Fossil 1Q16 Earnings Call Notes

posted in: Notes | 0

Fossil Group (FOSL) Kosta N. Kartsotis on Q1 2016 Results

Challenging environment in the traditional watch category

“Specific to the first quarter, as we expected, results trailed last year, reflecting the challenging environment for the traditional watch category, foreign currency headwinds, and last year’s relatively strong first quarter performance in the multi-brand portfolio. As pressure on the traditional watch category intensified during the quarter, our wholesale partners, both in the U.S. and Europe, experienced a noticeable step-down in sales trends from the last few quarters, leading to conservative inventory management for the category in anticipation of technology products delivering later this year.”

Challenging environment will continue

“ we expect a challenging retail environment and pressure on the traditional watch category to persist. Given those pressures on the business, we will continue to be mindful of our areas of investment and prudently manage our expense structure in order to direct our resources to the areas of greatest opportunity and pull back where we see less compelling opportunity for immediate impact.”

Stores are very interested in wearables

“There’s so much consumer interest in wearables. It’s very top-of-mind. It brings a younger customer in their store. There’s a bunch of excitement around it. We think that there’s an opportunity to change the entire watch department from a typical watch department to a wearable technology department.”

There’s been an overall step down in traffic and consumer activity

“First of all, I’d say, overall, I think in the first quarter this year, there has been a step-down just in overall traffic and consumer activity. So that’s one thing.”

There’s also a malaise in watches

“In addition to that, I think especially in watches, I mean, we attribute this really to all the press and PR and excitement around wearables. I think there seems to be somewhat of a lack of interest in watches relative to last year…So I think there’s just kind of a malaise in watches.”

We want to put new technology in traditional watches

“Our biggest objective in all this technology stuff is really to disrupt the watch business. We think, as Greg mentioned, to put additional functionality in traditional watches. And as we’ve said before, our mission is to eventually we want to put connectivity in every watch we make without adding a lot of additional to the retail price. “

Gregory A. McKelvey – Executive Vice President, Chief Strategy Officer & Chief Digital Officer

Examples of new features

“So some of the features you’ll see this fall, the time will be automatically updated with time zone changes or daylight savings. You’ll have a feature we call Link, which is the ability to control the Internet of Things around you off of your device. So you’ll have a push button on your watch. You’ll be able to push it and it will ring your phone, so it’s a where’s-my-phone feature. We’re getting very strong initial feedback from our initial customer research on even that as a very valuable feature. In addition, activity tracking, sleep, smart notifications.”

We have to get to scale in these products

“ scale matters a lot in these products. More so than our traditional business that’s highly depreciated asset base that supports it. So we’ve got to make a lot of upfront investments in engineering costs to get product to market. That requires for each major product line over 1 million units to really reach scale, we’re investing heavily on the supply side of our business to get our own captive manufacturing facilities to test, assemble, and bring these products to market. And then we’ve got a large fixed cost base in the engineering resources and the software platform we’ve acquired with Misfit. So on all three of those dimensions, we’ve got to get to scale to get to fully-loaded margins, but a really good margins.

Dennis R. Secor – Executive Vice President, Chief Financial Officer and Treasurer

Sales down 9%

“Overall, first quarter reported net sales decreased 9% to $660 million and on a constant currency basis declined 7%. Sales declined in each of our region which also reflects a relatively strong first quarter performance last year.”

Partners saw meaningful sustained deceleration in wholesale sell throughs

“During the first quarter, the data we received from our wholesale partners indicated a meaningful sustained deceleration in wholesale sell-throughs, not only in the United States, but also with wholesale partners in Europe. Mall traffic remains difficult, and many of our wholesale partners have announced transitions in their own businesses.”

Currency environment has not changed materially

“The currency environment has not changed materially from our initial guidance, so we are still expecting significant translation and margin headwinds as well as far fewer net currency contract gains. We now estimate the net impact of those items is roughly $0.87 per share. “