Eric Cerny - Investor Relations Kosta Kartsotis - Chairman and Chief Executive Officer Dennis Secor - Chief Financial Officer.

Omar Saad - Evercore ISI Erinn Murphy - Piper Jaffray Oliver Chen - Cowen & Company Laurent Vasilescu - Macquarie Simeon Siegel - Nomura Securities Dana Telsey - Telsey Advisory Group Rick Patel - Stephens Incorporated Ed Yruma - KeyBanc Capital Markets Anna Andreeva - Oppenheimer.

Good day and welcome to the Fossil Group Second Quarter 2015 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Eric Cerny. Please go ahead, sir..

Thank you. Good afternoon, everyone. Thank you for joining us and welcome to Fossil Group’s second quarter 2015 earnings conference call.

I would like to remind you that information made available during this conference call contains 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 regularly 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 a replay of this call by visiting fossilgroup.com under the Investors section.

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

Thank you and good afternoon everyone. I will begin with a few prepared remarks before turning the call over to Dennis Secor, our Chief Financial Officer and then we will open the call to answer any questions. For the second quarter, we delivered sales growth across all regions and earnings per share growth ahead of our expectations.

From a top line perspective, our Fossil and Skagen brands drove the increase and we also benefited from our recent addition of newer brands. Across all of our brands and categories, leathers and jewelry increased compared to last year, while watches were flat. Overall, there is a lot happening in our market right now.

On the one hand, we are encouraged with the early reads on our owned brand investments and expect to see continued improvements as we move in even more in the second half of the year. We continue to leverage our strategic advantages to partner with the best fashion brands and companies in the world.

On the other hand, we are adjusting to changing consumer shopping patterns and preferences as well as the natural progression of brands in their lifecycles. We also see technology emerging as the latest trend in fashion, with the growing interest in wearable technology inspiring new entrants into the watch space.

We believe our key competitive advantages in design, sourcing, distribution, as well as the great brands in our portfolio, have us well positioned to capitalize on the evolving landscape.

Our anticipated launch of connected accessories later this year has the potential to energize the accessories category, given the innovation we are bringing to market and the strong consumer interest in the category.

We operate a resilient and diversified model that benefits from scale, diversification and financial strength and positions us well to win in the long-term. The second quarter proved to be an example of this.

Despite difficult economic conditions in some of our key markets as well as strong currency headwinds, we generated solid results and earnings per share that exceeded our expectations, aided by ongoing efforts to leverage our base infrastructure as well as our share repurchase activity.

Turning to our key highlights for the quarter, we grew across all of our major geographies, the Americas, Europe and Asia. We grew our own brands, with both Fossil and Skagen delivering solid growth led by watches. We delivered positive comps in our retail stores.

And we continued to invest in initiatives that we believe can fuel our future growth while using our strong financial position to repurchase over $100 million of our stock for the benefit of our shareholders. For Fossil, the brand grew 6% in constant currency, with increases in all of our regions and solid growth in both watches and leathers.

Across geographies, Fossil saw the strongest gains in Asia followed by the Americas and Europe. Globally, our retail stores continued to deliver positive comps led by the Americas region and the brand saw very strong growth in the e-commerce channel. Overall, it was a solid quarter for the brand.

We expect to build upon our momentum as we further invest to drive brand awareness and sharpen our analytic capabilities to measure returns on these investments to ensure we are directing our resources to areas that generate strong returns.

In our retail channel, comp store sales increased 2%, with positive comps in our core category, watches as well as leathers, where recent investments in the category including our design capabilities are driving positive changes in the assortment. For Skagen, the progress we continue to make with the brand is very encouraging.

Constant currency sales increased over 20% with solid double-digit increases in all regions. Watches led the performance and we are also seeing positive responses to both leathers and jewelry. We continue to see great potential with Skagen through expanded global distribution fueled by excitement around its unique positioning and design.

As we continue our journey to become world-class on our digital capabilities, we made progress in advancing our CRM initiatives, our omni-channel capabilities and our digital experiences for our customers, all things that position us to engage customers in this very disruptive environment.

We look forward to re-launching the Fossil brand website with improved mobile functionality later this quarter. We are excited to launch the upgraded site ahead of holiday, which will provide an enhanced customer experience and introduce rich brand content, positioning us to drive sales and further build interest in the Fossil brand.

This quarter, we also made significant progress in developing connected accessories. This is a category we are increasingly excited about given the significant consumer interest in the space. We remain on track to launch our first product under the Fossil brand in the fall.

We are finalizing our plans for distribution, which will include our FOSSIL stores in select wholesale distribution and are very pleased with the functionality and the design of the product.

While these are only the first generation of products, we are excited to enter the space and learn from the initial assortment, we will incorporate our learnings in the next generation of products as well as introduce new products under additional brands in 2016.

We continue to leverage our partnership with technology leaders as we look to scale technology across our platform of products and brands. We believe this will add heat to our categories and drive increases in awareness and sales.

Turning to our multi-brand watch portfolio, as you know, our objective is to leverage what we do best, exercise our strategic advantages in design, production and distribution to gain share in the global watch market and extend our leadership position.

While we believe that we have the most desirable fashion brands in our portfolio, we know that all brands evolve through lifecycles over time and we are experiencing that with our own brand strengthening while other brands in the portfolio are not growing as fast.

