Fossil Group, Inc. (FOSL) Q1 2019 Earnings Report, Transcript and Summary

Welcome to the Q1 2019 Fossil Group Incorporated Earnings Conference Call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. [Operator Instructions] Please note this conference is being recorded. I'll now turn the call over to Allison Malkin. Allison Malkin, you may begin.

Thank you. Good afternoon, everyone. Thank you for joining us, and welcome to Fossil Group's first quarter 2019 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 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 our Form 8-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 can find a reconciliation and other information regarding non-GAAP financial measures discussed on this call in our earnings release filed on Form 8-K and in the Investors section of our website. Please note that you may listen to a live webcast or replay of this call by visiting www.fossilgroup.com under the Investors section. Now, I would like to turn the call over to the Company's Chairman and CEO, Kosta Kartsotis.

Good afternoon, everyone, and thanks for joining our call today. I will begin with a few prepared remarks and then turn the call over to Jeff Boyer, our CFO, to cover our Q1 financial performance and financial outlook for the year. Following Jeff's comments, we'll have Greg McKelvey, our Chief Commercial and Strategy Officer join us for the Q&A. Note that our sales comments today will be based on constant currency unless otherwise noted. In the first quarter, sales performed at the higher end of our expectations, though down the last year. We're continuing to see growth in our Asia business where core sales grew 7% in the quarter with both China and India delivering double-digit growth. Our direct business also continues to see encouraging trends driven by our digital marketing and our consumer experience focus. Full price retail comps on a global basis, which include full price retail stores and our owned e-commerce sites, were roughly flat for the quarter with the modest negative impact due to Easter shifting to the second quarter. As we expected, our connected business declined for the quarter. This was due to higher liquidation levels last year, which were not repeated, our Generation 4 Smartwatch availability issue and store closures. The underlying performance of our newest generation display product however, continues to perform well and grew for the quarter. Despite these positives, our overall core sales declined 12% in the quarter with currencies, store closures and business exits negatively impacting reported sales by approximately 600 basis points. As we outlined in our February call, our core business continues to be affected by the disruptive environment. The watch and accessories business is changing at a rapid pace and consumer shopping patterns continue to shift. Product innovation in watches has expanded the category overall, but has caused a move away from traditional watches to connected product. We're working aggressively to transform our sales channels and to increase product innovation to regain market share in this environment. Though our core sales have been pressured, our New World Fossil program continues to deliver profitability enhancements by delivering better-than-expected gross margins and a significant reduction in operating expenses. Gross margin for the quarter was 53.3%, above our guidance range and almost 300 basis points better than last year. Our SG&A expense for the quarter, including $10 million of restructuring expense, declined 15% to last year as our New World Fossil initiatives continue to create efficiencies in our operating model. Adjusted operating income for the quarter was above the high end of our guidance range and roughly flat to last year. We continue to be highly focused on the four overarching priorities we shared with you in February. One, improving our overall profitability; two, driving product innovation; three, maximizing topline growth; and four, transforming our business model. As we are focused on improving profitability and transforming our business model, product innovation and differentiation remain at the core of our business. Delivering exciting new products and engaging in creative new ways is critical in this retail environment. Our brands are positioned well to deliver great fashion and function across the marketplace. We recently announced the extension of two license agreements, Tory Burch and DKNY, and we're excited about the future opportunities within our portfolio, including the rollout of the Puma and BMW brands which are launching this year. Near term, we have a tremendous pipeline of new product ideas and concepts coming to market in 2019 across all our categories. In watches, our teams have developed great new fashion ideas across traditional and connected. We're also ramping up our use of exclusives and limited edition products across all of our brands. Consumers and our retail partners are telling us they want more innovation, more exclusives, and more personalization, all of which we're focused on accelerating. Within the connected category, our next-gen products are bringing great new technology and innovation to the market with a particular focus on the sports segment of the market. We have several new connected products planned for introduction at the end of third quarter and we’ll share more with you on the next call. Our new product innovation efforts support our strategy to maximize sales growth across multiple channels. As consumer shopping patterns continue to rapidly evolve, digital engagement is now the first critical step in attracting and engaging customers. We're continuing to see great results with our digital marketing programs, which are focused on driving awareness and purchase intent across channels. To further expand our ability to drive consumer awareness and engagement, later this year, we will complete the integration and rollout of a new state-of-the-art e-commerce and marketing technology platform. This platform will provide better insights and targeted support across both our direct and wholesale channels, and will also enable us to expand the number of countries in which we have direct e-commerce sites. We are also testing new price points and promotional programs across segments of our watch offering to ensure that we are communicating the great value of our outstanding products. Though product innovation and sales growth are critical to our business, given the significant disruption in the market, it is now more important than ever to transform our business model. We have recently launched a transformation project that we’re calling New World Fossil 2.0, Transform To Grow. In New World Fossil 2.0, we will be focused on creating organizational and spending efficiencies as well as gross margin expansion opportunities to fund our sales expansion initiatives. We continue to see significant opportunities to capture market share across our categories and channels. But, we know over time this will require significant reallocation of resources and strategic investments. In New World Fossil 2.0, we will rework our business model. So, we can invest more in digital capabilities and marketing, move closer to the consumer and react more quickly to the ever-evolving consumer shopping patterns. To do this, we're taking a zero-base budgeting approach and working with the support of a major consulting firm to create organizational opportunities and efficiencies and reallocate resources to the most critical parts of our business. While New World Fossil 1.0 has been a clear success we believe, based on additional insights and analysis, there is a much broader opportunity to create efficiencies to enable investment for growth. We have completed the initial phase of this project and work continues on specifically defining the potential profit enhancements New World Fossil 2.0 could deliver. The early work we completed in revenue management, supply chain transformation, procurement and zero based budgeting, indicates that savings benefit are expected to be similar to the New World Fossil 1.0. We look forward to updating you more on this topic in our next call. In closing, while we're pleased the Company performed better than expected in the first quarter, we remain unsatisfied with our sales decline. In the near-term, we will continue to plan our topline conservatively, but we are on a mission to change the trajectory of sales with the relentless approach to bring new innovation and excitement to the market while we expand our digital capabilities. We will also continue to transform the Company to put us in position to unlock significant growth in the future. And now, I’ll turn the call over to Jeff.

