Edgar Filing: FOSSIL INC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: October 3, 2009

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-19848

FOSSIL, INC.

(Exact name of registrant as specified in its charter)

Delaware		75-2018505
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

2280 N. Greenville Avenue, Richardson, Texas 75082

(Address of principal executive offices) (Zip Code)

(972) 234-2525

(Registrant’s telephone number, including area code)

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares of the registrant’s common stock outstanding as of November 9, 2009: 66,735,302.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FOSSIL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

UNAUDITED

AMOUNTS IN THOUSANDS

	October 3, 2009		January 3, 2009

Assets
Current assets:
Cash and cash equivalents	$	297,963	$	172,012
Securities available for sale	8,749		6,436
Accounts receivable - net of allowances of $51,099 and $55,596, respectively	184,481		205,973
Inventories - net	279,611		291,955
Deferred income tax assets - net	29,665		27,006
Prepaid expenses and other current assets	54,237		60,084
Total current assets	854,706		763,466

Investments	12,756		13,011
Property, plant, and equipment - net of accumulated depreciation of $175,045 and $156,758, respectively	211,822		207,328
Goodwill	44,194		43,217
Intangible and other assets - net	63,958		60,274
Total assets	$	1,187,436	$	1,087,296

Liabilities and Stockholders’ Equity
Current liabilities:
Short-term debt	$	3,735	$	5,271
Accounts payable	109,651		91,027
Accrued expenses:
Compensation	31,569		34,091
Royalties	12,065		17,078
Co-op advertising	10,825		21,869
Other	33,609		30,306
Income taxes payable	28,620		7,327
Total current liabilities	230,074		206,969

Long-term income taxes payable	22,511		38,784
Deferred income tax liabilities	32,617		22,880
Long-term debt	4,613		4,733
Other long-term liabilities	9,607		8,567
Total long-term liabilities	69,348		74,964

Stockholders’ equity:
Common stock, 66,733 and 66,502 shares issued at October 3, 2009 and January 3, 2009, respectively	667		665
Additional paid-in capital	88,233		81,905
Retained earnings	764,645		695,427
Accumulated other comprehensive income	30,541		24,147
Noncontrolling interest	3,928		3,219
Total stockholders’ equity	888,014		805,363
Total liabilities and stockholders’ equity	$	1,187,436	$	1,087,296

See notes to the condensed consolidated financial statements.

FOSSIL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

UNAUDITED

AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA

	For the 13 Weeks Ended						For the 39 Weeks Ended
	October 3, 2009			October 4, 2008			October 3, 2009			October 4, 2008

Net sales	$	381,362		$	409,760		$	1,020,254		$	1,119,136
Cost of sales	170,625			185,583			472,956			510,369
Gross profit	210,737			224,177			547,298			608,767

Operating expenses:
Selling and distribution	115,263			120,644			330,872			341,365
General and administrative	38,110			39,795			112,783			119,588

Total operating expenses	153,373			160,439			443,655			460,953

Operating income	57,364			63,738			103,643			147,814
Interest expense - net	50			79			183			371
Other (expense) income - net	(1,660		)	(2,692		)	7,574			(3,429		)

Income before income taxes	55,654			60,967			111,034			144,014
Provision for income taxes	19,109			23,447			38,501			48,185

Net income	36,545			37,520			72,533			95,829
Less: Net income attributable to noncontrolling interest	1,270			1,049			3,315			4,004
Net income attributable to Fossil, Inc.	$	35,275		$	36,471		$	69,218		$	91,825

Other comprehensive income (loss) - net of taxes:
Currency translation adjustment	11,133			(33,432		)	15,412			(19,324		)
Unrealized loss on securities available for sale	517			(467		)	1,018			(1,140		)
Forward contracts hedging intercompany foreign currency payments - change in fair values	(4,986		)	15,423			(10,036		)	11,952

Comprehensive income	43,209			19,044			78,927			87,317
Less: Comprehensive income attributable to noncontrolling interest	1,265			1,053			3,311			4,008
Comprehensive income attributable to Fossil, Inc.	$	41,944		$	17,991		$	75,616		$	83,309


Earnings per share:
Basic	$	0.53		$	0.54		$	1.04		$	1.35
Diluted	$	0.52		$	0.54		$	1.03		$	1.33
Weighted average common shares outstanding:
Basic	66,714			67,261			66,640			67,931
Diluted	67,408			68,049			67,023			68,881

See notes to the condensed consolidated financial statements.

FOSSIL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

AMOUNTS IN THOUSANDS

	For the 39 Weeks Ended
	October 3, 2009			October 4, 2008

Operating Activities:
Net income	$	72,533		$	95,829
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	30,272			27,763
Stock-based compensation	5,223			5,262
(Decrease) increase in allowance for returns - net of related inventory in transit	(4,139		)	187
Loss on disposal of assets	234			141
Impairment loss	1,650			1,116
Equity in loss (income) of joint venture	719			(1,211		)
Increase in allowance for doubtful accounts	3,036			918
Excess tax benefit from stock-based compensation	(3		)	(535		)
Deferred income taxes	8,828			(1,061		)

Changes in operating assets and liabilities:
Accounts receivable	25,990			1,018
Inventories	8,950			(87,104		)
Prepaid expenses and other current assets	1,371			(10,682		)
Accounts payable	8,117			1,063
Accrued expenses	(14,799		)	(19,208		)
Income taxes payable	5,023			4,886

Net cash provided by operating activities	153,005			18,382

Investing Activities:
Additions to property, plant, and equipment	(28,172		)	(40,548		)
Increase in intangible and other assets	(1,378		)	(13,274		)
Purchase of securities available for sale	(1,111		)	(1,847		)
Sales and maturities of securities available for sale	45			6,395

