Fossil Group, Inc. Aktie

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.

Good afternoon, ladies and gentlemen, and welcome to the Fossil Group Second 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 on 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. As noted in today's press release, we delivered second quarter financial performance above expectation, raised our full year guidance and announced a comprehensive debt refinancing. These developments reflect ongoing operational and financial momentum resulting from our turnaround plan. In Q2, our talented global teams drove a third consecutive quarter of both gross margin expansion and positive adjusted operating income against in a complex macro backdrop.

A few highlights from the quarter. Net sales trends reflect continuing improvement in the wholesale channel as well as better-than-expected comparable sales strength in our Fossil retail stores. This is particularly meaningful given that we substantially lowered our promotional activity and took some strategic pricing action during the quarter. Importantly, we also fueled a strong bottom line performance with gross margin of more than 57% and significant cost reduction, delivering positive adjusted operating income of $4 million.

The results demonstrate the power of our rich brand heritage and ability to connect with consumers around the world as we continue to execute under the 3 key pillars of our turnaround, refocusing on our core, rightsizing our cost structure and strengthening our balance sheet. Next month will mark the completion of my first year at Fossil Group. Since joining the company last September, the pace of change has been fast and furious, and our progress has been notable. During this time, we have built a world-class leadership team, bringing fresh perspective to key function across the organization. Most recently, Lakshmanan was appointed Chief Supply Chain Officer, bringing more than 20 years of expertise to the role.

I'm thrilled about the team we have assembled and the way everyone has united around our game plan and strong desire to succeed. We have much more work ahead, but the opportunity is significant. We're operating with excellent focus and intention. Our year-to-date results, coupled with ongoing operating and financial rigor position us to raise our outlook for full year 2025. We have increased our top line guidance to the high end of our previous range and now expect to deliver breakeven to slightly positive adjusted operating margins. We're making bold moves, and it is clear that our actions are paying dividends.

Now I will move to an update on the strategies driving our results. Looking at the strategies under our first pillar, refocusing on our core. Since we initiated this turnaround, we've been bringing a new Fossil brand platform to life to elevate the design and storytelling and initiatives to create a standout experience for the customer. On the digital side, we recently launched a second phase of improvement under our website redesign. The site features richer storytelling and a more seamless customer journey designed to drive increased engagement times and higher conversion rate. I encourage you to visit fossil.com, where we recently refreshed our landing pages to highlight Fossil's innovation around core classics, elevating the traditional watch platforms that reflect our history of design and storytelling.

On the product and marketing front, our engine is fired up. Fossil traditional watch icons like the Neutra, Raquel and Machine platforms were top performers in Q2. This collection reflect our heritage and remain an important part of our product pipeline. Equally important, we have a long history of on-trend collaboration that enable us to enhance our storytelling and drive brand heat. Our latest launches, Fossil per Shelby, Superman and Fantastic Four have been standout drawing significant media attention, delivering outsized performance across our content channels and capturing consumer mind share.

This year, we're increasing our investment in upper funnel marketing initiatives to cultivate enthusiasm for the Fossil brand through unique and immersive experiences. Consistent influencer and in-person activation around key commercial and cultural moments globally have contributed to rising engagement rates, price impression and improving top line trends in traditional watches.

In Q3, our global teams are gearing up for the official worldwide launch of Nick Jonas as a Fossil global brand ambassador. We have a series of exciting consumer activation and VIP events planned, which will kick off next week when we welcome consumer and fans to the Fossil Diner, a branded pop-up experience in New York City. We will be replicating a traditional New Jersey diner, bringing this to life in an iconic Manhattan space with exclusive merchandise and experiences.

We will also be investing in a robust wholesale marketing strategy to support the campaign launch. This includes window takeovers at our wholesale partners globally, point-of-sale marketing, new fixtures and improved storytelling collateral. We're thrilled about the launch of this campaign, which represent a pivotal moment for Fossil. We're confident that Nick's global reach and influence will help us build increased awareness of the Fossil brand, create excitement around our product offerings and drive cultural relevance.