Thanks, Kosta, and good afternoon, everyone. As Kosta mentioned, we continue to operate in a disruptive environment. During this period of disruption, our focus continues on improving our overall profitability while also strengthening our balance sheet. While our topline sales have been challenging, we are pleased with our progress to improve profitability through both gross margin expansion and reduced operating expenses. We expanded gross margin rate to 53.3%, an increase of nearly 300 basis points, and we reduced expenses by $48 million or 15%. We are also pleased with our progress on the balance sheet, as we improved our net-debt position by nearly $280 million with our debt balance at $230 million and our cash position expanding to $271 million by the end of the first quarter. We reported net loss of $12 million for the first quarter compared to a net loss of $48 million last year. $48 million at last year. Our reported loss of $0.25 per diluted share included New World Fossil restructuring charges of $0.16 per diluted share and included a gain on sale of intellectual property to Google of $0.33 per diluted share. Last year, our first quarter EPS was a loss of $0.99 and included a restructuring charge of $0.35 per diluted share. Excluding these items, our adjusted EPS was a loss of $0.42 this year as compared to a $0.64 last year. Currencies, including both the translation impact on operating earnings and the impact of foreign currency hedging contract had an unfavorable $0.08 impact on our EPS in the first quarter. Sales, which were within our expectations, decreased 18% to $465 million and decreased 15% on a constant currency basis. While store closures unfavorably impacted sales comparisons during the quarter, profitability in our direct business improved significantly as we exited unprofitable stores and were less promotional overall in our retail concepts. Store closures negatively impacted total year-over-year sales comparisons by approximately 160 basis points. We have closed 59 stores since the first quarter last year and ended the quarter with 461 stores. Overall, retail comp sales decreased 9% as a 7% positive e-commerce comp, was more than offset by declines in our retail stores. Our first quarter underlying core sales results were negatively impacted by lower promotional levels, off-price and liquidation sales, and a display watch availability issue. The supply chain issue on our display watch product has been corrected but it will take through the second quarter for inventory levels to build to appropriate levels. Our traditional wholesale channel remains the most challenging. Our wholesale business declined double digits in the Americas and Europe as sellout trends remained soft, while Asia wholesale business increased double digits in the first quarter. Our watch sales declined 15% in constant currency for the quarter with decreases in both traditional and connected products. Sales in our traditional watch business generally performed within our overall expectations, with continued weakness in the Americas and Europe, modest growth in Asia and the unfavorable impact of licensed brand exits. While our next generation smart watches are resonating well with consumers, connected sales decreased moderately during the quarter, largely due to delays in inventory receipts the impact of store closures and reduced liquidation levels as compared to last year. Our connected watch business delivered $62 million in sales, representing 17% of total watch sales for the quarter, as compared to 18% last year. Total Fossil brand sales decreased 9% in constant dollars compared to last year with declines in watches and leathers, and a modest increase in jewelry sales. Fossil Watch sales decreased 6% in constant dollars, driven mainly by the closure of underperforming stores and significant declines in the traditional wholesale business in Europe. Our connected business continues to gain traction, positively impacting the category growth rate by about 4 percentage points. Despite display watch availability issues and difficult liquidation comparisons, our Fossil brand connected business did grow 10% in the quarter, primarily driven by Gen 4 product introduced last fall. Excluding business exits and store closures, direct channel Fossil Watch sales increased single digits in the Americas and Asia, while sales decline single digits in Europe, largely driven by a more challenging macroeconomic environment. Total sales decreases in our retail stores driven by a reduction in promotional activity to increase profitability combined with store closures, drove an overall 11% decrease in our total direct channel, while our global direct e-commerce sales increased double digits. Store closures negatively impacted our total direct channel by approximately 430 basis points. Michael Kors brand sales declined 35% with declines in both watches and jewelry. Kors watch sales declined 32% for the quarter as liquidation sales that occurred last year mainly in older generation connected products were not repeated. We continue to partner closely with the Kors team to bring great new watch product to market globally. Regionally, Kors watches decreased double digits in both the Americas and Europe, while decreasing modestly in Asia. The Kors jewelry business continued to be negatively impacted by the reposition of the line as we transitioned into a higher price assortment. In the Americas, first quarter sales decreased 24% on a reported basis to $190 million with declines in