Fossil Group, Inc. Aktie

Thank you. Good afternoon, ladies and gentlemen, and welcome to the Fossil Group Second Quarter 2026 Earnings Call. [Operator Instructions] 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 Greany of The Blueshirt Group to begin. Thank you.

Hello, everyone, and thank you for joining us. With me on the call today is Franco Fogliato, Chief Executive Officer, and [ Randy Grevin ], Chief Financial Officer. Before we begin, I would like to remind you that information made available during this conference call 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 as well as certain non-GAAP financial measures. Please note that you can find 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 is available on the Fossil website, was filed today on Form 8-K, and is available in the Investors section on fossilgroup.com. With that, I'll now turn the call over to Franco to begin.

Good afternoon. Thank you, Christine, and welcome, everyone. We're pleased to deliver another quarter of strong financial performance, which reflects the compounding benefits of our turnaround plan and disciplined execution. Our Q2 net sales totaled $211 million, led by strength in key brands, channels, and geographies, which is setting the stage for our return to top-line growth in the fourth quarter of this year. Gross margins of 62.4% were above our expectation, largely attributable to our full-price selling model, and adjusted operating income doubled versus a year ago, coming in at $8.6 million. Momentum enables us to confidently raise our full-year outlook, underscoring the strength of our turnaround pillars and our commitment to driving durable growth and value creation.

During the quarter, we saw notable strength in two of our biggest and most scalable markets, the U.S. and India. From a regional perspective, the Americas region stabilized and was highlighted by mid-single-digit growth in the U.S. The Asia region increased 4% with strong double-digit growth in India. Solid performance in these two regions is particularly gratifying given the headwinds we're seeing in EMEA, which is being increasingly impacted by the geopolitical climate in the Middle East. Another standout this quarter was our Fossil brand traditional watch business, which delivered impressive growth of 12% globally in the wholesale channel. We're pleased that our solid top-line results, healthy gross margins, and effective cost management translated to strong bottom-line delivery in the quarter.

We view this as a testament to the hard work and commitment of our teams around the world and would like to express our gratitude for their ongoing dedication to helping us consistently deliver on our plans. Now, I will turn to some updates on the initiatives under our three strategic turnaround pillars. First, returning to profitable growth. We're strengthening the Fossil brand platform to action to fuel innovation, deepen consumer engagement, grow the traditional watch business, and reinvigorate our jewelry and leather categories. Our product engine is key to growing our business. As a market share leader, we are benefiting from structural tailwinds that are driving traditional watch growth across markets and demographics.

And we are uniquely positioned to capture this opportunity by continuing to deliver a steady pipeline of innovation. We're building a portfolio that allows Fossil to win at every level, from attainable everyday style to elevated watchmaking. We're thrilled to have recently been nominated for American Watch Brand of the Year, Volume Watch Brand of the Year, and Best Marketing Campaign for Big Tic Y2K for the upcoming WatchPro Awards in September, a premier watch industry event. This is a tremendous honor that speaks to the enduring strength of the Fossil brand and the talented teams driving our product engine and storytelling. Fossil has over 40 years of design heritage that we are drawing from to inspire innovation for the future.

Bringing back iconic products from our archives, we're transforming nostalgia into a competitive advantage. And we're just getting started in 2026. In the first half of the year, we launched Big Tic, introduced a [ War Plex ] collection to coincide with the World Cup games, and continued to bring high-profile collaborations with Star Wars and Marvel to market. At the same time, Fossil icons like the Everett, Machine, Neutra, and Townsman collections for men, and the Harlow, Raquel, and Scarlette collections for women continue to drive scale and market share. We're continually innovating our icons forward, which has enabled us to create best sellers like watch rings and minis, two categories that Fossil has defined within the industry.

This fall, we are launching an exciting evolution of our Machine platform, the X1, which is bolder, sportier, and marks another step forward in our premiumization strategy. We are focused on elevating our brand equity through innovation, material, craftsmanship, and now Swiss watchmaking. Among our biggest product stories in the second half of the year is the launch of Signature, a premium platform that introduces a new level of technical sophistication and Swiss-made craftsmanship. We're incredibly proud of this offering and believe it to represent an important new chapter for the Fossil brand. The Signature collection will premiere at New York Watch Week in October, supported by a dedicated campaign designed to celebrate craftsmanship and drive engagement with watch industry press and influencers.

It will be quickly followed by a launch event in India, where consumers are increasingly seeking premium products. We will be amplifying the India launch by partnering with Padmanabh Singh, our global senior ambassador. Padmanabh is the Maharaja of Jaipur and one of India's leading polo players. He represents a unique blend of heritage, modern style, and global influence that we believe will help drive excitement and engagement. Storytelling is also critical to our brand-led, consumer-focused operating model, and in Q2, we accelerated our investment in demand creation. In the first half of 2026, the combination of robust product innovation and targeted marketing investment helped us drive brand heat in new customer acquisition.

Our global marketing teams have been focusing on putting Fossil at the center of culture with a digital-first approach, social engagement, and immersive events. During Q2, we had a Fossil fun event featuring K-pop star [ HAL ] at our flagship store in the capital of Malaysia. The event drew an overwhelming response from hundreds of fans, far exceeding the capacity of our store. It also captured live media attention, drove exceptionally high engagement rates on social media, and generated 600,000 impressions in one day. We're continuing to invest behind marketing and events to drive cultural relevance and have more storytelling on deck for the second half, including our Signature launch and other key moments leading up to the holiday season.

Looking further out, there is much more to come next year in terms of product innovation and creative marketing. We just held our Spring/Summer 2027 Global Sales Meeting at our headquarters in Dallas last month. The energy, collaboration, and enthusiasm from our teams from around the globe was tremendous and reflective of the exciting opportunities in front of us. Turning to our omnichannel initiatives, which are focused on modernizing our brand expression at wholesale, improving our e-commerce business, and optimizing our Fossil store portfolio. On the wholesale front, we're driving growth with our long-term partners and extending our footprint in specialty retail doors. This is primarily being driven by three major factors.

Great product supported by a robust innovation pipeline, engaging storytelling, and our commitment to full-price selling. During Q2, we saw traditional watch growth in both the Americas and Asia regions, with strength across brands in key markets. This includes the important U.S. market, where wholesale channel performance was highlighted by traditional watch growth of 16%, led by even stronger performance from the Fossil brand. Looking now at DTC in the e-commerce channel, we're continuing to drive higher product margins and AUR as we prioritize full-price integrity and implement initiatives to provide a more engaging customer journey. In the retail channel, we're pleased to note that our store of the future strategy is continuing to gain traction, driving improved performance in our full-price stores during the quarter.

Most notably, we're seeing accelerating trends across product margins and AUR. Building on the momentum we have seen across channels, we recently strengthened our leadership in the Americas region by bringing in seasoned industry veterans to lead our wholesale and retail businesses. We believe this leadership addition will accelerate our efforts to strengthen operational excellence, drive productivity, and increase market share. Moving now to our core licensed brands. In the Michael Kors brand, watches and jewelry delivered another quarter of improved performance in our most important channels and geographies. The brand is undergoing a successful turnaround, and we're following their lead on style and fashion authority.

We're evolving our strong hero watch collections like Lexington that resonate globally with consumers, while also building new platforms beginning with the Chelsea collection this fall. We're also focused on rejuvenating jewelry through elevated design and a redefined pricing strategy, bringing new energy to demand across collections and price points. In Emporio Armani, the brand continues to generate strong sell-through, driven by innovation and a focus on premium offerings, while the Armani Exchange brand is benefiting from product newness and curated events featuring celebrity collaborations. This fall, Emporio Armani will introduce the next evolution of the Archetipo, a classic dress watch positioned in the $200 to $300 price segment in one of the brand's most iconic timepieces, which will serve as the foundation of the collection for the years to come.

Looking now at India, one of our most important strategic markets, where we are seeing ongoing strength in all brands and channels. During Q2, we delivered double-digit growth in the Fossil, Armani, Diesel, and Kors brands, with strong performance in both the wholesale and direct-to-consumer channels. This was driven by product newness, disciplined full-price selling, and great storytelling, as our experienced team continues to deliver strong execution. We're executing a number of initiatives to continue the momentum in the Fossil brand. We're maintaining a robust pipeline of newness to drive consumer engagement and branding. At Michael Kors, we're leveraging the brand image and amplifying our bridge-to-luxury positioning as we cater to local consumers with a strong desire for upscale product.

In the Armani brand, we're delivering newness and premiumization at Emporio Armani. We'll continue to focus on product innovation, premiumization, and customer engagement initiatives at Armani Exchange. To support the pace of growth we're seeing in this market, our operational and supply chain teams have been working fast and furious and delivering strong execution. Our India factory has been delivering increased throughput and recently achieved ISO certification, indicating outstanding commitment to quality procedures and protocols. We believe there is still a tremendous runway ahead to unlock additional growth in India as we double down on product marketing and channel expansion opportunities. Moving to our second turnaround pillar, optimizing our operating model.

The major areas of focus include sharpening go-to-market execution, enhancing our digital and technology infrastructure, delivering best-in-class supply chain performance, and prioritizing high-impact projects and key performance indicators. Within the quarter, we made several important tactical advancements that are worth mentioning. First, the deployment of AI is supercharging automation and productivity improvements across our back office. Next, we completed a transition of our South Africa subsidiary to a distributor model, which is expected to lower our operating costs and drive greater flow-through of gross profit to the bottom line. We also transitioned our Malaysia-Singapore markets to a new hybrid operating model, capturing synergies in the region while yielding G&A reduction.

Another key initiative is the recent execution of lease extensions on more than 25 of our best-performing stores in the Americas region. Lastly, during Q2, we also executed a lease for a new North American fulfillment and distribution center. The new facility located in Sunnyvale, Texas, will come online later this year, replacing our existing Richardson ground. The upgraded space is not only fit for purpose based on our current business space, but also accommodates our future growth plans at a lower cost, further underscoring our commitment to optimizing our cost structure as we return to profitable growth. These are just a few examples that demonstrate the rigor with which our teams are executing across the business on a wide range of operational initiatives to capture efficiencies, unlock value, and strengthen performance.

Now, turning to our third pillar, building shareholder value. We're pleased to be delivering a second year of traction under our turnaround plan. We're driving improved top-line trends, have established a healthy gross margin profile, demonstrated disciplined cost management, and returned the business to profitability. As we look at the balance of the year, based on our strong first half and positive business trends, we are pleased to be raising our full-year outlook on the top and bottom line. Most importantly, we continue to expect to return the business to sustainable top-line growth beginning in Q4 and now expect to generate positive free cash flow on a full-year basis in 2026.

We believe our strategy, talented teams, and disciplined execution position us to deliver long-term profitable growth and remain committed to driving value creation for all of our stakeholders. Now I will turn the call to [ Randy ] to discuss the financials.

Thank you, Franco. Q2 was another strong proof point that our turnaround plan is delivering on all fronts. Sharp execution across our initiatives enabled us to exceed expectations on the top line, expand gross margins, capture operating efficiencies, and deliver 2x in adjusted operating income versus last year. Net sales in Q2 totaled $211 million. That represented a decline of 4% versus last year and includes approximately 220 basis points of impact related to our store closure program. This was better than our expectations and marks another quarter of improving sales trends with the rate of decline continuing to narrow. Gross margin performance in the second quarter was strong, expanding 490 basis points to 62.4%.

