Good day, ladies and gentlemen, and welcome to the Fossil Group's Fiscal 2016 First Quarter Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Mr. Eric Cerny, Investor Relations. Please go ahead, sir.

Thank you for joining us and welcome to Fossil Group's first quarter 2016 earnings conference call. I'd like to remind you that information made available during the 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 readily 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 replay of this call by visiting fossilgroup.com under the Investors section. Now, I'd like to turn the call over to the company's Chairman and CEO, Kosta Kartsotis. Kosta N. Kartsotis - Chairman & Chief Executive Officer: Thanks, Eric, and good afternoon, everyone. I will begin with a few prepared remarks before turning the call over to Dennis Secor, our Chief Financial Officer. Following his prepared remarks, Greg McKelvey, our Chief Strategy and Digital Officer, will join us for the Q&A. With the first quarter of 2016 behind us, we are reporting financial results that are in line with our expectations coming into the quarter. But more importantly, we are pleased to report that we are on track to achieve our larger goal for the year of advancing our many strategic priorities. Specific to the first quarter, as we expected, results trailed last year, reflecting the challenging environment for the traditional watch category, foreign currency headwinds, and last year's relatively strong first quarter performance in the multi-brand portfolio. As pressure on the traditional…

Thanks, Kosta, and good afternoon everyone. Our first quarter performance while below the prior year was in line with our expectations as we anniversaried a relatively strong performance in Q1 2015, continued to face the challenging retail environment and navigated ongoing headwinds in the traditional watch category. Overall, first quarter reported net sales decreased 9% to $660 million and on a constant currency basis declined 7%. Sales declined in each of our region which also reflects a relatively strong first quarter performance last year. You may recall, constant currency and comparable calendar results increased 5% last year with a very strong performance in Europe and growth in most of our portfolio brands, particularly our larger brands. We continue to be encouraged by the performance of Fossil and Skagen, particularly in light of the strong performance last year in both brands. While Fossil's first quarter sales were flat compared to last year's 6% first quarter growth, Skagen grew 12% compared to last year. For the quarter, we delivered diluted earnings per share of $0.12 compared to $0.75 last year. The comparison to last year's results was largely driven by lower sales given the challenging retail environment and pressure on the traditional watch category. Gross margin also declined as our pricing initiatives were offset by changes in foreign currency, higher markdowns, and more promotional activity in outlets than we had planned, part of our effort to stimulate sales. The sales and margin headwinds were partially offset by a decrease in infrastructure expenses and we had fewer gains on foreign currency contracts compared to last year. From a sales perspective, the Fossil brand was flat to last year in constant dollars. We were particularly encouraged with growth in the quarter for the leathers category led by women's handbags. Growth in leathers was offset…

Thank you. Good afternoon, everyone. Thank you for joining us and welcome to Fossil Group's first.

Thank you. We'll go to Omar Saad with Evercore.

Thanks. Good afternoon. Was hoping you could help us understand the back half and how you're thinking about the back half revenues guidance and the change in trend. I understand the traditional watch business has really dropped off in the first quarter, traditional wholesale watch business. But how do you think about integrating all the new products you have coming into the market both from the wearables side and the tech side, but also from the fashion side. My understanding was you guys have a lot of new stuff coming into the market. Are you getting feedback from your retail channels that they don't want to order into those areas strongly? Or is it really wait-and-see from the retail accounts? Like, help me understand why – I understand why maybe sales are slower now, last – in 1Q, 2Q, but with all the newness coming, why don't you expect sales to rebound in the second half, constant currency? Thanks.

Well, let me take maybe a deeper dive into guidance, and then we can fill in with some of the discussion about wearables for the back half. But just to sort of double-click on how we're seeing the year and just to echo what we said, first, the change in guidance is virtually all related to what we saw in the wholesale watch business, which reflects both the step-down in sell-throughs that the channel reported to us in the quarter, and frankly, to reflect the further risk in a channel where our visibility is very limited right now. And you remember back to the last fourth quarter, we guided to a pretty wide range that accommodated a big step-down at the time, even though sell-throughs had been fairly stable for the prior couple quarters, and that was principally to reflect our lack of visibility. And fortunately, in the fourth quarter, we didn't see that step-down and our performance came in near the top of the range. So we've maintained that same approach coming into 2016, guiding to a pretty wide range with wholesale sell-throughs that then actually been pretty stable for three quarters. So what's changed is unlike the fourth quarter, in the first quarter that just passed that reported, we did see that wholesale step-down and it was substantial, larger than we had seen before and it was pretty much across the board. With the data we receive from partners, reported sell-through declines here in the United States and Europe, and as we mentioned earlier, Latin America where market intel is pretty challenging, that business fell well short of our sales plans. And even external sources like NPD also repeated a very significant step-down from Q4 to Q1. So where that leaves us is the top of our guidance…

And our next question comes from Ike Boruchow with Wells Fargo.