During the second quarter, our multi-brand watch portfolio was flat to last year, a disappointing performance for the quarter as growth in the Americas was offset by slight declines in Europe and Asia compared to last year.

In our international markets, we believe Europe and Asia represent a significant opportunity to gain share, particularly given that we are under-penetrated in many markets around the world. Specific to the second quarter, however, we feel our growth was impacted by unique market-specific conditions that we believe will move in our favor over time.

In Europe, while our business did grow in constant dollars, we saw some softness in parts of our business. This was especially true of the UK, where performance was also impacted by accelerated Q2 shipments last year as we transitioned a warehouse there.

Our business in Germany was not as strong as we expected, while we did see some strong double-digit growth in France. In Asia, our business grew, but did not meet our expectations. The MERS outbreak in South Korea and economic downturns affecting Hong Kong and Macau are putting pressure on our near-term results.

China continues to be tough with economic, political and distribution challenges there making it difficult to drive near-term growth. On a positive note, markets like Japan, Australia and India continue to grow, with India posting strong double-digit growth in the quarter.

We don’t believe the quarter’s performance is indicative of the true potential of the international business and continue to believe the market share opportunity available to us in the regions is very meaningful.

We believe we are poised to succeed in our international markets as the same market dynamics that help drive our significant share gains in the United States to play out across the globe. We continue to have opportunities to drive brands to our just existing distribution in Europe as well as expand in new markets there.

And in Asia, where we feel market demographics were still in our favor, we are well positioned to take advantage of fashion brands emerging to take share from traditional watch brands. As we entered the year, we identified several disruptive factors that were going to make 2015 challenging.

We expected visibility would be difficult with new entrants moving into our market. While we feel this will energize the category in the long-term as we add technology to our products, the near-term implications seem to be playing out.

Also, the natural ebbs and flows of brands in their lifecycles can create volatility in sales patterns as consumer preferences evolve around the globe and currencies have put a significant strain on our near-term results. With that in mind, we remain focused on pursuing the investments that we believe are most critical to our long-term success.

As a company with significant competitive advantages, we are moving quickly with changes in our business. We are ramping up innovation across the board in design, technology and marketing.

We believe our competitive positioning and strong balance sheet are even more advantageous in a challenging economic and currency environment as we have the financial flexibility to invest in innovation and our growth initiatives to increase our global watch and accessories market share.

We remain intently focused on executing to the key objectives that we believe position us to accelerate sales growth and we have already seen traction from the initiatives we are embarking on to drive toward our objectives. First, we are investing in our own brands, Fossil and Skagen, which have already delivered solid first half growth.

We are making additional investments in the second half and we expect to see even stronger results later this year. Second, we are well on our way to enhancing our digital capabilities including omni-channel retailing and e-commerce.

We have taken big strides in developing a robust platform and have already seen a sharp uptick in online sales for the first half. And finally, connected accessories, we are leveraging the significant partnerships that we have built and are on track with products that will hit our stores in the fall.

We think this will be an important driver in the years ahead. At the same time, we continue to see significant potential to expand our watch portfolio sales, with longstanding brands as well as the benefit of new brands including Tory Burch, Kate Spade New York and Chaps in 2016.

We expect continued expansion in the other categories we offer such as in leathers and jewelry and soon to be connected accessories. We also still have significant growth ahead of us internationally, with Asia representing our biggest opportunity by far.

While we recognize that pockets of our business are challenging and may remain so in the short-term, overall we remain excited about the many strategic initiatives we are implementing through the remainder of the year and our potential to ignite future growth.

The world is changing quickly and so are we, positioning the company for long-term sustainable growth in an evolving environment. Now I would like to turn the call over to Dennis for more comments..

Thanks, Kosta and good afternoon everyone. Second quarter net sales increased 2% in constant dollars and on a reported basis declined 4% to $740 million. While we delivered constant dollar increases across all regions, sales came in below our expectations as both Europe and Asia grew at a lower rate than we anticipated.

For the quarter, we delivered earnings per share of $1.12 compared to $0.98 last year. This quarter’s EPS benefited by roughly $0.09 of non-operating gains, $0.04 from a lower tax rate related to second quarter audits and a net $0.05 related to financing activities.

Compared to EPS in the second quarter of fiscal 2014, this quarter’s results, was negatively impacted by roughly $0.30 due to currency and another $0.10 due to our restructuring charges. Constant currency sales growth and a lower share count combined with non-operating gains to drive the year-over-year comparison.

Overall, operating expenses decreased compared to last year, primarily driven by changes in foreign currencies. In constant dollars and excluding restructuring costs, expenses were flat to last year despite the impact of new store additions from last year that we had yet to anniversary.

Before I get into second quarter details, let me share some insight on our first half performance as our reported results tend to obscure what we consider our core earnings per share. Thus far in 2015, our reported results have absorbed $0.43 of currency headwinds and $0.27 of restructuring charges.

We have also benefited $0.09 from the tax and financing activity I just mentioned. Factoring out those items, we delivered first half core EPS that is nearly 13% higher than the comparable period last year. Now specific to the second quarter, Fossil sales increased 6% in constant dollars.

