Good day and welcome to the Fossil Group Second Quarter 2015 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Eric Cerny. Please go ahead, sir.

Thank you. Good afternoon, everyone. Thank you for joining us and welcome to Fossil Group’s second quarter 2015 earnings conference call. 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 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 regularly available in our Form 10-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 may listen to a live webcast or a replay of this call by visiting fossilgroup.com under the Investors section. Now, I would like to turn the call over to the company’s Chairman and CEO, Kosta Kartsotis.

Thank you and good afternoon everyone. I will begin with a few prepared remarks before turning the call over to Dennis Secor, our Chief Financial Officer and then we will open the call to answer any questions. For the second quarter, we delivered sales growth across all regions and earnings per share growth ahead of our expectations. From a top line perspective, our Fossil and Skagen brands drove the increase and we also benefited from our recent addition of newer brands. Across all of our brands and categories, leathers and jewelry increased compared to last year, while watches were flat. Overall, there is a lot happening in our market right now. On the one hand, we are encouraged with the early reads on our owned brand investments and expect to see continued improvements as we move in even more in the second half of the year. We continue to leverage our strategic advantages to partner with the best fashion brands and companies in the world. On the other hand, we are adjusting to changing consumer shopping patterns and preferences as well as the natural progression of brands in their lifecycles. We also see technology emerging as the latest trend in fashion, with the growing interest in wearable technology inspiring new entrants into the watch space. We believe our key competitive advantages in design, sourcing, distribution, as well as the great brands in our portfolio, have us well positioned to capitalize on the evolving landscape. Our anticipated launch of connected accessories later this year has the potential to energize the accessories category, given the innovation we are bringing to market and the strong consumer interest in the category. We operate a resilient and diversified model that benefits from scale, diversification and financial strength and positions us well to win in the…

Thanks, Kosta and good afternoon everyone. Second quarter net sales increased 2% in constant dollars and on a reported basis declined 4% to $740 million. While we delivered constant dollar increases across all regions, sales came in below our expectations as both Europe and Asia grew at a lower rate than we anticipated. For the quarter, we delivered earnings per share of $1.12 compared to $0.98 last year. This quarter’s EPS benefited by roughly $0.09 of non-operating gains, $0.04 from a lower tax rate related to second quarter audits and a net $0.05 related to financing activities. Compared to EPS in the second quarter of fiscal 2014, this quarter’s results, was negatively impacted by roughly $0.30 due to currency and another $0.10 due to our restructuring charges. Constant currency sales growth and a lower share count combined with non-operating gains to drive the year-over-year comparison. Overall, operating expenses decreased compared to last year, primarily driven by changes in foreign currencies. In constant dollars and excluding restructuring costs, expenses were flat to last year despite the impact of new store additions from last year that we had yet to anniversary. Before I get into second quarter details, let me share some insight on our first half performance as our reported results tend to obscure what we consider our core earnings per share. Thus far in 2015, our reported results have absorbed $0.43 of currency headwinds and $0.27 of restructuring charges. We have also benefited $0.09 from the tax and financing activity I just mentioned. Factoring out those items, we delivered first half core EPS that is nearly 13% higher than the comparable period last year. Now specific to the second quarter, Fossil sales increased 6% in constant dollars. Solid growth in watches and leathers more than offset the decline in jewelry.…

Thank you. [Operator Instructions] And we will take our first question from Omar Saad with Evercore ISI.

Hi. Thanks. Good afternoon, my first question is…

Hi, Omar.

Hi, how are you going? I wanted to ask a question on what’s happening in the – what are the different discrete items, if I look at your second half guidance where it was 90 days ago versus where it is today ex-currency of course, it’s certainly come down a lot, has something changed and obviously it looks like international business is a little bit slower, is that the only key driver there, are there other things you are seeing in the watch marketplace that are causing you to see a much lower revenue number in the second half versus what you are thinking. And then related, as I look at the – things you are talking about on the call connected accessories, you are really ramping up the marketing and brand investments around Fossil and Skagen, should we take that to read into a corporate level of view across the watch category that’s changed? Thanks.

