Good afternoon, ladies and gentlemen, and welcome to the Fossil Group Third Quarter 2021 Earnings Call. At this time, all parties are in a listen-only mode. This conference call is being recorded and may not be reproduced in whole or in part without written permission from the Company. Now, I'll turn the call over to Christine Greany of Blueshirt Group to begin.

Thanks, Shannon. Hello, everyone, and thank you for joining us. With us today on the call are Kosta Kartsotis, Chairman and CEO; Jeff Boyer, Chief Operating Officer; Sunil Doshi, Chief Financial Officer; and Greg McKelvey, EVP and 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 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 the Company's Form 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. During today's call, we will refer to constant currency results. Please note that you can find a reconciliation of actual results to constant currency results and other information regarding non-GAAP financial measures discussed on this call in Fossil's earnings release, which was filed today on Form 8-K and is available in the Investors section of fossilgroup.com. Now I'll turn the call to Kosta to begin.

Thanks, Christine. Good afternoon, everyone, and thanks for joining us today. We are pleased to deliver another quarter of strong performance, driven by continued momentum across our key categories and regions. Our Q3 net sales grew 13% or 11% in constant currency. Gross margins remained strong at 53% and we delivered double-digit adjusted operating margins of 11%. We are proud of our teams for continuing to deliver superior execution and remaining focused on our strategic priorities in what has been a dynamic environment for nearly two years. Our topline performance has been fueled by our digital-first focus, ongoing product innovation and favorable watch category dynamics. Importantly, over the last several years, we have become a much more efficient organization, effectively transforming our company and positioning us to deliver profitable growth and to create long-term shareholder value. Most recently, we further strengthened our financial condition with the successful completion of a $150 million senior notes offering. More to come on this from Sunil later. It is great to see our digitally-led mindset drive measurable results in 2021. In the third quarter, digital sales grew 28% and doubled from 2019. Our digital sales penetration remains strong at approximately 40% of our overall sales mix. As a reminder, digital sales include sales on our own e-commerce sites, global third-party platforms and wholesale.com sites. During the quarter, we completed another key element of our strategic roadmap on digital. All 27 of our global websites now reside on our Salesforce platform. These websites cover our Fossil, Skagen, Watch Station, Michele and Zodiac brands. Specifically, having our sites on one common platform allows us to more effectively scale our strategies to drive consumer engagement and personalization through digital means. Longer term, this will also enable us to deliver superior customer experiences across both digital and non-digital…

Thanks, Kosta, and good afternoon, everyone. Starting with our third quarter results. Our third quarter was strong, highlighted by better-than-expected topline growth, solid gross margins and ongoing cost discipline, which collectively drove adjusted operating margin of nearly 11% and EPS of $0.60. First, let me highlight net sales. Q3 net sales were $492 million, up 13% or up 11% on a constant currency basis. From a regional perspective, net sales in the Americas were up 10% in constant currency, with stronger growth in the U.S. market, driven by continued strength in consumer demand. In Europe, Q3 net sales were 21% in constant currency as the region began to emerge from pandemic restrictions. Our teams have adeptly navigated store closures and reduced foot traffic, with strong digital execution to drive overall topline sales growth. In our Asia region, Q3 net sales increased 5% in constant currency, led by strong growth in India as the country continues to recover from pandemic-driven conditions that impacted demand in the first half of this year. Conversely, in Mainland China, sales were down 1%, reflecting a slowdown in trend from Q2 due to accelerating pandemic lockdowns in the third quarter. Other markets like Japan, Korea and Australia have not seen a significant improvement in trend. From a channel perspective, Q3 digital sales remained strong, up 28% versus a year ago and 2x compared to the third quarter of 2019. Additionally, we continue to see our digital sales mix at about 40%, up significantly from 2019 levels. Looking at sales in our DTC channels, which encompasses our own e-commerce sites and stores, comparable DTC sales were flat versus last year. Globally, traffic and conversion trends have remained consistent with recent quarters with traffic improvement in both the Americas and Europe. We ended the quarter with 374 company-owned…

Thanks, Sunil. Let me run through a few questions that we've been getting from investors. I'll start with Kosta. We heard in the prepared remarks that traditional watch outpaced connected watches in Q3. Can you share more about your outlook on both of these categories?

Sure, Christine. First of all, in traditional watches, our analytics are showing that the overall category is healthy and growing. We're seeing strong growth in all three of our regions, with brand performance varying by market. The Kors and Fossil businesses are both doing quite well in the Americas and also surprisingly strong in Europe, considering the closures we've seen in the region. In Asia, our Emporio Armani business has been a consistent grower for us, especially in China. In India, as the market opens up, we are seeing increasing activity in the category, especially in our Fossil and Emporio Armani brands. We believe the long-term market potential for traditional watches is significant in Asia, given the growing number of emerging customers who have a strong affinity for brands, watches and accessories. Broadly speaking, the traditional watch business is a growing category. And we're well positioned across brands, product categories and geographies. From a near-term perspective, we are approaching holiday with product innovation, healthy inventory levels and increased margin spend to drive awareness and sales. Smartwatches is also a fast-growing category. Over the past 12-plus months, we have executed on our strategy to prioritize key brands and digital channels. We successfully worked through our older generation product last year and brought innovation to the market in 2021. We are seeing positive consumer response to the improved functionality and performance of our latest Gen 6 product, which was launched in September. So we'll have more features and greater functionality coming to market in 2022 when we introduce an advanced version of Google's Wear OS in the market. At a high level, we've made good progress on realigning our strategy, and we're well positioned to drive improved performance next year.