Net cash used in investing activities	(30,616		)	(49,274		)

Financing Activities:
Acquisition and retirement of common stock	—			(94,888		)
Distribution of noncontrolling interest earnings	(2,602		)	(4,359		)
Excess tax benefit from stock-based compensation	3			535
Borrowings on notes payable	1,900			—
Payments on notes payable	(3,769		)	(6,209		)
Proceeds from exercise of stock options	1,666			4,297

Net cash used in financing activities	(2,802		)	(100,624		)

Effect of exchange rate changes on cash and cash equivalents	6,364			(5,917		)

Net increase (decrease) in cash and cash equivalents	125,951			(137,433		)
Cash and cash equivalents:
Beginning of period	172,012			255,244
End of period	$	297,963		$	117,811

See notes to the condensed consolidated financial statements.

FOSSIL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

1. FINANCIAL STATEMENT POLICIES

Basis of Presentation. The condensed consolidated financial statements include the accounts of Fossil, Inc., a Delaware corporation, and its wholly and majority-owned subsidiaries (the “Company”). The condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to present a fair statement of the Company’s financial position as of October 3, 2009, and the results of operations for the thirteen-week periods ended October 3, 2009 (“Third Quarter”) and October 4, 2008 (“Prior Year Quarter”), respectively, and the thirty-nine week periods ended October 3, 2009 (“Year To Date Period”) and October 4, 2008 (“Prior Year YTD Period”), respectively. All adjustments are of a normal, recurring nature.

These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the annual report on Form 10-K filed by the Company pursuant to the Securities Exchange Act of 1934 for the year ended January 3, 2009. Operating results for the thirteen and thirty-nine week periods ended October 3, 2009 are not necessarily indicative of the results to be achieved for the full year.

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company has not made any changes in its significant accounting policies from those disclosed in its most recent annual report.

Business. The Company is a global design, marketing and distribution company that specializes in consumer fashion accessories. Its principal offerings include an extensive line of men’s and women’s fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, cold weather accessories, footwear and apparel. In the watch and jewelry product category, the Company has a diverse portfolio of globally recognized owned and licensed brand names under which its products are marketed. The Company’s products are distributed globally through various distribution channels including wholesale, export and direct to consumer at varying price points to service the needs of its customers, whether they are value-conscious or luxury oriented. Based on its extensive range of accessory products, brands, distribution channels and price points, the Company is able to target style-conscious consumers across a wide age spectrum on a global basis.

Foreign Currency Hedging Instruments. The Company’s foreign subsidiaries periodically enter into forward contracts principally to hedge the future payment of intercompany inventory transactions in U.S. dollars. If the Company’s foreign subsidiaries were to settle their Euro, British Pound, Australian Dollar, Mexican Peso and Japanese Yen based contracts at the reporting date, the net result would be a net loss of approximately $6.2 million, net of taxes, as of October 3, 2009. Refer to Note 7, Derivatives and Risk Management, of this Form 10-Q for additional disclosures about the Company’s use of forward contracts. The changes in fair value of hedging activities resulted in a tax benefit of $0.6 million in the Third Quarter and a tax expense of $1.8 million in the Prior Year Quarter. The tax benefit of the changes in fair value of hedging activities for the Year To Date Period was $1.8 million and the tax expense of the changes in fair value of hedging activities for the Prior Year YTD Period was $1.4 million.

Fair Value Measurements. The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.

Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”) (now codified within Accounting Standard Codification (“ASC”) 820, Fair Value Measurement and Disclosures (“ASC 820”)) establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

· Level 1 - Quoted prices in active markets for identical assets or liabilities.

· Level 2 - Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.

· Level 3 - Unobservable inputs based on the Company’s assumptions.

ASC 820 requires the use of observable market data if such data is available without undue cost and effort.

The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of October 3, 2009:

	Fair Value at October 3, 2009
	Level 1		Level 2		Level 3		Total
	IN THOUSANDS
Assets:
Securities available for sale	$	8,749	$	—	$	—	$	8,749
Foreign exchange forward contracts	—		370		—		370
Total	$	8,749	$	370	$	—	$	9,119

Liabilities:
Foreign exchange forward contracts	$	—	$	7,309	$	—	$	7,309
Total	$	—	$	7,309	$	—	$	7,309

The fair values of the Company’s available for sale securities are based on quoted prices. The fair values of the Company’s foreign exchange forward contracts are based on published quotations of currency spot rates and forward points, which are converted into implied forward currency rates.

Earnings Per Share (“EPS”). The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS:

	For the 13 Weeks Ended				For the 39 Weeks Ended
	October 3, 2009		October 4, 2008		October 3, 2009		October 4, 2008
	IN THOUSANDS, EXCEPT PER SHARE DATA

Numerator:
Net income attributable to Fossil, Inc.	$	35,275	$	36,471	$	69,218	$	91,825

Denominator:
Basic EPS computations:
Basic weighted average common shares outstanding	66,714		67,261		66,640		67,931
Basic EPS	$	0.53	$	0.54	$	1.04	$	1.35

Diluted EPS computation:
Basic weighted average common shares outstanding	66,714		67,261		66,640		67,931
Stock options, stock appreciation rights and restricted stock units	694		788		383		950
Diluted weighted average common shares outstanding	67,408		68,049		67,023		68,881
Diluted EPS	$	0.52	$	0.54	$	1.03	$	1.33

Approximately 430,000, 420,000, 1,155,000 and 222,000 weighted average shares issuable under stock option awards were not included in the diluted earnings per share calculation at the end of the Third Quarter, Prior Year Quarter, Year To Date Period and Prior Year YTD Period, respectively, because they were antidilutive. These common share equivalents may be dilutive in future EPS calculations.