Hi, everyone. Thanks for taking my question. Kosta N. Kartsotis - Chairman & Chief Executive Officer: Sure.

I guess in terms of your own connected technology products that you plan on rolling out in the back half of the year, can you just help us understand maybe what level of commitment your department store partners have discussed with you? I mean, I'm just trying to understand at this time how are you internally planning the launch given it's a brand new category that you guys have never sold through and the fact that they seem to be buying the traditional watch business much more cautiously today? Thanks. Kosta N. Kartsotis - Chairman & Chief Executive Officer: Well, first of all, the stores obviously have seen their watch business decline. So if you go back seven years ago, the watch department is very much larger than it was then. It's grown in multiples. It is actually, with the decline in the watch business, probably come down a bit obviously in productivity, but still one of the most productive areas of the store. And the stores are actually very excited. There's so much consumer interest in wearables. It's very top-of-mind. It brings a younger customer in their store. There's a bunch of excitement around it. We think that there's an opportunity to change the entire watch department from a typical watch department to a wearable technology department. Obviously, millennials overspend on technology, so it's very exciting. So we are in the process of getting plans in place for the back half of the year in all the brands we're launching, especially Fossil and Kors, getting point-of-sale visual presentation fixturing in place, getting a lot of marketing PR. There's probably going to be TV campaigns on both brands. We're getting everything in position. There are commitments we've made in products, but we're going to be launching in the third quarter…

Thank you. We'll now hear from Dorothy Lakner with Topeka Capital Markets.

Thanks, everyone, and good afternoon. Just wanted to, I mean, I don't want to beat the dead horse here but just to go back to what you're hearing from your wholesale partners, you did see the significant step-down in traditional watches. Are they stepping up to the plate on the new watches on the wearables? Are you seeing some commitment there or is there just a lot of reticence around the entire category? How confident are you in seeing this growth in the second half of the year from all that you're doing on the wearables side? Kosta N. Kartsotis - Chairman & Chief Executive Officer: A couple of things. First of all, I'd say, overall, I think in the first quarter this year, there has been a step-down just in overall traffic and consumer activity. So that's one thing.

Right. Right. Kosta N. Kartsotis - Chairman & Chief Executive Officer: In addition to that, I think especially in watches, I mean, we attribute this really to all the press and PR and excitement around wearables. I think there seems to be somewhat of a lack of interest in watches relative to last year. We actually had a pretty good quarter, first quarter last year in watches. I think another piece of this is the stores saw in the fourth quarter relatively slower sell-throughs on watches so they didn't fill back in in the first quarter as they normally would have and typically that means, as you know, the larger doors don't get filled back in and they may impact their sales so it has a multiplier effect in there. So I think there's just kind of a malaise in watches. Our biggest objective in all this technology stuff is really to disrupt the watch business. We think, as Greg mentioned, to put additional functionality in traditional watches. And as we've said before, our mission is to eventually we want to put connectivity in every watch we make without adding a lot of additional to the retail price. So we're – with the Misfit technology and all of our engineers, et cetera, the mission is really to take the existing watch business and add functionality, innovation, and connectivity and make that category more relevant to consumers that increasingly overspend on technology. We think that's a very exciting prospect and largely Millennials have not worn watches because they grew up with smartphones. So just taking the existing core business and all the activities we've got without smart analog movement, which is just a regular analog watch, great looking watch, that's heavily designed and branded, and it's got connectivity in it with…

Thank you. Our next question will come from Oliver Chen with Cowen & Co. Cecile Origenes - Cowen & Co. LLC: Hi. This is Cecile Origenes for Oliver Chen. Thank you for taking my question. I actually wanted to just ask you a little bit more questions about your CRM and digital initiatives. It's very encouraging to see some of the – or hear some of the positive results you're seeing from your investments so far in that area. Could you just speak to some of the opportunities that remain in FY 2016 and what you're most excited about? Gregory A. McKelvey - Executive Vice President, Chief Strategy Officer & Chief Digital Officer: Yeah. This is Greg. So we're actually getting just in the last couple months a lot more highlights from the successes that we had in Q4. So although Q1 this year, 2016, wasn't a big step-up in marketing for the Fossil brand, the highlights – some of the highlights that we saw in Q4 were a very, very good ROI, significant increase year-on-year, very strong Millennial response, so not to bringing a lot of new customers into the business that are not just wearables-driven, but are actually coming in and buying wearables plus other products, saw not just brand interest growing across social channels and search channels, but omni-channel traffic, and that's measured by our own e-comm channels, our own direct-to-consumer channels and what we're seeing in traffic and searches broadly. So really in all channels, we're seeing increasing interest in Fossil brand. So that's where, as we look for the back half of this year, we're going to continue to fine-tune the mix and continue to lean in on the vehicles that have been working to-date and then plus up a significant amount of spend against the wearables launch in particular so that we're getting the right push on the brand into the direct-to-consumer channel on the products that are working.