So let me take the first part of that. With respect to the guidance, as we said on our prepared remarks, we always expect that 2015 would be challenging as much as there would be some fairly significant headwinds and the net headwinds would be greater than the tailwinds. And as we said, that certainly has proven to be the case with currencies, the entrance of new competitors, brands moving, economic choppiness in some markets. The American market performed pretty close to the way we expected in the first half as did Asia. Asia was a little weaker. Europe was the standout for us. It was certainly weaker than we expected in the second quarter and that largely drove the second quarter, where our sales missed the top or the bottom of our range. So that’s number one, is that we just missed our sales expectations for the second quarter. So as we look out for the remainder of the year, we are operating still with a fair amount of – lack of visibility as we always do and that’s exacerbated by some of the factors that we talked about. And Europe, while we are still evaluating that hard to better understand those dynamics and there is a good probability that we are going to discover that a lot of the factors that are impacting the rest of the business is also affecting Europe. You have got some economic issues going on there too, with continued impact of Greece and the Russian ruble and oil impacting our Middle East business. So Europe generally was softer than we expected. So what we wanted to do was adjust our expectations accordingly. And this year, we are operating now with the sales expectations much wider than we had done certainly last year and implied in the back half of the year because I think, to some extent there is a little more uncertainty in the business in the back half of the year than we thought before. But for the same – likely the same there are similar reasons.

On your question regarding investments, we said at the beginning of the year we were in somewhat of a pivot position where we are going to hold our SG&A flat and invest in demand creation omni-channel and wearable technology. I think the year is playing out pretty much like we have planned it in that regard. We are already seeing results from our demand creation and most of that spend starts in September. We are already seeing benefits from our omni-channel investments and our digital capabilities so that’s starting to happen. And I would say about wearable technology, our investments and working with partners as got us to the point. We are probably more excited about wearable technology and its future right now than we were at the beginning of the year. So all in all, holding the SG&A flat and investing pretty heavily in our future, I think is playing out pretty well and we will see how it works.

We will take our next question from Erinn Murphy with Piper Jaffray.

Great. Thank you. Good afternoon, so a couple of questions for me. I was hoping maybe you could speak a little more about the Americas region overall, it did seem to surprise the upside in the second quarter and did accelerate sequentially. So we would love to hear a little bit more about what you are seeing right now in terms of sell-in versus sell-throughs in the United States in particular and then any kind of context around some of the major brand movements in North America would be great. And then just my follow-up would be for Dennis. Just on the guidance, if I get the midpoint of your third quarter sales guidance, it implies the fourth quarter is down only about 1%. So if you could just walk through your assumptions in the fourth quarter that’s kind of giving you the confidence of that sequential improvement that would be great? Thank you.

Well, our performance in North America, as we said in the call, obviously both Fossil and Skagen did very well. And I think these are benefiting from our efforts to invest more in them, not only on demand creation in omni-channel. But if you look and see what’s going on in the stores and I would recommend you see both Times Square and our Fifth Avenue store at 45th [ph], you can see that the whole impact of the new fall product, the new marketing campaign. We have a total new visual look and it’s being reinforced with the digital and social media, it looks pretty strong. We think we got a perfect setup for additional activity in the back half of the year. So performance in North America is largely due to both Fossil and Skagen doing well. And as we mentioned our comps were pretty strong. Our e-commerce business, because of all the activities we are doing is – had a lot of traffic on it, a lot of increases in traffic, increase in sales. We know its driving traffic to our stores. Our analytics clearly show that. And we also know its driving traffic to our wholesale partners, stores and their websites. So we are having the benefit that we expected. And we think that by – in North America by continuing to do this plus adding wearable technology later this year and next year, we think we are in a pretty good place to continue to gain share in the U.S.

On the top line for the balance of the year, the – what we have adjusted our sales expectations on the high end is really assuming the rate that came out of the second quarter, generally follows for the rest of the year. That doesn’t necessarily create a linear growth trajectory because you are up against last year. If you remember last year, we had a very strong third quarter. We – and as we evaluated that performance, there was some inventory build that happened in the channel in the third quarter and that turned in the fourth quarter. And our sales I think in the third quarter last year were up 10 and they were roughly flat in the fourth quarter. So a lot of the choppiness you see this year is the reciprocal, if you will of what we saw last year. But generally, the assumption is if the current trend continues, we do expect with the significant investments that we are making in Fossil and Skagen, we are very excited with the improvements we have seen thus far and we are really just beginning to invest in those brands and we will lean in significantly more, so there will be a lot more marketing support to the Fossil brand in the back half of the year. So, our goal is to see some uptick and we left some room for some further softening in some of the places where the business hasn’t been as strong, but generally operating at that current trend. And then on the bottom of the range, we have assumed a more challenging performance.

That’s helpful. Can I just ask a quick follow-up just in terms of what you are seeing in wholesale between sell-in and sell-through? I know that gap has been a little bit wider in the prior quarters. Can you just talk about it in context of what you are seeing in particular in the license portfolio? I recognize Skagen and Fossil were better in the quarter. Thanks.