Goodwill. The changes in the carrying amount of goodwill, which is not subject to amortization, are as follows:

	United States Wholesale		Europe Wholesale		Other International Wholesale		Direct to Consumer		Total
	IN THOUSANDS
Balance at January 3, 2009	21,799		17,139		4,279		—		43,217
Currency	—		932		45		—		977
Balance at October 3, 2009	$	21,799	$	18,071	$	4,324	$	—	$	44,194

Subsequent Events. The Company evaluated all events or transactions that occurred after October 3, 2009 through November 12, 2009, the date the Company issued these financial statements. During this period, the Company did not have any material recognizable subsequent events.

Newly Issued Accounting Standard Updates. In August 2009, the Financial Accounting Standards Board (“FASB”) issued ASU 2009-5 Fair Value Measurements and Disclosures (Topic 820) Measuring Liabilities at Fair Value (“ASU 2009-5”). ASU 2009-5 provides amendments to Subtopic 820-10, Fair Value Measurements and Disclosures-Overall, for the fair value measurement of liabilities. ASU 2009-5 clarifies that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value. ASU 2009-5 is effective for the Company for interim and annual periods ending after October 3, 2009. The Company does not expect the adoption of ASU 2009-5 to have a material impact on its consolidated results of operations or financial position.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS 167”). SFAS 167 has yet to be codified within The FASB Accounting Standards Codification (“Codification”). SFAS 167 improves financial reporting by enterprises involved with variable interest entities. The FASB undertook this project to address (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, (“Interpretation 46(R)”) as a result of the elimination of the qualifying special-purpose entity concept in FASB Statement No. 166, Accounting for Transfers of Financial Assets, and (2) constituent concerns about the application of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under Interpretation 46(R) do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. SFAS 167 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009. The Company does not expect the adoption of SFAS 167 to have a material impact on its consolidated results of operations or financial position.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140 (“SFAS 166”). SFAS 166 has yet to be codified within the Codification. SFAS 166 improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of a financial asset; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS 166 is effective for financial statements as of the beginning of the first annual reporting period that begins after November 15, 2009. Additionally, the disclosure provisions of this statement should be applied to transfers that occurred both before and after the date of SFAS 166. The Company does not expect the adoption of SFAS 166 to have a material impact on its consolidated results of operations or financial position.

Newly Adopted Accounting Standard Codification. In August 2009, FASB issued ASU 2009-4 Accounting for Redeemable Equity Instruments — an Amendment to Section 480-10-S99 (“ASU 2009-4”). ASU 2009-4 represents a Securities and Exchange Commission (“SEC”) update to Section 480-10-S99, Distinguishing Liabilities from Equity. The adoption of guidance within ASU 2009-4 did not have an impact on the Company’s consolidated results of operations or financial position.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — A Replacement of FASB Statement No. 162, (now codified within ASC 105, Generally Accepted Accounting Principles (“ASC 105”)). ASC 105 establishes the Codification as the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. All guidance contained in the Codification carries an equal level of authority. Following this statement, FASB will not issue new standards in the form of statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates, which will serve only to: (1) update the Codification; (2) provide background information about the guidance; and (3) provide the bases for conclusions on the change(s) in the Codification. ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification supersedes all existing non-SEC accounting and reporting standards. The adoption of ASC 105 did not have an impact on the Company’s consolidated results of operations or financial position.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, (now codified within ASC 855, Subsequent Events (“ASC 855”)). ASC 855 establishes the general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 was effective for the Company on April 5, 2009. The adoption of ASC 855 did not have a material impact on the Company’s consolidated results of operations or financial position. Refer to Note 1, Financial Statement Policies, of this Form 10-Q for the enhanced disclosures required by the adoption of ASC 855.

In April 2009, the FASB issued Staff Position (“FSP”) No. 115-2 and FSP 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (now codified within ASC 320, Investments — Debt and Equity Securities (“ASC 320”)). ASC 320 provides greater clarity about the credit and noncredit component of an other-than-temporary impairment event and more effectively communicates when an other-than-temporary impairment event has occurred. ASC 320 amends the other-than-temporary impairment model for debt securities. The impairment model for equity securities was not affected. Under ASC 320, an other-than-temporary impairment must be recognized through earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost basis. This standard is effective for interim periods ending after June 15, 2009. The adoption of ASC 320 did not have a material impact on the Company’s consolidated results of operations or financial position.

In April 2009, the FASB issued FSP 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (now codified within ASC 820, Fair Value Measurements and Disclosures). ASC 820 provides guidelines for making fair value measurements more consistent and provides additional authoritative guidance in determining whether a market is active or inactive and whether a transaction is distressed. ASC 820 is applied to all assets and liabilities (i.e., financial and non-financial) and requires enhanced disclosures. This standard is effective for periods ending after June 15, 2009. The adoption of ASC 820 did not have a material impact on the Company’s consolidated results of operations or financial position.

In April 2009, the FASB issued FSP 107-1 and Accounting Principles Board 28-1, Interim Disclosures about Fair Value of Financial Instruments (now codified within ASC 825, Financial Instruments (“ASC 825”)). ASC 825 requires disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. ASC 825 is effective for interim periods ending after June 15, 2009. The adoption of ASC 825 did not have a material impact on the Company’s consolidated results of operations or financial position. Refer to Note 1, Financial Statement Policies, of this Form 10-Q for the enhanced disclosures required by the adoption of ASC 825.