Turning now to our core licensed brands, Armani, Kors and Diesel. We have strengthened our position in the wholesale channel by investing in point-of-sale and in-store presentation. This is driving improved results in key markets, including the U.S., India, Germany and the U.K., while China performance remains under pressure by the macro environment. From a brand perspective, Kors and Armani Exchange both demonstrate year-over-year growth in the wholesale channel during the first half of the year, while Armani performance was challenged in China, the brand grew in other key markets, including North America and EMEA in the first half.

Next, we are remaining focused on optimizing our global wholesale footprint. We are prioritizing key geographies where we continue to see strengthening trends. This included Americas where Fossil traditional watch sales were up double digit in the second quarter as well as India, where we are seeing strong momentum across brands and channels.

Additionally, we're gaining traction quickly with our European distributor partners, driving increased sales and profitabilities in those geographies. Our aggressive action to strengthen channel profitability are paying dividends. Our strategic decision to dramatically scale back promotional activity in our e-commerce channel is driving significant improvement in our gross margin profile and bottom line profitability. We're also seeing uplift in key performance indicators, including traffic quality and average unit retail in both our Fossil's stores and e-commerce sites. This is having a halo effect across other channels, most notably wholesale. We're pleased to be leading by example with our return to a full price selling model, further demonstrating our commitment to strengthen our relationship with our wholesale partners.

Looking at our Fossil retail stores, we're continuing to optimize the portfolio through the closure of underperforming doors. In Q2, we exited an additional 6 locations. As part of our efforts to deliver an engaging shopping experience and improve fleet productivity, we have begun prototyping our store of the future, which blends lifestyle selling, data-led decision-making and purpose-driven strategy. The new program is shifting our selling culture to one that is rooted in proactive clientele and outreach and prioritize personalized service and community. We started with a pilot in our home base of Dallas and are quickly expanding to more than 50 of our U.S. stores this summer.

The initial results are compelling. We're seeing month-over-month increase in conversion, average daily sales and unit per transaction. We're planning to roll out the program to all of our North American locations this year and have some pilot stores underway in EMEA.

Turning to our second turnaround pillar, rightsizing Fossil Group's cost structure. We've taken action to strengthen our operating model and continue to act with financial rigor to position the business for long-term profitable growth. Our cost-cutting actions have generated nearly $50 million of savings in the first half of 2025. And we remain on track to capture full year SG&A savings of $100 million.

Additionally, we are continuing to evaluate incremental opportunities, including the potential sale of noncore assets. Lastly, I would turn to our third key pillar, strengthening the balance sheet. I'm pleased to share that we have successfully refinanced our revolving credit facility and entered into a transaction support agreement with our largest bondholders to amend and extend our bond maturities into 2029. This balance sheet transformation, which Randy will cover in more detail, will meaningfully improve our liquidity and provide us with added flexibility to execute our turnaround and return Fossil to a profitably growing cash-generating organization.

We're incredibly grateful to our stakeholders for their support and appreciate their conviction in our team, our business plan and our long-term vision. Looking ahead, I'm confident we have what is needed to win, world-class teams, a clear strategy and a plan of action, a solid balance sheet and a strong brand equity, underpinned by a 40-year heritage in watchmaking.

As we face an increasingly complex environment, we're controlling what we can in leaning into our strength. Halfway through the year, we're performing ahead of our expectation and gaining increasing traction against our initiatives. Importantly, as we continue on our path to restoring top line growth, we're strengthening our underlying operating model and unlocking efficiencies, which is driving improved profitability. We greatly appreciate the support of our shareholders and look forward to keeping you updated on our progress.

Now I will turn the call over to Randy to review the second quarter financials and discuss our outlook.

