Fossil Group's (FOSL) CEO Kosta Kartsotis on Q1 2014 Results - Earnings Call Transcript

May.13.14 | About: Fossil, Inc. (FOSL)

Fossil Group, Inc (NASDAQ:FOSL)

Q1 2014 Results Earnings Conference Call

May 13, 2014; 04:30 p.m. ET

Executives

Kosta Kartsotis - Chairman & Chief Executive Officer

Dennis Secor - Chief Financial Officer

Eric Cerny - Investor Relations

Analysts

Simeon Siegel - Nomura Securities

Oliver Chen - Citigroup

Anna Andreeva - Oppenheimer & Co.

Omar Saad - ISI Group

Dorothy Lakner - Topeka Capital Markets

Matt McClintock - Barclays Capital

Rick Patel - Stephens Inc.

Lorraine Hutchinson - Bank of America

John Kernan - Cowen and Company

Erinn Murphy - Piper Jaffray

Ike Boruchow - Sterne Agee

David Wu - Telsey Advisory Group

Liz Dunn - Macquarie Capital

Edward Yruma - KeyBanc Capital Markets

Barbara Wyckoff - CLSA

Operator

Good day ladies and gentlemen. Thank you for standing by. Welcome to the Fossil Group, first quarter fiscal 2014 earnings conference call.

During today’s presentation all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today Tuesday, May 13, 2014.

I would now like to turn the conference over to Eric Cerny, Investor Relations. Please go ahead.

Eric Cerny

Thank you. Good afternoon everyone. Thanks for joining us and welcome to Fossil Group’s first quarter 2014 earnings conference call.

I’d like to remind you that information made available during this conference call contain forward-looking information and actual results could differ materially from those that will be projected 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 our Form 10-K and 10-Q reports filed with the SEC. In addition, the company 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.

Please note that you may listen to a live webcast or replay of this call by visiting www.fossilgroup.com under the Investors section.

Now I would like to turn the call over to the company’s Chairman and CEO, Kosta Kartsotis.

Kosta Kartsotis

Thank you and good afternoon everyone. Joining us today is Dennis Secor, our Chief Financial Officer.

We are pleased to be off to a good start in 2014 with a solid first quarter performance that produced revenue growth at the top end of our expectations. We continue to expand our international footprint as we gained significant market share in both Europe and Asia and as we expanded our business in the Americas, even as mall traffic remain challenging.

Our growth was driven by strong performance in watches, with both Fossil and our multi-brand portfolio delivering solid increases. Our jewelry business accelerated with a strong double-digit increase, which highlights a significant opportunity that branded jewelry represents for the company.

During the quarter we continued to pursue many operational initiatives to drive efficiencies throughout our global infrastructure. We also invested in areas that will enable us to capture future growth and we maintained our commitment to our share repurchase program. With all of that, we feel that we are on track for the year as we delivered earnings that were just ahead of our expectations for the quarter.

We continue to attribute our consistent, positive performance to the many competitive advantages of our diversified business model, including our design and brand building talent, our compelling portfolio of desirable brands and our world-class manufacturing capabilities, as well as our expansive global distribution network. With our experienced management team and the advantages of operating in a high margin category, we are well positioned to deliver sustained growth well into the future.

For the FOSSIL brand, watches delivered the strongest increase, with solid growth rates in all three regions. Our strongest growth came from Asia where we have been investing in brand building and also expanding our distribution. FOSSIL jewelry sales also increased, while leather has delivered results even with last year and continued to lag our expectations.

In jewelry, we continue to drive our performance through an elevated assortment and higher quality materials. In our U.S. stores, our customers are responding well to our jewelry assortment and in our FOSSIL brand and environment. We are planning to narrow our wholesale distribution throughout the year, where delivery and markdown cadences conflict with our brand messaging.

Our leathers performance showed progress in our retail stores, but the category remains highly competitive and promotional in the wholesale channel. This area of the business is still our biggest opportunity for improvement and we are focused on ways to elevate the assortment and the brand presentation within our U.S. department store partners. To that end, we will continue investing in shop-on-shops that allow us to provide a true showcase for the brand.

This year we also plan to increase our investments to enhance FOSSIL brand awareness and further cultivate the emotional connection that customers have with the brand. By expanding our print media campaigns and our digital and social media presence, we expect to drive more traffic into our stores and enjoy a better conversion in unit sales as customers shop across the full breadth of our assortments.

For SKAGEN, we delivered solid double-digit growth in both Asia and Europe, while sales were down in the Americas as we are redefining our distribution to support our overall brand strategy.

During the quarter, our two newly remodeled U.K. stores continued to perform very well, and we believe they are an indication of the potential for the brand. We continue to see strong results in SKAGEN jewelry, particularly in Europe, and are excited about the full launch of leathers later this year and the assortment will fully reflect more of our design team’s new look for the brand.

In our multi-brand watch portfolio, we continue to gain share and posted a solid increase of 17% for the first quarter. Once again our growth was balanced geographically with double digit increases in all three regions, and with the majority of our brands posting gains.

Michael Kors continued to be a strong driver of growth and the brand is gaining significant momentum in many of our international markets. We expect this strength to be ongoing as we continue to expand the brand’s presence in our global network.

