Welcome to the Q2 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, you may begin.

Good afternoon, everyone. Thank you for joining us and welcome to Fossil Group’s second quarter 2019 earnings conference call. I would like to remind you that information available during this conference call contains forward-looking information and actual results could differ materially from those that will be discussed during the 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 to provide a financial update. Following Jeff’s comments, we’ll have Greg McKelvey join us for the Q&A. Second quarter sales performance was in line with our expectations with Q2 adjusted operating income near the high end of our guidance. Though top-line sales trends remain challenging, we’re making solid progress on our key strategic initiatives such as our China and India growth plans our direct to consumer expansion, our connected product performance, and our investment in more advanced e-commerce and marketing cloud platforms. As we commented previously, the watch and accessories business is evolving as consumer shopping patterns continue to shift. Those dynamics, particularly in our wholesale channels continue to pressure our core sales, which declined in high single digits in the quarter. While we’re not pleased with our overall sales results, we are seeing some underlying positive signs in parts of the business. Overall, the contraction in our core sales in the second quarter improved four percentage points sequentially from the first quarter. Our Asia business continues to perform well and deliver double-digit core sales growth in the quarter with both China and India posting strong double-digit growth. Fossil’s full price retail comps, which include Fossil brand full price retail stores and our own e-commerce sites were roughly flat for the quarter. Our connected business as expected decline slightly in the quarter due to higher liquidation levels last year, which were not repeated. but within the overall connected results, our newest generation display smartwatch product continues to resonate well with consumers and grew double digits in the quarter. In addition, our New World Fossil program continues to drive meaningful improvements to profitability, both…

Thanks, Kosta and good afternoon everyone. As Kosta mentioned, stabilizing sales trends is critically important for us. At the same time, we remain highly focused on improving our profitability and strengthening our balance sheet. We continue to make solid progress on each of these objectives. The top-line performance remains challenging, sales trends, which show improvement relative to the last two quarters and these trends are expected to continue. Our adjusted operating income approach the high end of our guidance and our balance sheet is much improved over the same time last year. For the second quarter, we reported a net loss of $7 million compared to a net loss of $8 million last year. Our reported loss of $0.15 per diluted share included New World Fossil restructuring charges of $0.11 per diluted share. Last year, our second quarter EPS was a loss of $0.16 and included restructuring charges of $0.23 and non-cash intangible asset impairment charges of $0.10 per diluted share. Currencies, including both the translation impact on operating earnings and the impact of foreign currency hedging contracts had an unfavorable $0.06 impact on our EPS in the second quarter. Sales decreased 13% to $501 million and decreased 11% on a constant currency basis, an improvement of four percentage points over sales trends in the first quarter. Second quarter sales results were negatively impacted by store closures, less off-price and liquidation sales this year, and licensed brand exits. Excluding store closures and business exits, our core sales declined high single digits, primarily driven by lower sales in our wholesale and off-price channels. Asia wholesale increased double digit driven mainly by emerging markets in China and India while our Asia business is quickly gaining scale, the gains are not yet big enough to overcome the continued challenges in our wholesale business…

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

Hey, good evening guys and thanks for taking the questions. I guess first, it sounds like you have some really interesting functionality embedded in the new gen smartwatch. How should we think about the transition from old parts to new product? Kind of what’s in the channel? And I know there’ve been times, where the transition in wearables has been a little bit rocky. So, I guess how should we expect this on a map out versus some of the previous transitions?

Sure. This is Greg. first, I’d like to highlight gen 5 a bit more and kind of where we see the business going. The heart of our innovation focuses that dedication to listening to our customers, improving the user experience of these products. So, it’s why we first off focused on fitness and health and wellness device. It’s why we’ve invested in the proprietary iPhone compatibility apps and the battery life apps as well. So, we’re really proud of the teams and a significantly forward in the products that we just announced and will continue to scale across brands as we go through the rest of the year here. We’ve gotten now several years under our belt as it relates to bringing products to market and thinking through new generations of product. We think we’ve done a nice job this year of managing that transition without getting into too many specifics. So, we’re excited about the new products that are coming and I think also that the gen 4 products that are currently market still have some staying power as well as a value offering in our line. So, we’re pretty pleased with the balanced view of the product tiers that we’ve got right now in market.

Yes. I'll just add also we had our PR launch for Gen 5 Monday and we’ve seen a strong response already. We had a significant amount of impressions online, but also we’re starting to see on our ecommerce site in our stores, we’re starting to see out of the gate really strong sales there. The product has got a lot of advanced features from the last generation and this will continue as we continue to move along over the next couple of years, our products get better and better. The battery life will get better. The functionality will be better. We’ll have more better software and easier use, and everything will get better. They’ll get slimmer. And this – as this business, it was $17 billion globally. The smartwatch business was last year. In three years, it’s going to be $33 billion. We’re in the game and we’re participating, and we think we have a very strong future in that business.