In June 2008, the FASB issued Staff Position — Emerging Issues Task Force 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (now codified within ASC 260, Earnings Per Share (“ASC 260”)). Under ASC 260, unvested share based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. ASC 260 was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years and requires retrospective application. The adoption of ASC 260 did not have a material impact on the Company’s earnings per share calculations.

In April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of Intangible Assets (now codified within ASC 350, Intangibles — Goodwill and Other (“ASC 350”)). ASC 350 provides guidance for determining the useful life of a recognized intangible asset and requires enhanced disclosures so that users of financial statements are able to assess the extent to which the expected future cash flows associated with the asset are affected by our intent and/or ability to renew or extend the arrangement. ASC 350 was effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The adoption of ASC 350 on January 4, 2009 did not impact the Company’s consolidated results of operations or financial position.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (now codified within ASC 815, Derivatives and Hedging (“ASC 815”)). ASC 815 requires enhanced disclosures about an entity’s derivative and hedging activities aimed at improving the transparency of financial reporting. ASC 815 was effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of ASC 815 did not have any impact on the Company’s consolidated results of operations or financial position. Refer to Note 7, Derivatives and Risk Management, of this Form 10-Q for the enhanced disclosures required by the adoption of ASC 815.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (now codified within ASC 805, Business Combinations (“ASC 805”)). ASC 805 establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the fair value of identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date. ASC 805 significantly changes the accounting for business combinations in a number of areas, including the treatment of contingent consideration, preacquisition contingencies, transaction costs and restructuring costs. In addition, under ASC 805, changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. The provisions of this standard will apply to any acquisitions we complete on or after December 15, 2008. The adoption of ASC 805 did not have an impact on the Company’s consolidated results of operations or financial position.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51 (now codified within ASC 810, Consolidation (“ASC 810”)). ASC 810 changes the accounting and reporting for minority interests, which is recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions with minority interest holders. The provisions of ASC 810 were applied to all noncontrolling interests prospectively, except for the presentation and disclosure requirements, which were applied retrospectively to all periods presented and have been disclosed as such in our condensed consolidated financial statements herein. ASC 810 became effective for fiscal years beginning on or after December 15, 2008. The Company adopted ASC 810 effective January 4, 2009. Upon adoption of ASC 810, the Company has recognized noncontrolling interests as equity in the condensed consolidated balance sheets, has reflected net income attributable to noncontrolling interests in consolidated net income and has provided, in Note 8, Controlling and Noncontrolling Interests, a summary of changes in equity attributable to controlling and noncontrolling interests.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (now codified within ASC 820). ASC 820 provides guidance for using fair value to measure assets and liabilities. Under ASC 820, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The guidance within ASC 820 became effective for financial statements issued for fiscal years beginning after November 15, 2007; however, the FASB provided a one year deferral for implementation of the standard for non-recurring, non-financial assets and liabilities. The Company adopted ASC 820 for non-financial assets and non-financial liabilities effective January 4, 2009, which did not have any effect on its consolidated results of operations or financial position.

2. INVENTORIES

Inventories - net consist of the following:

	October 3, 2009			January 3, 2009
	IN THOUSANDS
Components and parts	$	16,162		$	22,354
Work-in-process	1,726			3,339
Inventory purchases in transit	41,632			30,056
Finished goods	233,938			252,523
	293,458			308,272
Inventory obsolescence reserve	(13,847		)	(16,317		)
Inventories - net	$	279,611		$	291,955

3. INTANGIBLE AND OTHER ASSETS

Intangibles and other assets - net consist of the following:

		October 3, 2009				January 3, 2009
	Useful	Carrying		Accumulated		Carrying		Accumulated
Fiscal Year	Lives	Amount		Amortization		Amount		Amortization
		IN THOUSANDS
Intangibles - subject to amortization:
Trademarks	10 yrs.	$	2,623	$	1,568	$	2,620	$	1,459
Customer list	9 yrs.	7,687		5,415		7,656		4,578
Patents	14 -20 yrs.	764		292		752		258
Other	7-20 yrs.	203		183		196		168
Total intangibles - subject to amortization		11,277		7,458		11,224		6,463

Intangibles - not subject to amortization:
Tradenames		23,540		—		23,327		—

Other assets:
Key money deposits		21,727		4,524		17,011		2,405
Other deposits		9,175		—		8,639		—
Cash surrender value of life insurance		2,718		—		2,101		—
Other		7,875		372		7,131		291
Total other assets		41,495		4,896		34,882		2,696
Total intangibles and other assets		$	76,312	$	12,354	$	69,433	$	9,159
Net of amortization				$	63,958			$	60,274

Estimated aggregate future amortization expense for intangible assets is as follows:

	IN THOUSANDS
For the three months ended January 2, 2010	$	417
For the twelve months ended January 1, 2011	1,333
For the twelve months ended December 31, 2011	752
For the twelve months ended December 29, 2012	458
For the twelve months ended December 28, 2013	183
For the twelve months ended January 3, 2014	141

4. INCOME TAXES

The Company’s income tax expense, excluding amounts attributable to noncontrolling interest, for the Third Quarter and Prior Year Quarter was $18.8 million and $23.2 million, respectively, resulting in an effective income tax rate of 34.8% and 38.8%, respectively. The lower effective rate for the Third Quarter is the result of a $0.9 million reduction in the Company’s previous year estimated federal income tax liability. Income tax expense, excluding amounts attributable to noncontrolling interest, was $37.8 million for the Year To Date Period, resulting in an effective rate of 35.3%. For the Prior Year YTD Period, income tax expense net of amounts attributable to noncontrolling interest was $47.3 million, resulting in an effective rate of 33.9%.