The year-over-year improvement is first and foremost attributable to our commitment to full-price selling, which drove strong product margins, and is a continued testament to the strength of our supply chain initiatives. Lower tariffs compared to last year also served as a tailwind. We are pleased with our healthy gross margin profile and based on Q2's particularly strong performance, we now anticipate that full-year gross margins will be in the upper 50s. It's worth noting that this assumes we do not capture any additional tariff refunds in 2026. Turning now to operating expenses. SG&A came in at $123 million, essentially flat, excluding an $11 million gain recorded in Q2 of last year, resulting from the sale of our European distribution center.

In aggregate, SG&A in Q2 2026 reflects fewer stores in operations, as well as lower compensation and administrative expenses, which more than offset a planned increase in marketing spend to support our storytelling engine. Disciplined cost management remains a core tenet of our turnaround strategy. That said, we have continued to balance demand-generating marketing with some of our savings reinvested back into the business, as seen this quarter, as we've worked to support key product launches in Q3 and the seasonally important Q4. In Q2, we ended the quarter with 17 fewer stores, including 6 closures and 11 stores that we transitioned to a distributor in South Africa, which we talked about last quarter.

We have another two closures planned for this year and expect to end the year with approximately 178 locations globally. Stepping back, we believe the hard work of optimizing the store portfolio is largely behind us. Going forward, we will continue to deploy our successful store of the future strategy and evaluate longer-term opportunities to drive growth and productivity of the fleet. Physical retail remains a core pillar of our omnichannel business, and we are pleased to have extended our lease agreements on more than 25 of our best retail locations in the Americas, as Franco referenced earlier. Zooming out, we remain focused on optimizing our operating model by capturing efficiencies and rationalizing investments across key areas of the business, including go-to-market, IT, and back-office functions.

Looking at the bottom line, driving flow-through remains a priority. Gross margin expansion and disciplined SG&A management converted our top-line performance into bottom-line delivery. Q2 adjusted operating income doubled compared to last year, coming in at $9 million. I believe it's worthwhile to pause here and reflect on our bottom-line performance for the first six months of 2026. Year-to-date adjusted operating income of $18.1 million is 35% greater than last year's $13.4 million even on reduced sales. And as we have continued to advance our turnaround, the cost of restructuring is far less impactful this year than last, which translates to a meaningful increase in GAAP operating income, up nearly $14 million versus a year ago, even before normalizing for the gain of the European distribution center sale in last year's Q2.

Turning to the balance sheet, we ended the quarter in solid financial condition with $79 million of cash and cash equivalents and $18 million of availability under our ABL. Additionally, during the quarter, we collected $4.9 million of the $5.9 million tariff refund we recognized in Q1, and we had no utilization under our ATM program of $178 million. That's approximately flat compared to Q2 of last year and in line with our seasonal expectations, leaving the business well-positioned to support an anticipated return to growth in the fourth quarter, consistent with our emphasis on a full-price selling model. Importantly, higher year-over-year profitability and improved working capital management enabled us to narrow operating cash use versus a year ago. Moving now to guidance.

Given our strong first half performance and business momentum, we are raising our full-year outlook on the top and bottom line. Worldwide net sales are now expected to decline in the range of 3% to 5%, which compares to our prior expectation for a decline in the range of 4% to 6%. As a reminder, about 360 basis points of the decline can be traced to the net impact of store closures and the extra week in 2025. Of note, our outlook assumes an expected return to top-line growth in Q4 as we continue to unlock the benefits of our turnaround plan. On the bottom line, we now expect adjusted operating margins in the range of 4% to 6%, up from our prior range of 3% to 5%.

As a result of this improved profitability outlook, we now expect to generate positive free cash flow on a full-year basis. We are incredibly pleased with the way the business is performing, which is a testament to the work our teams are doing to reignite sales growth and strengthen our operating model, putting us firmly on a path to generate durable, profitable growth. Now I'll ask the operator to open the call to Q&A.

[Operator Instructions] Our first question comes from the line of [ Henry Dare ] with Maxim Group LLC. Your line is now open.

Hi, so [ Henry Dare ], I'm in for Tom Forte. First of all, congratulations on the quarter. I have two questions. The first is sales and traditional watches were up year-over-year in the previous quarter, and they were strong in this quarter. You've guided to a return to consolidated revenue growth in the fourth quarter. What would it take for traditional watches to consistently and sustainably grow revenue year-over-year in the future? Thank you.

Hi, [ Ari ]. Thank you very much for the question. I really appreciate it. We are extremely excited about our performances with our traditional watches. You've probably seen in the quarter our wholesale traditional watch growth was 12% globally, which is beyond our expectation and is really driven by the innovation that we started to develop and to enforce since I joined the company in September '24. To answer your question, it's really all about innovation. Innovation design, the creativity, the storytelling, the technology. I always repeat to the teams, I'm very excited about what we have achieved so far, but I'm even more excited about what is coming next, in particularly the second half of the year, and even further down into 2027 as we're building the alliance for 2027.

I think that our teams are gaining confidence. We have world-class teams. The company is in a much better position than for many years. We're excited, and we're excited about doing what we like to do, which is really building great products. So, you know, really, the answer is we need to continue to build the best product in the world, continue to really create that emotional connection the brand has created over 40 years with our consumer, and continue to make our consumer dreaming about this brand. We're ahead of what we said, we're ahead of our original plan, and I can't say how thankful we are to our teams that are showing once more that once we put them in the best condition to operate, they can create the best product in the world, and we're excited about what's coming next.

Thank you. And my other question is, last year you had a big marketing effort with Nick Jonas in the back half of 2025. This year it seems like your marketing efforts are a little more spread out across the year. I know you touched on this a little bit during your comments, but could you compare and contrast your marketing efforts for 2026 with 2025? And also discuss high level, your future marketing spending plans as you continue to strengthen the company?

Yes, look, a great question. Thanks for asking. I think you've seen in Q2 our commitment to return the company to growth. We're here to build a sustainable long-term growth. We have downsized the structure, simplified the company, ultimately with the goal to invest more in demand creation, and we have done that in Q2. So I can't say how thankful I am with our teams that have been delivering on the strategy. Q2 has been exceptional. The first half have been exceptional and the second half will be even better. Our Big Tic Y2K campaign has been named as best watch campaign of the year, nominated as the best marketing campaign for the year. We're so honored of this.

I'm so happy about the work that's been done. The campaign was so innovative and caught so much attention from our consumer. What's coming next, again, it will continue to improve. Nick Jonas is a great partner, will continue to unleash the opportunities to the brand. We're creating more stories focused into each media channel, and this will drive additional consumers into the funnel. I made clear when I joined the company we were moving investment for performance into upper funnel to drive the stronger brand and drive the brand heat, and that's what we are delivering on.

Okay, that's very helpful. Thank you.

Thank you very much, [ Henry ]. Our next question comes from the line of [ Owen Rickert ] with Northland Capital Markets. Your line is now open.

First for me, the 490 bps of gross margin expansion was really impressive, but you called out some accelerated licensed brand minimum royalty recognition as a partial offset. How should we think about the cadence of that royalty headwind in the back half of the year? And is the 62% plus gross margin level sustainable, or is that more of a first-half weighted dynamic?

Hi, [ Owen ]. Thank you very much for the congratulations for the question. Look, let me get started. And I'm asking [ Randy ] to chime in on this one. The gross margin is probably another statement on the way we're now running the company. We're disciplined, we're focusing into innovation, we're focusing into best presentation in the store, and the great news is consumers are responding, are buying. So I want to make sure this is the discipline we're now installing with the company, is coming in even better than what we thought, honestly. But I'm so proud of the work the teams did globally. We have changed and transformed this company into a full-price selling model.

Absolutely right, and just to answer the specific components of your question with respect to the timing of our royalty shortfalls, the impact on the quarter was approximately a point and a half, so not super meaningful. The real story continues to be, as Franco pointed out, the power of our full-price selling model. It's also worth noting its margin accretion for the Fossil Group, which also translates directly to our operating partners, our wholesale partners. It's truly a rising tide lifting all boats. It's a wonderful result for the business, and we're excited about it.

Got it. Super helpful there. And then secondly for me, more of a general guidance question. What are the specific drivers that get you to that year-over-year growth in 4Q? Or is it mostly new product launches, wholesale door expansion, easier comps, or is it something else? And then just how much visibility do you have into that today?

Look, it's a great question. I think it's a combination of all of these. We're learning more about the business we're building. We're working close with our partners to build the visibility. We're presenting better our products in the stores, right? All of this gives us better confidence on anticipating our future. We obviously take always, I would say, a cautious look at the future. Not immune for what will happen in the market. I don't know what's going to happen with gas prices. There is another work, but we are very confident about the innovation, the product pipeline coming out, the marketing, the storytelling.

I think I mentioned in my opening remarks, we had our global teams coming into Dallas to look even at next year range early and talk about the remaining five months of the year. And they were super excited and they never seen such a great momentum for many years. Our partners, which I get to them on the phone regularly every week, they're excited. They see the Fossil Group coming back. They see the Fossil Group they used to know, that great partner that was driving profit and sales, and they just love us, and we love them. And we will continue to build into this momentum, and all of that will be based on innovation in product marketing and discipline of running the company.

Got it, got it. And then lastly for me, it was great to see the Americas, Asia year-over-year in terms of net sales. Can you maybe just walk us through the primary drivers of some of that weakness in the European region? And what specific actions are you guys taking to stabilize that business?

Yes, it's a great question. Look, you can imagine Europe is pretty close to me. I was there actually maybe a couple of weeks ago. Look, we're not immune from any other brands. We benchmark with everybody else. There is a few things, obviously the war did have an impact, in particularly in the Middle East. Travel retail has been impacted. I have a lot of data showing how people are traveling less or they're traveling in the country. We also made significant changes to the business model through moving some direct territories into subsidiaries, which ultimately improved and simplified the company and took some risk out of the company and that drives a better profit, but has some pain in the short term.

Now, we have a great management team there. We have a global team supporting Europe. I keep remembering everyone, Europe was actually relatively speaking the best-performing market last year for our company. So we think we're doing the right things there. So, we believe on the long run that the market is coming back and it's an important market obviously for the watch industry, and we're doing all what is necessary to have a long-term review without chasing short-term success.

Got it. Got it. Super helpful, guys. Thanks again, and congratulations again on the quarter.

So thanks, [ Owen ]. And I'm currently showing no further questions at this time. I'd now like to hand the call back over to management for any closing remarks.

Thank you everyone for joining our call today. We're looking forward to talking to you next quarter.

This concludes today's conference. Thank you for your participation. You may now disconnect.

Hello, and welcome to Fossil Group Q1 2026 Earnings Conference Call. [Operator Instructions] This call is being recorded. And this call may not be reproduced in whole or in part without the company's permission. I will now be passing the call over to the presenters. You may begin.