We'll continue on to Ed Yruma with KeyBanc Capital Markets.

Hi. Good afternoon, and thanks for taking my question. I guess on the department store front, anecdotally, it seems like some department stores are pulling out of one of your major brands. Has that been impactful to your numbers? And are you expecting that? And then I guess as a follow-up to that, do you think that they're selling down in anticipation of wearables? Or do you think they're selling down in anticipation to lower sell-through? Thank you. Kosta N. Kartsotis - Chairman & Chief Executive Officer: Well, I think it's a combination of factors. Traffic is off in general, and the watch category is slowing down. And the other thing to consider, and we've talked about this before, is that during the fourth quarter, it's a relatively small time of the year for watches, so there's not a huge amount of – there's not a lot of companies out there trying to fill back into watches right away because the sell-through is relatively slow. So all those things I think are playing into that. And then the stores are obviously very excited about wearables and there is going to be a conversion over the next couple of years from traditional watches adding more technology to them. So there may be some conservatism on inventory from that regard as well.

Thank you. Erinn Murphy with Piper Jaffray. Your line is open. Christof R. Fischer - Piper Jaffray & Co. (Broker): Hey. Good evening. This is Christof Fischer on for Erinn. So I was wondering if you'd speak a bit more about the Michael Kors brand and what role you see it playing in your portfolio. Maybe any type of information on kind of the performance during the quarter and what do you see as the key drivers going forward for the brand's performance. Thanks. Kosta N. Kartsotis - Chairman & Chief Executive Officer: While we were – last year, I think in the first quarter, we had a very strong watch business and Kors was a big part of that and we had over the last couple years seen very significant growth. The business is very, very large as you can imagine so we've seen a moderation of that but we're moving forward. I think probably the most exciting thing for Kors this year is a couple of things. One is we're going to have a huge launch. I mean we – they actually had a press conference in our Basel Fair and out of that press conference there was about 1 billion page views from it. The consumer interest on the Kors smartwatches, very significant, there's going to be very significant amount of activities around when that launches, so we think that's going to be very exciting. We also – as we mentioned, we have been changing the product line quite a lot. It looks a lot different. We're seeing a lot of new ideas, sell-through in there and we think that that's going to improve over time. We also still have a relatively large opportunity both in men's and in jewelry. We're continuing to build shop-in-shops. One thing that, even though the business has come down some, it's still by far the most productive watch brand that we have and it's one of the most productive in the world just in terms of sales per square foot. And, of course, Asia is just getting started. It's still a relatively small business. The brand is getting a lot of traction there. And in all of those markets, especially Asia, the smartwatch is going to be a big player because there's a lot of interest over there. So, all in all, I think we still have a lot of growth ahead of us long-term in the Kors brand. Christof R. Fischer - Piper Jaffray & Co. (Broker): Great. Thank you.

And we'll go on to Simeon Siegel with Nomura.

Thanks. Good afternoon. Kosta, just given the wholesale commentary, any thoughts on just how large that North American business should be, in your opinion, looking further out? And then, Dennis, maybe just a similar question around margins, what is the right EBIT margin for your business? Can you talk about the moving pieces be it product, geography, channel dynamics, anything within there and then how are connected margins versus traditional watches? Thanks. Kosta N. Kartsotis - Chairman & Chief Executive Officer: Well, I think, as we mentioned, the watch business globally is about $65 billion, wearable technologies is expected to be an additional $54 billion in 2019. We're going to – we think through this process we can gain share in the traditional watch business with all our activities. In addition to that, we're going to capture a share in the wearables business. So, to us, there's no reason why we shouldn't have a much larger wholesale business in the United States. There will be – with our activities with the Misfit brand and other items, there will be additional distribution for us as well and this is going to put is in the CE channel and other distribution and obviously distribution channels are changing globally. I think the one thing that's clear is that wearable technology is very much skewed towards e-comm and this is going to open up a lot of doors for us globally. It could be, actually a catalyst for us, not only in the United States but in Asia, where it's difficult to penetrate the Asian market, especially China, with shop-in-shops and concessions. But e-comm may be the answer and wearable technology may be the catalyst. So a lot of great stuff out there. We do think that we're going to have a much larger wholesale business in the U.S., though.