our three main product categories. Sales declines were primarily driven by softness in the wholesale channel, retail store closures, reduced promotions, lower levels of liquidation sales as well as license brand terminations. Wholesale sellout trends remained down double digits to last year with retailers continuing to tighten inventory levels. Our overall retail performance in the Americas declined as e-commerce growth was more than offset by negative store comps, driven by lower promotions especially in our outlets, the negative impact on sales from closing on product stores and delays in connected inventory receipts. While retail sales declined, profitability increased solidly. Fossil Watch sales in the Americas were modestly negative with declines in traditional watch sales partially offset by strong growth in connected sales. On a core sales basis, excluding store closures and a minor currency effect, Fossil Watch sales in America were slightly positive. In Europe, reported sales decreased 24% to $153 million. On a constant dollar basis, sales declined 19%, representing decreases across all product categories. During the first quarter, soft sales trends continued across all channels, reflective of the challenging macroeconomic environment and general softness in the European markets in the mid-priced fashion watch segment. Retail comps were moderately negative with negative comps across all concepts partially offset by modestly positive e-commerce comps. Fossil brand decreased double digits in Europe, driven by softening sales trends due in part to fewer promotions in the retail channel and delays in connected inventory receipts. Display watch inventory levels should normalize during the second quarter. Within our watch portfolio, sales declined across most brands. Across the Eurozone, sales were down in most major markets with the greatest declines in Germany, France and the UK. In Asia, we reported a sales decline of 1% on $117 million of sales. And on a constant currency basis, sales increased 4%, driven by the wholesale channel. Retail sales decreased modestly as strong e-commerce growth was offset by the negative impact of nonproductive store closures, reduced levels of liquidation and display watch inventory details. Excluding store closures and business exits, our underlying core sales growth in Asia was positive 7%. Fossil brand decreased modestly in Asia with decreases in watches and leathers. Emporio Armani, which became our largest brand in Asia this quarter, posted strong double-digit growth, driven by traditional watches. Most other brands in our portfolio were relatively flat to modestly down in sales for the first quarter. Strong growth momentum continued in China and India, primarily driven by third-party e-com and wholesale growth. Hong-Kong and Korea posted modestly positive results while Australia, Japan and Taiwan were down moderately during the quarter. Gross profit increased to $248 million and gross margin increased 280 basis points to 53.3%. The gross margin expansion was driven by decreased op price sales mix with improved margins, favorable region and product mix from higher margin Asia sales, and stronger Emporio Armani sales. Lower promotions and markdowns as well as the benefits from our New World Fossil initiatives also contributed to improved gross margin. These benefits were partly offset by unfavorable factory cost absorption on lower sales volumes and an unfavorable currency impact of approximately 50 basis points. On a reported basis, first quarter operating expenses were $268 million, including $10 million in restructuring costs. Last year, operating expenses were 316 million and included $21 million in restructuring costs. Excluding restructuring charges, operating expenses decreased to $37 million in the first quarter as compared to the prior year, and included a $9 million favorable currency impact. The lower expenses in the first quarter resulted from lower store expenses, given the significant number of stores we've closed since last year, corporate and regional infrastructure reductions driven by our New World Fossil initiatives and the currency effect of the stronger dollar. Our first quarter operating loss was $20 million, an improvement of $8 million compared to a year ago. Interest expense decreased $3 million to $8 million on lower outstanding debt. First quarter, other income of $26 million was favorable to last year, mainly due to a $22 million gain on the sale of intellectual property to Google in the first quarter. Income tax expenses were approximately $10 million in the first quarter on pretax losses of $2 million. The resulting negative effective tax rate was driven primarily by the recognition of deferred tax asset valuation allowances. Income taxes in the prior year were $7 million on a pretax loss of $41 million. We continued to establish valuation allowances on a deferred tax assets in the U.S. in certain international subsidiaries given our operating losses in those jurisdictions, thereby increasing our effective tax rate. We improved our net debt position by $277 million compared to a year-ago, and ended the quarter with more cash than debt by almost $45 million. Cash was $271 million compared to $230 million at last year and debt was $227 compared to $463 million a year-ago. During the quarter, we invested $7 million in CapEx. Our adjusted EBITDA for the quarter was $35 million, resulting in a trailing 12-month adjusted EBITDA of $234 million. Our first quarter bank leverage was 1.0 