During the quarter we launched our Emporio Armani Swiss assortment at the Basel fair to very favorable reviews. We also remain on track to launch Tory Burch in the fall with a unique assortment of Swiss made watches to a targeted global distribution. We remain confident that this brand will be an exciting business for us in the future and we are looking forward to the launch later this year. With our strong brands and operating model, we feel we are in position to continue to gain share in the global watch market.

We also announced during the quarter our partnership with Google, as we pursue opportunities in wearable technology. This partnership allows us to bring our creativity and design and the power of fashion brands to the world of technology, in collaboration with some of the most innovative companies in the space. These are very early days in this exciting partnership and as things evolve, we look forward to sharing our plans with you.

In the first quarter we continued to develop our operating platform and strengthen our business across all regions. Europe posted outstanding results, growing sales by 20%. Our growth here was broad-based as we grew both watches and jewelry and expanded our business in nearly all countries.

We continue to be pleased with the trends we are seeing in our retail stores, where comps have been positive in nearly all of our European markets despite challenging overall traffic. We are also very pleased with our performance in Asia, where our sales increase exceeded 20% and nearly all of our markets posted solid gains. China increased well over 60% for the quarter and India where we just opened our first FOSSIL store increased significantly as well. Our focus is on continuing to develop distribution in Asia and creating awareness for our brands in the very important regions.

Our mission as a company is to continue on our path of building a world-class entity of excellence, where creativity and entrepreneurship are carefully balanced with operational discipline, so we can drive growth and deliver solid returns for our shareholders in the near and long term.

Our entire management team is focused on optimizing our operating structure and driving efficiencies throughout our company. Our goal this year is to drive efficiencies to our base infrastructure, to create fuel to invest in brand building, customer engagement and demand creation, as well as continuing to build structure for our long term initiatives.

In addition to expanding Fossil’s print, social and digital media presence, this year we are investing in CRM to better communicate with and to understand our customer better. We are investing in shop-in-shops and point-of-sale materials to enhance the customer’s experience with our products and brands. We expect a higher advertising spend that will broaden the exposure that customers have to all our brands. In addition, we are continuing to build our infrastructure in China, as well as to build out our SKAGEN team.

As a company, we are focused on using all of our resources to drive shareholder value and we have made excellent progress so far this year. There’s still much of the year in front us, but we are pleased with our first quarter performance. While there remain many challenges, we have the momentum across the entire enterprise to drive results for the rest of the year.

Now, I’ll turn it over to Dennis.

Dennis Secor

Thanks, Kosta and good afternoon everyone. First quarter net sales grew 14% to $777 million, reflecting sales increases across all our reported business segments and included this fiscal year’s extra week, which occurred in January.

We slightly exceeded our earnings expectations with stronger gross margins and a lower tax rate. We drove growth during the quarter with strong performances in Asia and Europe with both regions delivering growth rates in the low 20% range. Our growth was also well distributed among our brands, as our multi-brand watch portfolio grew 17%, with a vast majority posting increases.

The FOSSIL brand grew by 5% globally, primarily driven by a double-digit increase in watches and growth in jewelry, while leathers were roughly flat.

SKAGEN sales were up 2% in the quarter with strong growth in Europe and Asia, while America’s sales declined as we are transitioning business from selective customers to support our overall brand strategy. In North America wholesale, sales increased 7% to $273 million. Our North American wholesale growth was driven by double-digit gains in our multi-brand watch portfolio and jewelry, while sales in leathers declined.

Our U.S. sales grew, while Mexico and Canada both declined. Our U.S. sales growth was driven by increases in boutiques, specialty accounts and off-price partners. Our U.S. department store business was affected both by the underperformance of leather, where we still have work to do on our assortment and a highly promotional environment where we limited our participation and promotions to protect brand integrity.

In Europe wholesale, sales increased 18% to $206 million, which includes $7 million of favorable currency benefits. Our European growth was driven by double-digit gains in our multi-brand watch portfolio, as well as in our jewelry business, with particular strength from our licensed portfolio.

For FOSSIL, watch growth was offset by declines in leather. Our growth continues to be balanced geographically as we posted gains in all markets other than Italy. We posted strong sales increases in established markets such as the U.K., France and the Middle East.

Sales from our Asia wholesale operations increased 19% to $104 million, which includes a $4 million unfavorable currency translation impact. We posted gains in our proprietary brands, as well as our multi-brand watch portfolio.

The growth was across nearly all of our markets, with particular strength in China, India, Japan and Korea. Sales through concessions grew double-digits, primarily driven by door growth. In the quarter, we added a net six concessions overall in Asia and ended with 315.

In our direct-to-consumer business, first quarter sales increased 18% to $195 million. Sales growth was driven by store expansion, as overall comps based on a 14-week calendar declined 2.4%. The comps were also negatively impacted by this year’s later Easter.

Positive comp store sales results in Europe and Asia were offset by a decline in North America, primarily driven by the U.S. stores, where our conversion rates have improved though not sufficiently to offset the impact of mall traffic decline.

