Fossil Group, Inc. (FOSL) Q4 2019 Earnings Report, Transcript and Summary

Welcome to the Fourth Quarter 2019 Fossil Group Incorporated Earnings Conference Call. My name is Hilda, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Miss Christine Greany. Miss Greany, you may begin.

Hello, everyone, and thank you for joining us. With us today on the call are Kosta Kartsotis, Chairman and CEO; Jeff Boyer, Chief Financial Officer; and Greg McKelvey, Chief Commercial Officer. 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 and 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 the company's From 8-K and 10-Q reports filed with the SEC. In addition, Fossil 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 Fossil’s earnings release, which was filed today on From 8-K, and is available in the Investor Section of fossilgroup.com. Now, I'd like to turn the call over to the company's Chairman and CEO, Kosta Kartsotis.

Hello, everyone, and thank you for joining us today. I'll begin my remarks today with a discussion of Q4 and recap the highlights from 2019. Then, I'll provide our perspective on the current operating environment, how we plan to navigate our challenges, and where we see opportunities to drive growth as we continue to transform Fossil’s business model. Before returning to my formal remarks, I would like to briefly comment on the coronavirus. First and foremost, we want to express the collective concern of our management and board for the well-being of our Fossil team members, partners, and their local communities that are being impacted by the crisis. As it relates to our business, the 2020 outlook that Jeff will take you through reflects our current assumptions based on what we know today. As the situation unfolds, we will continue to monitor events closely and update our guidance if needed. Turning back to last year, while there were a number of strategic and operational accomplishments in 2019, we are disappointed to close the year with a particularly challenging quarter. The underperformance primarily reflects lower than expected sales of our older generation connected product, as well as ongoing softness in traditional wholesale, principally in the United States. Going into the holiday season, we anticipated that our previous generation connected product would be a significant growth driver as a strong value offering with a lower price point. However, consumer response was negatively impacted by the combination of competitive pricing in the marketplace for value-oriented product, and to the strong response to our Gen 5 offering, which has much improved functionality. To that end, Gen 5, our latest generation display product, and our new Hybrid HR product, both performed very well in the quarter. In fact, we are pleased to note that we're seeing a great deal of enthusiasm for our latest technology and fashion designs. Positive consumer reviews and strong response to our offerings in Q4 are further evidence that high performance technology combined with the latest fashion designs will drive consumer interest in purchases. Our business in Asia delivered another quarter of double digit growth, with strong performance in key markets, including China and India, which grew 60% and 10%, respectively. While Asia and Gen 5 were bright spots in the quarter, the softness in older generation smart watches pressured margins due to the promotional intensity, and the $38 million write down of that inventory. These factors drove operating profits significantly below our expectations. Although we faced considerable headwinds in 2019, our teams worked diligently to execute against our strategic priorities throughout the year. First, we completed our first New World Fossil Program, 1.0, which over the last three years delivered $200 million of run rate improvement across gross margin and operating expense. We also launched our New World Fossil 2.0 Transform to Grow Program, which is designed to drive operational efficiency and improve profitability, while also providing us with the ability to invest in top line growth opportunities. In 2019, we achieved our plan to capture total benefits of $50 million, primarily through operating expense reductions. From a product perspective, we delivered world class technology upgrades in connected watches and exciting new innovations across our traditional categories. And our accelerated product drop strategy, combined with a digital first marketing approach, drove more consumer engagement than ever before. We made big strides in Asia. We broadened our reach in key markets, and delivered double digit growth. We advanced our DTC and online marketplace businesses by optimizing our segment and assortment of strategy. We offset significant profit pressure from tariffs through adjustments to our sourcing base and to our product costing, and we ended the year in solid financial condition with $200 million of cash and virtually no net debt. As you know, we have been operating in an extremely challenging environment for a number of years now, as consumer interests and shopping patterns in the watch and accessory categories evolve. From a channel perspective, wholesale in the U.S. and Europe remains difficult, primarily in traditional watches. This is largely reflective of two major dynamics. One, the ongoing consumer transition from brick and mortar to online shopping, and two, the continued momentum behind the fashion cycle that is driving strength and connected watches in place of women's accessories and watches. Historically, Fossil’s largest share of market existed in mid-tier price female fashion watches sold in the traditional department store channel. The factors I just mentioned around channel shift and consumer preference for technology have been disrupted to the mid-price fashion watch segment as a whole, and have certainly had a profound impact on our core female fashion customer. In fact, over the past four years, women's watches sold to the wholesale channel in our Americas and Europe regions have contracted substantially. In contrast, our Fossil brand watch business in Americas and Europe over the same timeframe has remained relatively stable due to three major factors, a healthier mix of men's and women's product, a stronger direct business, including third-party marketplaces, and our robust connected business. Given the structural changes occurring across the industry, and within our business in particular, we've been pivoting our model accordingly. First, we are deploying greater resources to the direct channel for both our owned and licensed businesses. Second, we are accelerating our