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 as well as certain non-GAAP financial measures. 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 8-K and is available in the Investors section of fossilgroup.com.

With that, I'll now turn the call over to Franco to begin.

Good afternoon. Thank you, Christine, and welcome, everyone. We're pleased to begin the year with strong financial performance. Our turnaround pillars are delivering results today while advancing our path to long-term profitable growth. I want to recognize our exceptional global teams. Their commitment, creativity and disciplined execution are driving tremendous progress in our turnaround. In the first quarter, we delivered net sales of $218 million, healthy gross margin of 59.7% and strict expense control, which drove another quarter of positive adjusted operating income totaling $10 million. Top line results were better than we expected, led by strong performance in wholesale, core brands and key geographies as well as notable strength in traditional watches.

Looking at the balance of the year, strong first quarter performance, combined with continued industry tailwinds is enabling us to confidently reiterate our full year guidance despite the dynamic macro environment. Importantly, our teams remain laser focused on our 3 strategic turnaround pillars: returning to profitable growth, optimizing our operating model and building shareholder value. We're executing several initiatives across these pillars.

I will now turn to sharing updates on our progress and plans. First, returning to profitable growth. We're strengthening the Fossil brand platform through action to fuel innovation, deepen consumer engagement, grow the traditional watch business and reinvigorate our jewelry and leather categories. Our creative teams are delivering compelling innovation to consumer through a blend of creativity and logic that leverage our unique heritage to build the brand heat. The quarter was highlighted by the return of Fossil's Big Tic, which reflects our creative evolution as we draw from Fossil rich archives.

The storytelling around Big Tic has generated tremendous visibility from global lifestyle media and leading watch industry publication. Experiential seedings of the products drove a nostalgic excitement and placed Big Tic in the hands of media, influencers and celebrities early on.

In fact, Y2K media resonated with younger males, driving social engagement and online conversion among Gen Z and millennial consumers. We will be carrying this momentum forward with additional Big Tic animation launching throughout the year. In Q2, we introduced a limited edition Big Tic World Flags collection, which leverages engaged fan base and excitement around global sports moments such as the FIFA World Cup and Olympics.

More recently, we released our latest Star Wars collaboration on May 4. A new Mandalorian plus Grogu collection is garnering attention from Star Wars super fan, [ Sci-Fi ] and watch enthusiasts. Next up, we have exciting new collaboration with Marvel rolling out in Q3. Great storytelling remains a hallmark of the Fossil brand. Our marketing investments are helping us to drive brand heat and new customer acquisition, and we are amplifying our messaging around important times of the year.

Our recent Mother's Day campaign focused on our icon product offerings and double down Minis, which drove excitement around the well-loved collection such as Harlow and Raquel. Next month, we will be in the market with Father's Day's messages and local events.

Moving now to our omnichannel initiatives, which are focused on modernizing our brand expression of wholesale, improving our e-commerce business and optimizing our Fossil store portfolio. Our focus on full price integrity, channel discipline and operational excellence is building traction in key areas of the business. During Q1, wholesale grew mid-single digit with our core brand traditional watch sales up high single digits in the channel. Performance was strong with both our long-term wholesale partners as well as specialty in energy retailers, a new channel that is helping us build brand awareness and create excitement among a younger demographic

From a regional standpoint, in Q1, we saw broad-based strength in both the U.S. and India. Additionally, we were pleased to see improved performance in key Asia Pacific markets such as Japan and Australia in the quarter. The results are a testament to new leadership that is advancing our commercial strategy across the region. From a high-level perspective, our wholesale partner relationships are strengthening as we continue to work on full price selling and deliver compelling product assortment. In fact, our order books are building earlier, and we're beginning to develop longer-term plans together, demonstrating the confidence our partners have in our brand.

Our direct-to-consumer model keeps us close to consumer, providing a deeper understanding of customer needs and fostering more relevant brand building. On the e-commerce front, we're continuing to drive channel profitability on a smaller sales base through 2 key focus areas: one, our commitment to full price selling; and two, initiatives to strengthen the online customer journey. This includes continuous improvement to our new Fossil brand platform with fresh content and a functional update that enable us to showcase a more cohesive brand presentation, drive customer engagement and strengthen brand perception as we aim to build scale.

A great example of this is the recent launch of a new navigation across our Fossil e-commerce site globally. This enables richer brand storytelling with the navigation experience and sharpened focus on our collection, making it easier for customers to discover and shop key product stories. The enhancement reduced friction points across evolving journey and empower our merchandising team with greater flexibility to respond quickly to trends and key commercial moments.

In the retail channel, we closed 7 stores in Q1 and remain on track to close approximately 15 locations in 2026. It is worth noting that we have significantly scaled back our plans to downsize the portfolio as a result of improving performance in our full-price stores. It is clear that our initiative to deliver more engaging customer experience are bearing fruit. In Q1, comp performance was particularly strong in our full-price stores. In the near term, we're further advancing our Store of the Future strategy by rolling out an expanded suite of selling tools that equip our associates with the skills needed to maximize full price sales. Longer term, we plan to test and learn to build a refined store model that generates compelling returns and presents an opportunity for major expansion.

Moving now to our core licensed brands, where we are seeing growth across the spectrum, including Armani Group, Diesel and Michael Kors. I will start with the Michael Kors brand, where we were pleased to see year-over-year growth in Q1. Productivity and newness with momentum in the wholesale channel, further supported by the ongoing work being done by the Michael Kors team to drive brand heat.

Additionally, the shift towards a more competitive pricing architecture in jewelry is driving increased AUR and improve the brand position. In Emporio Armani, the brand achieved a strong sell-through across channels, driven by elevated assortment, a shift towards premium offerings and compelling high visibility marketing campaigns. In the Armani Exchange brand, healthy performance is attributable to higher full price sales, strength in women's and product newness.

Looking now at India, where we're successful scaling a proven growth engine. During Q1, we executed against the key initiatives we outlined on our last earnings call. Specifically, we broadened our reach with the addition of more than 70 new wholesale doors. We drove premium position with new price points, resulting in a higher mix of full price sales as well as a higher average unit retail. We implemented a new e-commerce platform and CRM integration tool to enhance our omnichannel capabilities. And we continue to leverage our market leadership position and build brand heat through strong execution across Fossil, Armani, Diesel and Kors.

Moving to our second turnaround pillar, optimizing our operating model. Our teams are actioning a number of initiatives to strengthen our go-to-market execution, including both operational investments and infrastructure improvement. Simplification across the organization continued as we further streamline operations, rationalize our investment and consolidate our IT stack. This includes the ongoing simplification of our analytics platform, which has reduced costs and enhanced our capabilities, establishing the data architecture required for Agentic AI.

As part of our broader strategy to build a more competitive and profitable model in smaller international geographies, subsequent to the quarter end, we signed an agreement to transition another international market to a distributor model, aligning with a best-in-class partner in South Africa. This strategy enabled us to leverage the local knowledge and expertise of regional distributors while lowering our operating expenses, driving strong flow-through of gross profit to the bottom line.

I will now turn to our third and final pillar, building shareholder value. Ongoing progress across the business is setting the stage for us to continue to drive improved profitability and deliver positive free cash flow. Our strong start to 2026 reinforce the effectiveness and durability of our turnaround plan. The impact of simplification and focus is clear. Our brand-led consumer-focused model is enabling us to build a smaller, more profitable business that is positioned to return to growth in the fourth quarter of this year.

The progress and momentum we saw throughout 2025 carried into the first quarter of 2026. With only 1 quarter of the year delivered, we're holding our guidance in light of the geopolitical climate and its potential impact on the consumer. We continue to have strong conviction in the trajectory of the business and remain committed to building long-term shareholder value.

Now I will turn the call to Randy to discuss the financials.

Thank you, Franco. We delivered another strong quarter across the P&L, reflecting the strength of our brand portfolio and continued traction within our turnaround pillars. While our top line outperformance was primarily driven by better-than-expected wholesale results, including the shift of some receipts previously anticipated in Q2 moving into Q1, we continue to make progress towards strengthening our DTC channel. In fact, every facet of our business is contributing to the success of our turnaround.

Net sales in Q1 totaled $218 million. That's down 6% from last year. Looking deeper, the comparison versus last year includes 7 points of unfavorable impact as we lap the extra week in last year's first quarter as well as another 280 basis points related to the net impact of our store closure program and our smartwatch exit. Taking these factors into account, we are clearly demonstrating that the business is stabilizing and poised to return to top line growth. First quarter gross margin came in at 59.7%, down 160 basis points year-over-year, reflecting both strong product margins and our ongoing focus on full price selling.

Similar to revenue, there's quite a bit to unpack as it relates to the inputs to our results. First, we incurred higher tariff expenses this year versus Q1 of 2025. While prevailing tariff rates at present remain lower than they were before this year's court ruling, they are still elevated as compared to where they were prior to Liberation Day, which you will recall was a Q2 2025 event. Next, we've recognized a portion of our anticipated full year minimum royalty shortfall in the quarter.

As a reminder, in recent years, the GMR true-up was recognized in our second half with the majority of it being booked in Q3. Concurrent with negotiating more favorable license agreement terms for 2026 last year, we are now amortizing the shortfall throughout all 4 quarters. It bears reminding that the quantum amount of shortfall is forecast to be materially lower than in recent years and should result in much more consistent quarterly gross margin, which we continue to anticipate being in the mid- to upper 50% range.

These 2 impacts, higher tariff expense and license brand minimum royalties were partially offset by the recognition of a tariff refund claim during the quarter. Of the total $5.9 million claim, $4 million was recognized as a reduction to cost of sales, $900,000 was recognized as a reduction to SG&A and the remaining $1 million was recorded as a reduction to inventory on the balance sheet. The majority of the $4 million cost of goods benefit is related to costs incurred in 2025 and therefore, has been adjusted out of our operating income.

Net-net, our Q1 gross margin is very healthy and reflects not only the power of our portfolio of brands, but also the strength of our robust supply chain. Importantly, we remain confident that we can maintain this margin profile throughout the balance of the year. It's also worth noting that we have not embedded any further refunds into our 2026 outlook.

Turning now to operating expenses. We lowered SG&A dollars by 13%, which exceeded our sales decline and drove expense leverage in the quarter. The improvement is attributable to 27 fewer stores in operation versus a year ago as well as lower compensation and administrative expenses. During Q1, we closed 7 stores and expect to close up to 15 in total this year. This would put us at 185 locations globally at the end of 2026. As you heard from Franco, we are continuing to focus on optimizing our operating model by capturing efficiencies and rationalizing investments across key areas of the business, including go-to-market and information technology.

I will also point out that restructuring costs have come down considerably, totaling just $2 million in Q1 of 2026 versus $16 million a year ago. The leverage we achieved in SG&A with costs coming out in excess of our sales decline is a tangible example of the discipline that underpins all of the efforts of the group today. And subsequent to quarter end, we've continued to fine-tune the operating model, including, as Franco mentioned, signing the agreement to transition our South Africa subsidiary to a distributor during Q2. The combination of healthy gross margins and expense control absolutely translated to the bottom line, where we delivered another quarter of profitability. Q1 adjusted operating income came in at $10 million versus $9 million a year ago.