Comp store sales in jewelry increased in the quarter, while sales of watches and leathers declined. During the quarter, we closed a net one store, bringing our Company-owned store counts to 542 at quarter end.

In the first quarter gross profit increased 17% to $443 million and gross margin expanded 150 basis points to 57.1% when compared to 55.6%, which was last year’s lowest quarterly gross margin. The improvement was primarily driven by the impact of a greater sales mix of higher margin products, improvements in freight and other costs, prior year acquisitions and a favorable regional distribution mix, given the growth in international markets. These benefits were partially offset by increased promotional activity in outlook stores and reserves associated with leather.

As planned, our operating expenses increased $54 million or 19% to $339 million, including the impact of the extra week. The expense increase was driven by our retail and concession expansion, infrastructure investments to support growth in global initiatives and higher advertising royalties.

The comparison was also negatively impacted by first quarter’s acquisition of credit insurance, which reduced operating expenses in that period. These were also the main drivers of our 190 basis point expense rate increase from 41.7% to 43.6%. Many of our infrastructure investments were made in the latter part of last year and will remain headwinds until we lap them towards the end of this year.

Operating income increased 11% to $105 million for the quarter and the foreign currency translation impact was negligible. Operating margin declined 40 basis points to 13.5%.

Interest expense increased $2 million to $4 million compared to last year and net other income decreased by $10 million compared to last year’s first quarter, which benefited from the non-cash mark-to-market valuation gain related to the acquisition of our Spanish joint venture and net gains on foreign currency contracts and account balances.

Our effective income tax rate for the first quarter was 31.3% compared to 28.1% last year, which was impacted by favorable discrete items that included the settlement of prior year tax audit. So overall first quarter net income decreased 8% to $66 million.

During the first quarter, we invested $117 million to repurchase about 1 million shares of our common stock at an average price of about $117 per share. We ended the quarter with $376 million remaining on our share repurchase authorization.

First quarter earnings per share increased to $1.22 from last year’s $1.21, which included an $0.11 benefit from the Spanish joint venture acquisition. We generated higher operating income this year and operated with a lower share base, which more than offset the impact of a higher tax rate, increased interest expense and non-operating currency-related losses compared to gains last year.

Now turning to our cash flows and balance sheet, for the quarter we generated operating cash flow of $97 million compared to $86 million a year ago. We ended the quarter with $303 million in cash compared to $241 million last year and debt of $542 million compared to $153 million a year ago.

Our inventories increased 16% to $602 million. The year-over-year increase primarily reflects investments we’ve made to ensure availability in some of our best-selling watch brands, as well as higher levels of leather. Accounts receivable increased by 6% to $290 million and wholesale DSOs were roughly flat compared to the prior year.

In the quarter we invested $22 million in CapEx, primarily to support new and remodeled stores, along with system investments. Depreciation and amortization expense totaled $23 million for the quarter.

Moving now to our outlook, after achieving our sales expectations in the first quarter, we feel we are on track for the full year. We continue to expect strong growth coming from our watch and jewelry businesses, with both Europe and Asia continuing to gain share. Our biggest challenges are the retail environment here in the U.S. and jumpstarting our leathers business.

As we said on our last call, we anticipate relatively consistent sales growth for the remaining three quarters now that the extra weak is behind us. For the second quarter we expect sales growth between 8% and 9.5% and continue to expect full year sales growth between 8% and 10%.

With respect to gross margins, given the strong mix of high-margin product, international mix and the impact of last year’s acquisitions, we continue to plan full year gross margin expansion, in fact slightly better than our previous expectation. These tailwinds should be partially offset with traffic driving promotions and our outlook and the impact of clearing leather.

For the second quarter however, we expect gross margins to be roughly flat as favorable mix will likely be offset by outlet promotions which began later last year and the impact of off price sales where last year’s second quarter off price volumes were the lowest of the year.

This year, stronger gross margin will allow us to invest strategically in our business and maintain our operating margin structure. While we expect to operate with a higher expense rate than last year, our goal continues to be to create efficiencies in more developed areas of our business to fund investments and growth opportunities.

We view this year, as a transition from investing in infrastructure to investing in areas that can fuel our future growth. Based on our plans, this year’s expense deleverage will be mainly driven by investments in brand building, customer engagement, marketing and demand creation, including the initiatives that Kosta shared. These are important investments that should benefit us in the long term and we are committing to them now, even though they do consume flexibility in achieving near-term results, considering so much of our annual sales volume was generated in the last several weeks of the year.

To a much lesser extent, the build-out of our China infrastructure and SKAGEN team should also result in some modest deleverage this year. Based on this year’s plans and sales expectation however, our goal is to achieve leverage on the rest of our operating expense structure.

In addition to the initiatives that are affecting the full year rate, we do expect our second quarter expense rate will be significantly higher than last year. This will result from the timing of many investments we made during the latter part of last year, as well as the impact of our display and fixture rollouts, which we are increasing and rolling out earlier this year.

We do expect the expense rate headwinds to abate as we move into the second half of the year with a potential for overall leverage in the fourth quarter, given our current sales expectations. Therefore, we expect operating margin for the second quarter in the range of 10.5% and 11%.