connected product offerings. And third, we're successfully driving growth in key APAC markets, including China and India, where the developing middle class has an increasing desire for fashion watches. Equally important, we are taking actions to strengthen our operations and build scale, as we evolve our model in tandem with industry dynamics. As I just mentioned, the contraction in the wholesale channel has had a substantial impact on our business. Looking back to just four years ago, our U.S. and European wholesale channels represented over half of our worldwide net sales. In 2019, this segment of wholesale made up roughly one-third of the sales mix. Over time, we anticipate that will shift even further, with the U.S. and European wholesale channels ultimately representing less than 20% of worldwide sales. Because we expect these secular trends will persist, our mandate is to maximize top line growth opportunities outside of the traditional wholesale, while at the same time, transforming our financial model to improve profitability over the long term. We expect to accomplish this by pulling levers across product channel and geography, and capturing efficiency through New World Fossil 2.0. Let me provide some color. This year, we are focusing on four strategic priorities that are expected to improve operational efficiency in 2020 and position the company to begin reversing our top line trend and building scale in 2021. Priority number one is delivering exceptional storytelling and innovation. The path forward to change in our sales trajectory will come first and foremost from great product and unmatched creativity. Although we'll have fewer product stories in the market in 2020, we're going to tell them in bolder ways through focused digital marketing programs. We've expanded our use of data and analytics, which is improving our ability to understand consumer trends and preferences, and how to more effectively interact with the customer digitally. We have significant opportunities in our traditional and connected watch categories, and we're also refocusing our efforts on the jewelry category. In 2020, we'll be refining our assortment levels and distribution strategy in connected watches to more closely reflect consumer preferences across channel and assortment. Consumers are telling us that the shopping experience for connected product in traditional wholesale channels is not compelling. To address this, we will be launching connected LTE product this year, and aggressively expanding in the CE and telecom channels, while reducing our connected presence and select wholesale accounts and brands. We anticipate that the reduced assortment and distribution will be partially offset by expanded CE and telecom channels in 2020, with growth in 2021 and beyond. Priority number two is driving commercial transformation. The consumer is increasingly gravitating to all things digital, and we're moving quickly to improve our digital capabilities across the company. This encompasses everything from multi-brand omnichannel capabilities, digital marketing and CRM, to analysis, targeting, and retention. The implementation of our new e-commerce platform is in process now, and brings us a robust set of tools to support a larger direct to consumer business in the coming years. Importantly, the nature of our high-dollar value, small cube proposition will enable us to increase our DTC business without pressuring margins, as often happens in other categories. Our third strategic priority is to expand on our opportunity in China and India, which as I mentioned earlier, both grew double digits in 2019. The emerging middle class in these countries loves our categories and brands. We've had great success with our localized marketing, and segment and assortment approach, and we see even more runway to accelerate growth in these markets going forward. In China, specifically, our ability to combine great brands and marketing content, while partnering closely with the largest online marketplaces, has proved to be a winning strategy with select brands. We expect to see continued momentum and growth as we bring this formula to an increasing number of our brands going forward. Our fourth priority is continuing to implement New World Fossil 2.0. In 2019, we conducted a comprehensive review of our operating model, and our leadership team has been working with a sense of urgency to drive greater efficiency in our processes and work streams throughout the organization. Notably, we see a significant opportunity to reengineer our supply chain. We plan to drive improvement in our end-to-end manufacturing and distribution capabilities, which will allow us to reduce lead times, lower costs, and enhance our overall competitiveness. Major initiatives in 2020 include implementing an advanced demand planning, and a more sophisticated open to buy process. Cost reduction is also a critical component of New World Fossil 2.0. In 2020, we expect to capture benefits totaling $65 million, with $15 million coming from gross margin improvement, and $50 million coming from operating expense reduction. There's no question that the headwinds in traditional wholesale will continue for some time. Our direct to consumer business is stable, and with our expanded digital capabilities, we expect to see solid growth in this channel in 2020. Our work on segmented assortments is paying off, with growth expected to significantly accelerate globally in third-party marketplaces. And we anticipate that Asia will continue growing at double digits. Given this backdrop, we are working urgently to optimize and right size our cost structure. These actions are important not only to improving profitability, but they will also provide more capacity to invest in our biggest areas of growth going forward. As I close, I want to thank our teams for their hard work and strong commitment to the company. The entire organization is working diligently on the priorities I outlined earlier. We believe the innovation we're bringing to market across our categories, and our increasing focus on digital, will generate improvements and sales trends over time. We know that transformation does not happen overnight. We are fortunate to have great brands, products, and people to help us accomplish our goal of stabilizing the top line as quickly as possible. Additionally, our strong balance sheet and cash flow provides us with the financial flexibility and runway we need to pivot our business model and work towards restoring growth and profitability. Now, I'll turn the call over to Jeff to discuss our Q4 financials and our 2020 outlook.