Turning to the balance sheet. We ended the quarter with $81 million of cash and cash equivalents and $28 million of availability under our asset-based revolver, reflecting our seasonal working capital cadence. Additionally, as of quarter end, we had no utilization under our ATM program. Inventory at quarter end totaled $156 million, down 14% versus last year, which is in line with our expectations to increase [ churn ] even as we lean into more full price selling. In Q1 of this year, our cash used in operations reduced by over 50% from the same period last year, reflecting our strengthening profitability and improved working capital management.

Moving now to guidance. Strong execution against our turnaround pillars is enabling us to reiterate our outlook for the full year 2026. While results to date are, in fact, ahead of expectations, we believe this is prudent given the uncertainty that exists in the geopolitical environment and the potential effect on input costs and consumer behavior. We continue to expect worldwide net sales to decline in the range of 4% to 6%. Of note, the net impact of store closures and the extra week in 2025 are worth about 360 basis points.

Further, we continue to anticipate that 2026 will be second half weighted and will be punctuated by an expected return to top line growth in the fourth quarter as we continue to harness the compounding benefits of our turnaround initiatives. On the bottom line, we continue to expect adjusted operating margin in the range of 3% to 5%. Lastly, we continue to expect to achieve breakeven free cash flow on a full year basis.

Now I'll ask the operator to open the call to Q&A.

[Operator Instructions] Your question comes from the line of Thomas Forte from Maxim Group.

So first off, Franco and Randy, congratulations on super impressive performance. I have one question and one follow-up. I'll go one at a time. So I think you commented, Franco, in your prepared remarks that you had a return to top line growth in traditional watches, which I believe is the first time in years. How should we think about the sustainability of that performance?

Tom, thank you very much. Look, we're excited. We're 1 quarter in. In particular, we're excited about the performances across the traditional watches in the wholesale channel, where we've been performing very well. We're still doing a lot of work from our DTC, in particular, with closing stores and reducing some of the sales we were doing on e-comm that we were -- at the beginning of 2025, we still had a lot of inventory that was old and bought prior I joined the company. The greatest thing is not only we're making progress with the wholesale accounts but also we're seeing we're selling at a higher AUR driving better gross margin.

So overall, we're very encouraged. I mentioned a lot of work we've done at the beginning when I joined the company, only go-to-market towards the end of '24. The pipeline in '25 -- sorry, go-to-market at the end of '25, in particular the Nick Jonas collection. We have a big peak now in '26, and we have a full pipeline ready to go as we enter later this year, the second half, and we're working on '27. So a lot of work we've done has been into turning around our traditional watch categories, and we're very excited. And this is honestly combined with a tailwind in the industry, in particularly in the America region where we're seeing a lot of younger consumers coming back to the space, which is very encouraging for all of us. Randy, anything?

The only thing that I would add is the combined power of not only having the traditional watch category perform in a manner of strength that it hasn't in some time, but coupling that with full price selling, you really see that flow through the gross margin. And this is a quarter where we've demonstrated the ability to translate that gross margin through to the bottom line. It's a tangible proof point of the strategy coming together.

Excellent. And then for my follow-up, Franco, you used the words Agentic commerce, which is something I've heard a lot from Amazon, really from all the big mega cap technology companies. What are your thoughts on how you're preparing for Fossil for Agentic commerce and what it could mean for you in the future?

It's a great question. Look, we're absolutely focused on driving, generally speaking, AI as an opportunity for the company, in particular Agentic AI. We're seeing -- we're making great progress. We're at the beginning of a journey where a lot of areas in the company from marketing, e-com, supply chain where we're applying AI already. We've got a great vision for the company, and we're just at the beginning of the journey, is shaping the way we work. we are definitely better. And this is a different company from what we used to do. Right now, we're focusing into execution and Agentic AI is an opportunity for us to improve our execution of the plan as we progress forward.

When we created the current version of the pillars that we're using that power this phase of our turnaround strategy, AI was at the heart, not just of growth, which is where you started this question, Tom, but also very much within Pillar 2, which is the optimization of the operating model. We already have a number of use cases that drive efficiency and/or remove cost. And I think like a lot of companies, we recognize that we're just scratching the surface. We're at the very beginning of this journey, but important to know that we're on it alongside many of our other competitors and other companies out there.

Your question comes from Owen Rickert with Northland Capital Markets.

Congrats on a great quarter. Firstly, on Big Tic, it sounds like the initial launch has been great and that the rollout is going to be over a few quarters here. Where are we in that rollout right now? How many doors is it in today versus the eventual target? And secondly, on Big Tic, are you seeing any evidence of a halo effect on the broader Fossil brand at accounts that are carrying Big Tic?

Yes. Thank you very much for the question. Look, we're excited because the Big Tic, particularly Y2K has been really, really well covered from the press. We're seeing great sellout. We have chosen a strategy of very key distribution, in particular, with energy retailers, our DTC and stores that we feel like they are driving brand heat and brand demand. So initially, the strategy was to use our incredible archives to drive consumer back into our brand as we've been moving off the -- really the promotional activity into a full price selling model, and this is paying off.

We will release -- we have the Big Tic World Flags coming out now, which is really celebrating some of the big sports moments, in particular, think about the FIFA World Cup or other events related to countries, which are very exciting. We also have additional movement on Big Tic coming out later this year. This has 2 effects, continue to drive consumer towards the archives of the brand. We have a unique history and heritage, but also drives the positive effect around the, what we call the icons, because it drives the brand heat, drive brand momentum, and that's really always this -- the goal has always been to build Big Tic as the brand story, which drive consequently sales across all our icons and it's paying off.

Got it. And secondly for me. It sounds like Signature is launching later this year. What does the initial retail door plan look like for Signature? How selective will distribution be? And how are you thinking about inventory risk at a price point that Fossil has really never operated in before?

Great question. Look, we're excited. This is going to be a limited launch. We're working with strategy of scarcity, and we're driving brand heat. We're driving brand demand. We started to show to some of our partners our product. They are excited about the quality of the product. So to your point, we will be very much measured on the inventory we're going to produce. We will create scarcity. We will make sure that they -- the presence and the way we come up at retail is unique and differentiated. And we want this to be the pinnacle with the brand with the ultimate goal to drive the brand credibility in the watch industry as we have -- we are a watch company with more than 40 years of history, but also drive sales on our icons.

If I can add one thing, while it is a step-up from where we're currently selling the majority of our Fossil time pieces, it's worth reminding that we've got a number of other brands, and many of those brands participate at points that are significantly higher than where we're aiming to launch Signature, which suggests that we've got the right supply chain in place to make sure that we're mitigating any sort of risk, buying appropriately.

We won't lose the discipline that you can already see on the balance sheet with respect to turn. So we'll buy it smart. And to Franco's point, scarcity allows us to do that, also drive consumer demand. And it is, again, a haloing effect for all of the partners that we launch that will carry it.

Great. Super helpful. And then lastly for me, you guys previously called out India as the closest thing to a vertically integrated operation Fossil really has anywhere globally. Can you just give us a sense about how you're feeling about the India business right now, just given some of the ongoing macro concerns in the region?

Well, I got to say our India business is one of our strongest assets. We're very pleased with our performances. We called that out as a pillar. We remain not only a leader in the region, but we're very well performing. We're excited about the opportunities. I think I spent a lot of time down in India. It's a growing industry and the watch category is very strong, and we have a leading position. So no concern from our side. We're not immune from what the world -- what is happening in the world, but we know our business, and we have a competitive advantage there with probably one of the best team in the industry, and we've seen great momentum.

There are no further questions at this time. So I will now turn the call back to management for the closing comments. Please go ahead.

Thank you, everyone, for joining today. We are pleased with our turnaround progress, and we look forward to updating everyone on our Q2 earnings call. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Good afternoon, ladies and gentlemen, and welcome to the Fossil Group Fourth Quarter and Full Year 2025 Earnings Call. This conference call is being recorded and may not be reproduced in whole or inquired without written information from the company. Now I will turn the call over to Christine Greany of the Blueshirt Group to begin.

Hello, everyone. Thank you for joining us. With me on the call today is Franco Fogliato, Chief Executive Officer; and Randy Greben, Chief Financial Officer. Before we begin, 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 as well as certain non-GAAP financial measures. 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 8-K and is available in the Investors section of fossilgroup.com. With that, I'll now turn the call over to Franco to begin.

Hello, everyone, and thank you for joining us. 2025 was a transformative year for the company, defined by operational excellence and financial performance that exceeded our expectations. We took all the steps to advance our turnaround plan, delivering strong execution against the 3 pillars we laid out just 1 year ago. Those include refocusing on our core, rightsizing our cost structure and strengthening our balance sheet. We built a brand-led consumer-focused operating model. [ Samena ] exceptional management team and established a culture of accountability. We recently appointed a new Chief People Officer who would be a valuable part of our efforts to continue strengthening our organizational capabilities, culture and customer-first mindset.

I'm incredibly proud of our teams and wanted to thank everyone across the organization for their energy, passion and hard work and for opposing our commitment to keep the consumer at the center of everything we do. Our turnaround efforts gained traction quickly, enabling us to end the year and of our initial plan. We delivered full year performance above the updated guidance we provided halfway through the year. Net sales totaled $1 billion. Gross margin expanded 380 basis points to 55.9%, and we reduced SG&A by over $100 million. This drove a positive adjusted operating income of $11 million, a year-over-year improvement of $48 million.

Now I will turn to the operating highlights and key accomplishment of 2025. First and foremost, we created a positive brand platform for the future. We accomplished this by improving the customer journey and delivering a robust pipeline of product innovation all supported by powerful heritage brand, [ Store Italian. ] At the same time, we successfully established a full price selling model by radically transforming our promotional cadence across channels.

This enabled us to return the business to a healthy gross margin profile in the mid-50s and improved profitability in both our wholesale and direct-to-consumer channels. Importantly, this has strengthening our wholesale partner relationship, creating a powerful flywheel effect that is delivering benefits across all channels. Next, we reenergized our core license brands, Michael Kors and Emporio Armani, Exchange and Diesel. Most notably, strategic investments in point-of-sale and a renewed focus on specialty watch retail enabled us to improve our in-store presentation and performance in the wholesale channel.

We also drove momentum in our traditional watch business by prioritizing our most scalable markets in the world sale channel, including the U.S. and India. This resulted in wholesale traditional watch growth in our core brands of 2% globally for the full year in 2025. At the same time, we took a clear action to rightsize our cost structure and instituted a culture of strict cost control.

Lastly, and as importantly, we transformed our balance sheet. We now have the 1 way and flexibility to support the next phase of our turnaround, build a sustainable, profitable business model and delivered long-term value creation. We have entered 2026 well positioned to leverage our foundational assets, including our 40-plus year Artic iconic brand, innovative design, global reach and talented teams. Also notable, the industry is experiencing strong momentum across markets and demographics.

At the same time, our comeback is capturing increasing attention from consumer, partners and the press -- just last month, I was at today in Organta Watch and Julie show Munich, where many of our brands were center-stage -- in 2026, we will be making more bold moves on our journey to reinvent Fossil Group and lead the industry. It's an exciting time for the company as we continue to foster a collaborative creative and energetic culture with accountability and a strong commitment to win.