Solid growth in watches and leathers more than offset the decline in jewelry. Sales for the brand increased in all three regions with Asia delivering a mid-teen increase. While still a relatively small part of the business for the brand, the e-commerce channel drove solid double-digit increases with higher traffic and improved conversion rates.

Early indications that we feel tell us our demand creation initiatives are working. Skagen sales grew 21% in constant dollars with growth in all three regions including 20-plus percent growth in Europe and the Americas. Strong double-digit watch growth drove the business with solid increases in leathers and jewelry as well.

E-commerce sales for SKAGEN also increased nicely, driven by higher traffic. In constant dollars, our multi-brand watch portfolio was flat to last year, with increases in the Americas offsetting declines in our international regions.

In the Americas, reported sales increased 1% to $386 million, a 3% constant dollar increase, which aligns with our first quarter trend. The increase was driven by growth across all three categories, with watches and leathers driving the volume and jewelry increasing in the mid-teens as the Michael Kors brand drove the category.

Across brands, constant dollar sales for the Fossil, Skagen and Armani brands increased in the quarter and we benefited from the addition of Kate Spade New York. Michael Kors brand sales declined slightly as very strong jewelry growth nearly offset lower sell-in watches.

The overall regional sales increase was driven by our retail stores, which delivered a solid positive comp, propelled by improved conversion resulting from compelling promotions in our outlet. Traffic was down again in the region.

We continue to drive a significant increase in our e-commerce business across all of our websites and posted a solid double-digit gain in the quarter. Constant dollar wholesale sales were flat to last year, with international increases offsetting declines in the United States. The U.S.

department store business, where we have planned the business down this year, continued to be soft. While this is likely to continue, we also expect that growth from our direct business can drive overall growth in this region. In Europe, reported sales decreased 12% to $228 million, while constant dollar sales increased to 2%.

Growth in jewelry and leathers offset a slight decline in watches. Growth in the region was softer than expected, particularly in watches, with overall sales in major markets such as Germany roughly flat and Italy and the UK down to last year.

The performance in the UK was at least partially attributable to a strong performance in the second quarter of last year, when some orders were shipped early ahead of the warehouse transition. France drove the slight increase for the region during the quarter.

Both Fossil and Skagen grew during the quarter, with notable strength in watches and the Michael Kors brand grew in the quarter driven by strong jewelry sales along with watch growth in boutiques. Within the portfolio, nearly all of the licensed brands posted slight declines for the quarter.

In the region, our sales growth was driven by our retail channel, where comp store sales increased slightly driven by our outlet stores. In Asia, reported sales decreased 6% to $126 million, while constant dollar sales increased 1%. Growth in leathers offset a slight decline in watches, while jewelry was roughly flat.

India, Japan and Australia were our strongest performing markets and the growth was partially offset by continued weakness in South Korea and the decline in China. Michael Kors, Fossil and Skagen were our strongest performers with each of the brands delivering solid double-digit gains.

Comp store sales decreased modestly in the region with the strongest performance coming from the outlet stores. In the quarter, gross profit decreased to $410 million and gross margin declined 220 basis points to 55.3%. The decrease was primarily driven by changes in foreign currencies.

Excluding currencies, gross margin expanded in the quarter, mainly due to the favorable impact of our pricing initiatives, partially offset by the impact of continued outlet promotions as we haven’t yet lapped promotional changes that we initiated last year.

Second quarter operating expenses decreased 6% to $339 million, largely due to the impact of changes in foreign currency and included a $7 million restructuring charge directed at optimizing our operating structure and improving retail profitability. Excluding the impact of currencies and restructuring, operating expenses were flat to last year.

Store expenses were higher mainly due to store investments we made last year that had yet to anniversary. Infrastructure expenses were down, as were customer engagement costs and marketing, though the latter change is due mainly to timing including this year’s earlier Baselworld.

Thus far this year, our constant dollar expenses, setting aside restructuring charges have increased principally in those areas that directly touch the customer. Infrastructure spending thus far is flat, while marketing and customer engagement investments have increased over 10%.

For the second half, we plan to lean in more on these marketing investments with a goal to ignite our business both for the near-term and long-term. Our second quarter operating expense rate was 45.8% compared to 46.5% last year, primarily due to these same factors.

Operating income decreased to $70 million, including a $28 million unfavorable currency impact. Operating margin decreased to 9.5% compared to 11% last year due mainly to the impact of currencies. Restructuring charges created a 90 basis point headwind on operating margins and the negative impact of currencies was 290 basis points.

Interest expense increased to $5 million given our higher debt level. Second quarter other income increased $15 million to $40 million largely due to a gain associated with an interest rate hedge settlement as well as net gains on foreign currency contract and account balances.

Our effective income tax rate for the second quarter was 28.7% lower than last year’s 31.2% due to the favorable impact of tax audits that were completed during the quarter. Second quarter net income increased $2 million to $55 million, largely due to non-operating gains.

Now, turning to our cash flows and balance sheet, for the quarter, we generated operating cash flow of $78 million versus $59 million a year ago. We drew down a net $48 million on our revolver. We invested $60 million in capital expenditures and $103 million to purchase roughly 1.2 million shares of our common stock at an average price of $82.