Thank you, Franco, and good afternoon, everyone. We're pleased to have delivered another quarter of outperformance across the P&L as we continue to advance our turnaround strategies. As a result of our strong year-to-date performance, we're raising full year guidance on the top and bottom line with adjusted operating margin now expected to be breakeven to slightly positive.

Second quarter net sales totaled $219 (sic) [ 220 ] million, down 16% in constant currency and in line with our expectations. Second quarter gross margin expanded 480 (sic) [ 490 ] basis points compared to last year, coming in at 57.4% (sic) [ 57.5% ]. You'll note that this is now the third consecutive quarter of meaningful gross margin expansion. The year-over-year increase primarily reflects higher product margins in our core categories, driven by improved product costing, our exit from connected watches, lower freight costs and importantly, a completely refreshed philosophy with significantly lower reliance on discounts and promotions. We are proactively addressing the tariff landscape and remain confident that we can mitigate the full impact to our cost of goods sold in 2025.

As a global organization with a flexible supply chain and significant scale, we are well positioned. We have several tactics in our arsenal, ranging from cost sharing with vendors to optimizing our sourcing allocations and distribution to strategic pricing actions. Specific initiatives include partnering with our long-standing suppliers to drive cost reduction on our key platforms, utilizing our strong supply base to optimize costs across multiple sourcing regions and supply chain tiers, leveraging our free trade zone status at our Dallas distribution center and implementing surgical price increases.

With respect to pricing, thus far, we have not seen any pushback from the consumer, which we view as a testament to our democratic pricing architecture. Continuing down the P&L and looking at operating expenses, our commitment to strict cost control was evident in the quarter. Our teams brought down SG&A by $32 million to $122 million, excluding an $11 million gain from the sale leaseback of our European distribution center, which we discussed on our May earnings call and as expected, closed in Q2. As a percentage of sales, SG&A was 340 basis points lower versus prior year, coming in at 55.7%. The year-over-year improvement in SG&A is attributable to 44 fewer stores in operation versus a year ago, lower compensation and administrative expenses and a planned decrease in performance marketing spend.

On a year-to-date basis, we have delivered $48 million of SG&A savings, putting us well on track to capture our targeted full year savings of $100 million. During Q2, we closed another 6 stores, bringing us to 34 closures year-to-date. We expect to close 45 to 50 locations this year as we work towards optimizing the fleet and improving productivity. As a reminder, virtually all of our store closures are occurring at natural lease expiration with minimal closing costs.

Turning now to earnings. We delivered a third consecutive quarter of profitability. Second quarter adjusted operating income came in at positive $4 million compared to a loss of $17 million a year ago. This strength drove Q2 adjusted operating margin of 1.7%. Of note, adjusted operating income does not include the $11 million gain I just discussed.

Moving to the balance sheet. We ended the quarter with $110 million of cash and cash equivalents, which includes more than $20 million from the sale leaseback of our German distribution center. Inventory levels were down 12% compared to the prior year and totaled $178 million. Most importantly, as Franco pointed out, subsequent to quarter end, we meaningfully strengthened the balance sheet, a critical pillar under our turnaround plan that we have been working with urgency to address.

The comprehensive financing plan we announced today considerably improves our liquidity position and provides us with a runway to transform Fossil into a consistent, profitable grower and strong cash flow generator. Let me unpack the mechanics of what we announced. We are pleased to have secured a new $150 million asset-based revolving credit facility with Ares Management Credit Fund, a best-in-class lender and partner. The new facility, which has a 5-year maturity, is commensurate with the size of our current business, carries enhanced terms and provides increased availability to meet our working capital needs.

Concurrently, we have signed a transaction support agreement with our 2 largest bondholders to amend and extend the maturity on our 7% senior notes into 2029. We are pleased to have reached this collaborative agreement with these key stakeholders, which also includes their commitment to provide a cash backstop of $32 million in additional funding to further fuel our turnaround. Their support covers approximately 60% of our outstanding bonds, and we expect to launch a public exchange later this month to address the balance of our notes. We look forward to sharing the results of the exchange with the investor community prior to year-end.