As of October 3, 2009, the total amount of unrecognized tax benefits, under FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (now codified within ASC 740, Income Taxes (“ASC 740”)), excluding interest and penalties, was $35.1 million, of which $8.0 million would favorably impact the effective tax rate in future periods, if recognized. During the fourth quarter of 2008, the Internal Revenue Service opened an audit of the Company’s income tax returns for tax years 2005 and 2006. The Company is also subject to examinations in various state and foreign jurisdictions for the 2004-2007 tax years, none of which are individually significant. Audit outcomes and the timing of audit settlements are subject to significant uncertainty.

The Company has classified uncertain tax positions as long-term income taxes payable unless such amounts are expected to be paid within twelve months of the balance sheet date. As of October 3, 2009, the Company had $15.8 million of unrecognized tax benefits for positions that are expected to be settled within the next twelve months. Consistent with its past practice, the Company recognizes interest and/or penalties related to income tax overpayments and income tax underpayments in income tax expense and income taxes payable, respectively. The total amount of accrued income tax-related interest and penalties included in the condensed consolidated balance sheet at October 3, 2009 was $6.4 million and $0.4 million, respectively. For the Year To Date Period, the Company accrued income tax-related interest expense of $1.0 million.

5. STOCKHOLDERS’ EQUITY AND BENEFIT PLANS

Common Stock Repurchase Program. During 2008 and 2007, the Company’s Board of Directors approved two stock repurchase programs, pursuant to which up to an aggregate of 4,000,000 shares of its common stock could be repurchased. During 2008 and 2007, the Company repurchased and retired 3.6 million and 0.4 million shares, respectively, of its common stock under these repurchase programs at a cost of approximately $105.9 million and $15.9 million, respectively. The repurchase programs were conducted pursuant to Rule 10b-18 of the Securities Exchange Act of 1934 and were completed in April 2008 and November 2008.

Stock-Based Compensation Plans. The Company accounts for stock-based compensation in accordance with the provisions of SFAS 123(R), Share-Based Payment (now codified within ASC 718, Compensation — Stock Compensation (“ASC 718”)) using the Black-Scholes option pricing model to determine the fair value of stock options and stock appreciation rights at the date of grant. The Company’s current stock-based compensation plans include: (a) stock options and restricted stock for its international employees, (b) stock options for its non-employee directors, and (c) stock appreciation rights, restricted stock and restricted stock units for its U.S.-based employees.

Long-Term Incentive Plan. Designated employees of the Company, including officers, are eligible to receive (a) stock options, (b) stock appreciation rights, (c) restricted or non-restricted stock awards, (d) restricted stock units, (e) cash awards or (f) any combination of the foregoing. The current stock options, stock appreciation rights, restricted stock and restricted stock units outstanding have original vesting terms ranging from three to five years. All stock options, stock appreciation rights, restricted stock and restricted stock units are accounted for at the grant date fair value. All stock appreciation rights and restricted stock units are settled in shares of common stock of the Company.

Restricted Stock Plan. Shares awarded under the Company’s 2002 Restricted Stock Plan were funded with shares contributed to the Company from a significant stockholder. The restricted shares outstanding have original vesting periods that predominately range from one to five years. These shares were accounted for at the grant date fair value. On August 29, 2007, the Company’s Board of Directors elected to terminate this plan; however, the termination will not impair the remaining 65,690 outstanding shares, which will continue in accordance with their original terms.

Non-Employee Director Stock Option Plan. During the first year individuals are elected as non-employee directors of the Company, they receive a grant of 5,000 non-qualified stock options. In addition, on the first day of each subsequent calendar year, each non-employee director automatically receives a grant of an additional 6,000 non-qualified stock options as long as the individual is serving as a non-employee director. Prior to April 1, 2008, 4,000 non-qualified stock options were granted annually. Pursuant to this plan, 50% of the options granted will become exercisable on the first anniversary of the date of grant and the remaining options granted will become exercisable in two additional installments of 25% each on the second and third anniversaries of the date of the grant. All stock options granted under this plan are accounted for at the grant date fair value.

The following table summarizes stock options and stock appreciation rights activity during the Third Quarter:

Stock Options and Stock Appreciation Rights	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
	IN THOUSANDS					IN THOUSANDS
Outstanding at July 4, 2009	3,060		$	20.53	5.6	$	15,622
Granted	—		—
Exercised	(76	)	11.31			1,252
Forfeited or expired	(2	)	26.93
Outstanding at October 3, 2009	2,982		20.76		5.4	20,516
Exercisable at October 3, 2009	1,986		19.49		4.4	15,034
Nonvested at October 3, 2009	996		23.29		7.5	5,482

Expected to vest	929		$	23.29	7.5	$	5,111

The aggregate intrinsic value in the table above is before income taxes and is based on the exercise price for outstanding and exercisable stock options and stock appreciation rights at October 3, 2009 and the fair market value on the exercise date for stock options and stock appreciation rights that have been exercised during the Third Quarter.