We ended the quarter with $842 million remaining on our share repurchase authorization. We ended the quarter with $250 million in cash and $695 million in debt. Second quarter ending inventory totaled $669 million, a slight increase compared to last year.

We are expecting some inventory growth in the third quarter and our goal is to realign with sales by year end given changes to this year’s demand. Accounts receivable decreased by 16% to $255 million and wholesale DSOs improved by roughly 5 days. Depreciation and amortization expense totaled $22 million for the quarter. Moving now to our outlook.

And just for clarity, I will start with our assessments based on constant dollars a like-for-like calendar to exclude the effects of last year’s extra week as well as this year’s restructuring charges. At the end, I will also give you the various data that includes these items.

Back to the business, we remain very excited about our prospects, our competitive position and our future. We operate a business model that is well diversified and possess key strategic advantages that position us for strong share gains and a growing market over time.

We generate strong cash flows and solid returns both in good and more challenging times. With the year now half behind us, the factors that we anticipated could affect our business for 2015 are generally coming to fruition and we expected on balance that headwinds this year would be stronger than tailwinds. That has proven to be the case.

We expected with new entrants in our market, consumers could take a pause to evaluate new product offerings and divert spending away from traditional products. We expected to see brands continuing to ebb and flow in their natural lifecycle making it always a challenge to immediately fill in as customers pace shifts.

We expected that there will be certain markets where competitive pressures would be strong and where economic conditions might impact our ability to grow uniformly and we expected that the currency environment would continue to put pressure on our operating results.

With so much happening with consumers and in our markets to-date continues to be very challenging to gain great visibility into near-term sales trends and demand. Our second quarter sales did not meet expectations, especially in our international markets, which resulted in a sequential slowdown in watch growth. In Europe, our UK business declined.

Some of the changing trends there was caused by some operational changes we made last year, but we are very focused on understanding the underlying trends in the business there. Asia continues to be challenging for a variety of reasons. South Korea, which has been economically challenging for some time was further impacted by MERS.

Hong Kong and Macau have been weak in China, which still represents a big opportunity long-term is taking longer to develop. We are advantaged with our diversified business model that we have the opportunity to pursue nearer term opportunities like India and China, while continuing to invest in opportunities that may take longer to achieve.

Newer brands like Kate Spade New York and Tory Burch, while contributing, are not yet driving outsized growth, but are hot brands with enormous potential in international stature.

We are seeing encouraging results thus far this year with the Fossil brand across all categories and we have not yet begun our most significant marketing investment, which will start to support our business in the second half of this year. Skagen continues to make steady progress with continued strong double-digit growth in all markets.

Strategically, we remain committed to the priorities we outlined at the beginning of the year, including investing an additional $35 million or $0.50 per share to support our most critical strategic priorities.

In the second half, we are stepping up our marketing investments for Fossil and Skagen, focusing on bringing new customers into our stores, heavily leveraging digital channels and fresh creative to reach our target customers.

For Fossil, we are launching a new global campaign in the third quarter that highlights the brand’s heritage and personality through a cast of collaborators and influencers featuring our key product categories. The campaign has a fully integrated approach with emphasis on digital and social along with print and strategic markets.

Our investments are focused on markets and media that drove results at the end of last year. We are also investing in targeted digital marketing with key partners globally to support all channels of our business.

We are continuing to invest in our multiyear, omni-channel roadmap that advances our capabilities to interact with consumers in a more digital, personally relevant and on-demand way. We are elevating our in-store and online experiences to improve conversion, engagement and overall consumer experience.

This will include the rollout of tablets in all U.S. stores, better tools to capture customer data both in-store and online, and a redesigned website that is optimized for mobile. We continue to pursue our entry into wearable technology and we have already made significant progress with the tech relationships that we have built.

We see one of the biggest trends in fashion today as technology and we have developed our initial suite of products to the Fossil brand expected in stores this fall. More products and more brands will follow in 2016.

We continue to believe that with our great design capabilities, scale and world class portfolio of brands, we can be the point where technology and great fashion come together. We believe that we can win here, where others can’t.

Considering then all of these factors, along with the trends we saw coming out of the first half of the year, we now expect full year constant dollar and constant calendar sales growth to range from a 3% increase to a 1% decrease.

On the upper end, this range generally reflects our most recent trends, including tempered international expectations, but also includes an expectation of benefits from our Fossil investments as well as the potential for some further softening due to some of the headwinds that we have been experiencing this year.

The lower end would accommodate even greater headwind. For the third quarter, we are expecting constant dollar revenues to decline in the range between 3% and 8%.

We do expect the third quarter will be our weakest quarter in terms of relative top line performance given the strong growth rates that we posted last year, especially in the Americas and in Europe. We continue to expect full year constant dollar gross margins to expand compared to last year.

This is largely due to our efforts to increase margins through both targeted price increases as well as cost improvement initiatives in our supply chain. For the third quarter, we expect a similar gross margin profile.

For the full year, excluding restructuring expenses, we expect to operate with a higher expense rate driven primarily by the investments that we are making in marketing, omni-channel and connected accessories. Store and concession expenses will modestly increase the rate due mainly to stores that we added last year.

Modestly offsetting these factors, we expect to achieve leverage from our overall global infrastructure. We expect that our third quarter expense profile will be similar to the full year. Based on a lower sales base, we now expect full year constant dollar operating margin between 14% and 15%.