As we noted on our last earnings call, we continue to anticipate earnings to be down in the second quarter and expect diluted earnings per share in the range of $0.90 to $0.97.

Overall, for the full year, we continue to expect operating margins in the range between 16.5% and 17%, with improvements in gross margin offset by the higher expense rate. We are now planning 2014 with a tax rate of around 31.5%.

We are planning assuming that currencies remain at roughly prevailing rates, which would result in higher non-operating expenses than we assumed in our previous guidance. We continue to expect earnings to grow and accelerate as we move to the second half of the year, and we reiterate our expectations for full year diluted earnings per share in the range between $6.90 and $7.30.

Finally, we continue to plan annual capital expenditures in the range between $110 million and $120 million, and anticipate annual depreciation and amortization expense will be about $98 million.

So now, I’ll turn the call over to the operator for your questions.

Question-and-Answer Session

Operator

Thank you, sir (Operator Instructions). Our first question comes from the line of Simeon Siegel with Nomura Securities. Please go ahead.

Simeon Siegel - Nomura Securities

Thanks. Good afternoon guys. Can you quantify the comps by geography and maybe talk about your store expansion strategy? How many stores and concessions are you planning this year and what format? And then just Dennis, did you quantify the impact of that extra week this quarter? Thanks.

Dennis Secor

Yes, overall the comps were as we’ve said down on a global basis from the direct business. Down in the Americas, although they were positive both in Europe and the comps were also positive in Asia as well. So the last part of the question, we didn’t actually quantify the impact of the extra week. We did say on the last call, if you remember that, the extra week is in January, which is one of our slowest months. So if you straight line it, in the first quarter you probably will be overstating the impact of that extra week.

Simeon Siegel - Nomura Securities

Okay, great. And then anything on just the store expansion for the year, strategy?

Dennis Secor

Our plan this year is to open. We are continuing to focus on outlooks in international stores, that’s where the bulk of our expansion will be. If you look at the last three years, the full price accessory stores have been roughly flat. We have been sort of replacing as we’ve closed, but our strategy continues to be, as we open stores to be focused on outlook and international growth.

Simeon Siegel - Nomura Securities

Great, thanks. Good luck guys.

Dennis Secor

Thanks.

Operator

Thank you. Our next question comes from the line of Oliver Chen with Citi Research. Please go ahead.

Oliver Chen - Citigroup

Hi, congrats on a solid quarter.

Dennis Secor

Thanks Oliver.

Oliver Chen - Citigroup

Regarding maintaining your full year guidance you did exceed your guidance for Q1. So where is the incrementality in maintaining the full year, and also just as a follow-up, could you walk us through the typical license renegotiation process and kind of the catalyst we should think of about as you undergo when your looking at like two quarters. Thank you.

Dennis Secor

Yes, let me start with the first. Just relative to the year, I mean we did slightly beat our expectations for the year. The margins were a little bit stronger than we had planned going in. We are planning to reinvest some of that, in some of the initiatives that Kosta mentioned on building awareness into the FOSSIL brand.

But I think if you step back, the way we are looking at this. We’re not trying to put too fine a point on it, but the way we look at the year, the first quarter is relatively small quarter. We have a lot of time in front of us. The large portion of our revenues come towards the end of the year, but we are thinking about the year in roughly the same terms that we were thinking about the year two months ago, when we first talked to you.

Oliver Chen - Citigroup

Okay, thank you.

Operator

Thank you. Our next question comes from the like of Anna Andreeva with Oppenheimer. Please go ahead.

Anna Andreeva - Oppenheimer & Co.

Great. Thanks so much guys for taking my question. I was hoping to just get more color on what drove the decline in watches at your own stores, was that North America, was it across regions? And I guess did comps and watch performance improve here in the second quarter with later Easter?

And then maybe talk about some of the buckets of SG&A spend as you’re obviously reinvesting in the business. Maybe quantify the advertising spend this year and I guess, should we start getting some SG&A leverage in ‘15? Thanks so much.

Dennis Secor

So trying to remember those. The watch comps were down overall. I think probably the easiest way to think about that is that’s coming from our retail stores where traffic has been down. So when traffic has been down in the double-digits then you would not be surprised to see the watch comp down. We have been particularly in the U.S., we’ve been able to convert better, but not sufficiently to offset the impact of the lower traffic.

Anna Andreeva - Oppenheimer & Co.

And just on SG&A, maybe some of the buckets of decent. Thanks.

Dennis Secor

Well again, the way we’re looking at SG&A this year is that based on our plans, we think we will be able to achieve leverage on the overall operating structure. If you go back and think about the way expenses were timed last year, there was investments that were made in the back half of last year.

Things like we outgrew our structure in Asian and opened a new office building. We’ve been adding to the teams here, building out the brand teams, building out the regional teams, a lot of that was in the back half of the year. We need to fully lap that this year, which is going to create some headwind until we get to the back half of the year.

But overall our goal this year, sales behave and come in as we are planning them, that we should be able to achieve some leverage on that overall sort of base structure. Where we are then redeploying that is in a lot of the areas that we talked of just a few seconds ago.