Stock Options and Stock Appreciation Rights Outstanding and Exercisable. The following table summarizes information with respect to stock options and stock appreciation rights outstanding and exercisable at October 3, 2009:

Stock Options and Stock Appreciation Rights Outstanding					Stock Options and Stock Appreciation Rights Exercisable
Range of Exercise Prices	Number of Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (Years)	Number of Shares	Weighted- Average Exercise Price
	IN THOUSANDS				IN THOUSANDS
$4.39 - $8.78	165	$	7.35	1.15	165	$	7.35
$8.78 - $13.18	493	11.32		2.87	493	11.32
$13.18 - $17.57	407	14.01		8.09	36	13.62
$17.57 - $21.96	403	18.83		5.26	313	18.88
$21.96 - $26.35	830	24.16		5.13	751	24.19
$26.35 - $30.74	378	30.53		7.21	99	30.09
$30.74 - $35.14	253	31.46		6.97	103	31.51
$35.14 - $39.53	2	36.18		6.08	0	36.18
$39.53 - $43.92	51	43.10		8.24	26	43.10
Total	2,982	$	20.76	5.43	1,986	$	19.49

The Company has elected to apply the long-form method to determine the hypothetical additional paid-in capital (“APIC”) pool provided by FASB Staff Position No. FAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards (now codified within ASC 718-740, Compensation — Stock Compensation — Income (“ASC 718-740”)). The Company had determined that a hypothetical pool of excess tax benefits existed in APIC as of January 1, 2006, the date of adoption of ASC 718-740, related to historical stock option exercises. In future periods, excess tax benefits resulting from stock option and stock appreciation right exercises will be recognized as additions to APIC in the period the benefit is realized. In the event of a shortfall (that is, the tax benefit realized is less than the amount previously recognized through periodic stock-based compensation expense recognition and related deferred tax accounting), the shortfall would be charged against APIC to the extent of previous excess benefits, if any, including the amounts included in the hypothetical APIC pool, and then to tax expense.

Restricted Stock and Restricted Stock Units. The following table summarizes restricted stock and restricted stock unit activity during the Third Quarter:

			Weighted-Average
			Grant Date Fair
Restricted Stock and Restricted Stock Units	Number of Shares		Value
	IN THOUSANDS

Nonvested at July 4, 2009	519		$	21.52
Granted	—		—
Vested	(15	)	19.49
Forfeited	(2	)	27.58
Nonvested at October 3, 2009	502		21.54

Expected to vest	460		$	21.54

The total fair value, calculated as the market price on vesting date, of restricted stock and restricted stock units vested during the Third Quarter was approximately $384,000.

6. SEGMENT INFORMATION

The Company manages its business primarily on a geographic basis. The Company’s reportable operating segments are comprised of the United States wholesale, Europe wholesale, Other international wholesale and direct to consumer. The Europe wholesale segment primarily includes sales to wholesale or distributor customers based in European countries, the Middle East and Africa. The Other international wholesale segment primarily includes sales to wholesale or distributor customers based in Australia, Canada, China (including the Company’s assembly and procurement operations), India, Indonesia, Japan, Korea, Malaysia, Mexico, New Zealand, Singapore, Taiwan, Thailand and countries in South America. The direct to consumer segment includes company-owned retail stores, e-commerce sales and catalog activities. Each reportable operating segment provides similar products and services.

The Company evaluates the performance of its reportable segments based on net sales and operating income. Net sales for geographic segments are generally based on the location of the customers. Operating income for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. Operating income for each segment includes intercompany profits associated with the sale of products by one segment to another. However, in evaluating the performance of each segment, management considers the impact that such intercompany profits have on each reportable segment. Corporate expenses include certain administrative, legal, accounting, technology support costs, equity compensation costs, payroll costs attributable to executive management and amounts related to intercompany eliminations and are not allocated to the various segments. Intercompany sales of products between segments are referred to as intersegment items. The following table presents summary information by operating segment:

	For the 13 Weeks Ended						For the 13 Weeks Ended
	October 3, 2009						October 4, 2008
	Net Sales			Operating Income (Loss)			Net Sales			Operating Income (Loss)
	IN THOUSANDS
Europe wholesale:
External customers	$	111,255		$	21,595		$	135,539		$	31,863
Intersegment	20,278						6,514
Other international wholesale:
External customers	60,451			21,886			72,010			27,070
Intersegment	111,970						139,803
United States wholesale:
External customers	117,974			25,704			126,319			20,098
Intersegment	50,903						50,061
Direct to consumer	91,682			7,554			75,892			5,492
Corporate				(19,375		)				(20,785		)
Intersegment items	(183,151		)				(196,378		)

Consolidated	$	381,362		$	57,364		$	409,760		$	63,738

	For the 39 Weeks Ended						For the 39 Weeks Ended
	October 3, 2009						October 4, 2008
	Net Sales			Operating Income (Loss)			Net Sales			Operating Income (Loss)
	IN THOUSANDS
Europe wholesale:
External customers	$	302,969		$	49,958		$	382,019		$	91,614
Intersegment	36,994						22,329
Other international wholesale:
External customers	164,567			49,750			207,119			77,410
Intersegment	250,085						350,298
United States wholesale:
External customers	313,906			51,407			329,658			32,975
Intersegment	144,287						140,021
Direct to consumer	238,812			10,837			200,340			9,296
Corporate				(58,309		)				(63,481		)
Intersegment items	(431,366		)				(512,648		)

Consolidated	$	1,020,254		$	103,643		$	1,119,136		$	147,814

7. DERIVATIVES AND RISK MANAGEMENT

On January 4, 2009, the Company adopted SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133 (now codified within ASC 815). ASC 815 requires enhanced disclosures about a company’s derivative instruments and hedging activities. The adoption of ASC 815 did not have any financial impact on the Company’s consolidated financial statements.

The Company is exposed to certain risks relating to its ongoing business operations, which it attempts to manage by using derivative instruments. The primary risks managed by using derivative instruments are the future payments of intercompany inventory transactions, denominated in U.S. dollars, by non-U.S. subsidiaries. Forward contracts are entered into by the Company to manage fluctuations in global currencies that will ultimately be used to settle such U.S. dollar denominated inventory purchases. ASC 815 requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the statement of financial position. In accordance with ASC 815, the Company designates all forward contracts as cash flow hedges.