Yeah, in terms of the margin structure, last call we went through this quite a bit but nothing really fundamentally has changed. And we feel that, and said before that 2016 is an inflection. As we go through this transition and there's headwinds in the wholesale business and we've got growth opportunities and the steepness of that inflection point is part of what's masked right now with the lack of visibility, but we still see growth drivers coming out in the back half of this year and beyond that can accelerate as we bring more brands onto the platform and even add new brands. The biggest risk remains how we can replace any weakness in the traditional watch business with these new growth drivers. In terms of operating margins, in gross margins we see some near-term dilution, because wearables margins right now are a little tighter than the traditional business but there's opportunities to offset those with scale and innovation. And then as we've proven to ourselves, we think there's opportunities for additional AUR when our best-selling product in the stores right now is coming at a very substantial price tag that bodes well for our ability to add AUR as we add features into our products. We said and our strategy remains that as we come out of this year that we would expect to moderate. We've had some headwinds as we've been investing in marketing and our goal going forward is to invest more consistently with our top line. We're getting good returns on those investments now. The biggest opportunity for us in terms of margin expansion is on the overall structure, which we will always every year as we look at our plans, we look to see what we think revenues could be and then size that appropriately. But as we look forward, largely everything that we need to run this business is already in place to any material extent. So that remains an opportunity for us to leverage. Probably the one big factor that remains to be solved is the impact of currencies over the last two years. Based on our numbers right now, currencies have taken about almost four full points of operating margin, and that's going to be difficult to get back quickly, absent a weakening of the U.S. dollar.

Thank you. Our next question comes from Rick Patel with Stephens.

Thank you. Good afternoon, everyone. There seems to be a lot of excitement about the features your wearables will have thanks to Misfit. Can you give us some examples of the types of things that will change? Are there features that can be improved upon that consumers would take notice of? And as you leverage these new capabilities, will that change your relationships with Google and Intel? Thank you. Gregory A. McKelvey - Executive Vice President, Chief Strategy Officer & Chief Digital Officer: Sure. I'll address first the adding technology to existing watches because I think we sell 30 million watches today. All they do primarily is tell time. And now we've got the capabilities to add a lot of features to a product without compromising the style, the branding, and all the reasons people purchase these products and love these products today. So some of the features you'll see this fall, the time will be automatically updated with time zone changes or daylight savings. You'll have a feature we call Link, which is the ability to control the Internet of Things around you off of your device. So you'll have a push button on your watch. You'll be able to push it and it will ring your phone, so it's a where's-my-phone feature. We're getting very strong initial feedback from our initial customer research on even that as a very valuable feature. In addition, activity tracking, sleep, smart notifications. These are all things that are value-adds to the existing products we have today. A substantial upgrade. And also, as Dennis mentioned, a significant increase in average unit retail. Over time, we believe that the cost of get – think of that as a new type of watch movement. The cost of that will get closer and closer to a…

Thank you. Our next question comes from Lindsay Drucker Mann. Lindsay Drucker Mann - Goldman Sachs & Co.: Thanks. Good evening, guys. Kosta N. Kartsotis - Chairman & Chief Executive Officer: Hi. Lindsay Drucker Mann - Goldman Sachs & Co.: I wanted to ask again on the U.S. wholesale business, could you help us understand, first of all, your channel mix, department stores, and any other buckets? So how much of the U.S. wholesale business is in department stores? And then, as you talked about that sort of step function change in sell-through, could you help give us some specifics on maybe order of magnitude, what sell-through was running in the preceding three quarters and what it's running now? We heard from you in mid-Feb, and did that dynamic happen sort of later in Feb and into March or was it already underway? And then just lastly, as I square your earnings guidance to back half of the year, the implied revenue guidance I think is up 1% to 2%, and I wanted to understand what sort of growth or how you were thinking about the trend for the Americas in the context of sort of the back half of the year. Thanks.

