Good afternoon, ladies and gentlemen and welcome to the Fossil Group Third Quarter 2023 Earnings Conference Call. [Operator Instructions] This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company. I will now turn the call over to Christine Greany of The Blueshirt Group to begin.

Hello, everyone and thanks for joining us today. With us on the call are Kosta Kartsotis, Chairman and CEO; Jeff Boyer, Chief Operating Officer; and Sunil Doshi, Chief Financial Officer. I would like to remind you that information made available during this conference call contains forward-looking information and the 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, you will, excuse me – 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 over to Kosta to begin.

Thanks, Christine. Good afternoon, everyone and thanks for joining us today. The third quarter proved more difficult than expected mostly because of headwinds in the wholesale channel in Europe and because of soft consumer spending in China. From a high level perspective, we are facing challenging category consumer and channel dynamics. While working against these headwinds, including tough macro conditions globally, we remain focused on our objectives, most notably, the execution of our Transform and Grow Plan, which we are making solid progress on. Three quarters into the TAG plan, which we announced in February, we are tracking to deliver the cost of goods and operating expense savings we previously outlined, which are expected to drive approximately $300 million in annualized operating income benefit by the end of 2025. Year to date in 2023, we have captured approximately $80 million in annualized expense savings. Under the extended plan we announced last quarter, we are advancing our strategies to improve our sourcing practices and to further streamline roles and responsibilities across the organization. Both of these initiatives are laying the groundwork to help us generate improved operating margins in 2024. Our third quarter net sales decline of 21% primarily reflects ongoing headwinds in the wholesale channel in both the Americas and Europe and a slower than expected recovery in Greater China. The overall decline includes approximately five points of headwinds related to declines in our smartwatch business and due to store closures. Importantly, we are seeing some encouraging signs in our core FOSSIL brand where our product and marketing initiatives are bolstering our traditional watch sales, which were up 2% and up 11% in the U.S. and India, respectively. To address the industry wide pressure in the wholesale channel, we have put a dedicated team in place that is focused on…

Thanks, Kosta, and good afternoon, everyone. There are three topics I’d like to review as part of our Q3 update. First, our Q3 results were below our expectations with headwinds similar to those we shared on our Q2 call. We are updating our forecast for Q4 based on current ordering levels in wholesale and trends in our retail stores, and a slower than planned response to peak selling events in key markets like China. We are making solid progress on our Transform and Grow Plan, capturing operating expense reductions that we outlined at the beginning of the year and executing against initiatives that will drive benefits into the next couple of years. As a reminder, our Transform and Grow plan outlined a total of $300 million in annualized benefits to be realized by fiscal year 2025. We are on track to capture $50 million of expense reductions in fiscal year 2023 and now estimate to capture $135 million to $150 million of benefits in fiscal year 2024. With that, let me step through our third-quarter results in more detail. Global sales were $344 million, down 21% or down 22% in constant currency. The impact of foreign currencies in the third quarter was a 100 basis point tailwind to sales, about 1 point lower than our prior estimates based on the strengthening dollar during the quarter. From an operating margin perspective, foreign currencies were a 10 basis point headwind. In addition, we did have approximately a $10 million or roughly 2 point headwind on our revenue results due to a timing shift from Q3 into Q4, primarily related to wholesale shipments in China. Sales into the wholesale channel represented our biggest headwind for sales declined 25% in constant currency. Regionally, year-over-year declines in wholesale shipments into the Americas and Europe lagged…

Terrific. Thank you, Sunil. I’ll begin with a question for Kosta. What are the key strategies to stabilize sales and when do you expect to see an inflection point?

Overall, we’re moving as quickly as we can to improve the business all across the enterprise. There are a number of TAG initiatives that we have in place that will drive higher sell-throughs and profitability, including SKU reductions, improved market pricing, lower product costs, better promotional management, higher gross-to-net profit capture. In addition, we will operate with lower expense structure. So, we are moving in the right direction. Also, we are going to lean more into our strengths. Our Fossil Brand, especially in traditional watches, the brand is showing strength, and we think that will continue. Also in our increasing digital capabilities, the investments we have made the past few years in people and technology have become a strategic advantage for the company that will have increasingly significant benefits. We also have a significant opportunity overall in emerging markets as well as in our jewelry business, which presents a large opportunity for the company long-term. So overall, there is a lot of activity going on in the company, and we are making progress on many fronts, and our teams are focusing on strong execution and on improving the business.

Thank you, Kosta. Moving on to Jeff, could you put more color around the TAG program and how that’s progressing?