We’re building our brands, we are investing in brand awareness, print media campaigns specifically for FOSSIL, expanding our digital and social media, CRM, Customer Relationship Management, that’s an important initiative for us longer term to get us better understanding and awareness of the customer and ultimately get us better analytics and allow us to communicate much more directly and use that as a vehicle to drive traffic. We expect advertising spending will be higher this year and that should create awareness for all of our brands.

The other thing to last year, we pushed some of the display and fixturing initiatives later in the year. We are actually going to invest more in displays and do it earlier this year. That’s among the things that’s putting some pressure on the second quarter specifically as that, a lot of that change is landing in the second quarter.

Kosta mentioned on the call too, we are building out our SKAGEN team. China is still an initiative. Both of those latter two will be less impactful for the year than the other. So again, the way we view this is that this can be that year where we reached that inflection point from investing in structure, investing in growth.

Anna Andreeva - Oppenheimer & Co.

Terrific thanks.

Dennis Secor

Thank you.

Operator

Thank you (Operator Instructions) Our next question comes from Omar Saad with ISI Group. Please go ahead.

Omar Saad - ISI Group

Thank you. It’s interesting to hear a lot of your comments and conversations around this accelerated investment theme. It’s not that the company’s been under-investing in the past so to say, but can you talk about the timing, the catalyst, the philosophy around reinvesting in the business?

Why the accelerated commentary around it now? Are you seeing returns in some of the existing shop-in-shops that you’ve rolled out and fixturing that you’ve rolled out, that gives you greater confidence to make those investments now, also around the marketing too. Thanks.

Kosta Kartsotis

There is a couple of things in it and as you know, we have over the last year or so added an enhanced marketing team to the company that are very proficient at consumer insight segmentation, research, social media, digital media, advertising and the measurement of all those things.

The whole idea is to put that functionality in place and do testing on different ideas of ways to create more demand. We basically have been more of a pull organization, great point of sale, customer experience, great flow of inventory. We think that we have the opportunity to turbo-charge the sales a bit by adding some demand creation. And if you specifically look at FOSSIL and you look at the platform, it’s got globally, with a lot of points of sales, our own stores are in a great position.

Our research says that we have a lot of fans for FOSSIL; customers love the brand. They love all the categories. They want us to be more aspirational and tell a clearer story. Some of our research says that, we have the opportunity to raise some prices in some situations, so everything tells us it’s a go. So we wouldn’t want an a inflection point in the company.

We, over the past few years, have been investing in infrastructure for future growth, and I think we’re going to convert more to investing in demand creation for maybe a faster growth track. So, we think we’re in a great place and we’re going to be spending some time and energy in resources doing that this year and more to come as we move on.

The whole idea behind it is that, we think it can be very beneficial and also very measurable, which gives us the opportunity to tell a different story over the next couple of years.

Omar Saad - ISI Group

Thank you Kosta

Operator

Thank you. Our next question comes from the line of Dorothy Lakner with Topeka Capital Markets. Please go ahead.

Dorothy Lakner - Topeka Capital Markets

Thanks and good afternoon everyone. I wondered if you could just talk a little bit about the leather category and what you think you need to do to really get that going. Obviously the environment in department stores has been highly promotional. So, what do you do from here in terms of both the product and then just to get around that highly promotional nature of the department store business? Thanks.

Kosta Kartsotis

Yes, well it’s obviously a very promotional and competitive environment, and we are actually showing some strong results. We have in our first quarter and in our own stores we had a positive comp in our leather goods, and if you look at the product in our stores and you see it online, you see it’s an improved product.

We also have over the last six months to a year have an enhanced design team. We’ve got some new design resources in there and it’s starting to really look better, and I think you’ll see that over the next couple of seasons.

I think we’re in the right place, especially if you consider where the brand is positioning relative to the environment, and our ability to do more brand-building, etcetera, create more demand, I think that’s going to be helpful.

We also are going to be investing, as we mentioned, in shop-in-shops in department stores to create a better customer experience, a better environment. We also will support those with sales staff, etcetera that try to turbo-charge those sales, but we think we’re in the right place for ongoing growth and let’s see how it plays out.

Dorothy Lakner - Topeka Capital Markets

Great. Thanks and good luck

Kosta Kartsotis

Thank you.

Operator

Thank you. Our next question comes from the line of Matt McClintock with Barclays. Please go ahead.

Matt McClintock - Barclays Capital

Hi yes, good afternoon and thanks for taking my question. Kosta, I was wondering if we could talk a little bit more about the merchandise and innovation in watches that you are putting out today.

If I recall correctly from the Analyst Day, you were talking about getting behind certain stories more meaningfully. I was just wondering if any of those stories today are resonating in a particularly meaningful manner that we should maybe pay attention to or keep our eye out for. Thank you.

Kosta Kartsotis

Yes, I think that’s the modus operandi in which we operate in. Each brand has maybe different ideas or different stories they are telling. We actually are telling them I think with more clarity. As you know we have a lot fewer skews than we did two years ago in watches, so our ability to tell story is clear. I think its one of the things that’s helped our growth and helped us gain share and we’ll continue to do that.