times. Comparable inventory levels at the end of the quarter were down 28% versus a year-ago, driven by reducing slower-moving traditional product inventories and clearing our previous generation connected products. Additionally, our display watch inventory levels were constrained due to supplier delays through the first quarter. Accounts receivable decreased by 15% to roughly $200 million and wholesale DSOs increased four days as compared to the prior year as we did not participate in early paid discount programs in the Americas as terms were not economically attractive this year. Depreciation and amortization expense totaled $14 million for the quarter. Now, let's move to our 2019 outlook. As we outlined in our February call, and Kosta mentioned earlier, we are working aggressively to change sales trends and drive improved profitability. However, given our limited visibility on top line revenue due to watch and accessory market disruptions, it remains prudent for us to continue plan our finances conservatively. As we look to the remainder of 2019, we’re maintaining our guidance for the Q2 to Q4 period while adjusting full-year guidance for the actual results in Q1. As a result, for the full-year, we expect total reported sales to range from negative 12% to negative 7%. The upper end of the sales range reflects additional opportunities in connected and e-commerce across our owned and third-party platforms, while the lower end reflects the potential change in sales trends, given macro factors. As a reminder, our full-year sales guidance includes approximately 250 basis points of headwind, related to store closures and business access as well as 150 basis points of headwinds from changes in foreign exchange rates. We’re continuing to see momentum in gross margin through our New World Fossil program in addition to regional and channel mix benefits. We expect these drivers to continue through the balance of the year to deliver roughly 100 basis points of gross margin improvement, though changes in currency rate will offset most of the underlying improvements. Overall, we expect our full-year gross margins to be 52% to 53.5%. Operating expenses for the full-year are expected to be $1.13 billion to $1.19 billion, inclusive of restructuring charges expected in the range of $40 million to $50 million. Our full-year expenses are declining compared to 2018 due to the ongoing success of our New World Fossil program. In addition, we continue to refine our store base with an expected reduction of store count of 30 stores in 2019. Therefore, for the full-year, we expect an operating margin of 1.5% to 3%, excluding restructuring charges, adjusted operating margin is forecast to range from 3.5% to 5.5%. Overall, unfavorable currency fluctuations are expected to have a $20 million negative impact on our operating income metrics. In constant currency, the midpoint of our guidance reflects modest growth in adjusted operating over last year. Looking at 2019 on a sequential basis, reported sales are expected to improve as we move throughout the year due to tougher comparisons in the first two quarters which moderate in the back half. As a reminder, first half results in 2018 were stronger, primarily driven by currency fluctuations, as well as higher liquidation levels early last year. For the year, we are maintaining our prevailing rate assumptions for the euro and the British pound of $1.14 and $1.27 respectfully. For the second quarter, we expect sales in the range of negative 16% to negative 10%, which includes approximately 300 basis points of negative headwind from store closures and business exits and approximately 200 basis points negative impact due to foreign currency fluctuations. The second quarter will also be negatively impacted by lower inventory liquidation sales compared to Q2 last year. New World Fossil will continue to deliver gross margin expansion as we move through the year, but this will be offset by moderating channel mix benefits and a larger negative impact from currency in the second and third quarters. For the second quarter, we expect gross margin of 52.5% to 54.5%. Operating expenses for the second quarter are expected to be $265 million to $279 million, including restructuring charges expected to range from $9 million to $11 million. Therefore, we expect second quarter operating margin of negative 2.5% to positive 1%. Given lower debt levels, we expect interest expense to decline in 2019 with relatively flat sequential interest expense throughout the year. We expect full-year net interest expense to be $31 million. Based on the foreign exchange rates embedded in our final assumptions, other income and expense is expected to be flat to a modest positive for each remaining quarters. For the full-year, we expect other income expense to be approximately $29 million, primarily driven by the first quarter gain on the sale of assets to Google. Therefore, we expect full-year earnings before tax of approximately $30 million to $75 million. And we expect second quarter earnings before tax of approximately negative $17 million to negative $3 million. Based on the profile of our geographical earnings, including the tax loss in our U.S. companies, we expect tax expense to range from $20 million to $30 million, and we expect second quarter tax expense to be approximately $3 million. We're planning to invest approximately $30 million in capital expenditures in 2019. Now, I'd like to turn the call over to the operator to open up the lines for Q&A. Thanks.