Thanks, Kosta. At a high level, sales came in at the low end of our expectations, principally due to ongoing challenges in U.S. wholesale, as well as soft performance of our older generation connected product. We continued to improve our cost structure, but gross margin was impacted by promotional intensity and charges related to the write down of inventory, which puts substantial pressure on profitability in the quarter. Q4 sales came in at $712 million. That's down 10% versus a year ago and 9% in constant currency. The top line was negatively impacted by continued challenges in traditional wholesale, store closures, license brand exits and weaker than expected performance in older generation connected product. Excluding store closures and business exits, which were roughly a 150 basis point headwind, underlying core sales declined high single digits consistent with performance in both the second and third quarters. Looking at performance by region, strong growth in Asia was more than offset by double-digit declines in the Americas and EMEA. On a constant currency basis, net sales in Asia increased 11% reflecting growth of 61% in mainland China and double-digit increases in India and Korea. Our exceptional growth in China is attributable to ongoing strength in the Emporio Armani brand and the success our integrated wholesale and e-commerce marketplace approach. In the Americas, sales declined 16% driven primarily by the wholesale channel. Within the wholesale, department stores have been the most challenged with sell in and sell out performance declining more than 20% in Q4. We are able to partially offset these declines with strong growth in e-commerce marketplaces in the U.S. In Europe sales declined 9% in constant currency, reflecting softness in the wholesale channel. Similar to the U.S. department stores independent within EMEA continue to face headwinds, while our e-commerce marketplace business is stable. Moving now to our direct to consumer business, retail comp sales decreased 3%. While full price comps were down high single digits in the quarter outlook comps were positive driven by more effective promotions. Within e-commerce, international strength was offset by softness in the Americas, primarily resulting from underperformance in older generation connected product. Turning to category performance in Q4. Watches declined 8% in constant currency, with traditional watch sales declining low single digits, similar to our third quarter trend. Connected watch sales, which represented 18% of total watch sales in the quarter decreased double digits. This is largely due to underperformance in older generation display watch sales and reduced liquidation levels versus a year ago. Fourth quarter gross margin came in at 43.3% reflecting a decline of 970 basis points from last year. Of that amount, approximately 530 basis points is attributable to a one-time non-cash charge of $38 million related to the write-down of older generation connected inventory. We had anticipated that our lower-priced older generation product represented a strong value offering and would account for nearly 70% of our connected sales volume in the quarter. However, Gen 4 product sales were lower than anticipated, as consumer opted for the much-improved tech functionality in Gen 5 and we faced more aggressive competitive pricing in the marketplace for value-oriented connected product. This led to an inventory imbalance with a much higher level of older generation inventory, a portion of which we now anticipate will need to be liquidated. Fourth quarter margins also reflect the following factors. Increased markdown activity to move older generation connected product, higher inventory costs, largely due to increased tariffs and freight, softness in retail margins driven by promotions and the unfavorable impact of currency. These pressures were partially offset by margin optimization efforts through our New World Fossil programs, as well as favorable regional and product mix. Selling, general and administrative expenses were $304 million in the fourth quarter, reflecting a decline of $41 million versus a year ago. We continue to make solid progress against our cost reduction targets in the quarter and delivered full year operating expense reduction of $45 million from our New World Fossil 2.0 program. As a reminder, key areas of expense focus include corporate and regional overhead, stores and indirect spend. In 2019, we closed a total of 45 stores ending the year with 451 Fossil locations. Income Tax expenses in the fourth quarter were approximately $1 million. The negative effective tax rate was driven mainly by the recognition of deferred tax asset valuation allowances and an unfavorable impact from the GILTI provision of the Tax Cuts and Jobs Act. Income tax expense in the prior year was $14 million and pre-tax income of $62 million. For the fourth quarter, we reported a net loss of $0.14 per diluted share, which included New World Fossil