Yes. I don’t have those particular data. I mean, to the point you made, we have shared some comments that before in quarters where we saw a pretty strong divergence between sell-in and sell-throughs just to give some understanding of how those two may differ and how our sell-in may not necessarily be the most important number or a meaningful number to understand the business trend. We didn’t see that in the second quarter. So, we haven’t specifically provided any numbers, but we didn’t see a significant differentiation in sell-in and sell-off.

Thank you, guys and best of luck.

You bet. Thank you.

We will take our next question from Oliver Chen with Cowen & Company.

Hi, thanks. Thanks for the details. On your comments on lower sell-in on the Michael Kors watch brand, do you expect that trend to kind of continue as that gets offset by the pickup in jewelry? And I was curious about there has been talk of really restructuring newness in that brand. Is that something that’s happening in terms of the inventory that you are going to sell in and are there expectations around how that may manifest?

Well, we look at Kors globally and the opportunity. If you just look at the pure brand power, the brand is still extremely productive. It’s the most productive brand we have and it’s got the best metrics in terms of sell-through sales per foot. It’s just a huge number. So, obviously, growth has moderated a bit. We did have growth globally in Kors, with jewelry having a big increase and we think that will continue. We do think now that jewelry can be a much larger number than we thought in the past. We also – they are ramping up their activities in men’s and we have got a whole initiative around automatics. We do have probably more innovation and newness going into the general product line that we had in sometime and that’s launching in the back half of this year. So, we think that’s going to be very good. We are continuing to build shop-in-shops. We built another 33, I think we are around 300 now and there is still significantly more to grow. Travel retail is increasing to look like a big opportunity and we will be launching a whole platform, a wearable technology next year that could be another stage of disruption for Kors. So, all-in-all, the brand power is very strong and we are going to take advantage of that and garner that across the globe.

Okay. And Kosta, on the context of your comments about near-term challenges, what are your thoughts about the nature of the category with respect to discounting or not in department stores in terms of what the category is looking like and initiatives you are taking? I mean, it sounds like the lifestyle demand creation is really the algorithm for rejuvenating interest here, but I am curious about your thoughts on the promotional nature of the category?

Well, as you know, we believe strongly the business should be regular price. And I think if you look at the last 18 months or so, we haven’t seen more days on sale probably stable, if not slightly less and we are doing everything we can to keep it that way with innovation and excitement. And that’s the way we operate and we would like to continue that way. So, we have always thought that innovation and new ideas are going to be what drives sales and anything else short of that is the short-term prospect and that’s why we operate.

Okay, best regards. Thanks.

We will go next to Laurent Vasilescu with Macquarie.

Good afternoon. Thanks for taking my questions. How should we think about the leathers business in the back half of the year in terms of revenue growth versus gross margin opportunity as we got last year’s handbag liquidation strategy?

The leathers business has been strong for us. I mean, it’s been – we have made some additions. Overall, we are very happy with the design and the product is doing well. So, as we said, generally speaking, we are assuming the trends that we are seeing coming out of the first half of the year are continuing. So, we are expecting that business to perform as well and no significant changes in terms of the margin structure relative to leathers performance.

Yes. The one thing to keep in mind is the handbags is a very emotional and aspirational business and the category that will benefit the most from the Fossil brand getting stronger is the handbag category. We have the opportunity to do multiples of what we are doing in handbags in our existing environment in our existing stores, but that’s partly why it’s such an important prospect for us to continue to make the brand stronger, more cohesive, tell a better story and have a stronger community, because the win for us on that is very significant.

Great. And then along with the wearable initiative, I think the Swiss made initiative is one of the white spaces that you are tackling. Can you give a little bit of an update on this initiative of what you are seeing, how that business is doing versus the non-Swiss watch business?

One thing I would say has changed, if you said two years ago, the importance of Swiss in the marketplace and the direction it was going and I think it was stronger than it is now. I think technology and the whole idea of wearables I think has taken some of the oxygen out of the Swiss business. In addition to that, obviously, China and Asia hasn’t been as active. So, there is not as much discussion about it, but I do think that, that’s a short-term situation. If you look at the global watch market which we are relatively small share now and want to be a larger share, a very significant portion of the global traditional watch business is Swiss-made. So, long-term, we want to play in that environment. So, it still remains a big white space for us. And as you know, we are building our own automatic movements in Switzerland. We have Swiss activities in different product lines. Tory Burch was launched last year in Swiss and it’s going to do very well, but we are still moving along. And I think long-term it’s a very large white space for us. And I just think technology is taking a little bit of win from those sales in the last six months to a year.

