Fossil Group, Inc.

Welcome to the Q2 2020 Fossil Group earnings conference call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in listen-only mode. Later, we'll conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star, then 1 on your touch-tone phone. Please note this conference is being recorded. I'll now turn the call over to Christine Greeney of the Blue Shirt Group. Christine, you may begin.

Hello, everyone, and thank you for joining us. With us today on the call are Costa Kartsotis, Chairman and CEO, Jeff Boyer, Chief Operating Officer and CFO, and Greg McKelvey, EVP and Chief Commercial Officer. 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 discussed during this call. Fossil Group's policy on forward-looking statements and additional information concerning a number of factors that could cause actual results to differ materially from such statements is readily available in the company's Form 8K and TANQ reports filed with the SEC. In addition, Fossil assumes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise, except as required by law. Please note that you can find a reconciliation and other information regarding non-GAAP financial measures discussed on this call in Fossil's earnings release, which was filed today on Form 8K and is available in the Investors section of FossilGroup.com. With that, I will turn the call over to Costa to begin the formal remarks.

Good afternoon everyone and thanks for joining us today. We hope you are all safe and doing well during these unprecedented times. As the pandemic continues to have devastating effects all over the world, we remain committed to prioritizing the health and safety of our employees, customers, and the communities where we operate. At the same time, we are disheartened by the racial tragedies we've seen and the underlying systemic bias that exists in our country. As an organization, we are doing our part to foster positive change We are committed to leading by example and doing good for the planet, for our communities, and for our people. Since we spoke to you in early June, we have remained focused on navigating the highly dynamic environment, reopening our fossil stores, and executing the four strategic priorities we outlined at the beginning of this year. Those include delivering exceptional storytelling and innovation, driving commercial transformation, most notably increasing our digital business, expanding on our opportunity in China and India, and continuing to implement our New World Fossil 2.0 program. The current operating landscape has caused us to accelerate the expansion of our digital business and to increase the size of our New World Fossil program this year. More on these strategies shortly. In Q2, broad-based store closures persisted within the wholesale channel and across our fossil retail locations throughout much of the quarter, resulting in a net sales decline of 47% on a constant currency basis. We did see, however, sequential improvement in top line trends across all regions during the period, as many economies began reopening in the latter part of May and June. We delivered Q2 sales of $259 million, reflecting a stronger than expected pace of store reopenings and wholesale order flow. From a global business perspective, Europe and Asia performed slightly better than the Americas, Reflecting the heightened pace of the respected COVID recoveries relative to the United States. From a channel perspective, our digital business accelerated significantly in Q2. Sales were up nearly 140% on our own e-commerce sites globally, and third-party e-commerce increased 20%, despite a focus on essentials among third-party e-commerce players and the shift of Prime Day out of Q2. We also saw stronger performance with our wholesale partners who have strong e-comp capabilities and a well-developed online presence. Core digital sales throughout our own e-commerce sites and third-party marketplaces, such as Amazon and Tmall, shifted from 13% of our sales mix in the second quarter of last year to nearly 50% this year. This does not include our wholesale.com channel, which is a growing part of our wholesale business. The reopening of wholesale doors and fossil retail stores started to phase in across all geographies and channels during the latter part of the quarter. In the Americas, we had reopened approximately 175 stores by the end of Q2, with the remainder open during July. In Europe, we have opened essentially all of our 155 locations across the continent. In the Asia-Pacific region, where we currently have 89 stores, approximately 80% have reopened. Some locations in India and Australia remain closed pending government direction. During the second quarter, traffic and conversion trends were fairly similar across all regions, with comp traffic down about 50% by the end of the quarter and conversion is up significantly. As we look ahead to the back half of the year, we continue to expect similar traffic and conversion trends. That said, we are facing significant uncertainty across the globe. Many regions, states, and countries are struggling with containing the virus, which is particularly true here in the United States, and consumers appear slow to return to former spending levels, giving the health and safety concerns. During this time of significant business disruption and uncertainty, we are taking steps to strengthen our operations and our financial position. In the first half of 2020, we took actions to reduce costs, manage inventory levels, preserve cash, and to increase our financial flexibility. We continue to have productive discussions with our landlords and licensing partners regarding a mutually beneficial path forward. On the real estate front, we are taking a critical lens to the portfolio. With a significant percentage of our leases coming due in the next few years, we'll be evaluating opportunities to increase the productivity of our fleet. Importantly, we are making progress against the four strategic priorities I mentioned earlier. The first is storytelling and innovation. We are leveraging our strengths to bring great style, brands, stories, and value to the marketplace. In the second half of this year, we'll be engaging the consumer with the introduction of critical shapes and styles in traditional watches while also bringing new enhancements and upgrades to our connected category. We continue to see dive-inspired watches perform well globally, especially in the assortment of our Fossil Blue collection. Our Gen 5 watches continue to garner excellent consumer feedback. With a mid-August rollout, our Fossil SmartWatch app can help you stay healthy, adding oxygen consumption and sleep tracking features to our current contactless payment function. And we're looking forward to bringing LTE to the market and expanding to new channels of distribution later this year. Additionally, we are expanding our digital and social marketing programs in tandem with our growing e-commerce presence, as well as emerging trends in media consumption as consumers increasingly gravitate to all things digital. Moving now to our second strategic priority, commercial transformation. The expansion of our digital capabilities is enabling us to leverage the fast forward of online adoption among consumers. We have accelerated our investments in the digital channel for the last 12 to 18 months, investing in a new e-commerce platform, digital tools, and online marketing programs, which are beginning to bear fruit. Our digital channels, which include Fossil.com and third-party e-commerce, are performing well and represented nearly 50% of sales in Q2. We are excited about the pace of digitization and expect to continue growing the digital channel as a percentage of our overall mix. Watches are particularly well suited to online sales and the economics within our own business model are margin accretive. The high value small cube in an e-commerce marketplace lends itself to great branding, striking visuals and powerful economics. At Fossil, We already have the infrastructure in place across systems, warehousing, and distribution to help us drive scale. As we shift a greater portion of our sales toward direct-to-consumer touchpoints, particularly Fossil.com, we expect to strengthen gross margins and expand profitability in that segment over the long term. Looking at our third strategic priority, we're continuing to focus on expanding our opportunity in China and India. In 2019, we implemented a segmented assortment strategy supported by localized marketing, which drove double-digit gains in these markets. While India continues to be affected by stay-at-home measures, mainland China has been faster to recover. Despite the pandemic impacts, we grew our mainland China business by 37% versus last year in the second quarter. We believe both of these markets will be important growth vehicles for fossil when market conditions stabilize and begin to rebound. Turning to New World Fossil, we are on pace to deliver our targeted expense savings of $100 million for 2020. We will continue to look for additional opportunities as right-sizing the cost structure and driving greater efficiency throughout the organization remain key priorities. As we approach fall and holiday, we believe we're well-positioned on several fronts. We have a focused collection of innovative products in the market. and greatly enhanced digital capabilities across functionality, fulfillment, customer interface and marketing. Our view of the retail marketplace remains cautious in the near term given the number of macro uncertainties. Looking farther out as we are confident that our strategic focus and purposeful actions as we adapt to a new reality will enable us to strengthen our business model and emerge stronger with a more powerful product assortment, a more digital focus channel mix and an improved margin and cost structure over the long term. Before turning the call over to Jeff, we want to express our thanks and appreciation to the entire fossil organization. Our teams have done a tremendous job of coming together and quickly adapting to the current environment. We also want to thank all of our stakeholders for your ongoing support during these unprecedented times. And now I'll ask Jeff to discuss the financials in detail.