restructuring charges of $0.08 per diluted share. Last year, our fourth quarter EPS was $0.94 and included restructuring charges of $0.07. Currencies, including both the translation impact on operating earnings and the impact of foreign currency and hedging contracts, had an unfavorable $0.01 impact on our EPS in the fourth quarter. Moving to the balance sheet and cash flow, we ended 2019 with $200 million of cash and cash equivalents. Year-end inventory levels were up 20% versus 2018, primarily reflecting the underperformance in older generation connected watches. Additionally, you may recall that we had lower levels of connected inventory existing last year, due to the timing of 2018 product launches. We ended the year with net debt of $5 million as compared to net cash of $7 million last year. The increase in our net deposition was largely driven by our higher inventory levels. We continue to maintain a low net leverage ratio of 0.8x. Our adjusted EBITDA for the quarter was $62 million, resulting in a trailing 12 month adjusted EBITDA of $169 million. We recently reached an agreement with our primary term loan B credit or to revise our quarterly net debt leverage covenant metrics for 2020 and for the first three quarters of the fiscal 2021. This adjustment takes into consideration our expectation for higher revolving debt requirements to support ongoing and seasonal inventory levels through this time period. Now, let me turn to our 2020 outlook. As Kosta mentioned, we recognize the significant disruption underway in the traditional wholesale channel and in our categories. We're pivoting quickly to accelerate major growth areas such as Asia, direct to consumer and connected. Importantly, we're taking actions that will allow us to appropriate control margin costs and inventory while transforming our business for future growth. We expect full year sales to decline in the range of 11.5% to 4.5%. This includes headwinds of approximately 130 basis points related to store closures and 50 basis points from currency, as our guidance is based on prevailing rate for the euro and the pound at $110 and $130, respectively. Our sales guidance anticipates continued double digit core sales growth in Asia and modest growth in the global direct to consumer channel. While wholesale declines in the Americas and AMEA are expected to persist. From a category lands we expect return to growth in jewelry in 2020 with moderated declines in leathers and watches. Within watches, we anticipate that connected will be down modestly given the refinements to assortment and distribution that Kosta mentioned. Turning to gross margin, excluding the inventory right down in Q4 of 2019, we expect to see modest year over year expansion in 2020. This will be driven by higher connected margins, beneficial channel mix, and improvements from New World Fossil 2.0 partially offset by increased promotional activity and the negative impact of tariffs. For the full year 2020, we expect to capture gross margin benefits under New World Fossil of approximately 15 million. Gross margins are expected to be relatively consistent on a sequential basis throughout 2020, with some year over year pressure and the first half and improvement in the second half. Moving now to operating expenses, we expect our New World Fossil initiatives to deliver approximately $50 million of operating expense reduction in 2020. Cost savings are expected to be driven by organizational efficiencies as well as lower spending levels. The anticipated reductions will be partially offset by incentive compensation included in our 2020 plan. We expect to incur $35 million of charges related to restructuring efforts in 2020, including severance and related costs. On a sequential basis first quarter operating spent is expected to be down slightly to last year, including restructuring expenses of approximately $12 million. Moving beyond the first quarter expenses are expected to decline at roughly the rate of sales, as the impact of New World Fossil benefits is realized. Therefore, for the full year, we expect operating margin to range between negative 1.5% and positive 1.5%, which includes $35 million of expense, or roughly 150 basis points related to restructuring charges. First Quarter operating margin is expected a range from negative 14% to negative 10% inclusive of $12 million are restructuring charges or roughly 300 basis points. For the full year we expect interesting expense of approximately $32 million and we're planning CapEx to $25 million. We expect to carry elevated levels of inventory through the first half of the year as we work with a higher level of Gen 4 connected products. Before we open the call to questions, I want to echo posttest sentiment regarding the coronavirus and reiterate that because this is such a dynamic situation, the guidance we're providing today may need to be revised if the crisis extends beyond Q1. Now I let the operator to open the call to questions. Operator?

