Fossil Earnings Call Nuggets: Consumer Environment and Fossil Watches

Fossil (NASDAQ:FOSL) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Consumer Environment

Randy Konik – Jefferies: Kosta, can you just give us some color on how you’re thinking about the consumer environment right now and if you could give us a little bit more granularity on the KORS performance in the quarter that would be very helpful? Then Dennis, if you could just give us some color on when we could expect to see a leveraging on the Asian growth expense and then separately, when do you think we should see an inflection point back in the gross margins?

Kosta N. Kartsotis – Chairman and CEO: Well, I think if you look at the business, especially in accessories and watches, it appears to be very strong. We are probably benefiting from an ongoing situation where there’s not as much interest in apparel or it’s kind of an over-served category where a small percentage of sales move from that category into watches and accessories has a big impact and we expect that to continue. So we’re, we think in a very strong position in terms of the ongoing business. We also get – we’ve seen estimates that the watch business will continue to grow at 7% to 10%. So, we’re playing into that strength as well. So, we just keep doing what we’re doing and we’re in the right place and we’ll continue to benefit from the tailwind. Of course, obviously, it continues to be very strong. As we’ve said before, we’re showing strength outside the United States as well, so we think that to continue. We also have a number of other brands in our portfolio that are growing at a very fast rate throughout the world. So, we think the power of the portfolio to adapt to markets and to show ongoing growth, we’re really in a good position in terms of that.

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Dennis Secor – EVP, CFO and Treasurer: Randy, on the Asia question, we feel very strongly about the long-term potential of our business in Asia. And as we said on the last call, our focus is building the distribution channel. One of the challenges there is to find the right partners. It’s very fragmented. We’re very pleased that we were able to have signed one regional partner that has the potential, as Kosta mentioned, to open 100 doors for us in the future. But our strategy, Randy, is to do it well rather than fast. We are really focused on working with the best operators in the region, and those discussions are ongoing. So, with respect to the inflection point, it really is a function of when we build that distribution. We’re investing. That will put some pressure on the margins right now. But it’s really going to take the revenues and the distribution channel to be built out. That will happen sometime in the future. With respect to the margins, we’re actually expecting gross margins this year overall to be flat to slightly up. There’s a portfolio of initiatives that will help drive some improvement. Currencies are not going to be as favorable as we had happened. But still, for the full year, we expect to be flat to slightly up on gross margins.

Fossil Watches

Simeon Siegel – JPMorgan: Were there any specific categories or price points that led to that 17% growth in the Fossil watches? And then in terms of the $15 million incremental sales, can you help us where that fell geographically? And then kind of keeping that Easter thought alive, on the DTC side of the business, did you see any incremental strengths during that last week of Q1 tied to that Easter timing and then maybe perhaps followed by a negative side of shift in Q2?

Kosta N. Kartsotis – Chairman and CEO: As far as the watch business, obviously, the growth was pretty strong across the world. In the United States, it was up – up 22% in the United States, up 17% globally, and it’s really across the board. We had, as you know, kind of reformulated the brand about how we go to market. It’s more design driven and brand driven rather than category driven and we’re starting to see the benefits of that. There’s a stronger point of view and a really strong assortment. We also have benefited from having fewer SKUs, not just in Fossil, but in all our watch brands. So what we’re telling is fewer stories more well told, and I think customers are responding to that.

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Simeon Siegel – JPMorgan: So was that 17% across all the portfolios?

Kosta N. Kartsotis – Chairman and CEO: 17% Fossil watches. The total watch business across the unit, in the whole world was up 23%. U.S. Fossil watch business, up 22%…

Dennis Secor – EVP, CFO and Treasurer: Then on the shift, that was all North America related. What we did is we – actually analyzing the timing of wholesale shipments is not a perfect science. So, you look at patterns and when we looked at March, we saw a very distinct second wave of shipments that happened in the middle of March than we had been anticipating for April. So, we would expect that that shift was fully – that $15 million shift would fully turn in the second quarter. Now, just not to confuse everybody, the first shift that we talked about last time; the $10 million shift that we saw in January, that’s the result from the NRF calendar disconnect. This year that fully turns in January of next year. So that’s a Q1 ’14 event for us.

Randy Konik – Jefferies: And then – so, did you see on the DTC side, was there an Easter impact there?

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Jennifer Pritchard – President, Retail Division: On the DTC side we saw an increase in March, as you would expect and a decrease in April, but overall, given the two months combined, we were very pleased with the results, and we were very happy with the fact that Europe came out positive in the month of April.

Randy Konik – Jefferies: And then just lastly, so, how much was the incremental expenses that you guys just mentioned for Basel for 2Q?

Dennis Secor – EVP, CFO and Treasurer: We didn’t disclose those.

Jennifer Pritchard – President, Retail Division: It’s a timing issue.

A Closer Look: Fossil Earnings Cheat Sheet>>