Before moving to guidance, I'd like to underscore the importance of these balance sheet movements. As Franco mentioned, we are confident that we now have ample liquidity to affect our turnaround. A big thank you to our bondholders, advisers and new partners.

Turning now to guidance. Based on the results we're seeing from our turnaround initiatives and ongoing momentum across the business, we are raising our full year outlook for 2025 as follows. We expect worldwide net sales to decline in the mid-teens, which includes approximately $40 million of impact related to retail store closures. This compares to prior guidance of a decline in the mid- to high teens. We are also taking up our expectations on the bottom line, reflecting the combination of gross margin expansion and significant cost reduction. Our updated outlook calls for breakeven to slightly positive adjusted operating margins, which compares to prior guidance of negative adjusted operating margin in the low single digits.

To provide more context, I'll speak to the cadence of profitability in the second half. First and foremost, we continue to expect to deliver healthy gross margins in the mid to upper 50s on a full year basis. From an accounting perspective, we recognize any minimum royalty deficits in the second half of the year, the majority of which are recorded in our third quarter. In 2025, the impact will be more significant than prior years due to our smaller sales base.

Therefore, in Q3, we anticipate that gross margin and adjusted operating margin will decline on both a year-over-year and sequential basis. Excluding royalty shortfalls, we expect Q3 gross margin to increase versus prior year. Our turnaround efforts began to take root in Q4 of last year when we started to see meaningful gross margin expansion associated with our lower promotional full price selling strategies.

Therefore, we expect a more comparable gross margin rate year-over-year in Q4 as the minimum royalty reductions we've agreed with our license partners benefit us moderately in 2025 and much more meaningfully in 2026 when we expect to bend the curve of these minimum royalty guarantee shortfalls. Implicit in our outlook is a return to positive adjusted operating income in the fourth quarter.

In summary, we are entering the second half of the year with momentum from both an operational and financial perspective. Our teams are delivering strong execution against our turnaround pillars and are acting with financial rigor, remaining committed to driving long-term profitable growth and building durable shareholder value.

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

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

Congratulations on the quarter. I would like to start from the ongoing impressive gross margins improvement. I understand that there's a lot of moving parts, but I was hoping you guys could focus a bit more on the impact of the changes in your promotional activity in your price increases.

And then also I was hoping you guys could give us some color if there was any impact from tariffs?

Francesco, thanks for the question. Look, we're extremely pleased. As I mentioned, since I joined the company, for us, it was very important to really move into a full price model. And the full price model, combined with the very strong work done by the supply chain teams has led this improvement into gross margin, which we think we guided in the mid- to high 50s in a long-term perspective.

We're very pleased. I would say what is very pleased in what we have seen over the last month since we changed our strategy is that our brands are so strong that despite being less promotional, we haven't seen really any decrease. Consumers have been paying the value for the brand. They understand that the product has more value than what we were asking for, and they've been very resilient. So we've seen a strong increase in AUR. We're very pleased, and we believe that this is a new model that we can continue over the long run. Same on our supply chain, but I will ask Randy to jump in. He's going to give you an idea on all of the work that's been happening.

Yes. Thank you, Franco. And thank you, Francesco, very much for the question. To address specifically your question, we have not seen any negative impact in our gross margins year-to-date from tariffs. As I shared in my prepared remarks, we have a litany of strategies that we are employing to address tariffs. Obviously, that situation remains quite fluid with nearly daily or weekly changes.

But as we've said in the past, and we continue to believe into the future, our diverse, sophisticated supply chain affords us with a number of levers that we can pull to effectively mitigate any sort of incremental tariff pressure.

One thing that I do want to mention, though, because while tariffs right now are not currently a tailwind or a headwind that we're unable to manage through, we did want to make sure that folks understood the way in which minimum royalty guarantees do impact our business. We shared externally prior to this call that we'd achieved modest royalty reductions in '25 and meaningful royalty reductions in '26. That's why in Q3 in years past and certainly in 2025, we would expect a debit in our gross margin percentage from the recognition of those minimum royalty rate shortfalls. Our underlying margin rate remains quite strong, very much in line with the actions that Franco just articulated.