[Operator Instructions] We have a question from Ike Boruchow from Wells.

Hey, good morning, everyone. I guess my first question is to start with the first quarter. Could you elaborate on? I know your Asia guide for the year, I think it's double digits you said. What are you planning Asia in Q1 given the headwinds from the virus? I was curious.

We are expecting the APAC region should be down double digit, just low double digits overall. We got off to a very good start in January, and had anticipated the typical slowdown during Chinese New Year. Obviously, the virus situation has had an impact on the business. So for the remainder of the quarter, we forecasted that down fairly significantly, and it puts us down low double digits in the first quarter for APAC.

Got it. A few more if it's okay. I think you gave some color, but can you give a little bit more explicit guidance on the wearable's outlook. I know it's declined the last two quarters but what are you planning wearable's in Q1? And then how do you expect that to progress through the year?

Yes, we are expecting to be down on the full year overall. On this [indiscernible] contraction, both in assortment rationalization as we focused on some of the key brands and skews and also on a distribution, rationalization as well. We focused on channels of our business that can drive the business overall. Don't have the specifics right in front of me on the Q1 call on it, but I tell you be down probably for the year roughly about 10% on it, so some contraction for the contraction.

The one thing I would add icon the wearable's is, as we mentioned, we're seeing very strong reviews and sell through on Gen 5. And when you stand back and look at where we are wearable's right now, especially with a new product out there. Do we obviously have a product issue last year, but our capabilities, our software, our programs, our roadmap, just our overall capability is much greater than it was last couple years and the reviews and sell through we're getting just leads to believe that we have a much bigger opportunity going forward. So that's something for us to be excited about.

I mean to stick with that. I mean it sounds like the new generation product keeps working. And I think this is the second inventory. Right down, I think in the last as many years just is there anything you guys are working on to do better at kind of managing the lifecycle of your wearable business and trying to understand like at what point do you kind of get more comfortable with managing the inventory after that category?

