Fossil Group, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Fossil Group second quarter 2023 earnings call. At this time, all parties are in a 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 Kosta Kartsotis, Chairman and CEO, Jeff Boyer, Chief Operating Officer, and Sunil Doshi, Chief Financial 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, 10Q, and 10K reports filed with the FCC. In addition, FOSSIL assumes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information feature 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 Investors section of FossilGroup.com. Now I'll turn the call over to Costa to begin.

Thanks, Christine. The first half of 2023 has proved challenging, affected by macro challenges and choppy demand trends resulting in softer than expected Q2 performance. Q2 net sales declined 13% as we saw continued headwinds in our wholesale channels in the Americas and Europe and a slower recovery in greater China. Comp retail sales remained healthy with 3% growth primarily from our own .com sites, where much of the benefits from our digital transformation are bearing fruit. We continue to make progress on our growth initiatives, and we'll be activating several of these for Q4 selling that will expand into next year. Many of the macro challenges we saw in 2022 have continued into this year, most notably a cautionary tone among our wholesale partners, especially in the Americas and Europe. In addition, our smartwatch business has continued to underperform. Despite these challenges, we need to improve our financial performance, and we are taking decisive action to do this and put the company on a path toward elevated and sustained profitability. We are announcing new initiatives under our previously announced Transform and Grow plan and undertaking a comprehensive three-year transformation program. We will do this work in partnership with Alvarez and Marcel, which has an exceptional track record of leading retail and consumer business transformations. Together, we will leverage the company's critical assets as we work to reignite growth on the top and bottom lines. We have deep roots in the watch industry, a legacy brand with tremendous equity, and a committed team that is being further enhanced by the expertise of a best-in-class external resource. Before taking you through our detailed plans, let's take a few minutes to talk about where we've been in recent quarters. In the past few years, we have seen many headwinds with softness in the traditional watch market and ongoing and planned declines in our smartwatch business. So far in 2023, the wholesale channel in the Americas and Europe has been difficult as stores have underinvested in the watch business. While we expect this channel to level out over time, the near-term impact has pressured our operating results. And lastly, China's reopening has been slower than anticipated through the year's first half. In March of this year, we introduced our Transform and Grow plan, designed to reduce operating expenses, improve operating margins, and advance the company's commitment to profitable growth. We have been making steady progress with CAG, but we recognize the need to do more and acted with a sense of urgency, taking steps to drive accelerated change. Specifically, during the second quarter, we engaged Alvarez and Marsal to assist us with developing a more comprehensive transformation plan that expands beyond tech. This new plan greatly expands the scope of work and goes beyond operating expense reductions to include aspects of the business that we had previously not included. This expanded project will better tackle gross margin and increase our scope and operating expenses, ultimately driving operating income benefits for our business. Indeed, we now expect to capture $300 million of annualized operating income benefits over the next three years. As you'll hear today, we are on a definitive path to right-size our operating model in tandem with reigniting top-line growth. We believe this new plan positions us to return to gross margins in the low to mid-50s range and is critical to helping us achieve our longer-term goal of approximately 10% operating margins. As we began this important work, we decided to establish a transformation office comprised of key members of our organization and the A&M team. Establishing this office leverages our joint capabilities to drive meaningful change and progress. Five key principles are guiding the transformation. First, we are leading with a digital first approach. After several years of investment, we have built a robust digital infrastructure, and our teams operate with a digital first mindset. Next, we are acting with speed and precision, and it is gratifying to see our teams embrace the opportunity in front of us. And third, we are prioritizing shareholder value creation. We recognize that transformation we're undertaking will take time, but we are committed to getting that right to create value for all stakeholders. Moving to number four, the strategies under our transformation are grounded in preserving our meaningful brand ethos and heritage in the watch industry. And lastly, as we evolve our operating model, ensuring we embed agility into everything we do is critical. With that backdrop, let's discuss the dimensions of our expanded Transform and Grow plan, which comprises of three major focus areas. These include driving sales productivity, reengineering end-to-end operations to drive gross margin expansion, and generating overhead cost reduction and capital efficiency. The first two areas are new and directly result from the rigorous and comprehensive review we undertook this past quarter. Importantly, we have identified and begun work on tactical initiatives within all three focus areas. We have identified meaningful opportunities to improve our existing sales productivity. We will be driving value through pricing and adjusting many of the historical pricing practices that remain in place for many years. We will also optimize our product assortment and mix, enabling us to invest behind fewer and higher impact stories. And lastly, we will implement initiatives to improve our store productivity, particularly in our outlets. On the second focus area, we will reengineer end-to-end operations to drive gross margin expansion. With a greater focus on fewer products done well, we will undertake a more meaningful change to our end-to-end business operations. This starts with an integrated approach to business planning. and naturally extends to redesign our supply chain and sourcing practices. Also included is a continuation of our store rationalization program. Our third focus area is generating overhead cost and capital efficiency. In large part, we began this work earlier this year as part of our initial $100 million program, which remains on track. Our work has uncovered incremental savings opportunities as we right-size our overall expense structure to reflect a smaller and more nimble company. Our extensive work in recent months to identify these opportunities gives us confidence that we have ample runway to achieve our goals. The actions I just described are expected to result in a gross margin profile in the low to mid-50s range and to help us achieve our long-term goal of 10% operating margins. At the same time, our teams are focusing on our most compelling growth opportunities, designed to recapture growth and drive the top line, all of which are underpinned by the extensive digital marketing and tech capabilities we've built in recent years. As a reminder, our key growth pillars include revitalizing the fossil brand, maximizing our core licensed brand portfolio in watches and jewelry, and growing our premium watch offerings. We're continuing to progress against these opportunities, and as the TAG Plan takes shape, you can expect us to reinvest in these areas. We recognize that transformations like this take tremendous discipline and focus. We are committed to providing updates on our transformation and growth plan in the upcoming quarters. And finally, I want to thank all of our fossil teams worldwide for their significant efforts to improve our business overall. And now I'll turn the call over to Sunil to take us through the financials.