We now expect full year constant dollar earnings per share between $6.20 and $7 per share. For the third quarter, we expect operating margin between 13.5% and 15%. We expect third quarter constant dollar EPS between $1.45 and $1.70. These constant dollar estimates all assume a tax rate of about 31% and excludes the impact of restructuring charges.

For reported GAAP purposes, we are continuing to expect that currencies will significantly impact our reported numbers. Over the last quarter, the US dollar, while still very strong has been more stable against most of the currencies that affect us.

So our reported guidance assumes roughly prevailing rates at both the high and low points of our guidance. Given that we have tempered our expectations for international growth this year, this will actually serve to reduce the overall currency headwind compared to our prior expectations.

For the third quarter, our assumptions would yield a reported sales decline between 10% and 15%. We would expect reported third quarter operating margin between 9.5% and 11% and EPS between $1.03 and $1.28. This includes a restructuring charge of about $0.06 per share. For the full year, reported GAAP sales will decline between 4% and 8%.

Operating margin would range between 10.5% and 11.5% and EPS would range between $4.80 and $5.60 including a restructuring charge of $0.35 per share.

Our guidance continues to assume higher interest costs due to higher levels of debt as well as continued investment in our share repurchase program, though as we shared before, not at the same level as last year. We estimate capital expenditures for the year will be between $100 million and $110 million.

So with that, I will turn the call back to the operator for your questions..

Thank you. [Operator Instructions] And we will take our first question from Omar Saad with Evercore ISI..

Hi. Thanks. Good afternoon, my first question is….

Hi, Omar..

Hi, how are you going? I wanted to ask a question on what’s happening in the – what are the different discrete items, if I look at your second half guidance where it was 90 days ago versus where it is today ex-currency of course, it’s certainly come down a lot, has something changed and obviously it looks like international business is a little bit slower, is that the only key driver there, are there other things you are seeing in the watch marketplace that are causing you to see a much lower revenue number in the second half versus what you are thinking.

And then related, as I look at the – things you are talking about on the call connected accessories, you are really ramping up the marketing and brand investments around Fossil and Skagen, should we take that to read into a corporate level of view across the watch category that’s changed? Thanks..

So let me take the first part of that. With respect to the guidance, as we said on our prepared remarks, we always expect that 2015 would be challenging as much as there would be some fairly significant headwinds and the net headwinds would be greater than the tailwinds.

And as we said, that certainly has proven to be the case with currencies, the entrance of new competitors, brands moving, economic choppiness in some markets. The American market performed pretty close to the way we expected in the first half as did Asia. Asia was a little weaker. Europe was the standout for us.

It was certainly weaker than we expected in the second quarter and that largely drove the second quarter, where our sales missed the top or the bottom of our range. So that’s number one, is that we just missed our sales expectations for the second quarter.

So as we look out for the remainder of the year, we are operating still with a fair amount of – lack of visibility as we always do and that’s exacerbated by some of the factors that we talked about.

And Europe, while we are still evaluating that hard to better understand those dynamics and there is a good probability that we are going to discover that a lot of the factors that are impacting the rest of the business is also affecting Europe.

You have got some economic issues going on there too, with continued impact of Greece and the Russian ruble and oil impacting our Middle East business. So Europe generally was softer than we expected. So what we wanted to do was adjust our expectations accordingly.

And this year, we are operating now with the sales expectations much wider than we had done certainly last year and implied in the back half of the year because I think, to some extent there is a little more uncertainty in the business in the back half of the year than we thought before. But for the same – likely the same there are similar reasons..

On your question regarding investments, we said at the beginning of the year we were in somewhat of a pivot position where we are going to hold our SG&A flat and invest in demand creation omni-channel and wearable technology. I think the year is playing out pretty much like we have planned it in that regard.

We are already seeing results from our demand creation and most of that spend starts in September. We are already seeing benefits from our omni-channel investments and our digital capabilities so that’s starting to happen. And I would say about wearable technology, our investments and working with partners as got us to the point.

We are probably more excited about wearable technology and its future right now than we were at the beginning of the year. So all in all, holding the SG&A flat and investing pretty heavily in our future, I think is playing out pretty well and we will see how it works..

We will take our next question from Erinn Murphy with Piper Jaffray..

Great. Thank you. Good afternoon, so a couple of questions for me. I was hoping maybe you could speak a little more about the Americas region overall, it did seem to surprise the upside in the second quarter and did accelerate sequentially.

So we would love to hear a little bit more about what you are seeing right now in terms of sell-in versus sell-throughs in the United States in particular and then any kind of context around some of the major brand movements in North America would be great. And then just my follow-up would be for Dennis.

Just on the guidance, if I get the midpoint of your third quarter sales guidance, it implies the fourth quarter is down only about 1%. So if you could just walk through your assumptions in the fourth quarter that’s kind of giving you the confidence of that sequential improvement that would be great? Thank you..

Well, our performance in North America, as we said in the call, obviously both Fossil and Skagen did very well. And I think these are benefiting from our efforts to invest more in them, not only on demand creation in omni-channel.