Great. And shifting quickly to the traditional watch market, I know that you seem like you’ve added a lot of fashion, you’ve innovated with some of your product and I think X close out the results, seem to be improving nominally. I guess, how do we think about when you kind of hit the tipping point, where either the losses in that business are kind of minimized or you’re potentially able to stabilize the traditional watch business. Thank you.

Yes. When we look at the traditional watch business, we actually are doing very well in Asia obviously, with double-digit growth and it’s more of a traditional market. Smartwatches are not as significant over there, but the consumer itself is very active in buying and owning watches. And we have a huge runway ahead of us as more and more people join the middle class. They love watches. they love our brands. So, we think that’s a long-term significant play for traditional watches. We’re seeing some improvement in Europe even though it’s still not back to where we’d like it to be. The U.S. is where it’s very difficult. We think that’s being impacted by not only channel shift and disruption in the overall market, but the wearables business in the United States is very, very strong. A lot of that’s female, which is mostly our core customers. So, it’s – we’re going through a difficult challenge on that right now. But having said that, we’ve got a ton of new product in the market. We’re focusing more on men’s, we’ve got a lot of ideas around exclusives and limitations and segment and assortments. We’re going after the channels aggressively and we’re – the numbers are obviously less now than they were a year ago. So, at some point, this is going to turn around, and we think we’re going to be in a position for growth again and we think we’re in a really strong position in terms of the brands we have, our geographic diversity, our strength in Asia and our design and brand capabilities.

[Operator Instructions] Our next question comes from Ike Boruchow of Wells Fargo. Your line is open.

Hey, good afternoon guys. This is Michael Mayo on for Ike. So, on the last call, I think you guys mentioned expectations for positive low single-digit growth and the wearables business for the year. Given the positive commentary on Gen 5. was just wondering if there’s any update, you could provide on that outlook for the year and any help with the cadence in the back half, along with any commentary you can provide on how the Michael Kors watch business performed in 2Q.

On the connected question given the cadence on it in a full year, it’s still going to be a modest growth that we’re forecasting overall low single digits, for the full year, not taking it up. We’re very encouraged by what we saw with the Gen 5 introduction and we have some new product launches coming on a little bit later on this month as well. So, we’re really looking for that, but we have that factored into our sales right now. So, not looking to take that to that number up at this point. the Michael Kors’ watch performance continues to be one of our more challenging brands on it. It was a very successful fashion brand for a long time for us. It’s been cooling off woman’s fashion business has slowed down. it has been down double digits now for a number of quarters. I’m not seeing a big, big change at this point in time, but we are working hard with the cores brand to bring newness and innovation, new trends there. We’re seeing some elements of the trends hitting, but not enough yet to turn it over all – turn around overall.

Yes. I’m just going to say to our – you remember we had significant supply issues in Q4 and Q1 last year, liquidation that we’re sort of having to lap in Q2 as well and we’re just working really closely with Michael Kors boutiques and our wholesale partners around the world to just make sure that all of the newness that’s coming in, it gets out there into full distribution, so that we can see – get these products in consumers’ hands, and see the trend improvement that we expect. We just have to make it happen.

The other thing I’d add about Kors is so we’re seeing improved sell-throughs in our new transitional jury assortment and we’re expanding that. And we think that over the next couple of quarters, we’re going to see an improvement there and we think that can mitigate some of the declines we’re seeing in watches.

Okay. That’s helpful and I could just ask one more, as far as the margin guidance goes, it’s pretty weighted towards 4Q. So, I was just wondering, where you guys are seeing the most areas for leverage in the quarter and what’s kind of driving the confidence in the holiday quarter?

And there’s really not a major change in the guidance overall, actually from a quarterly guidance standpoint, it’s actually a little bit less than Q3, which typically happens. It tends to be a little bit more promotional quarter on it. Really, there’s no different trends or changes in the underlying drivers on it really quarter-to-quarter being pretty consistent on how we perform benefits come from New World Fossil, benefits coming from the regional mix going on. Asia is our strongest region overall. That’s been helpful. We’ve also cut back on our off-price sales and done a better job managing the margin in that business as well. And our retail margins are pretty much stabilized. So, I’d roughly say there’s no real trend change in that overall from a gross margin quarter-to-quarter this year.

And that concludes our question-and-answer session. I’ll now turn the call back over to Jeff Boyer for final remarks.

Well, I want to thank everybody for joining us on this. We’re really pleased with the progress we’re making as you heard on our comments, our Asia business is growing strongly. We expect that to continue for a number of years. our most recent generation of connected products are being well received and continued to drive growth. We are moving through some difficult comparisons for most of this year as we move through inventory reduction liquidation. We’re making great progress on our digital and direct to consumer projects and our New World Fossil transformation is really taking shape. So, really pleased to be able to reaffirm our overall operating guidance here and we look forward to updating you on our continued progress on next – our next call. Thanks.

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