Fossil 4Q16 Earnings Call Notes

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Kosta N. Kartsotis

We were advantaged now we’re disadvantaged

“To step back for a second, as you know, the global watch market has experienced significant disruption over the last couple of years. Prior to that, we were clearly positioned as the competitively advantaged leader in a growing category. However, with the introduction of technology into wrist devices, traditional watches came under pressure and we were disadvantaged. We didn’t have the technology capabilities to compete with smartwatches, leading to a decline in our addressable market.”

Kors exceeded expectations

“What we learned is, first of all, Kors by far exceeded expectations at full-price. We weren’t even testing prices on Kors, because we were chasing inventory and are still chasing inventory to a certain extent right now. So complete blowout at that price and what we perceived is a huge amount of demand out there, very significant for overall smartwatches, as well as hybrids.”

Traditional watches continue to be soft

“On traditional watches in the fourth quarter, the traditional watches continue to be soft. But what we said earlier, on the brands that have wearables, so mostly Fossil and Kors, we were able to offset most of the decline with wearable sales. So that’s where we are on that.”

Dennis Secor

Operating margins have declined by 11 points

“To begin, I want to first review the recent changes in our model. Between 2014 and 2016, currency has eroded our sales by $250 million and our operating income by $150 million. In that same period, operating margins have declined by roughly 11 points, from 16% in 2014 to 2016’s 5%, which excludes restructuring charges. Roughly four of those points reflect the negative impact of currency.”

Sold 1.5m wearables in 2016

“For 2016, we sold more than 1.5 million wearables devices and generated sales of almost $170 million. The majority of those sales were fourth quarter smartwatch sales for Fossil and Michael Kors. We did roll out more brands in a more limited way late last year for a total of eight brands, and we’re excited to build on the momentum for 2017.”

Gregory A. McKelvey – Fossil Group, Inc.

We think we understand pricing sweet spots

And I’ll just add, now that we understand sweet spot price points that drive real volume, we then translate that onto the supply side of our business. So we’ve got technology costs in components and manufacturing that were negotiated and really reflect the low volume we had prior to Q4 last year. We’ve also completed an extensive benchmarking study. So we understand where those costs will go as we get scale and are able to drive to increasing levels of automation with all our major component suppliers, and just also just generate the benefits of scale.