Thank you. Best of luck.

Thank you.

We’ll go next to Simeon Siegel with Nomura Securities.

Thanks. Good afternoon. Can you guys quantify any expectations for the relatively new license brands and portfolio? Do you think they can ultimately grow large enough to plug the watch declines you might see from those – from the existing brands? And then Dennis, just what do you expect to gain from other income in 3Q and for the year? And then how should we think about the impact of FX into next year, is there any hedges that might be rolling off? Thanks.

Well, if you look at the portfolio of some of the newer brands in there, so we have added Tory Burch Kate Spade New York and Chaps in the last year or so, all of them have very strong potential. In addition to that, if you just look at our portfolio, I mean, there are some brands in there that are in a state of transition, where the owners of those brands are reinventing them and getting ready to spend a lot of energy and resources repositioning them and we think those have got the big potential also. So, all-in-all that whole idea of the portfolio is the brands will ebb and flow. I think part of our issue this last quarter is we had more ebbing and flowing. In the long-term, we think that we got more brand power and strength in our portfolio than we are seeing results for right now and I think we are in position for ongoing sustainable long-term growth of market share.

Yes. In terms of below the line, if you will, I think you should always anticipate in an environment where currency is a headwind given that we hedge that when you are talking about GAAP – reported GAAP number that you would have some benefit from the currency contracts that we have. Generally, that would be the rational expectation down there as well as you always consider the fact that we have taken on debt as we need to look at interest rate, which over the last few years – our interest expense rather, which has been growing as we have taken on some more debt. Our share repurchase, I just remind you that we did say this year that we would not expect to be buying as many shares as we did last year and the year before that as that was largely driven by taking on some debt on the balance sheet overall. Thinking forward, we haven’t guided to ‘16, but – and so we will provide more insight as we get to that point. But just generally speaking, if you look at the pattern of currencies, you would expect still some additional – if currencies now flattened out now for the rest of next year, you would probably still have some headwinds at the beginning of the year largely in the first quarter. And then by definition of my example here, they would neutralize for the rest of the year.

And then just making sure I am thinking about the right way, is there any general rule of thumb – so if you have 340 basis points of the FX transitional impact on the third quarter, is there any easy way to think how much gets mitigated in the other expense line?

No, there are just so many moving parts to that. There are just so many moving parts to that, there is no simple back of the envelope way to do that.

Okay, great, alright. Thanks and best of luck through rest of the year.

Thank you.

We will go next to Dana Telsey with Telsey Advisory Group.

Good afternoon everyone. Can you talk a little bit – watch category growth I think went from 3% growth in the first quarter to around flat in the second quarter, how are you planning it for the second half of the year. And as you shift to jewelry, as that becomes a more important part, what’s the impact on the margin in ticket versus watches? Thank you.

Yes. The second part first, the margin profile is fairly similar, so shifting between watches and jewelry shouldn’t change a lot, shouldn’t overall impact our margin structure. Again, as we said that our general assumption around the trends for the back half of the year is that we would expect to see similar trends coming out of the second quarter for the balance of the year, some ups and downs within that, but generally that’s the way we are thinking of it. We have got some expectation that we can see some improvements in Fossil, specifically given the investments we are making which would assume that you might leave room for some softening in other parts of the business. But generally, that’s the way we are thinking about the back half of the year. At the top end of the guidance, at the lower end and we have assumed some deterioration from that.

Thank you.

You bet.

We will take our next question from Rick Patel with Stephens Incorporated.

Thanks. Good afternoon, just a question on price increases, can you talk about how much average ticket change versus last year and did those price changes stick as we think about markdown support that you may have had to provide and are you planning any additional pricing actions for the back half of the year?

So far, the pricing adjustments that we made and we did some – actually we started last year at the end of the year, some in March, another roundabout now. Generally, I would tell you that what we are seeing has generally been very favorable and sort of consistent with what our expectations going in. Not perfect but generally, we are achieving the results as you heard in the second quarter. We actually expanded our gross margins ex-currency and that was largely driven by the performance of the price initiatives, some cost initiatives in there, but mostly pricing. So generally speaking, what we are finding thus far is that on balance of the portfolio, we have been able to sustain the price adjustments that we have made so far.

And then a question on wearables, it seems like the initial entry into this category is going to be pretty well controlled, can you frame the wholesale launch for us, is it going to be in all of the doors of your best customers or just they select few and can we expect this to be material for your fourth quarter or is this more of a 2016 and beyond story?

