Fossil Group, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Fossil Group's second quarter 2024 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 Greeney of the Blue Shirt Group to begin. Christine?

Thank you. Hello, everyone, and thanks for joining us. With us today on the call are Jeff Boyer, Interim CEO, and Andy Scobie, Interim CFO. 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 8-K, 10-Q, and 10-K 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. 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. With that, I'll now turn the call over to Jeff.

Thanks, Christine, and good afternoon, everyone. Thanks for joining us. I'd like to welcome Andy Scobie, our newly appointed interim CFO to the call. Andy joined us on July 1st and has quickly ramped up on our business, allowing for a seamless transition into the CFO role. I'll begin with a high-level overview of our financial results and business performance. Then I'll do a deeper dive on our TAG plan and why we're confident that we'll position Fossil to return to profitability. Then I'll pass the call to Andy for a more detailed look at the financials. Second quarter results were in line with our expectations, with top-line trends remaining relatively constant year-to-date. Against this backdrop, ongoing progress within our TAG plan allowed us to deliver meaningful gross margin expansion, continue to take costs out of the business, and substantially narrow our adjusted operating loss. The highlights for the quarter include 390 basis points of gross margin expansion, an 18% reduction in SG&A, and a nearly 40% reduction in our adjusted operating loss. Let me provide some color around sales trends. Net sales declined 19% on a constant currency basis, which include approximately five points of impact related to our strategic actions to exit the smartwatch category and optimize our retail store portfolio. At a high level, macro and category dynamics continue to present a significant headwind. As other companies in the consumer segment have noted, the wholesale channel in the US and Europe remains challenging, and consumption sentiment remains soft in China. As we discussed last quarter, about half of our sales base is beginning to show signs of stabilization, with Q1 performance in this sector approximately flat and Q2 results down about 4%. The most notable areas of the business where we're seeing positive dynamics emerge are fossil traditional watches, which are approximately flat, globally on account basis, and India, where sales increased double digits compared to last year, reflecting strong growth across virtually all brands. The more challenging areas of our business, licensed watch brands and leathers, represent about half of our revenue base in the quarter. The pressure we're experiencing on our licensed watch brands can be traced to ongoing contraction due to licensed or brand repositioning, as well as the soft consumer demand I noted in China. Encouragingly, we started to see watch and jewelry sales trends begin to strengthen in our key license or boutiques. Though a small percentage of our overall sales, we view this as an early sign that their brand repositioning efforts are starting to gain traction. In our fossil leathers category, as a result of softer than anticipated consumer response to our new product offerings, we are repositioning the assortment to deliver enhanced functionality and increased value to the consumer. During these challenging times, we're focused on four core priorities to position the company to return to growth and profitability. First, advancing our Transform and Grow plan. Second, strengthening our balance sheet. Third, stabilizing the business. And fourth, conducting a strategic review of our business model. Our teams are working tirelessly and delivering strong execution on multiple work streams under our TAG plan. We're encouraged by the operational and financial progress we're seeing as reflected in our margin expansion and cost reduction year to date this year. A critical foundational element of TAG is our shift to a globally led operating model with regional execution of consolidated brand strategies. This model, which is expected to drive greater consistency, efficiency, and accountability, is better aligned with the size of our business and our long-term strategic objectives. Standing up this new model included some right-sizing actions in the first half of the year, and we're continuing to evaluate additional opportunities as we evolve the organizational structure in the coming quarters. Importantly, the efficiencies we're capturing under our TAG plan are driving significant improvement in gross margin and operating expense. Year-to-date, we're tracking to achieve at least $100 million of annualized benefits from TAG in 2024 and remain on track to achieve expected total plan benefits of $300 million. From a gross margin perspective, we're realizing benefits from skew rationalization in pricing and promotional initiatives. From an operating expense lens, we're capturing benefits through several actions as we continue to right-size our cost structure. These include workforce reductions, procurement and indirect cost savings, store closures, rent negotiations, and store labor optimization. The actions I just outlined are expected to generate significant gross margin and SG&A benefits in the second half of 2024 and continue into next year. Our work to strengthen the balance sheet is progressing. As we discussed on our last call, during Q2, we received a U.S. tax refund of $57 million. providing us with incremental cash and strengthening our liquidity position. Second quarter ending inventory declined 38% versus a year ago, and 10% compared to Q1, driving improved working capital. We're continuing to focus on the asset monetization opportunities we talked about last quarter, including the sale of our real estate in Europe, while also pursuing opportunities to utilize our working capital more efficiently, leverage our inventory and receivables, and obtain liquidity opportunities for our non-AVL assets. We ended the second quarter with $156 million of liquidity comprised of cash and available borrowings under our revolving credit facility. Based on current business trends and anticipated working capital needs, we're positioned to maintain ample liquidity and generate positive pre-cash flow for the full year. Our near-term actions to stabilize the business are bearing fruit. In the first half of 2024, we exited 46 retail store locations at naturally to expiration and now expect to close up to 55 fossil and watch station stores by year-end as part of our store optimization initiative. Additionally, we've successfully exited the smartwatch category with almost no inventory remaining. In the second quarter, we saw trend improvements in our own stores and boutiques for traditional watches across our alpha brand, as well as several of our major licensed brands. Of note, fossil traditional watches were up 4% in our DPC channels on a count sales basis in Q2. In the second half, our teams will focus on additional upper funnel initiatives to drive awareness and heat, including brand ambassador and influencer campaigns. Just this morning, we announced supermodel and entrepreneur Ashley Graham as the new ambassador for Michelle, our luxury women's watch brand. She'll serve as the face of Michelle's latest marketing campaign. Similar partnerships are expected in the coming months. From a licensed brand perspective, we just signed an expansive license agreement with Skechers, broadening the scope of our agreement and extending the term to 2029. Over the past five years, we've grown our Skechers watch business by 35% annually. We're extremely excited to continue our partnership with one of the world's fastest growing brands, look forward to driving further growth on a global scale in the coming years we continue working closely with our advisors on our strategic review including an ongoing analysis of our business model development of strategic initiatives refinement of our financial plans and comprehensive reviews of our capital structure and financing alternatives looking ahead to the remainder of 2024 We expect to see sequential improvement in trends across sales, gross margin, and adjusted operating margin. We remain on track with our tax plan and reiterate our full-year expectation to achieve net sales of approximately $1.2 billion, adjusted operating margin of minus 3% to minus 5%, and positive pre-cash flow inclusive of the $57 million tax refunds. We're acting urgently to drive improved financial performance and remain committed to building long-term shareholder value. We appreciate the dedication of our teams and the support of our shareholders. Now I'll turn the call to Andy to review the financials, and we'll conclude the call with some Q&A led by Christine.