But some of the ideas the different brand teams are generating, some it comes from the brands themselves and the initiatives. They even place the stories they want to tell. Some of it comes from our own R&D group, whether it’s new materials or new ideas. And in some cases there are commonalities across brands or certain things that resonate with every brand customer, and there are some things that are somewhat more attributed to certain brands. But the idea of being able to tell some story with the brand ID at the point-of-sale is really what’s driving sales.

Operator

Thank you. Our next question comes from the line of Rick Patel with Stephens Inc. Please go ahead.

Rick Patel - Stephens Inc.

Good afternoon everyone. Thanks for taking the question. Just a question on jewelry, you mentioned narrowing the wholesale distribution given some promotional concerns. Can you just elaborate on that, perhaps talk about any potential impact that it will have on sales and margins as we think about the rest of the year.

Kosta Kartsotis

As we’ve talked about with the jewelry over the last several years. Jewelry in the United States market is quite different than the categories in Europe. For example, in Europe, we typically sell a higher level of quality and price point and that’s done at regular price in a more branded jewelry environment.

In the United States, the jewelry departments have typically in the past been very promotional, very much lower-end, more costume jewelry in effect and because of that we are actually pulling FOSSIL jewelry out of the U.S. department stores and it will be only in our own stores in its distribution. It really is too messy of a market for us right now to really participate. So we’re hopeful that over time that our higher level of quality and the regular price jewelry business would resonate in United States.

We’re actually very encouraged by our initiatives with Kors in the United States, Kors Jewelry, which is of that higher level and is resonating with customers and showing strong growth at regular price in the United States. So over time, this whole paradigm of how the department stores do their jewelry business may change and FOSSIL might be entry at that point.

Dennis Secor

We have contemplated that in the current year guidance.

Rick Patel - Stephens Inc.

And just to clarify that, do you mean pulling back on the FOSSIL brand or Kors or both?

Kosta Kartsotis

No, FOSSIL brand. Kors is actually selling extremely well and we are expanding that and building more shop-in-shops in the United States.

Rick Patel - Stephens Inc.

Thank you.

Operator

Thank you. Our next question comes from the line of Lorraine Hutchinson with Bank of America. Please go ahead.

Lorraine Hutchinson - Bank of America

Thank you. Good afternoon. I just wanted to follow up on the smart-watch opportunity. Can you provide us with some idea of expected timing and then also, any discussions that you’ve had with your brands about how they plan to roll out smart-watches if they do?

Kosta Kartsotis

Well, it’s in very early stages. So we’re just in the middle of discussions with many different companies and with Google as a facilitator to develop ideas for products. So, it’s really too early to say.

Except the one thing I would say is that we definitely will have some products. I mean there’s a lot of great ideas and brainpower working on this. There’s certainly a lot of interest on the consumer’s part. So we definitely will have some stuff.

It’s too early to tell and we’ll keep you posted on that. In fact, your question about brands, I think all of the brands that we are associated with are interested in some point, because there is a lot of opportunities I think to tell different stories for different brands.

So we’re keeping them posted on our progress and some brands may be interested in some type of product and some others, but it gives us an opportunity across our portfolio of brands to maybe have different technology products for different brands.

Lorraine Hutchinson - Bank of America

Great. Thank you

Operator

Thank you. Our next question comes from the line of John Kernan with Cowen and Company. Please go ahead.

John Kernan - Cowen and Company

Hey, good afternoon guys. Thanks for taking my questions. Just, can you comment on how you see the health of the fashion watch category in general in the U.S. wholesale channel? You’ve been pushing and it seems like more product into the off-price channel and how are your wholesale partners in the department stores feeling about allocating more space to watches in general?

Kosta Kartsotis

Well, the category over the last five years is many times the size they was, so there’s been a huge amount of growth in that and obviously the growth rate has slowed down. It’s still a very important category, high-margin category and in terms of adding additional space, what we see stores that are remodeled etcetera, we see the watch department get bigger and we think that’s prudent, so we think it’s still a very strong category.

Having said that, our plans are, we are not really expecting to get big increases out of the U.S. market. Our plans are to grow double-digit over many, many years and that’s mostly double-digits in Asia, maybe singles in Europe and the U.S., so we’re not really expecting the business to be phenomenal in the U.S.

One thing I would reiterate is we do have research from Euromonitors. Since the last five years the watch business has grown 5.1%, they expect the next five years to grow at 5.6%. So our business model is just blocking and tackling, gaining space, gaining market share while we are building out a much larger opportunity for Asia.

John Kernan - Cowen and Company

And just Dennis, obviously, you were very active in the share buyback in the first quarter. Can you comment on what share count you expect to finish the year at? Thanks.

Dennis Secor

We didn’t specifically give a number. What we have said last year, we invested pretty heavily in the share repurchase program. At the same time we did add a bit of debt to the balance sheet. We did say on our last call and it remains true that we expect to be continuing to invest in the share repurchase program this year, but not to the same level that we invested in last year.

John Kernan - Cowen and Company

Okay, thanks. Good luck.

Dennis Secor

Thank you.

Operator

Thank you. Our next question comes from the line of Erinn Murphy with Piper Jaffray. Please go ahead.