Okay. Great. That was extremely helpful. And then shifting gear one second. Talking about wholesale, it looks like a pretty resilient part of your business, and it sounds like you guys are working closely with your partners. I was wondering whether you guys could give us some color on the initiatives you are taking and in general, the trends that you're seeing in that channel.

Yes, great question. So Francesco, look, let me take the lead and maybe Randy can give some color. We're excited. I've been in a roadshow since I joined the company talking to our -- really our largest partners globally. The love that our partners have for our brands is extremely high. But they've also been very critical to all of us about our promotional activity, which led us to really start to lead by example. We're building great relationship. I think -- when I was talking to them early days, they loved my story. They said we want to see action. We proved that in quarter 4. They said, great. Let's see the future. We proved in Q1, and we doubled down in Q2.

And even last week, our teams were in New York meeting with the largest accounts, they all have been very complementary. You guys are now leading the industry by example. You're driving stronger relationship. This is step #1. Step #2 is about what we are doing to invest with them. And we've been very clear over the last -- over the plan that wholesale channel was really a priority for the company. We are doubled down on investing in-store presentation for this year. The project is really taking live now with a lot of new fixture delivered to our accounts globally as well as we are doubled down on activities from a marketing perspective. And I will mention the pretty soon launch of the Nick Jonas collaboration, which we are excited about hitting our wholesale partners globally.

So we're building a relationship. We know it takes time. We want to be credible. We want to be their best partner, and we will focus on continuing to do that, and we're seeing this paying off dividends.

Okay. Great. And then if I have time, if I can sneak in one more. So we're seeing anecdotal evidence of a renewed interest in traditional fashion watches among younger consumers. And then we've been following clearly the Fossil brand really closely. And we noticed that several of the limited edition collaboration are actually sold out on your website. I'm talking about the -- Fantastic Four, Superman S-Shield and Minecraft.

So I was wondering whether you guys saw any strength in that younger consumer category? What kind of products are those customers more interested in? And then when it comes to the collaboration side of things, I was hoping you guys could give us an idea of the kind of initiatives you guys are undertaking to manage and promote those launches and how you see that brand momentum kind of reverberate across the broader offering of the Fossil brand?

Great question. Thanks for asking. Look, we're definitely seeing a comeback of the traditional watch. I would say it's really different by region, definitely very strong in India, in the Americas. We don't see that really happening in China. China has been still -- even has been a little better, but we still don't see those consumers there.

From what we see is exciting because you see this new generation coming and the relevance of the smart watch for them is not quite there. The traditional watch becomes an accessory, a way to express themselves. They don't need to -- they really don't need to take the smart watch approach in general as I've done over the years or many other consumers have done over the years.

So we're excited about the traditional watch coming back. I think a collaboration are helping us to connect with some very key communities that drive brand awareness and brand momentum. I think we have an amazing team that has been able to refocus the business into what we are good on, which is really building great product and telling stories. And those communities and those collaborations are just helping us to tell a better story. You're right, I recall Minecraft, honestly, we didn't expect that. It was impressive. We were sold out within hours. Shelby, Superman has been -- I'm really, really proud of the work the teams have done because it really has led Fossil to a different level, to a new level.

And -- but I'm also very excited about what's coming next. I'm going to be in New York next week, and I can't wait to see the new collaboration with Nick Jonas. This is going to be by far the biggest activation we've done for the Fossil brand since years. So I look forward to tell more in the next call about the success of this collaboration.

There are no further questions for Q&A. I'll turn the call back to management for closing comments.

Thank you, everyone, for joining today. We're excited about the future. We're looking forward to see you and talk to you for Q3 earnings. Thank you.

This concludes the meeting. You may now disconnect.