For a derivative instrument that is designated and qualifies as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss) - net of taxes and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

The Company designates only those contracts which closely match the terms of the underlying transaction for hedge accounting treatment. These hedges resulted in no ineffectiveness in the statements of operations, and there were no components excluded from the assessment of hedge effectiveness for the Third Quarter and Year To Date Period.

As of October 3, 2009, the Company had the following outstanding forward contracts that were entered into to hedge the future payments of intercompany inventory transactions:

Functional Currency		Contract Currency

Type	Amount	Type	Amount
IN THOUSANDS		IN THOUSANDS
Euro	97,846	U.S. Dollar	136,355
British Pound	7,453	U.S. Dollar	11,951
Japanese Yen	2,104,000	U.S. Dollar	23,107
Mexican Peso	13,205	U.S. Dollar	1,004
Australian Dollar	8,160	U.S. Dollar	6,650

The effective portion of gains and losses on derivative instruments designated and qualifying as cash flow hedges that was recognized in other comprehensive income (loss) - net of taxes during the Third Quarter, Prior Year Quarter, Year To Date Period and Prior Year YTD Period is set forth below:

	For the 13 Weeks Ended			For the 13 Weeks Ended
	October 3, 2009			October 4, 2008
	IN THOUSANDS			IN THOUSANDS

Foreign exchange contracts	$	(3,797	)	$	14,885
Total (loss) gain recognized in other comprehensive (loss) income, net of taxes	$	(3,797	)	$	14,885

	For the 39 Weeks Ended			For the 39 Weeks Ended
	October 3, 2009			October 4, 2008
	IN THOUSANDS			IN THOUSANDS

Foreign exchange contracts	$	(4,872	)	$	9,883
Total (loss) gain recognized in other comprehensive (loss) income, net of taxes	$	(4,872	)	$	9,883

The effective portion of gains and losses on derivative instruments designated and qualifying as cash flow hedges recorded in accumulated other comprehensive income (loss) during the term of the hedging relationship and reclassified into earnings during the Third Quarter, Prior Year Quarter, Year To Date Period and Prior Year YTD Period is set forth below :

		For the			For the
	Income Statement	13 Weeks Ended		Income Statement	13 Weeks Ended
	Location	October 3, 2009		Location	October 4, 2008
	IN THOUSANDS			IN THOUSANDS

Foreign exchange contracts	Other Income			Other Income
	(Expense) - net	$	1,189	(Expense) - net	$	(538	)

Total gain (loss) reclassified from other comprehensive income (loss) into income, net of taxes		$	1,189		$	(538	)

		For the			For the
	Income Statement	39 Weeks Ended		Income Statement	39 Weeks Ended
	Location	October 3, 2009		Location	October 4, 2008
	IN THOUSANDS			IN THOUSANDS

Foreign exchange contracts	Other Income			Other Income
	(Expense) - net	$	5,164	(Expense) - net	$	(2,069	)

Total gain (loss) reclassified from other comprehensive income (loss) into income, net of taxes		$	5,164		$	(2,069	)

The table below discloses the Company’s fair value amounts as separate asset and liability values, presents the fair value of derivative instruments on a gross basis and identifies the line item(s) in the balance sheet in which the fair value amounts for these categories of derivative instruments are included.

Asset Derivatives

Liability Derivatives

October 3, 2009

January 3, 2009

October 3, 2009

January 3, 2009

IN THOUSANDS

Balance

Sheet

Fair

Sheet

Fair

Sheet

Fair

Sheet

Fair

Location

Value

Location

Value

Location

Value

Location

Value

Derivatives designated as hedging instruments under ASC 815:

Foreign exchange contracts

Other Current

Accounts

Other Current

Assets

370

Assets

8,476

Payable

7,309

Assets

3,629

Total derivatives designated as hedging instruments under ASC 815:

370

8,476

7,309

3,629

At the end of the Third Quarter, the Company had foreign exchange contracts with maturities extending through 2011. The estimated net amount of the existing losses at the reporting date that is expected to be reclassified into earnings within the next 12 months is $6.2 million.

8. CONTROLLING AND NONCONTROLLING INTERESTS

The following tables summarize the changes in equity attributable to controlling and noncontrolling interests:

	Fossil, Inc.						Total
	Stockholders’			Noncontrolling			Stockholders’
	Equity			Interests			Equity
	IN THOUSANDS

Balance at January 3, 2009	$	802,144		$	3,219		$	805,363

Net income	69,218			3,315			72,533
Currency translation adjustments	15,412			(4		)	15,408
Unrealized gain on available for sale securities	1,018			—			1,018
Unrealized loss on forward contracts	(10,036		)	—			(10,036		)
Common stock issued upon exercise of stock options and SARs	1,666			—			1,666
Tax benefit (expense) derived from stock-based compensation	3			—			3
Restricted stock forfeiture put to treasury	(562		)	—			(562		)
Restricted stock issued in connection with deferred compensation plan	5,223			—			5,223
Dividends paid	—			(2,602		)	(2,602		)

Balance at October 3, 2009	$	884,086		$	3,928		$	888,014

	Fossil, Inc.						Total
	Stockholders’			Noncontrolling			Stockholders’
	Equity			Interests			Equity
	IN THOUSANDS