We're turning the page to a new chapter and evolving our 3 strategic pillars as follow: returning to profitable growth, optimizing our operating model and building shareholder value. Over the next 3 years, this evolution of our turnaround is expected to generate a return to top line growth high single-digit adjusted operating margin and positive free cash flow. More on our financial outlook shortly. But first, let's talk about the initiative we will be executing against to further advance our turnaround.

Within our first pillar, returning to profitable growth, our teams will be focusing on the fine initiative across the positive brand platform to full innovation, deepen consumer engagement, grow the traditional watch business and ran ingrate our jewelry and leather categories. In 2026, we will be full innovation to design, technology and store retain -- this includes a raisin key icons continuing to delight our customers with culture with relevant collaboration, revising 1 of fossil sold after Y2K innovation and introducing a selected group of premium products.

Let me take you through the road map. Starting with our watch items, which make up a significant portion of our business, we will be innovating and expanding upon key collection, including our Abrate, Arlo, Machine and Racal platforms and our watch rings. Additionally, we will be doubling down on our mini collection across all of our top women's platforms.

Following the success of 2025 collaboration, such as a fantastic 4, Galaxus, Minecraft, Shelby and Superman, we will continue activating culturally relevant partnership with both new and returning properties in 2026. These collaboration deliver highly engaged audiences, customer acquisition scale and meaningful earned media. Importantly, as we anniversary successful 2025 partnership, we're focused on converting collaboration shoppers into long-term positive customers, improving retention and lifetime value.

One of our most significant introduction this year is the return of fossil big take a bold animated mogmented combined analog of craft with digital innovation. Originally introduced in the late 90s, Vitec is 1 of the focal most recognizable and emotional resonant designs. The design are geared towards millennial watch consumer nostalgic for Y2K. Gen Z consumer, cladding and analog forward accessory and the male watch enthusiast looking for a big bold watch to match this start.

Earlier this month, we recently launched an Nostalgic Limited Edition Y2K capsule, quickly followed by a reinvention of big-ticket machine. Initial response from consumer and a claim from the press has been tremendous thus far. Our big tick marketing campaign reflects the evolution of our accretive strategy featuring a dynamic animated concept built around the idea that everything bigtictouches becomes larger than life. It's both solidly reinforce product stintness while driving modern real events.

We have a lot more exciting big tick innovation coming and anticipate that momentum will continue to build as we roll out additional collection throughout the year. Another significant innovation coming later this year is the introduction of Signature fossil first premium platform in more than a decade. Protein craftsman shift and timeless design, the collection represents an important evolution for the brand and is designed to resonate with watch enthusiasts and collectors alike.

Signature will also introduce a new level of technical sophistication and assembly that reflects Fossil continued commitment to quality and innovation. We look forward to sharing more details in the coming quarters. While we are first and foremost a watchmaker, our Julien leader offerings expand our expression as a necessary brand. Our strategy for this category focused on staying true to our brand DNA of quality, value and timelessness. We're positioning the business with modern design, including jewelry introduction inspired by our most important watch collection and increased personalization to engravable offerings.

We will be supporting all of this product innovation with a focused, high-impact marketing road map. In 2025, where we concentrated our investments in priority markets and the results validated that discipline, brand-led investment drive stronger engagement return. This year, we will continue scaling this approach, deploying our resources to opportunities where we can build further brand equity and accelerate growth. Our 2026 story filing is designed to celebrate postal adhitage, reinforce our quality and design credential and elevate cultural relevance.

A great example of this is our exciting partnership with brand ambassador Nick Jonas. Nick has proven to be an authentic and highly engaged partner, currently anchoring campaign across Nikon's collection machine and big ticket. Moving now to our omnichannel initiatives, which are designed to modernize our brand expression of Walsall improve our e-commerce business and optimize our fossil store portfolio. In the wholesale channel, we are focusing on our top customer in mass win markets, including the U.S., France, Germany and India. For example, in the U.S., the strength of the Fossil brand our robust product pipeline and engaging campaigns are driving growth with key partners.

Additionally, we're expanding distribution to specialty and energy retailers that can have to build the brand awareness and create excitement among a younger demographic. In the e-commerce channel, we have reshaped our business through 2 major actions over the past 18 months. First, we dramatically reduced our discount posture by more than 50%, establishing a full price selling model. Next, we implemented a comprehensive redesign of the fossil side, futurely richer storytelling and a more seamless customer journey. The result is a smaller but more profitable sales channel with higher AUR across the entire marketplace. As we pursue long-term growth, we will continue to deliver consistent price and promotion while investing in personalization, inspiration and more cohesive brand presentation to drive customer engagement and strengthen bar perception.

In the retail channel, we are optimizing our store portfolio and deploying our Store of the Future strategy in the U.S. and EMEA. Very pleased with the initial results from our Store of the Future concept, which blends lifestyle selling, data-led decision-making and a purpose-driven strategy. Importantly, it is shifting our selling culture to proactively playing and telling at outreach personalized service and community focus. This as a result in improvement across key performance indicators, including AUR and conversion. Turning to our core license brand. We're focusing on initiatives to return the brand to sustain sales growth.

We believe there is a significant opportunity to unlock the potential in MicroCor July and men's watches. Our strategy for course Julie centered on more than wearable design while leaning into 1 of our strongest assets, the MK law. We have recalibrated our pricing architecture to improve accessibility and enhance our competitive position. Mass watches were returning to proven MicroPort design codes and investing behind Hero platforms that have historically driven scale. We will do this by focusing on both confident styling recognizable attributes and strong perceived value within key price tiers.

For the importer Money brand, we're pushing opportunities in selected markets outside of China, where there is a strong lock of demand for premium products and additional runway in the woods channel to broaden assortment and leverage long-standing partnerships. We're also continuing to drive their money change brand, which is experiencing strong momentum across major markets, including the U.S. and India. Key initiatives include elevating our retail presence, expanding distribution, building on the success of our icons and delivering localized product offerings.

Turning now to the final focus under our growth pillar. We see a significant opportunity in India, which has been the fastest-growing large economy in the world for the past 4 years. This is an important strategic market where our brands have category leadership, strong momentum in secular tailwinds. I was in India last month with other members of our executive team as part of our focus on unlocking the full potential of this geography where we are experiencing growth across all channels and brands.

In 2026, we will be building further brand heat across our portfolio by broadening our assortment, entering premium price points and introducing limited edition, all supported by dynamic story time. We will also be increasing our footprint to expand the distribution, opening additional wholesale doors with both new and existing partners in opening new fossil retail stores. We have a highly seasoned team in India who is committed to driving continued growth and rapidly scaling the business.

Moving now to our second turnaround pillar, optimizing our operating model. We made significant progress toward visizing our expense structure in 2025. With this improved baseline and an emphasis on stricter cost control, we're well positioned to continue to drive optimization across the organization. We will be focused on initiatives to strengthen our omnichannel strategy and go-to-market execution while prioritizing operational investment and infrastructure improvement. Key areas of focus include sharpening our go-to-market execution to elevate point of sales engagement, reducing complexity and improving business agility, enhancing our digital and technology infrastructure delivering best-in-class supply chain performance and prioritizing high-impact project and key performance indicators.

I will now turn to our third and final pillar, building shareholder value. The rapid progress we made in year 1 of the turnaround, our accelerating profit profile and our strengthening balance sheet give us a condition that we're set up to create lasting value for all of our stakeholders. We expect to continue improving profitability, affording us the opportunity to strategically invest for growth and value creation. Building on the strong execution and financial performance we delivered in 2025, we're pleased to be raising the financial targets we introduced 1 year ago. As a reminder, we previously communicated 2027 sales target of at least $800 million. We now expect to surpass that benchmark 1 year earlier than planned.

In 2026, we expect sales in the range of $945 million to $965 million, highlighted by a return to top line growth in the fourth quarter. Additionally, we expect positive adjusted operating margin of 3% to 5% in breakeven free cash flow. Our commitment to operational excellence and returning the business to profitable growth is grounded in a focus on discipline, accountability and performance. I'm grateful to our teams partner shareholders for day continuing support of POSIGroup and look forward to reporting to you on our progress throughout the year.

Before I turn the call to Randy, I would like to acknowledge the current geopolitical climate. As a global company, we are diverted by the events occurring in the Middle East, and we're closely monitoring the safety and well-being of our employees and partners in the region. Now I will turn the call to Randy to discuss the financials.

Thank you, Franco. 2025 was a year of tremendous progress on multiple fronts. I'm pleased that we gained strong traction on our turnaround initiatives, delivered financial results ahead of our expectations and transformed our balance sheet. Our 2025 performance reflects the strength of our brands, strategies and teams and demonstrates that we have the right building blocks in place to drive long-term growth and profitability.

Now I'll turn to the specifics of our fourth quarter and full year performance. Net sales for Q4 totaled $274 million, reflecting a decline of 20% and including 4 points of impact from store closures. For the full year in 2025, net sales were $1 billion, including 330 basis points of impact from store closures and 80 basis points of impact from the exit of connected watches. Fourth quarter gross margin came in at 57.4%. That's up 350 basis points from last year and reflects the ongoing strength of product margins as well as our focus on full price selling, which allowed us to drive structurally higher margins over the past 12 to 18 months.

Indeed, Full year gross margin for 2025 was 55.9%, representing 380 basis points of expansion versus 2024 and even with the continued and compounded headwind of minimum royalty guaranteed shortfalls, which as previously shared, are expected to be materially abated in full year 2026. In 2025, we executed against several initiatives that drove a meaningful improvement in gross margin. Specifically, we substantially lowered our discount rate, strengthened our supply chain, negotiated better terms with key suppliers. We tooled our open-to-buy processes and implemented targeted price increases.

I am pleased to note that all of these actions not only improved our underlying gross margin profile but also enabled us to largely mitigate tariff headwinds throughout the year. The fact that we were able to absorb the impact of tariffs in 2025, while delivering a return to healthy gross margins demonstrates the agility of our supply chain and is a testament to our teams around the globe. Looking at 2026, we expect to continue to offset the current rate structure with our mitigation strategies and have not embedded material rate changes or any tariff refunds into our forward-looking guidance.

Moving now to operating expenses. Strict cost control enabled us to lower SG&A expenses by 16% versus prior year. The improvement is attributable to 49 fewer stores in operation versus a year ago as well as lower compensation and administrative expenses. During Q4, we closed 6 additional stores ending the year with 199 locations globally. All 49 closures in 2025 occurred at natural lease expiration with minimal closing costs. Given the improving performance of our fleet, we expect to reduce our number of store closures down to approximately 15 locations this year.

As we continue to focus on improving our cost structure, our teams are acting with financial discipline and rigor. I'm pleased to note that on a full year basis, we slightly overdelivered on our full year SG&A savings target of $100 million. Zooming out, the successful delivery of 2025 SG&A savings target was a key follow-on to work that began in 2023. In total, the company's SG&A levels have been rightsized by more than $250 million over the last 36 months. And while the lion's share of this work is behind us, we're never done. As Franco mentioned, in 2026, we expect to further optimize our operating model by capturing efficiencies throughout the organization. We will be directing resources toward go-to-market execution, operational investments and infrastructure improvements.