Let me -- let me provide a little bit more color. You know, as we position the business for Q4, it was clear that the market was developing into two distinct tiers of product. The first is just the latest tech, which is largely full price with a high consumer willingness to pay. And then the older generation or less featured products at sharper price points. And what we're hearing from a lot of our channel partners was the focus on the opening price point sharp price point business to be able to drive a unit volume and traffic to the stores. So we actually positioned our inventory as such. So we had 70% of our inventory, roughly in Gen 4 in sport, and only 30% in our latest tech offering, which was Gen 5 and our hybrid HR thinking that that mix represented the channels desire, but we found out the consumer responded very differently than channel expectations. So our Gen 5 and hybrid HR products, both of which have 4.3, 4.4 stars, really, really well done by our engineering teams across the world. Forex exceeded expectations than any channel that carry those was very happy with the results, but the price competition in the lower tier was much greater than we had expected, or frankly, any of the channel partners had had expected. And that drove not only in our lower unit volume overall, but lower margin than we expected. So that's why we took the charge. So although we're disappointed though, in the commercial outcome for Q4, we proved and our teams proved with the success and the seller reviews of Gen 5 and how to reach out that we belong in the category. We're a leader in the business, and we just need to keep pivoting with a focus on three things. The first, from a product perspective, we're going to stand for the latest technology. We're going to bring those to market with the best designs from the best brands in a focused way focused on full price sales, as opposed to the 70:30 split that we had in forth. We're going to do that as well with our engineering teams that have proven that they can really take the lead end to end in Gen 5 was the first product where they took the engineering lead end to end on both hardware and software which is why we had higher quality product with features like iPhone compatibility and in battery life modes that are really only found on our wear West watches. So the next 24 months of innovation that we've got an eyesight on are all built by this engineering team on that platform. That's our product focus, latest tech, full price and best brands. Second is from a channel perspective. You know, we're pretty broad in our distribution. So we're in direct to consumer, CE traditional wholesale and online marketplaces. And there's just a clear segmentation that's starting to emerge where there's certain channels that are set up to sell these products, well, where they have a better sales process, more customer engagement or more customer support. So that's CE channel that's online marketplaces largely in our own direct to consumer stores. Those are doing really well. In traditional wholesale we're going to have a top door approach, we're going to focus on trying to get the top up environments that we can provide that engagement. But where that's not the case, we will dramatically pull back. So that we've just are selling where these products sell well, that'll also have a side benefit of getting our traditional wholesale teams refocused on high margin traditional watches and jewelry, which are so much better in that environment. And then third, from a geographic perspective, you know, while will continue competing in the US market and see it as still a huge opportunity. The fact is that iOS is much more dominant here and internationally, Android is significantly more dominant. So we'll be doubling down our growth in international markets. Android has a much larger market share of the smartphone market which will allow us to capture much larger, go after much larger addressable market. So, in summary, smart-watch market continues to grow. We're just now seeing our best products built from our exceptional internal engineering and watching teams. We're going to reposition the business this year with the right product, the right locations and the right geography. We're confident the best is yet to come here.

Got it. Thanks, Greg. Last on the balance sheet if I can have one more, Jeff to understand few things, just the term loan amendment details and also, I think in that 8K [ph] there is potential leverage, covenant violation that would come up in Q2. I'm just kind of curious, what exactly is going on with the amendment and what's going on there. And then just quickly, can you give us. Sorry, go ahead, Jeff.

Yes, like the amendments complete. So we have that in place right now, with a broader net leverage ratio metric. So it's 2.7 times for the next four quarters all of this year, net debt over EBIT up. And some of those drawn by the inventory levels that we have. Also we get into the conversation given some of the business issues out there right now, with the coronavirus. I want to make sure I have some protection on that. And it continues on into next year at 2.25 for the first three quarters of the year and reverts back to the 1.5 times net debt leverage for Q4 of 2021. So, we're in a good position with that. So, that's all done and behind us at this point, Ike. So, there’s not a leverage issue.

Got it. Thank you, Jeff. And then lastly, can you help us with CapEx, G&A? And then based on your guidance on getting to a negative free cash flow number for this year, can you can you correct me there or help me out with free cash number you provided under guidance?