[Operator Instructions] And the first question comes from Edward Yruma from KeyBanc. Your line is open.

I guess, first on traditional watch business, is there any way you could contextualize the performance of Kors ex the liquidation drop off? And I'm just trying to understand, has the trajectory changed, is the -- and in particular, as you think about kind of the lineup of fashion watches going forward, are there reasons to get more constructive or do believe at this stage we're in kind of a continued secular pressure phase? And then second is a follow-up. I know that you gave some cadence information on New World Fossil 1.0, are we expecting a benefit from 2.0 this fiscal year? Thank you.

First, on Kors, the decline we had, as we mentioned, was largely due to what we were liquidating last year, was large numbers of wearables in the category. But, I would say, overall, if you look at the health of the business in all three categories, traditional, wearables and in jewelry, we're seeing sequential improvement on sell-throughs and overall health. It's still declining but it’s not declining as much as the overall numbers. And then going forward, I think we have a lot of opportunity to change the direction. We've been working very closely with Kors on all categories. But, in traditional watches we've identified some trends that really are getting back to more of the iconic oversized look. I think in the past year or so, we tried more minimal, which was the trend, and we think that's going to change the direction. In wearables, we’ve got more platforms coming this year than last year, and one of them is a sport version, health and wellness oriented. It could be a game-changer in the wearables business, so new functions and features, and we’ll be talking more about that later in the year, it could be good. And in jewelry, we also -- we've indentified some tweaks to the model. I think we've seen some things that we can change and improve the business. But, I think we're going to see ongoing improvement in all three of those categories. The other question about the watches in general is, I would say over the last couple of years, we had a lot of initiatives and emphasis on building our wearables business and traditional business has been soft. This year, I think over the last 6 to 8 months, we've kind of taken the gloves off on innovation, design, new materials and traditional watches, we've got a lot of new ideas hitting the market this year. Our idea is to the store [ph] differentiation as much as possible in the market. As soon as possible, you will see a lot of that product flow in the second and third and fourth quarters. We're also spending a lot of time and energy on making the cases look different but do marketing. We're emphasizing more digital capabilities to broadcast this, but we definitely think that in our experience sometimes the watch business and traditional watch business is cyclical. And what changes the direction is innovation and differentiation, and we're taking the gloves off and we’re bringing as much as we can in the market as we can.