Erinn Murphy - Piper Jaffray

Great, thank you for taking my question. Just following up on the strength of the watch category, we’d just love to hear just in the context of Baselworld just a few months ago, what your teams have learned? What are you seeing in terms of fashion trends out there that are top of line going forward?

And then Dennis just for you a follow-up on Oliver Chen’s question, I’m not sure if you answer it just in terms of the how you typically approach some of the license renegotiations. I know there is a lot of interest in the Michael Kors license as that comes up for renewal in 2015. We just love any context of how the 2010 negotiation went and what we could be looking for going forward? Thank you.

Kosta Kartsotis

Lot of the new things at Basel were more interesting and obviously you could expect Swiss watches. We had a lot of interest in Emporio Armani Swiss. It was probably I would say the most well received brand that was launched there and got a lot of excitement with flowing product in the market right now, so a lot of momentum behind that brand.

In addition to that, the Tory Burch launch which we did in Basel, which was a very limited distribution. Mostly their stores and a few targeted other stores globally created a lot of excitement, because of the specialness of the brand and the product we did and the price points are starting at 350 going to 1,000 for Swiss made brands. Its kind of an opportunity to create a new Swiss business based around the brand that’s very strong and growing across the world. So I would say those two things were very big in the Basel market.

The other thing you see is just increasing numbers of automatics and complications and we are continuing with our investments in Switzerland, making our own automatic movements and being able to facilitate our wherewithal to develop the Swiss business, put automatic movements in the marketplace and distribute them around the world. Obviously a lot of that’s going to go to Asia, but there’s increasing interest in automatics and Swiss made in the U.S. and in Europe.

As far as the discussions about the renewal of the contract, we still have a year and a half. We have a great relationship with the Michael Kors company. The business is very, very strong right now. We are really focused on putting strategies and resources in place in order to develop the business all over the world.

There is a lot more opportunity in terms of not only around the world, but in the U.S. We are developing the men’s business. Our consumer insight shows us that the customer is willing to pay even more for men’s watches, so there is the opportunity to put automatics in there as well as the Swiss made at some point.

Our jewelry business is going very strong and we are building shop-in-shops and more distinctive distribution around the world, so the brand is clearly going to continue to growth. So all in all I think we have a great relationship with them across the entire company, theirs and ours and we expect to continue to do business with them.

Erinn Murphy - Piper Jaffray

Great. Thank you guys.

Operator

Thank you. Our next question comes from the line of Ike Boruchow with Sterne Agee. Please go ahead.

Ike Boruchow - Sterne Agee

Hi guys, thanks for taking my question. Sorry if I missed this Dennis, did you comment for the quarter what the concession comp was for Q1 and also the impact of sales with the extra week that you got?

Dennis Secor

We didn’t mention either the concession comp. Overall it was positive, we didn’t specifically quantify it and we didn’t specifically quantify the extra week, but we did say the way to think about it is, that actually takes place in January, which is a relatively slow month for us. So if you try to straight-line it off of the fourth quarter, you probably will overstate it.

Ike Boruchow - Sterne Agee

Okay great, and then this is a follow-up. I know you are not to disclose the specific numbers, but can you talk to us about in the U.S. department stores, the kind of wholesale margin, maybe that you are seeing right now versus what’s embedded in your guidance for the remainder of the year. We’ve noticed some additional friends and family and discounts like that. I’m just curious if you’re sharing the cost with the department stores, who’s paying for it, just any color you could give there would be helpful.

Dennis Secor

Yes, I think the best way to look at it is, we don’t participate in those promotions. So that activity shouldn’t have an impact on our overall margin structure. I mean, the drivers of our margin this year, we are expecting tailwinds coming from mix and regional mix, product mix, a little bit of currency, some offsetting cost.

The changes, if you want to think about margins as you go through the year, we lapped the reengagement of our price towards the beginning of the third quarter. If you remember last year, we reengaged so that we would make more room for our Made For product in the outlet, so we’ve got time before we lap that.

We also increased promotional activity to drive traffic in our outlets towards the back part of the third quarter, so we have that in front of us. So once we clear that, then you get the full benefit of those tailwinds.

Ike Boruchow - Sterne Agee

Great. Thanks so much.

Dennis Secor

Sure.

Operator

Thank you. Our next question comes from the like of David Wu with Telsey Advisory Group. Please go ahead.

David Wu - Telsey Advisory Group

Thanks. Hi, good afternoon everyone. The China sales obviously, very strong this quarter. Can you just perhaps give us an update on the overall China business and really how the middle class is responding to the non-Swiss fashion watches versus the Swiss made and how much of the growth that you are seeing is coming from new distribution versus same door growth and how should we think about the cadence of distribution gains going forward, especially as you establish more local distribution partners in the region?

Kosta Kartsotis

Well our business in China, I would say is obviously growing very fast, but really too small that we’d be impacted too much negatively by negative influences of GDP growth or feelings about watches in general. So, we’re really in the early days still, just building distribution.

We have a big initiative in place really to increase the productivity of existing concessions, as well as building out new ones, but we are continuing to believe and its showing up in the numbers that this whole idea of lifestyle branded watches in China is going to be a big opportunity. Its too compelling, the brands are all investing over there, a lot of them are already well known, there is a number of boutiques being built by our partners. We are building additional infrastructure and distribution capabilities to really capture the market in a bigger way. So all things look really positive thus as far as China goes.