But if you look and see what’s going on in the stores and I would recommend you see both Times Square and our Fifth Avenue store at 45th [ph], you can see that the whole impact of the new fall product, the new marketing campaign. We have a total new visual look and it’s being reinforced with the digital and social media, it looks pretty strong.

We think we got a perfect setup for additional activity in the back half of the year. So performance in North America is largely due to both Fossil and Skagen doing well. And as we mentioned our comps were pretty strong.

Our e-commerce business, because of all the activities we are doing is – had a lot of traffic on it, a lot of increases in traffic, increase in sales. We know its driving traffic to our stores. Our analytics clearly show that. And we also know its driving traffic to our wholesale partners, stores and their websites.

So we are having the benefit that we expected. And we think that by – in North America by continuing to do this plus adding wearable technology later this year and next year, we think we are in a pretty good place to continue to gain share in the U.S..

On the top line for the balance of the year, the – what we have adjusted our sales expectations on the high end is really assuming the rate that came out of the second quarter, generally follows for the rest of the year. That doesn’t necessarily create a linear growth trajectory because you are up against last year.

If you remember last year, we had a very strong third quarter. We – and as we evaluated that performance, there was some inventory build that happened in the channel in the third quarter and that turned in the fourth quarter. And our sales I think in the third quarter last year were up 10 and they were roughly flat in the fourth quarter.

So a lot of the choppiness you see this year is the reciprocal, if you will of what we saw last year.

But generally, the assumption is if the current trend continues, we do expect with the significant investments that we are making in Fossil and Skagen, we are very excited with the improvements we have seen thus far and we are really just beginning to invest in those brands and we will lean in significantly more, so there will be a lot more marketing support to the Fossil brand in the back half of the year.

So, our goal is to see some uptick and we left some room for some further softening in some of the places where the business hasn’t been as strong, but generally operating at that current trend. And then on the bottom of the range, we have assumed a more challenging performance..

That’s helpful. Can I just ask a quick follow-up just in terms of what you are seeing in wholesale between sell-in and sell-through? I know that gap has been a little bit wider in the prior quarters.

Can you just talk about it in context of what you are seeing in particular in the license portfolio? I recognize Skagen and Fossil were better in the quarter. Thanks..

Yes. I don’t have those particular data.

I mean, to the point you made, we have shared some comments that before in quarters where we saw a pretty strong divergence between sell-in and sell-throughs just to give some understanding of how those two may differ and how our sell-in may not necessarily be the most important number or a meaningful number to understand the business trend.

We didn’t see that in the second quarter. So, we haven’t specifically provided any numbers, but we didn’t see a significant differentiation in sell-in and sell-off..

Thank you, guys and best of luck..

You bet. Thank you..

We will take our next question from Oliver Chen with Cowen & Company..

Hi, thanks. Thanks for the details. On your comments on lower sell-in on the Michael Kors watch brand, do you expect that trend to kind of continue as that gets offset by the pickup in jewelry? And I was curious about there has been talk of really restructuring newness in that brand.

Is that something that’s happening in terms of the inventory that you are going to sell in and are there expectations around how that may manifest?.

Well, we look at Kors globally and the opportunity. If you just look at the pure brand power, the brand is still extremely productive. It’s the most productive brand we have and it’s got the best metrics in terms of sell-through sales per foot. It’s just a huge number. So, obviously, growth has moderated a bit.

We did have growth globally in Kors, with jewelry having a big increase and we think that will continue. We do think now that jewelry can be a much larger number than we thought in the past. We also – they are ramping up their activities in men’s and we have got a whole initiative around automatics.

We do have probably more innovation and newness going into the general product line that we had in sometime and that’s launching in the back half of this year. So, we think that’s going to be very good. We are continuing to build shop-in-shops. We built another 33, I think we are around 300 now and there is still significantly more to grow.

Travel retail is increasing to look like a big opportunity and we will be launching a whole platform, a wearable technology next year that could be another stage of disruption for Kors. So, all-in-all, the brand power is very strong and we are going to take advantage of that and garner that across the globe..

Okay.

And Kosta, on the context of your comments about near-term challenges, what are your thoughts about the nature of the category with respect to discounting or not in department stores in terms of what the category is looking like and initiatives you are taking? I mean, it sounds like the lifestyle demand creation is really the algorithm for rejuvenating interest here, but I am curious about your thoughts on the promotional nature of the category?.

Well, as you know, we believe strongly the business should be regular price. And I think if you look at the last 18 months or so, we haven’t seen more days on sale probably stable, if not slightly less and we are doing everything we can to keep it that way with innovation and excitement.

And that’s the way we operate and we would like to continue that way. So, we have always thought that innovation and new ideas are going to be what drives sales and anything else short of that is the short-term prospect and that’s why we operate..

Okay, best regards. Thanks..

We will go next to Laurent Vasilescu with Macquarie..

Good afternoon. Thanks for taking my questions.

How should we think about the leathers business in the back half of the year in terms of revenue growth versus gross margin opportunity as we got last year’s handbag liquidation strategy?.

The leathers business has been strong for us. I mean, it’s been – we have made some additions. Overall, we are very happy with the design and the product is doing well. So, as we said, generally speaking, we are assuming the trends that we are seeing coming out of the first half of the year are continuing.

So, we are expecting that business to perform as well and no significant changes in terms of the margin structure relative to leathers performance..