Sure, Christine. As you heard in Sunil’s comments, we are making solid progress on both our initial and our expanded tech initiatives. We initiated these programs earlier this year due to potential business softness, which we are now experiencing. We have prioritized seven key work streams with three main goals or objectives. Our key objectives are to, one, reduce organizational complexity, two, improve gross margins, and three, optimize overhead spending and working capital efficiency. I will share our progress so far on each of these efforts. Regarding our efforts to reduce our organizational complexity, we are very far along in planning the right size of the organization as well as operating on a more global versus regional basis. Unlike some other efforts we have had in the past, this initiative is focused on fundamentally changing our operating model to be more globally driven and to improve decision making and efficiency. Execution of this work stream is well underway and will continue into next year. One of our most significant value creation pillars is improving gross margins as product cost, one of the most significant expense elements of our operating model. We are working with our current and new suppliers to reduce product costs. And so far, we are very pleased with the response and the support we are getting from our existing and new partners. We are on track to drive benefits from this work stream into the P&L in 2024. We are also focused on increasing our average AUR with customers by refining our pricing architecture, enhancing our promotional and markdown programs, and reviewing terms with our wholesale partners. Lastly, we are conducting deep dives on our demand signing programs, inventory levels, and product lifecycle management areas and expect additional economic benefits from improvements in each of these areas. On the spending side in supporting our overhead optimization and working capital efficiency initiative, all spend areas are being reviewed from marketing to information technology spend to indirect procurement. We have instituted an expense control tower process to review all significant expenditures requesting lower costs in issuing RFPs for major purchases. Our overhead optimization program also includes initiatives in our retail channel. We are taking a harder look at store rationalization and in-store process optimization. We are also revisiting our DC operations, logistics, and parcel management progress to identify incremental cost savings opportunities. Working capital initiatives currently being worked on include improving our inventory turnover, reducing customer account DSO and moving a major supplier to more standard industry payment terms. As you can tell, the transformation part of our tech program is extensive and has impacted nearly every area of our business and economic model. After several months of further work, we remain confident in our ability to deliver our TAG goal of $300 billion in benefits that we shared back in August.

Thank you, Jeff, very helpful. Sunil, how does that $300 million of TAG savings flow through the P&L? And what does the cadence look like beyond that initial $100 million of benefit that you expect to capture?

Yes. Thanks Christine. A quick recap on that first $100 million in annualized benefits. We expect to capture $50 million in 2023 and $50 million in 2024. For the $50 million in 2023, a couple of additional points. First, $45 million of the $50 million is in SG&A and $5 million of that benefit or that expense reduction is in gross margin as it pertains to freight costs. From an SG&A perspective, the $45 million in savings represents about 5.5% of our FY ‘22 actual SG&A expenses. Our current year forecast reflects about a 4% reduction in SG&A. The other 1.5 points from our TAG savings is primarily offsetting underlying inflation that we had coming into the year. With respect to 2024, we will capture the remaining $50 million and another $85 million to $100 million related to the initiatives that Jeff just spoke about. That brings the total benefits in fiscal 2024 to approximately $135 million to $150 million. There will be some offsets to these benefits as we rationalize some segments of our business and based on our current views of sales trends into 2024. But taken together, the actions from TAG will provide a meaningful improvement to our adjusted operating income expectations for FY 2024.

Alright. Thanks Sunil. One last question for you, how do you think about capital allocation in the near-term given your expected sales declines?

Yes. Thanks Christine. So, in the near-term, our capital allocation priorities are to focus on business operations and to execute our Transform and Grow initiatives. It’s also important to note that in 2023, we have been able to offset our operating losses by managing our inventory and overall working capital down from 2022 levels. Working capital is down approximately $100 million versus last year. In 2024, we expect a more normalized working capital flow where Q1 to Q3 tend to require some working capital. We do have initiatives included in our Transform and Grow plan that are focused on driving structural improvements in our inventory levels, but those benefits are more back-end weighted and into 2025 based on our development cycle and lead times. So, with those factors in mind and considering our most recent revenue trends, we think in the near-term, it’s important to preserve capital for business operations while we execute our Transform and Grow plans. Longer term, as we capture planned TAG benefits, work down restructuring costs, and resize the revenue base, free cash flow should be healthier, and we will be in a better position to consider a broader set of capital allocation options.

Great. Thank you, team for the Q&A. I will just turn the call back to Kosta for closing comments.

Well, thanks everyone for joining us today. We appreciate your support. We look forward to speaking to you again about our fourth quarter early next year. Have a good day.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.