Operator

Thank you. Our next question comes from the line of Liz Dunn with Macquarie. Please go ahead.

Liz Dunn - Macquarie Capital

Hi, good afternoon. My question was on just discussion of narrowing the wholesale distribution. I heard you on jewelry. Did I understand you correctly that that’s also happening for the leather’s business and maybe a little bit of a repositioning for SKAGEN in the U.S.? How much of this is your own strategy versus the department stores, maybe taking a stand on some of this product? And do we have an ability over time to kind of reposition these businesses to see door expansion in the future, or are they sort of permanently reducing the wholesale door expansion? Thanks.

Kosta Kartsotis

Well, SKAGEN is an example. If there’s a customer that we’ve been selling to, that we are over time going to discontinue, so it’s going to be a change in the strategy. We actually are getting especially fall additional distribution for SKAGEN in the United States in department stores, etcetera. That’s really why we’re dropping some distribution. We don’t want it and we’re gaining something that we do want.

And especially when you consider additional categories we have in leather goods, both men’s and women’s, we’re going to gain a lot more distribution for SKAGEN. So we’re going to be in leather goods departments, men’s and women’s and department stores in United States in addition to just the watch department, and of course, jewelries in some stores as well.

The jewelry thing that we described that FOSSIL is really, we think it could be something that there’s an opportunity for us to get back in at some point. We are not really targeting any specific date.

The other thing I would say is in Europe we have also been really looking closely at our distribution there and closing smaller and less productive doors, and I think that the ongoing benefit we are getting from that is just increased sales in the top doors, which obviously we went in and in the end it just ends up being more sales force.

So our distribution is changing pretty much all the time, we’re moving things around, but generally, in the right direction and it looks like it’s probably going to be a big plus we’ve got.

Operator

Thank you. Our next question comes from the line of Edward Yruma with KeyBanc Capital Markets. Please go ahead.

Edward Yruma - KeyBanc Capital Markets

Hi, thanks so much for taking my questions. I guess two quick ones; I guess first on this shift from infrastructure spend to demand creation, is it your intention that this is kind of a more permanent step-up in demand creation and marketing expenses? And then two, on the leathers business, do you think that this is a product issue that’s driving the weakness or do you think again, this is our brand perception or marketing issue? Thank you.

Kosta Kartsotis

On the infrastructure issue, what we are trying to do basically is benchmark other companies of our size and look really closely at our global amortization and understand exactly what the SG&A should be and really be as efficient as we possibly can.

As you know we’ve had a number of technology initiatives in the last several years to make the company more efficient. So as we scale, we can hold the investments down. It would enable us to fuel more growth by spending additional funds on that. In our mind it is permanent. We think it can get us to a better place. As I mentioned before, we are going to have measurability in it to make sure that we’re getting the results that we expect, but in our mind it can be a pretty big issue for us to enable the speed up the growth.

In terms of leathers, I would say, it’s two things, one is we had product misses. We over the last couple of years had been on a cycle where we were growing very quickly with a certain type of outlook and the look changed and we’ve somewhat struggled over the last year to really get back on track.

In addition to that, it’s a very, very difficult environment, especially United States. It’s very encouraging to us to see in the U.S. and all our stores globally to see comp increases in the first quarter, because we think the product looks better and the customer is obviously budding that way.

So we think we’ve got some ideas there that we can build on, but we’ll keep going. It still remains to be one of the biggest opportunities in the company. Our leather goods business has a huge runway ahead of us, and we just got to get our product and our ideas on track and we think we have a big opportunity.

Edward Yruma - KeyBanc Capital Markets

Great. Thanks so much.

Operator

Thank you. And our last question comes from the line of Barbara Wyckoff with CLSA. Please go ahead.

Barbara Wyckoff - CLSA

Hi. Could you talk about how many Emporio Armani dedicated points-of-sale you had at the end of first quarter versus last year? And then looking back, if you’d do over the quarter, are there things you might have done differently?

Kosta Kartsotis

Are you talking about Emporio Swiss? Are you talking about Emporio Armani?

Barbara Wyckoff - CLSA

I’m sorry. Points-of-sale for Emporio Armani?

Kosta Kartsotis

Yes, we don’t have the numbers in front of us.

Dennis Secor

We can follow-up with you on that, Barbara.

Barbara Wyckoff - CLSA

Okay, thanks. And then, if you could do over the quarter?

Dennis Secor

I guess, we would probably point you back to the areas, leathers we talked a lot about, but in terms of areas of the business where we see the greatest opportunity for improvement as Kosta just mentioned, leather is clearly there.

Barbara Wyckoff - CLSA

Okay, thank you.

Kosta Kartsotis

Sure.

Operator

Thank you. I’d like to turn the conference back over to Mr. Secor for any closing remarks. Please go ahead.

Dennis Secor

So thanks everybody for joining us today and for your interest in the Fossil Group and we are looking forward to speaking with you when we hold our next quarterly conference call, which should be on the should be on August 12. Thank you very much.

Operator

Thank you. Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation. You may now disconnect.

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