Yes. The one thing to keep in mind is the handbags is a very emotional and aspirational business and the category that will benefit the most from the Fossil brand getting stronger is the handbag category.

We have the opportunity to do multiples of what we are doing in handbags in our existing environment in our existing stores, but that’s partly why it’s such an important prospect for us to continue to make the brand stronger, more cohesive, tell a better story and have a stronger community, because the win for us on that is very significant..

Great. And then along with the wearable initiative, I think the Swiss made initiative is one of the white spaces that you are tackling.

Can you give a little bit of an update on this initiative of what you are seeing, how that business is doing versus the non-Swiss watch business?.

One thing I would say has changed, if you said two years ago, the importance of Swiss in the marketplace and the direction it was going and I think it was stronger than it is now. I think technology and the whole idea of wearables I think has taken some of the oxygen out of the Swiss business.

In addition to that, obviously, China and Asia hasn’t been as active. So, there is not as much discussion about it, but I do think that, that’s a short-term situation.

If you look at the global watch market which we are relatively small share now and want to be a larger share, a very significant portion of the global traditional watch business is Swiss-made. So, long-term, we want to play in that environment. So, it still remains a big white space for us.

And as you know, we are building our own automatic movements in Switzerland. We have Swiss activities in different product lines. Tory Burch was launched last year in Swiss and it’s going to do very well, but we are still moving along. And I think long-term it’s a very large white space for us.

And I just think technology is taking a little bit of win from those sales in the last six months to a year..

Thank you. Best of luck..

Thank you..

We’ll go next to Simeon Siegel with Nomura Securities..

Thanks. Good afternoon.

Can you guys quantify any expectations for the relatively new license brands and portfolio? Do you think they can ultimately grow large enough to plug the watch declines you might see from those – from the existing brands? And then Dennis, just what do you expect to gain from other income in 3Q and for the year? And then how should we think about the impact of FX into next year, is there any hedges that might be rolling off? Thanks..

Well, if you look at the portfolio of some of the newer brands in there, so we have added Tory Burch Kate Spade New York and Chaps in the last year or so, all of them have very strong potential.

In addition to that, if you just look at our portfolio, I mean, there are some brands in there that are in a state of transition, where the owners of those brands are reinventing them and getting ready to spend a lot of energy and resources repositioning them and we think those have got the big potential also.

So, all-in-all that whole idea of the portfolio is the brands will ebb and flow. I think part of our issue this last quarter is we had more ebbing and flowing.

In the long-term, we think that we got more brand power and strength in our portfolio than we are seeing results for right now and I think we are in position for ongoing sustainable long-term growth of market share..

Yes. In terms of below the line, if you will, I think you should always anticipate in an environment where currency is a headwind given that we hedge that when you are talking about GAAP – reported GAAP number that you would have some benefit from the currency contracts that we have.

Generally, that would be the rational expectation down there as well as you always consider the fact that we have taken on debt as we need to look at interest rate, which over the last few years – our interest expense rather, which has been growing as we have taken on some more debt.

Our share repurchase, I just remind you that we did say this year that we would not expect to be buying as many shares as we did last year and the year before that as that was largely driven by taking on some debt on the balance sheet overall.

Thinking forward, we haven’t guided to ‘16, but – and so we will provide more insight as we get to that point.

But just generally speaking, if you look at the pattern of currencies, you would expect still some additional – if currencies now flattened out now for the rest of next year, you would probably still have some headwinds at the beginning of the year largely in the first quarter.

And then by definition of my example here, they would neutralize for the rest of the year..

And then just making sure I am thinking about the right way, is there any general rule of thumb – so if you have 340 basis points of the FX transitional impact on the third quarter, is there any easy way to think how much gets mitigated in the other expense line?.

No, there are just so many moving parts to that. There are just so many moving parts to that, there is no simple back of the envelope way to do that..

Okay, great, alright. Thanks and best of luck through rest of the year..

Thank you..

We will go next to Dana Telsey with Telsey Advisory Group..

Good afternoon everyone. Can you talk a little bit – watch category growth I think went from 3% growth in the first quarter to around flat in the second quarter, how are you planning it for the second half of the year.

And as you shift to jewelry, as that becomes a more important part, what’s the impact on the margin in ticket versus watches? Thank you..

Yes. The second part first, the margin profile is fairly similar, so shifting between watches and jewelry shouldn’t change a lot, shouldn’t overall impact our margin structure.

Again, as we said that our general assumption around the trends for the back half of the year is that we would expect to see similar trends coming out of the second quarter for the balance of the year, some ups and downs within that, but generally that’s the way we are thinking of it.

We have got some expectation that we can see some improvements in Fossil, specifically given the investments we are making which would assume that you might leave room for some softening in other parts of the business. But generally, that’s the way we are thinking about the back half of the year.

At the top end of the guidance, at the lower end and we have assumed some deterioration from that..

Thank you..

You bet..

We will take our next question from Rick Patel with Stephens Incorporated..

Thanks.

Good afternoon, just a question on price increases, can you talk about how much average ticket change versus last year and did those price changes stick as we think about markdown support that you may have had to provide and are you planning any additional pricing actions for the back half of the year?.

