JPMorgan: Couple of questions on Europe and Asia, I guess I will start with Asia. Kosta, you gave the comps in Korea, I believe were down 6. Is there any way you could parse that with the comps in China, or for the China concessions, and then also – can you also help us – walk us through the rest of the year, why exactly should we expect revenues in the region to come out to the mid-20s on a percentage basis for the year, like what’s going to cause that acceleration?

Kosta N. Kartsotis – Chairman and CEO: Korea last year, I think we had 117% increase or something like that in the first quarter. So we are up against some pretty strong comps, just overall, and the comps and the concessions were 29% plus. We have perceived some softness in the market, you might have heard that from some other companies. But that operation we think has a huge potential long term and we think it (indiscernible) what the potential size of that business is going to be. China, I think our comps were 17.3%, Mike is that right?

Mike L. Kovar – EVP, CFO and Treasurer: That’s correct.

Kosta N. Kartsotis – Chairman and CEO: So, if you look at the numbers of additional concessions that we are going to be putting into the market, and all the other activities over there, that’s where we get to that overall Asia increase I think of 25% for the year.

Mike L. Kovar – EVP, CFO and Treasurer: On the Japan question, we were transitioning our business there to more of a concession environment and that’s an early on process for us, but if you look at our FOSSIL performance in that region, Jennifer, I think we were up 18% in the first quarter comp.

Jennifer Pritchard – President, Retail Division: Yes, and up 29% from the year before.

Mike L. Kovar – EVP, CFO and Treasurer: So I think we’re seeing strength in terms of our direct business there albeit the 18 FOSSIL stores we have in the country, it’s the wholesale business we’re refining a little bit more of a challenge in terms of growth and again that comes up against a 10% increase in Japan last year, which obviously most of our shipments went out before the disaster occurred and as we move forward we think we have some much easier comparisons in Asia. If you look at the sequential growth in Asia from Q1 last year to Q4 we went from a 58% increase I believe in Q1 down to 14% increase in Q4 so those of comps are getting progressively easier as we move through 2012.

Ike Boruchow – JPMorgan: Then just a couple of quick ones on Europe. I was wondering if you guys could help go through the weakness you saw intra-quarter maybe by country or by brand in terms of where you really saw that weakness or was it just as a whole and then could you also remind us again of your penetration. I believe Germany is your biggest market, followed by the U.K. but just any color there would be very helpful?

Kosta N. Kartsotis – Chairman and CEO: We actually had a pretty strong growth in both the U.K. and France. Germany was flattish and Italy and Spain were not good, down and those obviously are due to the tough macro environment there, but overall I mean I think we’re very bullish about our long-term ability to gain additional market share in the market. We have obviously with Skagen going in there, they are very strong especially in Northern Europe and we think we can expand the jewelry business there quickly and in addition to that the Michael Kors brand and some others are growing very quickly in Europe, so we think we continue to gain market share and we just keep pushing through it during this difficult time, it could be an opportunity for us to gain market share during this period.

Ike Boruchow – JPMorgan: Last but real quick, if you exclude the Skagen acquisition, would you expect your revenues in Europe on an organic basis to remain flattish for the remainder of the year? Could it be negative? How should we think about that?

Mike L. Kovar – EVP, CFO and Treasurer: As Kosta mentioned excluding Skagen, we’re guiding toward low-to-mid single-digit increases for the balance of the year in Europe.