Looking now at our bottom line performance in Q4, strong gross margins north of 57% and exceptional expense management translated to a profitable quarter with adjusted operating income totaling $11 million. We also achieved positive adjusted operating income for the full year also at $11 million. This is notable after 2 consecutive years of losses on the bottom line and is another very tangible demonstration of our turnaround taking routes.

Turning to the balance sheet. We ended the year with $96 million in cash and cash equivalents, $67 million of availability under our asset-based revolver and no utilization of our ATM program. Year-end inventory totaled $152 million, down 15% from last year, consistent with sales and in line with our expectations. It's worth noting that we have brought inventory levels down by more than $200 million over the last 3 years. The reduction in inventory, particularly in the last year, has not only seen us become more appropriately balanced in terms of weeks of supply and turns, but as importantly, it occurred as we rebalanced our overall inventory position to include far more full margin products.

Strengthening the balance sheet was a key pillar under the first phase of our turnaround, and we delivered on that in spades. We are pleased to have entered 2026 in a healthy position with the right combination of liquidity and debt maturity horizon. Now let's take a look at our outlook for 2026 and beyond. We are incredibly proud of the work our teams are doing and believe we're poised for another year of strong execution as we embark on the next evolution of our turnaround plan that Franco just laid out. provided there is no significant disruption in the macroeconomic environment. We expect our turnaround pillars to deliver the following outcomes for full year 2026.

Worldwide net sales of $945 million to $965 million including approximately $21 million of the impact related to retail store closures. That's down 4% to 6% and represents a significant improvement in the rate of decline versus last year. For added context, the impact of store closures and the extra week in 2025 is worth about 360 basis points. And it's worth reiterating the point that Franco made a few minutes ago. Based on the guidance we're providing today, we now see 2026 as the sales low points under our turnaround. 1 year earlier than previously planned and materially higher than the approximately $800 million in revenue we indicated for 2027, 1 year ago.

As we look at the cadence of the year, we anticipate that 2026 will be second half weighted, with year-over-year declines slowing through the year and an expected return to top line growth in the fourth quarter. This is in line with seasonal trends but more importantly, reflects the compounding benefits of our turnaround initiatives. This includes the lapping of last year's store closures and selected further closures this year. the sunsetting of some noncore small licensed brands and our washstations.com website and the company of last year's inventory reset as we shifted our focus to full-price selling.

Importantly, we anticipate that gross margins will remain healthy in the mid- to upper 50s. Further, we expect that the intra-quarter volatility we've experienced particularly in Q3 of previous years, should be largely abated with the benefit of our minimum guaranteed royalty relief. Additionally, Expense control is expected to drive another year of meaningful SG&A reduction and enable us to achieve SG&A leverage.

While we will be investing in marketing to support the robust pipeline of innovation that Franco spoke about, total marketing dollars are expected to be down slightly versus 2025. We are positioned to achieve improved profitability in 2026 and expect adjusted operating margins to be in the range of 3% to 5% on a full year basis. Additionally, our focus on improving cash conversion is expected to result in breakeven free cash flow as we drive the business to be cash generating in 2027 and beyond.

With innovative product offerings, favorable watch industry dynamics and talented teams, we are looking forward to building about the foundation and track record we established in year 1 of our turnaround.

To that end, we are rolling forward our previously communicated 3-year outlook by 1 year. In 2028, we expect our turnaround plan to be driving mid-single-digit sales growth high single-digit adjusted operating margins and positive free cash flow. Looking further ahead, we believe our brand-led, consumer-focused an increasingly optimized operating model will deliver benefits well into the future. Now I'll ask the operator to open the call to Q&A.

[Operator Instructions] And our first question comes from the line of Tom Forte with Maxim Group Tom.

Franco and Randy, congrats on the strong quarter and year. I have 3 questions. I'll go 1 at a time. I apologize to the extent that you may have commented on these during the prepared remarks. Question number one, what were the drivers of gross margin in the quarter? And what gives you confidence the improvements are sustainable.

First of all, this is Frank. Thank you. We're excited. Look, we made a significant progress. I think you remember, we always said that the quarter 4 last year was the beginning of the new strategy towards the end of the quarter 4. We wanted to build a smaller company, more profitable. We wanted to change the model from very promotional into a full price selling model. and we're continuing with this strategy. We're very excited. I'm thankful to the work the teams have done globally to drive the strategy, and that strategy is paying very much shareholder value.

Not only we've seen a better gross margin with our DTC, but we've seen incredible AUR increases across the marketplace as we become less promotional to the marketplace. We're excited. We're a product and marketing company. We built greater relationship with our partners. And I've seen -- I've just got back from the trade show, as I mentioned in my earlier remarks, and there is a great momentum we've seen customers that we haven't done business for years. They are coming back to us now because we were leading by example. So very, very encouraged. Randy.

Tom, wonderful to hear from you. The only thing that I'd add is, while Frank likes to say, 2025 is in the past, and we're now living in 2026. If you look at 2025, our gross margin performance was actually quite sustainable and consistent other than the dip that we took in the third quarter, which as we've spoken about, was related to royalty shortfalls as we've successfully renegotiated our minimum guarantees for 2026. That third quarter digit shouldn't be in place, and you should see that continued sustained performance -- so really the path is a very positive indication and we've already locked in the improvement that we were seeking for '26.

All right. Wonderful. And I appreciate pose answering all my questions. right. So question number two, -- so it looks like you're guiding to an inflection point in sales and a return to growth in the fourth quarter of '26. What gives you confidence you'll be able to achieve that goal?

Yes. Look, the last 18 months has been a transformation of the company. We're in the middle of the journey. We see the light out of the tunnel, a smaller company returning to grow and we're excited about the opportunities. I keep saying I'm excited about what we've done. But at history, I'm excited about what we are delivering to the market now in terms of innovation. But I guarantee you we are more excited about what's coming next. -- the pipeline takes 18 months to get there. We're so excited about the opportunities. We think as we are driving a smaller BTC, we've seen a very good return from our wholesale channel beyond our expectation in 2025. Consumer very resilient -- they love our portfolio of brands. Customers have a long-term relationship with the company. We are driving the company to get back into growth because the company has an incredible asset and incredible brands.

All right. Excellent. All right. So third and final question for me. It seems like you've already made a number of adjustments to manage expenses. In the next evolution of your turnaround plan, you talked about further improving the cost structure. What more can you do that you've not already done?

Yes, it's a great question. Let me take the lead, and then I'll let Randy jump in here, and he's riding that. Look, as an organization, we are really driving this continuous improvement that we're really anchoring into the discipline of managing the company. We will constantly evaluate what we do and constantly finding a better way to do that. It's all about the innovation, the way we bring the product to market, the focus into driving the business. And we're so pleased because, honestly, since we refinanced the business in November. This is a different company. Everything we do is about talking about how we go and we become more efficient. We're very, very pleased. I think there are plenty of opportunities still there. We'll look into store performances, market performances channel performance, this is really part of what we want to drive that accountability and focus into driving shareholder value.

So a few things that I'd like to add, if I could. If you think about the work that we've done to manage expenses, it's been very broad, and we're quite proud of the breadth and depth of where we've made adjustments to our business. One of the things that is important as we look into the future is the continued optimization of the business. And if you think about ways that, that may play out, we have lots of opportunity as it relates to the simplification of our technology stack places in which we can leverage automation or AI. And then as you move forward into the more medium-term horizon of our turnaround, that's when we start to play a little bit of offense as well. and we get the benefit of sales leverage as we return to growth.

And your next question comes from the line of Owen Rickert with Northland Capital Markets.

Congrats on a great quarter and outlook. It's pretty solid here. I have about 4 questions for you. I guess, firstly, deepening consumer engagement is cited as a key growth driver going forward. Can you guys just maybe elaborate on what that means tactically? Is that sounds like more marketing spend or first half of the year? And I guess, how are you measuring engagement improvement?

Yes, Owen, thanks again. Look, we're excited. We are a proven marketing company. Part of the strategy and the turnaround plan was to refocus the company into the fundamentals. When I joined the company when we ascended a world-class management team, we clearly said product takes time. And we saw some of that coming through 425, really Spring '26 is very exciting. You've seen we launched Big tick with Fossil. This incredible success, and we're just at the beginning. So we think an innovation product and the way we bring storytell into the market will be the key differentiator.

Think about the animation, we just announced with the Big -- and this is to us, it's just the beginning. When I think about our core licensed brand, which is really the second pillar of driving returning to growth, think about micro core or in diesel, those are world-class brands that consumers are shopping every day. We see good momentum -- we're investing in July. We're investing in traditional watches. We see great momentum there. And the third pillar, we're really probably, to some extent, a proud is really our India market that has been overperforming in the company.

India is the fourth largest economy in the world, and it's been 1 of the fastest growing in the last few years. It's an industry that is growing. We are very well positioned there. We've seen strong growth, and we think that, that market will continue to grow for us. So very excited. It's early days. Look, we're here for the long run. We think the opportunities as we get back the company into the fundamentals -- we think the opportunity is there, and we are really focused into driving these performances going forward really.

The only thing that I would add is, Owen, you suggested in your question that we'd be spending more marketing. Our anticipation is actually that we'll be spending slightly less marketing in 2026. We'll certainly be spending the marketing dollars that we do spend better. We'll be more optimized in terms of the way we deploy our funds, smarter media mix modeling, smarter use of ambassadors. We've got a robust pipeline of initiatives that we've got that we expect to really drive efficiency as we work through this year and into the next.

Got it. Next for me, you mentioned those 3 pillars of the next evolution, profitable growth, optimizing the operating model and building that shareholder value. I guess, how do you think about sequencing those? Is profitable growth, the prerequisite for everything else? Are these 3 pillars running in parallel?

Look, let me take this, and then I'll leave Randy to give you more visibility. Look, we always said returning the company to grow is a priority. We think the reason why we've done everything we've done so far is because we believe the company has an opportunity to return to growth. We also see the industry coming back, which is very encouraging and very pleasing to see younger generation coming back into the traditional watches -- all of this is very exciting.

The last -- the first 18 months from me where the company has been simply fantastic. They've been exciting. And I look at every day at all the opportunities and I think we're doing the right work to focus on what matters, which is really profitable sales. And once we are really driving this, and we see our DTC stabilizing because we're less promotional, and we continue to invest in our wholesale channel. There is no reason why the company shouldn't grow given the strong assets we have here.

Owen, I don't necessarily view them as sequential, there really should be a flywheel effect. If you think about the third pillar, building shareholder value, that should be borne through an improvement in profitability, our ability to grow and then strategically invest for growth. and, of course, to generate cash, all borne through efficiencies in the operating model, growing of the top line. So much less about sequencing more about getting all of these 3 to fuel each other.

Got it. Got it. Super helpful, guys. And then we're seeing strong -- some pretty nice tailwinds with consumer adoption. I guess as you think about the consumer you're trying to target, has your view of that target consumer for, I guess, the Fossil brand and license brands evolve through this transformation process or this turnaround process at all?