Thanks, Kosta. Greg, how are you thinking about brick-and-mortar versus digital over the next few years? What does the optimal mix look like? And what percentage of sales do you ultimately want to do in the wholesale channel?

Thanks, Christine. First, I believe that we've reached an important inflection point, where the watch category has strong consumer engagement, again, which is providing a broad-based lift across channels. Our digital-first strategy, in particular, is also now at a point where the combination of our progress on digital sales, plus positive comp performance in top brick-and-mortar locations has created a growth story in traditional watches that we see as sustainable. As mentioned earlier, digital sales penetration is currently 40% of total revenue, growing 28% year-over-year and doubling over the same period in 2019. We expect digital sales to represent at least 50% of sales over time as we continue to invest in our digital teams and in the technology, content and analytics capabilities to support them. Second, when we talk about digital, we aren't just referring to channels of distribution. The capabilities we've built and continue to build out in digital include the disciplines needed to convert at high rates in e-commerce, on global online marketplaces and in supporting our wholesale accounts with online sales. But also includes how we build brands, launch new products and create category heat online and through social and digital marketing channels with compelling content. How we use proprietary analytics to identify fashion trends and then quickly respond with new products enabled by a quick response supply chain we've geared up for digital. And how we integrate online and physical shopping tools to create great customer experiences and engagement with our brands. And the combination of these digital capabilities is driving digital sales growth, but also reinvigorating brick-and-mortar sales as well and together, creating a net positive growth trend we expect to continue for the foreseeable future. The last point I'd like to make here is that the wholesale channel in our own brick-and-mortar locations remain core to our growth strategies. In both instances, the optimization of our portfolio over the last few years has brought us to a point where the remaining stores are much more productive. And in both wholesale and our own brick-and-mortar stores, the attention is now on creating engaging shopping experiences that merge our digital capabilities with the benefits of physical shopping and store associate interactions that you can only get in store.

Thanks, Greg. Jeff, there's a significant amount of discussion these days regarding disruptions in the supply chain across many businesses. This is happening from ocean container delays to port congestion and onto the lack of truckers to clear the ports and deliver product to retailers. How have all the various supply chain issues impacted Fossil's business, particularly as we enter the holiday season?

So we're not fully immune from the supply chain issues you mentioned, Christine. We are fortunate these issues are not nearly as serious here at Fossil Group as they are at many other companies. As Kosta mentioned earlier, we benefit greatly from the actual dimensions of our product as nearly 90% of our product line is relatively small in size, and the vast majority of our products are shipped by air. The combination of relatively small dimensions and solid AURs, average unit retails, means that our watches, smartwatches and jewelry can be packed and shipped very efficiently via air, largely avoiding much of the port and trucking disruptions you mentioned. We have added additional time to our delivery schedules, and we have incurred additional costs as we've shifted to more air versus ocean freight. But to put some dimension on the cost impact, shipping disruptions actually started in 2020 to absorb some of the shipping cost increase last year. The incremental freight cost for the past two year period is estimated at several million a year. While we are never happy about these types of external incremental expenses, this low level of impact is manageable for a nearly $2 billion business. Our most significant challenge is on delivery time for leathers, which is about 10% of our business. Leather ships primarily via ocean freight. And even with doubling the delivery times, we find ourselves getting our product just in time, not ideal, but again, it has been manageable so far. Overall, we feel very good about our current inventory levels and the flow of product with limited risk regarding the timing of leather deliveries. And we feel we are very well positioned to continue to meet consumer demand during this upcoming holiday season.

Terrific. That's helpful. Thanks, Jeff. Turning now to Sunil. Can you share a bit more color on the bond offering for us? What was the driver behind the offering? And how are you thinking about the capital structure as we go forward.

Sure thing, Christine. We issued $150 million in a public debt offering. The bonds are five-year bonds that mature in 2026 and carry a coupon rate of 7%. The proceeds of the offering have been used to pay off our term loan, whose balance was $122 million at the end of the third quarter. We are pleased with the outcome of the transaction as we lowered our cost of capital, increased flexibility, reduced covenants and extended maturity, while maintaining a similar leverage profile of 1x to 1.5x gross debt-to- EBITDA

Terrific. One last question for you, Sunil. How should we think about the puts and takes on the increased guidance you provided today? And can you comment on your thoughts around the longer-term growth algorithm for us?

Yes, sure. First, on the guidance. With three quarters under our belt, it's obviously about the fourth quarter. For Q4, our topline growth estimate of 18% to 25% is an acceleration from Q3's 13% sales growth. Versus 2019, however, Q4 is down 10% using the midpoint of our range, similar to Q3's results. We do expect some currency headwinds in the fourth quarter relative to the third quarter's tailwind based on prevailing rates. In terms of adjusted EBITDA margins, our full year guidance of 8.5% to 9.5% assumes a fourth quarter range of 10% to 12.5% or 11% at the midpoint. The midpoint is slightly lower than our third quarter results as we are accounting for some seasonally driven gross margins that are historically lower in Q4 versus Q3. As for our longer-term algorithm, we expect to continue delivering net sales growth as we have not fully recovered to 2019 levels. In addition, key categories are growing, and the overall global outlook appears favorable. Also, we've demonstrated our ability to achieve leverage in the model as we right size the cost structure and continue to focus on driving efficiencies. With this combination, this will allow us to deliver expanding operating margins over time. As we finish off Q4 and finalize our plans for 2022, we look forward to sharing more specific guidance in our next quarterly call.

Terrific. Thanks, Sunil. Thanks, everyone, for the Q&A. I'm going to turn it back over to Kosta for closing comments.

Thanks for joining us for our call today, and I appreciate the interest in Fossil. We look forward to speaking with you on our next call for the end of the year, and have a good holiday. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.