You should have some modest free cash flow, overall on it. CapEx is about $25 million overall on it. The depreciation number is roughly $50 million or so, $45 million, $50 million on depreciation. And as you can appreciate with a bit of extra inventory ending fiscal ’19, that will be reduced and will drive some working capital benefits. Personally work with you a little closer to get the specifics on that EBITDA calculation.

Thank you very much, guys.

Okay, thanks, Ike.

[Operator Instructions] Our next question comes from Dana Telsey from Telsey Advisory.

Good morning. Can you unpack a little bit about wholesale channel, what you're seeing there, how it's impacted globally, and what changes you foresee for your product assortment? And then can you give us any update on the license brand, and any timing of expiration, and particularly what's happening with the Kors brand? Thank you.

Under the channel discussion, I think we've commented that we're largely expecting the trends to continue in both Europe and Americas, which means we quoted the sell through issue in Americas, and selling itself out issues being down about 20%. So, we're still forecasting that for most of this year in Americas wholesale. And then on AMEA, AMEA isn't impacted quite as much. It’s more in the mid-teens contraction we have. So, those are both still in our forecasts and in the underlying numbers. Those numbers largely are what's impacting our overall contraction as we make the change and the pivot to a more direct business model, both to third-party marketplaces, as well as websites on it. So, that's the kind of channel discussion. Strengthened in those channels, the DTC channel, as well as geographically, the strengthen in APAC, we expect will rebound in that in the second half of the year. On licensed brands, I would tell you there's not a lot new report. We continue to work closely with our licensed brands, have great relationships there. Continue to work with our Kors partners on the opportunity for watches and jewelry, both in the wholesale channel, as well as in the boutiques, and that relationship continues to be very strong. From an expiration standpoint, those no major expirations coming up at this point in time, and no major issues that we see in our licensed planning portfolio as we move through some of these transformation efforts that we're going through.

I would just add, Jeff, that we -- just like we have historically, we still have great relationships with both our wholesale accounts and our licensing partners. So, and we're focused across the board with them on driving growth across channels. Within traditional wholesale, especially in the U.S., is definitely more promotional and trends are challenging, but we do see a lot opportunity to continue to stabilize the business with just better product and better storytelling. And so, we've challenged our teams to create excitement for consumers in both brick and mortar and online. And then especially online, we see tremendous growth opportunities globally in the marketplace businesses that we're in, and frankly now with our digital transformation, that's accelerating with our sales force platform. So, you're going to, both in wholesale, online marketplaces, and DTC, see digital bring to life the right product and the right storytelling this year, but also as we go into future years.

And I would add also we continue to look at the marketplace as it evolves, and we probably, over the next couple years, will be adding additional licenses and change some of our portfolio as we continue to evolve the business.

And then, just on the coronavirus; where are you in terms of fast factories, component parts, given diversification and manufacturing? How do you see that playing out as this very fluid situation is still underway?

Actually, our factories are coming back online nicely, slower than we had anticipated. We estimate right now that the capacity right now is about 50%. Expect to have the factories and the underlying component suppliers up to full speed by the end of March on it. We've been prioritizing key products on it. As you can tell from our inventory position, we're actually in a very good inventory position to manage through this process. We pulled some inventory ahead because of Chinese New Year's anyway. And the inventory that we have is good quality. And we're prioritizing production for cheap products that continue to sell. So, we feel pretty good about our factories coming up to speed in China and being at full speed by the end of the first quarter.

Thank you.

Thanks, Dana.

Thank you. I will now like to turn the call back to management for closing remarks.

Before we sign-off, we wish to again express our concern for all those affected by the coronavirus. Despite this near-term issue, we want to emphasize that we have every confidence that our transformation initiative will be successful over the long term. We have innovative products, talented people, and great partners. We have a capital light business that generates good cash flow with no net debt at the year end. We're planning 2020 based on current market trends, but we will be driving our three major growth engines of connected, Asia, and DTC to achieve top line stabilization as quickly as possible. We appreciate your continued support and look forward to updating you in the next quarter. Thank you very much.

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