Thanks for the question. This is probably the most impressive I ever seen in my career is the resilience of our consumer. And literally, we moved from a model that was highly dependent on promotional so highly dependent full price model, and we have seen no slowdown. We've seen consumer coming back by our product. We've seen -- we lost some consumer in our fossil brand. And to be honest, I'm not even sure we wanted that because we're looking for deals. And we got back some of the consumer we lost because we were very promotional.

And there's only 1 way of defining that is the resilience of our brand. So we're very pleased with this. Thanks for asking the question because every time we discuss internally that is probably the biggest and best surprise we had. I would have thought we would have impacted more, but it didn't happen. The consumer work back and were like, we love what you guys are doing from for fossil. And the big ticket response is just a phenomenal as we are capturing not only stage consumer they've seen a big tick from the nits, but we're catching this new generation that are once a real brand, so very exciting. Thanks for asking.

Great. Great. And then last for me, guys. When you talk to your wholesale partners today versus, let's say, a year ago, how has that conversation been evolving? Are they leaning in more, asking for more products, more marketing support? What's the qualitative deal of those relationships right now?

It's a great question. Look, we're on the phone with them obviously, weekly. Some of them, we have decades of relationship they're impression for the speed of change driven with the company -- they love the consistency. And I recall, I think I said that in the previous call, the first time I met with them in, I think it was October, November 24, they said we love your story, but we heard that this story before. When I met again that in Q1 '25, they said, well, you've been consistent, keep going this way. And now they recognize we're working talk and the love.

And to be honest, the results are paying. So they're seeing more sales support our brands. They're seeing more margin because they're less promotional and suddenly from being probably, I would say, not very inspiring. We went to lead, by example, and we had a great relationship. I was in Munich in Germany for the trade show jewelry and watch trade show in literally a year ago, they were happy we were back -- but this year was really surprising the Wilcon and we literally had a customer that haven't done business with us for years, so they are back and wanted to deal with the fossil group -- this company has got a great reputation, and it was 1 of the reasons for -- this company has an opportunity to have a much stronger future. And I think the first indication from our partners are very encouraging.

That concludes our question-and-answer session. I will now turn the call back over to Franco for any closing remarks. Franco?

Thank you, everyone, for listening in today's call. We're excited about we're headed and look forward to talking with you after the Q1 results.

That concludes today's conference call. You may now disconnect.

Good afternoon, ladies and gentlemen, and welcome to the Fossil Group Third Quarter 2025 earnings call. [Operator Instructions] 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 Greany of the Blueshirt Group to begin.

Hello, everyone, and thank you for joining us. With me on the call today is Franco Fogliato, Chief Executive Officer; and Randy Greben, Chief Financial Officer.

Before we begin, 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 as well as certain non-GAAP financial measures. 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 8-K and is available in the Investors section of fossilgroup.com.

With that, I'll now turn the call over to Franco.

Thank you, Christine. Good afternoon, everyone, and thank you for joining us today. I'm pleased to open this call with the headline that we have successfully transformed our balance sheet, marking a major milestone under our turnaround plan. We announced today the completion of our bond restructuring, which extend our debt maturity to 2029 and brings more than $32 million of new capital to the business. Strengthening the balance sheet was one of the 3 pillars under our turnaround plan and has been a major focus of our team over the past year. After months of hard work and with the support of key stakeholders, we now have the financial flexibility needed to drive the business forward and turn the page to our next phase of long-term value creation.

Another noteworthy achievement I want to highlight is Fossil's second consecutive year on Time Magazine list of World's Best brands. For 2025, Fossil made every country list survey, ranking as the #1 watch brand in Germany, #2 in the U.S., #5 in both the U.K. and Mexico. We're incredibly proud of this recognition by consumers around the world, which speaks to Fossil rich manufacturing and storytelling heritage. Importantly, this achievement comes against the backdrop of a strengthening watch market globally. U.S. Circana data from Q3 highlights indirect market growth versus last year of low single digits with the department and specialty store channel up low double digits. For the Fossil brand in Q3, we saw traditional watch sales trending better than the market, up high double digits in these channels. This fundamental industry and brand strength underpins the ongoing success of our turnaround plan.

Moving now to our Q3 results. We're pleased to have delivered another quarter of strong financial performance. We narrowed our sales decline to 7%, reflecting year-over-year improvement in both the wholesale channel and our Fossil retail stores. Global growth in the wholesale demonstrates continued strength from our strategic initiative as well as a shift in the timing of certain shipments from Q4 into Q3. A key call out this quarter is the quality of sales. Average unit retail is higher in both our wholesale and direct-to-consumer channels, reflecting a strong combination of lower promotional activity, product mix and pricing architecture.

Third quarter gross margin remained strong, notwithstanding the recognition of minimum royalty deficit, which Randy will cover during his remarks. Our focus on full price selling has fundamentally changed the margin structure of the business, positioning us to return Fossil Group to a best-in-class gross margin profile in the mid-50s this year. During Q3, our disciplined approach to promotion and strict cost control translated to the bottom line, where we substantially narrowed our adjusted operating loss year-over-year. The improvement on a year-to-date basis is even more pronounced, moving from a loss of $58 million in the first 9 months of 2024 to nearly breakeven for the same period in 2025.

For full year 2025, we expect to achieve a breakeven to slightly positive adjusted operating margin. Our teams are continuing to deliver sharp execution across our 3 turnaround pillars: refocusing on our core, rightsize our cost structure and strengthen the balance sheet. Looking at the strategy under our first pillar, refocus on our core. Over the past 9 months, we have reignited our design and storytelling engines to build a robust Fossil brand platform for the future. In Q3, Nick Jonas officially took the helm as a Fossil global brand ambassador. Since the August launch, the worldwide campaign has generated nearly 6 billion impression.

We kicked off with a 1-day event for fans and Media in New York City, which included a surprise appearance by Nick, followed by regional events in major cities, including Berlin, Manila, Mumbai and Paris. Simultaneous with the campaign launch, we partnered with Nick to introduce an exclusive product line for Fossil. This bold and nostalgic collection has exceeded our expectations in the first few months. Also compelling, some of the best-selling items sold for $300, $400, a much higher price point for Fossil, which is driving higher average unit retail. Additionally, Nick's global reach and influences is attracting a younger male democratic to Fossil. Together, the campaign and product launches fueled brand heat, generated positive global press coverage and drove incremental traffic to both our website and stores.

In addition to the success of our new collection with Nick Jonas, Fossil collaboration with Fantastic Four and Galactus have been standout performance in key markets globally. In the U.S., Fantastic Four sold out during our early access event online as was out of stock in stores within week 1. In EMEA, the collaboration sold out online within 3 days. Galactus was also a tremendous success selling out online in both the U.S. and EMEA on day 1. For the upcoming holiday season, we will continue to amplify the Nick Jonas collection and position Fossil at the center of key shopping moments. Initial trends in our DTC channels indicate that our holiday collection is resonating with consumers with momentum building week-over-week.

We will be extending that energy globally with initiatives like our immersive pop-up in Le Marais in Paris during December, which is designed to showcase Fossil gifting spirit in a culturally relevant way. Across markets, we're staying committed to brand investment, working closely with media and PR partners to build awareness, desirability and brand heat.

Turning now to our co-licensed brand, Armani, Kors and Diesel. We continue to generate improved performance in key markets across the Americas, EMEA and Asia, driven by product innovation as well as our investments in point of sales and in-store presentation. From a brand perspective, Kors, Armani Exchange and Diesel all demonstrated year-over-year growth in the wholesale channel during the first 9 months of the year, while the Armani brand remained pressured by the macro environment in China.

Next, we continue to make progress towards optimizing our global wholesale footprint, which can be seen in many of our leading indicators. During the third quarter, the wholesale channel increased mid-single digit globally with notable strength in the EMEA and Asia region. In the U.S., traditional watch performance was up slightly in wholesale, while the Fossil brand grew double digit. Within Asia, both India and Japan grew double digits. We recently strengthened our team in Asia with the appointment of Davin Leong as a General Manager of the region. Davin is a seasoned leader who will advance our global commercial strategy to drive an enhanced market presence and accelerate growth across the region.

In EMEA, the transition to a distributor-led model in select European markets is enabling us to simplify our operation while driving increased sales and profitability. Most recently, we signed a new distribution agreement with Morellato Group in Italy, which takes effect January 1, 2026. Morellato brings decades of expertise in watches and jewelry, along with a deep understanding of local markets, which is expected to help us extend our reach and fuel long-term profitable growth in this key geography. Thus far, we have transitioned 6 European markets to a distributor model, and we'll continue to evaluate opportunities to drive scalable growth in highly relevant markets going forward.

As I mentioned earlier, our initiatives to strengthen channel profitability are returning the business to a healthy gross margin profile. This is primarily being driven by our commitment to a full price selling model, which was one of the first major initiatives we put into place when I joined the company a little over 1 year ago. This discipline is driving improved traffic quality at both our Fossil stores and e-commerce website while also generating higher average unit retail.

Traffic and conversion trends in our Fossil retail stores improved notably in Q3 with particular strength in the U.S. as our new clientele initiatives started to gain traction. Our Store of the Future, which we discussed in our Q2 earnings call, has been rolled out to all of our U.S. stores and over a dozen EMEA locations. The mission behind this new concept is to deliver a standout experience for the customer. We have reimagined retail to meet the evolving needs of today's guests, empowering stores to shine as a distinctive experience-driven destination where personalized service leads, community matters and strong results follow.

We believe we can unlock profitable sales growth by blending lifestyle selling, data-informed decision and a purpose-driven strategy with the goal of creating meaningful impact beyond the sale. The initial results are compelling for driving increased traffic to our store, winning higher average order value and attracting new customers. Looking now at our second turnaround pillar, rightsizing Fossil group cost structure. We've taken these actions to strengthen our operating model and continue to act with financial rigor to position the business for long-term profitable growth. Year-to-date, we have generated over $60 million in cost savings and reduced our SG&A by 260 basis points on a 10% sales decline, achieving better leverage on our cost structure as we transform the business.

Lastly, I'm happy to reiterate that we have delivered on our third key pillar, strengthening the balance sheet. These week marks a significant turning point of our business and sets us up for the long-term success. Randy will share more details with you in just a few moments. Entering the final months of the year, we are reiterating our financial guidance and remain confident in our path to drive profitable growth. We have strengthened our core, return to healthy gross margin profile, rightsized our cost structure, improved working capital management and fortified our balance sheet. While there are a number of successes to celebrate, we are clear about what we have yet to accomplish. Our teams are energized by the opportunity in front of us and committed to delivering flawless execution as we strive to build a stronger Fossil Group and deliver value to all of our stakeholders. Now I will turn the call over to Randy to review the third quarter financials and discuss our outlook.