As there were couple of more financial questions that you asked about, one was the liquidation impact on Kors and how much of that decline was due to that. I'll tell you about a third of the decline year-over-year, which is the liquidation, we had the additional liquidation last year, particularly in their Bradshaw connected product. So, that made a tougher comparison and for some of that decline. You asked the question about New World Fossil 2.0 and whether we’d see benefits in the P&L this year. Yes, you will. We've incorporated those into our forecast already. They are part of underlying forecast on it. It's going to be a smaller amount as we're just getting started on the program overall, $10 million to $20 million of benefit is embedded in the forecast right now for some of the efforts they we get early start on New World Fossil 2.0.

And our next question comes from Omar Saad from Evercore. Your line is open.

Actually I just wanted to clarify first, did you give the growth rate of the wearables business excluding the impact of the smaller liquidation this year versus last year, wearables grow excluding that?

Yes, it did. We gave it on the Fossil 1, it was when we were supposed to call out growth in Fossil business, provide 10%. And that's a good portion of our business overall, and Gen 4 product, this product did grow year-over-year about 10% in the first quarter. So, we feel great about that. And that's even with the situation where we really had limited supply. We are constrained because of supply issue we have. So, we feel really good going into Q2 and the rest of the year in terms of what that product did in a constraint supply situation and what it means for the back half of the year.

So, there is a lot of noise in the numbers, last year's liquidation of werables and also high results of store closures, but we're on track this year to have a double-digit increase from wearables.

So, yes, that was my follow-up. This is a kind of -- shift towards the sport, it sounds like that business is doing well but still small. Can you maybe give us some more context around the shift towards sports, why that makes sense, an increased focus, is that what's been missing in the wearable offering shoring and this is a key kind of moment when you are adding those types of functionalities? Can you give us some more context around that please?

