Good afternoon, ladies and gentlemen, and welcome to the Fossil Group’s Fourth Quarter and Full Year 2022 Earnings Call. At this time, all parties are in 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 the Blueshirt Group to begin.

Hello everyone and thank you for joining us today. With us 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 consists of 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, 10-Q and 10-K 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 will turn the call over to Kosta to begin.

Thanks Christine. Good afternoon, and thank you for joining us today. Our net sales for the full year of 2022 were $1.7 billion, down 5% on a constant currency basis. We continued to operate in a difficult environment with significant headwinds, including inflation, the COVID effects in China and the Ukraine crisis. The sharp rise of the U.S. dollar was also a major headwind impacting our top line by almost 500 basis points and our operating margin by 160 basis points. While the external environment had an impact on our overall results, we did make solid progress on our key strategies to advance our digital road map to significantly grow our addressable customer file size and to grow and strengthen the fossil brand, all of which are critical pieces to our long term business model. In 2022, we grew Fossil brand sales in our core categories by 9% in constant currency. With increased investment in talent, technology and marketing, we generated some big brand moments, driving increased awareness and heat through strategic collaborations and limited editions. Our footprint remains strong globally and we are accelerating our profits to grow the brand. We concluded the year with mixed fourth quarter results. Our wholesale business was challenging, especially in the U.S. and Europe, as retailers saw weaker than normal sales levels and operated conservatively. At the same time, results in Greater China continue to be impacted by COVID issues that weighed on consumer spending. The impact of these was that our wholesale business was down 24% in the fourth quarter. While shipments into our wholesale channel were challenged we continue our momentum in our DTC business, which was largely driven by our ongoing digital transformation and by much improved product assortments. We are capitalizing on strong traffic in our digital and marketing…

Thanks Kosta and good afternoon everyone. I'll start with some color on the fourth quarter and then dive into the actions under our transform and growth strategy and how that's driving our outlook for 2023. The headline is that Q4 performance was mixed with sales of approximately $500 million, down 17% or 12% in constant currency and adjusted operating margins of 0.6%. Currency headwinds were in line with our expectations coming into the quarter relative to last year the strong dollar impacted net sales by 510 basis points, gross margins by 190 basis points, and operating margins by 240 basis points. As Kosta noted from a brand lens, Fossil, our largest revenue brand, performed well in the quarter. The brand was down 2% across categories but up 8% in the core categories of traditional watches, leathers and jewelry. We are particularly pleased with the results in leathers and jewelry as we believe these categories have the potential for higher growth rates in the coming years. Net sales in our direct to consumer channels were strong in the quarter and grew 8%. Comparable retail sales to find that sales in our company owned stores and own websites were up 17%, with double digit growth in each region. In our wholesale channels, sales declined at 24%. In the Americas and Europe, larger wholesale accounts were increasingly cautious and focused on driving down their inventory levels through both increased promotions and constrained replenishment. Adjusted operating margins of 0.6% were lower than our expectations, driven by two key factors. First, shipments into the wholesale channel were lower than expected, which, against the fixed cost structure, pressured our adjusted operating income margins. Second, in our direct-to-consumer channels, we experienced a greater promotional sales mix and higher variable costs in marketing and shipping. Other factors like…

Thanks, Sunil. I'll start with Kosta. You talked about the strength of the Fossil brand. Can you share more color on how that moves forward in 2023 and beyond?

Yes. The Fossil brand has actually been relatively strong, and there's a significant opportunity for the company as we continue to transform. There's a lot of activities going on right now in Fossil. We've been investing in additional design and merchandising capabilities and are just starting to get the benefits of that. We have some great product coming in. We're also getting strong sell throughs on more premium aspirational product. We're seeing strength in our jewelry and leather goods businesses and so we are expanding those to be a bigger part of the brand as well. We are also ramping up our marketing and PR capabilities. We have been doing a lot of research and segmentation on the brand over the last year, and we'll be launching new creative this year to new cohorts of potential customers based on those insights. We believe our rapidly increasing digital and marketing capabilities will facilitate additional growth for the brand globally.

Great. Thank you. So zooming out a little bit. What is the state of the traditional watch category and how does Fossil's performance fit into that?

Well, it's great to see the activity in the category. The fashion watch business, especially at wholesale, has been relatively soft as we mentioned earlier. The Swiss watch business has been strong in creating sales growth and a lot of activity and awareness, which is very helpful to the overall category. This is obviously a luxury driven core watch consumer and it's typically more male than female. We are also seeing the more aspirational parts of our business do well and are tuning our assortments to include more premium products and more sports luxury type watches which make up the bulk of the Swiss watch business. We also have a lot of collaborations and limited editions and other storytelling that's launching this year. We think all this activity will be helpful to our overall watch category.

Thanks, Kosta. Moving on to Jeff. Can you talk about how the business has changed since you completed the New World Fossil program? Those captured $250 million in cost savings and efficiency over the last several years. What were the key inputs and considerations that fueled the new $100 million program? And then can you talk more broadly about the transform and growth strategy?