Thank you, Franco, and good afternoon, everyone. We delivered strong Q3 performance, reflecting another quarter of progress and momentum under our turnaround plan. Third quarter net sales totaled $267 million, down 7% in constant currency versus prior year. This is slightly ahead of our expectations, reflecting ongoing traction from our turnaround initiatives as well as a shift in the timing of some wholesale channel shipments from Q4 into Q3. Gross margin in the third quarter came in at 48.7%, that's down 70 basis points versus last year and more meaningfully on a sequential basis. There are so many positive proof points with respect to our turnaround, taking root that were offset by the minimum royalty shortfall true-up I spoke about on our last call, but I'd like to take a moment to talk about them.

Our focus on full price selling has fundamentally changed our margin architecture with the reduction in discount rate of more than 50% versus last year on Fossil brand e-commerce sales in Q3 being just 1 example. Our sourcing initiatives resulted in improved product margins in our core categories, driven by optimization of our supply chain and successful negotiations with key suppliers in all categories. We have retooled our open-to-buy process, distorting our investments deeper into bestsellers and driving more efficient inventory turns and productivity. We implemented targeted price increases and to date, have not seen any meaningful reduction in purchase behavior or any notable volume shifts.

And lastly, we drove an increased mix of higher-margin traditional watch sales. All of these actions helped us mitigate expected tariff headwinds in the quarter. However, the aggregate benefits from these moves was offset in Q3 by the impact of licensed brand minimum royalty payment true-ups. As we discussed on our August earnings call, from an accounting perspective, we have historically recognized any minimum royalty deficits in the second half of the year, the majority of which were recorded in our third quarter. Because of our smaller sales base, this year, the impact was more pronounced. It's worth noting that underlying gross margins improved in Q3 compared to the prior year, but the improvement was offset by the impact of royalties.

It's also worth repeating my comments from our August call. While we did receive some minimum royalty reductions with our key license partners that benefit us moderately in 2025, we have agreed on significantly more meaningful reductions for 2026 when we expect to materially reduce the Q3 minimum royalty guarantee shortfalls that we've experienced as our license business has contracted. Our turnaround initiatives are foundational and have resulted in a structurally higher margin business. Therefore, we continue to expect full year gross margin to be in the mid-50s, caveating, of course, that the tariff environment remains quite fluid.

Turning now to operating expenses. We continued to demonstrate exceptional expense management in the quarter. We lowered SG&A expenses by 10% versus prior year, primarily driven by our cost reduction initiatives. As a percentage of sales, SG&A leveraged by 160 basis points versus prior year coming in at 54.3%. The year-over-year improvement can be traced to 47 fewer stores in operation versus a year ago and lower compensation and administrative expenses. During Q3, we closed another 10 stores bringing us to 44 closures year-to-date, all occurring at natural lease expiration with minimal closing costs. Our teams are continuing to act disciplined enabling us to deliver meaningful SG&A savings of over $60 million year-to-date in 2025.

Looking now at earnings. As we anticipated, the impact to gross profit from the minimum royalty deficit resulted in an adjusted operating loss for the quarter. Nevertheless, we substantially narrowed Q3 adjusted operating loss to $15 million from $22 million a year ago. Moving to the balance sheet, we ended the quarter with $102 million of liquidity, including $80 million in cash and cash equivalents. Liquidity was down sequentially from Q2, reflecting the planned ramp-up in marketing spend and the normal cadence of seasonal working capital movements. That said, comparisons to prior periods are somewhat distorted by the transition to the new ABL facility reported on our last call and entered into during the quarter. This new structure is more efficient and purpose-built to align with the scale and seasonality of our business. Importantly, the facility carries a 5-year maturity.

Quarter end inventory totaled $167 million, down 26% year-over-year, consistent with our expectations. Cash conversion performance remains on track, supported by ongoing initiatives aimed at reducing structural cash volatility and driving more consistent free cash flow generation. Overall, working capital discipline continues to improve. Global net working capital declined by approximately $90 million year-over-year, reflecting lower inventory levels and tighter management of receivables and payables across the organization.

Turning now to our balance sheet transformation. To echo Franco's sentiment, we are thrilled to have reached a major turning point with respect to the capital structure of the company, delivering on the third pillar under our turnaround plan. We successfully completed the exchange of our 7% senior notes due 2026 for new 9.5% notes due 2029, which extends the maturity of our debt by 3 years, and comes with $32.5 million in incremental new money financing.

Further, the completed exchange gives the company expanded access to availability under our $150 million asset-based credit facility, which have been partially restricted pending the completion of the exchange offer. With the completion of the refinancing, we believe Fossil Group has the balance sheet fortitude necessary to advance the business on the path to profitable growth and positive free cash flow. Our refinancing was an all-hands effort by our internal teams and our collections of world-class advisers.

We're thankful for the conviction that our noteholders and lenders have in our company and are excited to have completed this critical turnaround pillar. Based on our ongoing business momentum and strong execution of our turnaround plan, we are reiterating our full year guidance. Worldwide net sales are expected to decline in the mid-teens, which includes approximately $40 million of impact related to store closures, and adjusted operating margin is expected to be breakeven to slightly positive.

Importantly, in the fourth quarter, we anticipate gross margin will be similar to last year, which combined with ongoing expense control is expected to drive positive adjusted operating margin. We're pleased with the meaningful progress we've made year-to-date and remain focused on driving durable growth and building long-term value for our shareholders. Now I'll ask the operator to open the call to Q&A.

[Operator Instructions] And your first question comes from the line of Francesco Marmo with Maxim Group.

Congratulations on the quarter and on the bond exchange. Three quick ones for me, if I may. So first of all, your wholesale grew 3% in constant currency, while store comps was down 22%. Can you please help us understanding what is driving that gap? And I was wondering if you guys could give us some color around any regional difference, maybe there some regions that might be more retail heavy than others.

Francesco, thank you for the question. We missed the first part of it. Could you please repeat it?

Sure. So the wholesale channel grew 3% in constant currency. while store comps fell 22%. I was hoping you guys could help us understanding the difference between the 2 channels.

Yes, absolutely. I just want to correct one point. When you talk about the store comps declining, that's not store comps, that's our full direct-to-consumer. We're actually quite pleased with the performance of our physical fleet. Our stores are performing quite well. As we've talked about in prior calls, the company has intentionally shrunk its e-commerce business as we've changed the full promotional strategy to drive really better margin architecture and more sales. So you have to look at it -- we have to look at it really on a channel-by-channel basis. To your point, wholesale is performing quite well. And then when you deconstruct direct-to-consumer, we're very pleased with our store performance. And our e-commerce business is performing absolutely in line with our expectations which was to be smaller. With respect to regions, I'll hand it to Franco.

Yes. Look, Francesco, I think let me recall probably one of the first call I did when I joined the company. We clearly said that our retail direct-to-consumer was very promotional, was driving the entire AUR marketplace price down. And we took since, I would say, towards the end of quarter 4 last year, we changed completely the policy. And we said that we're going to reduce dramatically the promotional activity. We've been performing very well to the point, honestly, that the wholesale came back probably faster than what we were expecting. Our retailers, our customers and partners have been very pleased with our policies, very encouraged.

I remember the first time I met with them and they were like, oh, we already heard that story, and now they're seeing that we're very consistent with what we said to the point that they are growing the business with us and are very willing to invest with us going forward. Our DTC will continue, I think it is performing well from a comp perspective. We are driving AUR higher. We're driving -- we're converting better than what we use because we have initiatives like Store of the Future and we're pretty pleased with that.

Now performances have been very different depending by region. I think from a DTC perspective, our store have been performing better than what we anticipated in the U.S. We still see a little weakness out of some of our retail in Asia, while in general, India remains strong. So those are kind of trends we see probably common to the watch industry with really U.S. coming back. Asia is still pretty challenging, even we said we've seen some improvement, but India continuing to perform strong.

Okay. That makes a lot of sense. This is great leading to my next question. Asia actually this quarter I would say, positive growth in constant currency, I think it was like flat overall in reported currency. There was strength in traditional watches, there was strength in jewelry and even gross margin expansion for the region. I was wondering whether you guys could give us some color around what's happening in the region.

Sorry, Francesco. Once again, we missed the first part of your question. If you could please repeat it.

Okay. Sure. And I was asking about Asia. The Asia region seemed particularly solid this quarter with positive constant currency growth, strength in traditional watches and jewelry and gross margin expansion. I was wondering if you guys give us some color, you already mentioned India, but anything else would be appreciated.

No, thanks for asking. It's a great question. Look, we're pleased the region performances have been led by India. We continue to be extremely positive not only about our leading position in India, but we have a very strong team, very strong recognition. Our retail performed well and the market is growing. So it's really a combination of the perfect storm from that perspective, and we are one of the leading company there, no doubt about that. We've seen, I would say, maybe -- I wouldn't -- we still are shrinking in China, honestly. The market hasn't -- is better, but still not into positive growth. And we've been also taking a policy of being less promotional, to drive improving gross margin. And I think that's also helping.

And I would say the other market, which has been pretty pleased has been Japan. Honestly, Japan was one of the question mark we had 12 months ago when I joined the company. We have a strong team there. Our brands are performing well. We -- in particular, Diesel is very strong in the region, and we're very encouraged about the opportunities there. We have a new leader for the region, Davin Leong joined early October. We're very excited because we needed that leadership to come from the region. He's got -- is a very strong leader, and we're very encouraged. So look, we -- it's good to see Asia performing better and performing well. It's definitely led by India, but also pleasing to see Japan doing well and China maybe seeing some better selling.

Okay. Great. And then if I may, one last question that has to do with your inventory position. Your inventory appears leaner every quarter, which is great. I was wondering whether you guys could give us a sense for what initiatives driving this improvement and also how this tighter inventory position fits within your broader distribution and promotional strategy?

It's a great question. Let me take a general view, and then I'll let Randy and Jeff can either. Look, we're very pleased. I think the -- we are very -- I made it clear, we're going to be a smaller company, but we're going to be a lot more profitable than what we used to be. And I think the working capital position, the inventory control, we had the sales down 7% in the quarter, but inventory was down 26%. We've reduced the number of SKUs. We're focusing on what matters. We're really driving stories that count. All of this comes together with a higher gross margin, comes together higher AUR and drives the company in a better position.

Would I expect this to continue forever? No. We will invest going forward. We believe we have performed a very clean inventory, both on what we own and what sits in our retailers. We manage inventory together with them. Our sales are performing well. We're very encouraged. And the fact that we fixed the balance sheet is also helping a lot to drive our investment from a strategic perspective. I will ask Randy maybe to comment a little more into the details.

Francesco, I'm so glad that you asked the question because it gives us an opportunity to acknowledge the work that the organization has done really across the globe to manage working capital in a significantly tighter fashion. We're proud of the work that we've done as it relates to overhauling the way we think about open to buy, the way in which we think about where we lean in on product investment and the wonderful byproduct of all of this is not only as working capital become quite more efficient, but we've managed to increase availability of products at the same time. So we're ordering the right inventory, getting it to the right place, and it's a comprehensive effort that is nice to be seeing bearing fruits.

At this time, there are no further questions. I will now turn the call back over to management for closing remarks.

Thank you, everyone, for joining us today. This has been an exciting earnings call, an exciting week. We have announced a new milestone, the company with a stronger balance sheet. We're looking forward to meet everyone to -- for the quarter 4 earnings call, and we wish everyone happy holidays.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.