Omar, this is Greg. There's actually five things. I'll start with sport. That is the reason why the back half we see actually a step -- a significant step-up of the business. First, sports, as you know, sport drives the category broadly. We’ve largely been focused on fashion SKUs, metal, leather, and we’ve done really big business off that. But Fossil sport right out of the gate has done incredibly well; we couldn’t keep it in stock, and we're going to be driving that sports platform with silicone, lightweight materials, latest tech across several brands as we go through the year. So, that’s just a significant addressable market we really weren’t going after before. As we mentioned, back half, we won't be -- won’t have the liquidation in our base. So, that will be clean in terms of lapping. We had significant inventory issues, as you know; so, we couldn’t actually fulfill demand Q4 or Q1. We're actually back up and running and caught up with significant capacity expansion in the back half to take advantage of the growth that we perceived. Michael Kors in particular, the fourth point, the runway platform that we launched, we really backed everything on one platform, which is a bit minimalist and we believe moved a little bit away from the jet set and true runway appeal that Michael Kors customer knows. We’ve got multiple proven platforms coming back again that are much more consistent with what their customer expects. We just launched on April 25th the Sofie product, which was a huge success when it launched year-and-a-half ago, and we’ve got more coming in the fall. So, we expect proven platforms to play out. And then we are seeing a lot of opportunity in sharper price points during key periods that we think are going to get us good margin and drive a lot of volumes, taking advantage of key moments. Last thing is, there is going to be as Kosta mentioned, a lot of partnership with our customers and completely overhauling point of sale to make sure that we are being disruptive and communicating at point of sale, the right messaging that gets customers to stop and quickly understand what these products do for them.

And the next question comes from Dana Telsey from Telsey Advisory Group.

Hi. Good afternoon, everyone. As you think about the gross margin and SG&A, the variables going forward with obviously platform 2.0 and lesser promotion. Can you unpack what that means either as you're thinking about it by region or by channel, both on the SG&A side and the gross margin side? And just one quick thing on Tory Burch and DKNY, were those renewals under the same terms as they had been before and for the same timeframe? Thank you.

On the newer Fossil 2.0, you asked channels and regions on it, and broadly this is a broader initiative that really effects the broader base. And if you think about we had a newer Fossil 1.0, we saved about a $100 million in gross margin about $100 million in SG&A. So, from that detail piece, we can share that, so it will be a couple of hundred million dollars over a three-year period with some start this year but really the bulk of it in 2020 -- in 2021 again split in those categories. On the gross margin side, it will be things such as strategic sourcing, manufacturing, logistics efficiencies as well as revenue management, category management efforts. On the cost side of it, I would tell you it’s spending efficiencies, continue to take a look at it. We mentioned on our comments, we're doing zero-based, so take a really hard look here where our spending is at that and look at where we could do much better from a spending standpoint and from an organizational efficiency standpoint as well. And that will go - that won't be limited or focused particularly in regions and sort of channels, it will be a broader corporate program, along those dimensions, Dana.

Yes. On the licenses, they are pretty much the same terms as the license -- so we look forward to working with those brands in the future.

And lastly, just any update on tariffs, if it does go to 25%, how you're thinking about it?

We've done an analysis on that, and the good news is we have very limited exposure, most of our product categories have been exempted already. Traditional watches are exempted definitionally and connected watches have an exemption that was granted. So, it’s really on the existing products that's 10%. In year impact right now, they were anticipating without any additional efforts which obviously we do additional efforts, is under $5 million. So, it's not a very material impact to us overall. And that's kind of a worse case in year impact without any additional work. But we're working hard to continue to shift our production, our sourcing around to minimize negative impacts from the tariff growth.

The good thing is in watches, the country of origin is actually Japan because we use Japanese movements. So, there's no risk there.

And our next question comes from Ike Boruchow from Wells Fargo. Your line is open.

So, congrats on the profitability improvements; that's good to see on the margins. But, I guess, I want to talk about the top line for a second. On the wearables side, I think Jeff, I think you said modest decline in the first quarter, but if I'm just going through the numbers, the decline looks like it's closer to 23%. So, is that accurate or am I looking at the wrong numbers? I'm trying to understand how much year-over-year the total wearables business looked like?