So we will launch in the October-November time period under the Fossil brand. It’s going to be in our own stores plus other partners globally, so – and the numbers will not be significant to us. It’s mostly pretty large test. It gives you an idea of how this is working. One thing to keep in mind is that, when we talk about wearables it’s not just smart watches. There is actually – it’s kind of crystallized into three different categories. First of all, there is the smart watch, which is the Android digital screen watch, which it looks really good for fall. And we think over the next couple of years, will get better as it gets smaller and more robust, technology gets better. We think that’s got long-term legs as it continues to improve. And we also have non-display items like our bracelets, more like jewelry that are – we think has the capability of creating an entirely new accessories category based around technology. And then the third, and probably most significant long-term, is what we call smarter watches, which is just adding chips and additional functionality to existing watches. So we are launching that this year, which is to watch it looks just like a regular analog watch but does have a chip in it that gives measures, activity and sleep and also has notifications in it. So to a certain extent, you could say that what we are doing is moving towards we think someday every watch we make will have some type of technology in it. What we have been making over the last 20 years are actually quartz watches largely and these have – basically it’s a quartz chip. So over time, by us adding additional functionality, sensors, as technology changes we think that we can add this across our platform and have additional functionality in the watches and other products without a lot of additional cost, the additional benefit from it also is that there is an app that goes with these that measures people’s activities, etcetera and also enables us to get data from them and also build the community and the tie in to our CRM and our marketing is really significant. So it’s a lot of benefits for us, which is why we are so interested in it. And we think it over time could be a very significant thing to scale across our entire platform.

Looking forward to seeing it. Thank you.

We will go next to Ed Yruma with KeyBanc Capital Markets.

Hey guys. Thanks very much for taking my questions. I guess first, on quality of inventory, particularly at wholesale and department stores, I guess how comfortable do you feel, what kind of channel inventory. And then as a follow-up, just kind of comfort level with existing leverage, there are some news report that you pulled a debt deal during the quarter, how do you feel about your existing leverage in light of the EBITDA? Thank you.

Yes. In terms of our inventory I mean our inventory – our own inventory was roughly flat this year. We did say, in the prepared remarks just as we have adjusted inventory, we would expect some growth as we come out of the third quarter and hopefully neutralize that by the time we get to the fourth quarter. I feel good about our own inventory position and our inventory typically has a long shelf life, not a significant fashion risk to it. So feel good about our own inventories, generally speaking. Everything that we look at suggest that inventories in the channel are pretty healthy as well. And then in terms of – at the beginning of the year, we achieved an investment grade rating both from Moody’s and Standard & Poor’s. We did enter the bond market and there is a lot of noise at that time. We were new entrants, a lot of supply and ultimately we decided that we didn’t achieve the economics that we felt we were – we deserve. Our goal was to term out some of our existing revolver, so we took a step back out of that market because we didn’t think the economics reflected our investment-grade rating.

Great. Thanks so much.

And we will take our last question from Anna Andreeva with Oppenheimer.

Great, thanks. Thanks for taking my question. A question on operating margin profile for the company, 10.5% to 11.5% guided this year, I think that’s the lowest levels in a while for you guys, how do we think about the margin level over time. And into next year, if watches are still difficult, do you think there are opportunities on the expense line to pull back or should we think you are going to be spending on marketing still since you are getting ROI there?

Yes. I mean first of all, we have got perhaps – don’t forget that those rates that you are talking about include restructuring charges. They include currency headwinds, which are – currency headwind is much more difficult to influence in the near-term, although we are having some success calling some of that back on pricing, but that’s a longer term play to get that back. The way we think about operating margins and for those who listened in on our investor presentation, our goal right now is to really drive top line growth. As we benchmark ourselves to other companies at this stage in their life cycle, top line was what really drove long-term value. So our goal is to really improve the health of our overall operating structure, to really get the infrastructure lean and drive leverage to that and create the capacity to use that to reinvest in top line and that’s what you are seeing this year. I mean we are going to generate significant leverage in this structure and be able to increase our marketing spend, customer engagement significantly by using the capacity that we create. So that’s really our priority for the near-term is to create capacity and use it to drive sales for the long-term. We think we have a lot of opportunities both now and for the future and we want to invest in those.

That does conclude today’s question-and-answer session. At this time, I would like to turn the conference back over to management for any closing remarks.

Well, we thank you again for your participation on today’s call. And look forward to speaking to you on our next call in November. So thank you very much.