Fossil Group, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Fossil Group's second quarter 2022 earnings call. At this time, all parties are in listen-only mode. This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company. Now I'll turn the call over to Christine Greeny of the Blue Shirt Group to begin.

Hello, everyone, and thank you for joining us. With us today on the call are Costa Cartodis, Chairman and CEO, Jeff Boyer, Chief Operating Officer, Sunil Doshi, Chief Financial Officer, 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 10Q reports filed with the FEC. 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. During today's call, we will refer to constant currency results. Please note that you can find a reconciliation of actual results to constant currency results 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 investor section of FossilGroup.com. With that, I'll now turn the call over to Costa.

Good afternoon, everyone, and thank you for joining us today. In our second quarter, we were impacted by a challenging and complex macro environment in each of our operating regions. As a result, our quarterly sales were down 10% versus last year, or down 5% in constant currency. Broadly speaking, there were a number of diverse factors contributing to top-line softness. The first was that the consumer is not responding the way they did last year. We saw shifts in spending in the quarter with the rotation out of goods and into services and travel. There are also signs that higher levels of inflation impacted discretionary spending, especially against the backdrop of last year's stimulus in the United States. In some cases, higher levels of inventory across many categories that some of our largest wholesale partners translated to fewer replenishment orders in the quarter. Also, ongoing COVID-19 restrictions pressured sales significantly in mainland China. And lastly, foreign currency headwinds intensified and accounted for approximately $18 million, or 430 basis points of impact to net sales in the quarter. From a regional perspective, these factors affected consumer behavior and our sales performance in somewhat different ways. In the Americas, Q2 sales were down 4% in constant currency. Traffic was up nicely in our physical stores, with comps up nearly 20%, while e-commerce showed declines due to the tough comparisons from last year. Our wholesale partners were impacted by across-the-board increases in inventory levels, which caused them to be conservative on replenishment orders. From a consumer perspective, traffic and average dollar sale has been positive versus last year in our stores and online, while the conversion is lower. And from a category lens, we have seen some category growth data that suggests that the overall traditional watch market is down versus last year, but up versus 2019, indicating to us that last year's stimulus activity drove higher sell-through. Both our jewelry and leather categories showed strong growth. In Europe, where constant currency sales declined 3%, consumers were out in physical stores with much lower COVID-driven restrictions during the quarter. Sales were up in both our retail stores and in our shipments to brick and mortar wholesale. Offsetting the growth in physical locations was a decline in digital sales, both our own e-commerce sites and pure play accounts, primarily driven by lower traffic. And as expected, FX headwinds contributed significantly to our overall sales results. More broadly, category sales data in key markets continue to highlight that our brands are seeing some modest improvements in market share. Turning now to Asia, constant currency sales declined 6%. As we anticipated, ongoing COVID restrictions in both digital and non-digital channels continued to dampen sales in mainland China. As we exited the quarter and some of these measures eased, we have seen some modest improvement, although sales are still down double digits. Our business in India continues to operate at a strong pace. We saw a nice sequential improvement in quarterly revenue, where consumer demand for the fossil brand remains strong. Our go-to-market strategies and localized marketing efforts have created strong brand equity with the Indian consumer, providing a solid foundation for future growth. Beyond China and India, other markets in the Asia region, including Japan, Malaysia, Singapore, and Australia, have returned to more consistent and predictable revenue growth as countries have reduced their COVID restrictions. From a brand perspective, our fossil business has been relatively strong and we are pleased with the results in Q2. Net sales for the fossil brand were up 7% and increased double digits in traditional watches. Our newness and marketing are helping us to gain market share in our largest markets. Our fossil leather and jewelry businesses had double digit growth and represented one third of the global fossil business. We had better stock positions in these categories and had increased product marketing in-store and online. These businesses both have significant long-term growth potential, and we are putting additional resources behind them. Importantly, our design and marketing capabilities give us confidence in our pathway for sustainable future growth, and we are focused on innovation in product and marketing. As part of that, we are using innovative collaborations to connect with existing and new consumers and to create more brand heat. Our recent collaboration with Jeff Staple is a great example of this. Last month, we introduced a staple and fossil collection spearheaded by the streetwear legend and designer Jeff Stapled. This garnered a great deal of attention for both consumers and media, creating a big brand heat moment for the brand. In our licensed brands, traditional watch sales were down, particularly in mainland China, where COVID restrictions persisted, creating a year-over-year headwind. While the declines have been sharply impacted by COVID-driven restrictions since Q4 of 2021, the market potential for fashion watches in the region remains large over the long term, and we are well positioned to capture growth as the conditions improve over time, particularly through our digital-first capabilities. Our jewelry category remains robust, and we have seen a nice trend for several quarters, including Q2, with broad-based growth across brands and channels. We remain encouraged by what we see as a long runway for growth for branded fashion jewelry. Turning now to smartwatch sales. Sales in the category lagged in Q2, with growth in Asia more than offset by declines in the Americas and Europe. Heading into holiday, we expect sales trends to improve with the recently launched Gen 6 hybrid platform and our refresh of Gen 6 with Wear OS 3. Both platforms will work on our proprietary new smartwatch app, which will have an improved wellness feature set. Both Gen 6 with Wear OS 3 and our app our plan to launch in time for holiday 2022 selling. We are particularly excited about the SmartWatch app as it will enable us to get first party data and engage with our customers at a higher level. Now looking to the back half of 2022, based on the macro dynamics that intensified in Q2, we are taking a more cautious view of the consumer across all three of our geographies. Our revised outlook, which Sunil will cover in more detail, reflects that our wholesale business will remain challenging and that we have reduced our prior expectations for a return to normalcy in our China business this year. As we navigate the near-term outlook, we continue to focus on our key priorities and opportunities. We will continue to invest in initiatives to drive brand heat through design and merchandising capabilities across watches, jewelry, and leathers. Our digital investments, which are being directed to both technology and talent, are expected to drive a number of significant enhancements in the coming quarters that will not only increase our active customer list, but also fuel deeper engagement with our existing file while helping us attract new customers. In closing, a big thanks to all of our FOSSIL team members all over the world for their relentless pursuit of excellence. And now I'll turn the call over to Sunil.