Yes. The total wearables business was down more in the mid-teens. So, your backwards math, you’re trying to triangulate on that is probably little bit high, but it was down about in teens with a fair amount of it all being driven by Bradshaw and hybrid liquidation on it, and constrained a little bit because of the supply chain issues, still with the supply chain issues we had, the display watch excluding that grew 10%.

Right. And I guess, my follow-up to that is, I mean, on the last call you had said you expect it to be down low single. So, there's clearly something that came in the quarter worse, down mid-teens, was it the supply chain constraints or was there something in point of sale. So, just trying to understand the down -- I guess mid-teens relative to down low-single.

The supply chain, we got back in the business a little later, took a little bit longer to bring the inventory back up again. We're actually just getting there now. We thought we'd be back in business a little bit faster on that. So, the vast majority of it was supply chain.

Got it. And so, when we look at the guide for the year on total topline now, there's clearly improvement baked in. I guess, just the two questions I have with that, and I'm done, would be, are you getting there, are you assuming the improvement is driven by the wearables inflecting or is it maybe a stabilization of traditional or both? Just trying to understand how you get there. And then, how Q4 weighted would that back half improvement relative to the first half be?

If you think about the timing issues we have, we have a lot of kind of structural comparison issues this year versus last year. So, it is weighted to the back half improvement. Liquidation was heavily weighted, connected and traditional business in the first half of the year. And then in the back half of the year, we also had connected supply issues. Those are the big structural things. The good news is you can kind of identify those things and look at them. I will tell you that from a traditional watch standpoint, the underlying forecast and expectation for traditional watches is really continuation of that. So, we get some benefit, decent amount of benefit just from the structural comparison changes, not going up against liquidation numbers in the back half of the year, being back in business and connected products that we feel really good about what's happening right now plus what's coming, so very excited about that. So, overall, we get into a much better year-over-year comparison by the time we get to Q4.

[Operator Instructions] Our next question comes from Simeon Siegel from Nomura. Your line is open.

Hey, guys. This is Steve McManus on for Simeon. Thanks for taking our question. So, just thinking through the store closures, can you give us some color around what you guys have been seeing in terms of any sales recapture, whether online or nearby doors? And then, maybe remind us the cadence, store closures moving through the balance of the year?

From a recapture standpoint, we don’t have a great deal of density in stores, so you can tell a good recapture when you are say a grocery chain or something that have stores within a 5-mile radius; our radius tends to be quite a bit further than that. So, we don’t get a lot of recapture in that. And it’s always a tough thing to just really capture how much we pick up online. And we know we are picking up some element in from some of our omni-channel work, but really hard to quantify that. It's an excellent question, Simeon. It’s one of the great mysterious right now in terms of the omni-channel modeling on it. In terms of the cadence of store closures, we always close most of our stores in the first quarter, that's when most of them happen. We have 30 that we anticipate closing for the full-year. And so those -- mostly in Q2, Q3 because Q4 you don’t really close any stores and Q4, it’s generally most profitable quarter. So, it tends to be first three quarters of the year with the heaviest weighting in Q1.

The other thing I would comment on, as we mentioned in the prepared remarks, we are now in the process of implementing a new e-com and marketing cloud. So, it's the latest state-of-the-art technology that’s going to enable us to do exactly what you mentioned, which is recapture customers as they migrate different places and then truly really up our game quite a lot, both on the e-com side, building e-com sites around the world where we don’t have them but also on CRM, omni-channel capabilities, use of data et cetera. So it's going to be, we think, quite a game changer for us now as well.

And this concludes our question-and-answer session. I'll now turn the call back over to Jeff Boyer for closing remarks.

I just want to thank everybody for your support and listening in on the call today, and look forward to updating you in about 90 days when we close the second quarter. Thanks again.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.