Sure, Christine. If I can, I'll recap our broad transforming growth strategy that Kosta and Sunil shared earlier and then dive a bit more into our efficiency opportunities. As Kosta mentioned, our growth program is comprised of three strategic initiatives. One, to revitalize the Fossil brand. Two to grow watches and jewelry in our core licensed brands, and three expand in premium watches. Underlying these initiatives are additional foundational capabilities, which we continue to build out our digital roadmap, our program to modernize our marketing approach, and our continued investment in technology. These elements are all critical to grow our business, but as you noted in your question, we also need to continue to transform our business model as well and become more efficient. And we are currently targeting $100 million in annualized savings from this program. As our business has evolved since New World Fossil, we're able to identify these additional savings through a heightened focus on core categories becoming closer to the customer and thereby reducing layers in our organization more fully utilizing our tech capabilities, rationalizing our back office costs and moving work to lower cost locations including our Bangalore GBS facility, which now has over 400 Fossil associates. And as Sunil mentioned, we continue to optimize our store base. These programs together will help us be a more effective organization while also reducing our cost structure and will generate savings that are incremental to our previous, New World Fossil initiative.

Thank you, Jeff. Moving on to Greg. Looking at the decline in the smartwatch business this year, what is the strategy to reverse the trend there? And more broadly speaking, how do you see Fossil fitting into the competitive landscape among much larger players?

Thanks, Christine. We are not pushing the smartwatch business like we were prior to 2020, when we are trying to establish a position in a new emerging category and launching new generations of product with significant marketing and inventory support. The primary reason is that the sales trajectory and margin profile of our traditional categories are simply much stronger. As Kosta mentioned, we are seeing solid performance in smartwatches at moderate price points and with wellness features. Our current focus is therefore in these areas.

Thanks, Greg. We're reading about the rebound in consumer spending in China given the reduced COVID policies there. What are you seeing in China right now?

After China unexpectedly canceled all domestic COVID restrictions in early January, we began to see sales recovery in both offline and online channels. Week by week we've seen and continue to see a clear uptrend in both traffic and sales. Overall, we're expecting modest year-over-year growth in Q1, 2023, with accelerating trends throughout the quarter, followed by strong year-over-year growth trajectory for the rest of the year starting in Q2. In terms of channel specifics, our offline business is clearly recovering, but it will likely take us another quarter before we're going to see growth year-over-year due to recovery being uneven throughout the country. Tier 1 cities are bouncing back more quickly, while Tier 2 and Tier 3 cities are experiencing slower recovery in traffic as they deal with the tail of the COVID impact. Overall, what we believe we're seeing in sellout is consistent with the watch and jewelry category overall in China. Our online business, on the other hand, has bounced back much more quickly than offline. With Chinese New Year and peak day performance, beating expectations. Online is significant within our channel mix in China, so bounce back and online is an important signal about the opportunities we can chase into for the rest of the year. Lastly, I'd highlight the strength of our Hong Kong, Macau and travel retail businesses. While international flights into greater China remain sparse, we are seeing significant traffic and sales increases from Mainland Chinese tourists taking advantage of the relaxed travel restrictions within Greater China. As international inbound flights get back to pre-COVID levels, we expect these channels to continue to see a nice recovery throughout the rest of the year. Overall, we're obviously very pleased to see a more accelerated recovery in Greater China than we were expecting. Our brand and commercial teams, as a result, are working feverishly on back half product opportunities and marketing campaigns to chase every opportunity we're seeing in the resurgence of this important business.

Thank you, Greg. Let's wrap up with a question for Sunil on the outlook. Sunil, could you please provide some additional color on your expectations for 2023 particularly how you see the trends playing out over the course of the year?

Yes, sure, Christine. There are various dynamics at play which come through the year at different times. At a high level there are a few key topics that we're stepping through. First, wholesale, sell-in trends, prevailing currency rates, direct to consumer trends, and then the recovery in China that Greg just discussed. I'll start with the first half of the year. First shipments into the wholesale channel will still have some downward pressure we estimate on a year-over-year revenue comparisons. In Q1 we see that retailers are still managing replenishment type and below underlying sellout trends as they maintain a cautious outlook on consumer discretionary categories in general. We think the majority of this selling impact on our revenue should be in the first half of 2023. Second, with respect to currencies, while the dollar has weakened a bit since late Q3 of last year, prevailing currency rates will still create some year-over-year headwinds on sales about 200 and 250 basis points in the first half of the year. In our direct-to-consumer channels we are seeing continued comparable retail sales growth enabled by investments from our digital roadmap, but we will see some overall revenue decline in the channel from planned store closures that are likely front half weighted. But again, these are lower productivity stores hitting their natural lease expirations. Partially offsetting this we are starting to see rebounds in China. Many of our accounts are re-forecasting for a return to growth and we are seeing better consumer spending on our direct channels in the market. So our expectation is that revenue and adjusted operating margins will be down on a year-over-year basis in the first half of 2023 and in the second half we anticipate that trend will reverse, enabling us to deliver sales growth and adjusted operating…

Terrific. Thank you, team, for the Q&A. That concludes today's call. We all look forward to updating you on our first quarter 2023 call in May.

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