So far, the pricing adjustments that we made and we did some – actually we started last year at the end of the year, some in March, another roundabout now. Generally, I would tell you that what we are seeing has generally been very favorable and sort of consistent with what our expectations going in.

Not perfect but generally, we are achieving the results as you heard in the second quarter. We actually expanded our gross margins ex-currency and that was largely driven by the performance of the price initiatives, some cost initiatives in there, but mostly pricing.

So generally speaking, what we are finding thus far is that on balance of the portfolio, we have been able to sustain the price adjustments that we have made so far..

And then a question on wearables, it seems like the initial entry into this category is going to be pretty well controlled, can you frame the wholesale launch for us, is it going to be in all of the doors of your best customers or just they select few and can we expect this to be material for your fourth quarter or is this more of a 2016 and beyond story?.

So we will launch in the October-November time period under the Fossil brand. It’s going to be in our own stores plus other partners globally, so – and the numbers will not be significant to us. It’s mostly pretty large test. It gives you an idea of how this is working.

One thing to keep in mind is that, when we talk about wearables it’s not just smart watches. There is actually – it’s kind of crystallized into three different categories. First of all, there is the smart watch, which is the Android digital screen watch, which it looks really good for fall.

And we think over the next couple of years, will get better as it gets smaller and more robust, technology gets better. We think that’s got long-term legs as it continues to improve.

And we also have non-display items like our bracelets, more like jewelry that are – we think has the capability of creating an entirely new accessories category based around technology.

And then the third, and probably most significant long-term, is what we call smarter watches, which is just adding chips and additional functionality to existing watches.

So we are launching that this year, which is to watch it looks just like a regular analog watch but does have a chip in it that gives measures, activity and sleep and also has notifications in it.

So to a certain extent, you could say that what we are doing is moving towards we think someday every watch we make will have some type of technology in it. What we have been making over the last 20 years are actually quartz watches largely and these have – basically it’s a quartz chip.

So over time, by us adding additional functionality, sensors, as technology changes we think that we can add this across our platform and have additional functionality in the watches and other products without a lot of additional cost, the additional benefit from it also is that there is an app that goes with these that measures people’s activities, etcetera and also enables us to get data from them and also build the community and the tie in to our CRM and our marketing is really significant.

So it’s a lot of benefits for us, which is why we are so interested in it. And we think it over time could be a very significant thing to scale across our entire platform..

Looking forward to seeing it. Thank you..

We will go next to Ed Yruma with KeyBanc Capital Markets..

Hey guys. Thanks very much for taking my questions. I guess first, on quality of inventory, particularly at wholesale and department stores, I guess how comfortable do you feel, what kind of channel inventory.

And then as a follow-up, just kind of comfort level with existing leverage, there are some news report that you pulled a debt deal during the quarter, how do you feel about your existing leverage in light of the EBITDA? Thank you..

Yes. In terms of our inventory I mean our inventory – our own inventory was roughly flat this year. We did say, in the prepared remarks just as we have adjusted inventory, we would expect some growth as we come out of the third quarter and hopefully neutralize that by the time we get to the fourth quarter.

I feel good about our own inventory position and our inventory typically has a long shelf life, not a significant fashion risk to it. So feel good about our own inventories, generally speaking. Everything that we look at suggest that inventories in the channel are pretty healthy as well.

And then in terms of – at the beginning of the year, we achieved an investment grade rating both from Moody’s and Standard & Poor’s. We did enter the bond market and there is a lot of noise at that time. We were new entrants, a lot of supply and ultimately we decided that we didn’t achieve the economics that we felt we were – we deserve.

Our goal was to term out some of our existing revolver, so we took a step back out of that market because we didn’t think the economics reflected our investment-grade rating..

Great. Thanks so much..

And we will take our last question from Anna Andreeva with Oppenheimer..

Great, thanks. Thanks for taking my question. A question on operating margin profile for the company, 10.5% to 11.5% guided this year, I think that’s the lowest levels in a while for you guys, how do we think about the margin level over time.

And into next year, if watches are still difficult, do you think there are opportunities on the expense line to pull back or should we think you are going to be spending on marketing still since you are getting ROI there?.

Yes. I mean first of all, we have got perhaps – don’t forget that those rates that you are talking about include restructuring charges.

They include currency headwinds, which are – currency headwind is much more difficult to influence in the near-term, although we are having some success calling some of that back on pricing, but that’s a longer term play to get that back.

The way we think about operating margins and for those who listened in on our investor presentation, our goal right now is to really drive top line growth. As we benchmark ourselves to other companies at this stage in their life cycle, top line was what really drove long-term value.

So our goal is to really improve the health of our overall operating structure, to really get the infrastructure lean and drive leverage to that and create the capacity to use that to reinvest in top line and that’s what you are seeing this year.

I mean we are going to generate significant leverage in this structure and be able to increase our marketing spend, customer engagement significantly by using the capacity that we create. So that’s really our priority for the near-term is to create capacity and use it to drive sales for the long-term.

We think we have a lot of opportunities both now and for the future and we want to invest in those..

That does conclude today’s question-and-answer session. At this time, I would like to turn the conference back over to management for any closing remarks..

Well, we thank you again for your participation on today’s call. And look forward to speaking to you on our next call in November. So thank you very much..

This does conclude today’s conference. Thank you for your participation..