Just quickly, the makeup of the American business, U.S. department stores is probably the largest part of that. You also have a significant number of boutiques. So some of our brands that have their own stores, they can be significant businesses and customers for us. Latin America is a big business for us as well, all wrapped up in the Americas region, as is Canada and Mexico. So there's a lot of components that make up that business. In terms of the second quarter, or the back second half of the year, what we've said about in the guidance is that the top, you should think about the top end of the guidance generally reflecting the current trends that we're seeing right now. And we've stretched that to accommodate in the lower end some further deterioration just given lack of visibility that we had in terms of what we saw in the channel. The step-down in the business was fairly consistent throughout the quarter. You get reads throughout different parts of the business, different times and there's differentiations in terms of the sophistication of the channel. So it really pulls together throughout the quarter. But in some parts of the business, the step-down was pretty quick and, significantly, there's always some choppiness to the data. But the significant thing is that it was sustained throughout the entire quarter in a lot of places.

Thank you. Our next question comes from Anna Andreeva with Oppenheimer. Anna Andreeva - Oppenheimer & Co., Inc. (Broker): Great. Thanks. Good afternoon, and thanks for taking our questions. Kosta N. Kartsotis - Chairman & Chief Executive Officer: Sure. Anna Andreeva - Oppenheimer & Co., Inc. (Broker): I guess we were curious on either Misfit or Fossil wearables, dollar or unit sales in 1Q, how did that number come in versus expectations? Just trying to assess the opportunity for 2016 as you have the additional launches in the back half. And we noticed you took AUR down to, I think, $95 on the activity trackers. I guess, what drove that decision? And any additional tweaks we should expect with pricing? Thanks.

So let me just start with the numbers. I mean, we're not separately disclosing the Misfit numbers or the Fossil wearables. We can tell you, right now, the numbers are still fairly modest for both of those brands. The bigger opportunity comes as we bring more brands into the back half of the year. Gregory A. McKelvey - Executive Vice President, Chief Strategy Officer & Chief Digital Officer: Yeah. And on price point, we think the tracker business is clearly having a lot of unit sales across multiple channels with the success of some of the competitors that are out that. We think as we bring fashion and the feature-rich functionality that Misfit brings us at a killer price point, so that $95 to $99 price point across eight brands this year, we think we have the ability to get, drive a lot of unit sales. And then we can ladder up in average unit retail as we add accessories that are more fashion-oriented, so from sport band to leather and other products that are brands that might command a higher premium. But that under $100 killer price point with breadth of brand is what we're going for.

And we'll hear from Betty Chen with Mizuho Securities.

Oh. Good afternoon, everyone. I was just curious, as we get into the second half, is there any color you can give us on sort of the inventory commitment for the smartwatches and trackers and wearables? I know that you mentioned exiting Q1 the inventory composition is very healthy. Just thinking about how we should expect that in the back half. And then in terms of the wearables having slightly lower margin than traditional watches for now, when should we expect the margin profile to be much more comparable? Is it going to be 2017 or perhaps even further out just because of the way the business may ramp up? Thanks.

Sure. On the margins, I mean, right now, if you look at our connected products, there is compression relative to the total. The volumes are still – certainly, right now, they're still relatively small. They'll get bigger but still relative to the total they'll be smaller. But it's, over time, as we bring more brands onto the platform and produce more units, it's the benefits of scale as well as improved technology that we think, ultimately, can drive those costs down and provides with a feature set and provides an opportunity to add AUR. Gregory A. McKelvey - Executive Vice President, Chief Strategy Officer & Chief Digital Officer: Yeah. And the scale matters a lot in these products. More so than our traditional business that's highly depreciated asset base that supports it. So we've got to make a lot of upfront investments in engineering costs to get product to market. That requires for each major product line over 1 million units to really reach scale, we're investing heavily on the supply side of our business to get our own captive manufacturing facilities to test, assemble, and bring these products to market. And then we've got a large fixed cost base in the engineering resources and the software platform we've acquired with Misfit. So on all three of those dimensions, we've got to get to scale to get to fully-loaded margins, but a really good margins. There's no reason long-term why we shouldn't be at our traditional margin structure the way that we see it. Kosta N. Kartsotis - Chairman & Chief Executive Officer: And on the inventory commitment, we're in the middle of this right now as getting projections from our customers, doing forecasting, looking at the supply chain, really measuring all of this right now. So it's still early to tell. As I mentioned, there is a potential – potentially that we could do a reorder for holiday as well. So it's kind of a moving target right now.

And at this time, I'd like to turn the conference back over to Dennis Secor for any additional or closing remarks.

Thank you all for participating today and we look forward to reporting on the second quarter in August. Thank you very much.

Thank you. And ladies and gentlemen, once again that does conclude today's conference. Thank you all, again, for your participation.