Balance at January 5, 2008	$	771,662		$	6,127		$	777,789

Net income	91,825			4,004			95,829
Currency translation adjustments	(19,324		)	4			(19,320		)
Unrealized loss on available for sale securities	(1,140		)	—			(1,140		)
Unrealized gain on forward contracts	11,952			—			11,952
Common stock issued upon exercise of stock options and SARs	4,297			—			4,297
Tax benefit (expense) derived from stock-based compensation	(486		)	1			(485		)
Restricted stock forfeiture put to treasury	(1,130		)	—			(1,130		)
Restricted stock issued in connection with deferred compensation plan	5,262			—			5,262
Repurchase and retirement of common stock	(94,888		)	—			(94,888		)
Dividends paid	—			(4,359		)	(4,359		)

Balance at October 4, 2008	$	768,030		$	5,777		$	773,807

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion of the financial condition and results of operations of Fossil, Inc. and its wholly and majority-owned subsidiaries for the thirteen and thirty-nine week periods ended October 3, 2009 (the “Third Quarter” and “Year To Date Period,” respectively) as compared to the thirteen and thirty-nine week periods ended October 4, 2008 (the “Prior Year Quarter” and “Prior Year YTD Period,” respectively). This discussion should be read in conjunction with the condensed consolidated financial statements and the related notes thereto.

General

We are a global design, marketing and distribution company that specializes in consumer fashion accessories. Our principal offerings include an extensive line of men’s and women’s fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, cold weather accessories, footwear and apparel. In the watch and jewelry product category, we have a diverse portfolio of globally recognized owned and licensed brand names under which our products are marketed. Our products are distributed globally through various distribution channels including wholesale, export and direct to the consumer at varying price points to service the needs of our customers, whether they are value-conscious or luxury oriented. Based on our extensive range of accessory products, brands, distribution channels and price points, we are able to target style-conscious consumers across a wide age spectrum on a global basis.

Domestically, we sell our products through a diversified distribution network that includes department stores, specialty retail locations, specialty watch and jewelry stores, owned retail and factory outlet stores, mass market stores and through our FOSSIL® catalog and website. Our wholesale customer base includes, among others, Neiman Marcus, Nordstrom, Macy’s, Dillard’s, JCPenney, Kohl’s, Sears, Wal-Mart and Target. We also sell our products in the United States through a network of company-owned stores that included 127 retail stores located in premier retail sites and 74 outlet stores located in major outlet malls as of October 3, 2009. In addition, we offer an extensive collection of our FOSSIL brand products through our catalog and on our website, www.fossil.com, as well as proprietary and licensed watch and jewelry brands through other managed and affiliated websites.

Internationally, our products are sold to department stores, specialty retail stores and specialty watch and jewelry stores in over 100 countries worldwide through 23 company-owned foreign sales subsidiaries and through a network of 59 independent distributors. Our products are distributed in Africa, Asia, Australia, Europe, Central and South America, Canada, the Caribbean, Mexico, and the Middle East. Our products are offered on airlines, cruise ships and in international company-owned retail stores, which included 117 accessory retail stores, 10 multi-brand stores and 14 outlet stores in select international markets as of October 3, 2009. Our products are also sold through independently-owned and franchised FOSSIL retail stores and kiosks in certain international markets. In addition, we offer an extensive collection of our FOSSIL brand products on our websites in certain countries.

Our business is subject to global economic cycles and retail industry conditions. Purchases of discretionary fashion accessories, such as our watches, handbags, sunglasses and other products, tend to decline during recessionary periods when disposable income is low and consumers are hesitant to use available credit. The global economic environment has deteriorated over the last four quarters. The decreased values in real estate, reduced credit lending by banks, solvency concerns of major financial institutions, increases in unemployment levels and significant declines and volatility in the global financial markets have negatively impacted the level of consumer spending for discretionary items. This has affected our business as it is dependent on consumer demand for our products. In North America, we have experienced a significant downturn in customer traffic and a more promotional environment. These same conditions are spreading to many international markets. If the global macroeconomic environment continues to be weak or deteriorates further, there will likely be a negative effect on our revenues and earnings across most of our segments for the remainder of fiscal year 2009 and potentially continuing into fiscal year 2010.

Future sales and earnings growth are also contingent upon our ability to anticipate and respond to changing fashion trends and consumer preferences in a timely manner while continuing to develop innovative products in the respective markets in which we compete. As is typical with new products, market acceptance of new designs and products that we may introduce is subject to uncertainty. In addition, we generally make decisions regarding product designs several months in advance of the time when consumer acceptance can be measured.

The majority of our products are sold at price points ranging from $50 to $500. Although the current economic environment is expected to negatively impact consumer discretionary spending and, ultimately, our net sales, we believe that the price/value relationship of our products will allow us to maintain our market share in those markets in which we compete. Additionally, we are focusing on our opening price points across all brands and categories as we believe consumers of discretionary accessory goods are looking for even more value for their dollars and looking to spend less money than in the past. Historically, during recessionary periods, the strength of our balance sheet, our strong operating cash flow and the relative size of our business with our wholesale customers, in comparison to our competitors, have allowed us to better weather such recessionary periods and generally results in market share gains to us.

Our international operations are subject to many risks, including foreign currency exchange rate risks. Generally, a strengthening of the U.S. dollar against currencies of other countries in which we operate will reduce the translated amounts of sales and operating expenses of our subsidiaries, which results in a reduction of our consolidated operating income. The strengthening of the U.S. dollar over the last four fiscal quarters against the currencies of international markets in which we operate has negatively impacted our reported sales growth and earnings during our Year To Date Period, as compared to the Prior YTD period.

Currently, the U.S. dollar has weakened against currencies of other countries in which we operate. Accordingly, should the current prevailing rate of the U.S. dollar persist throughout our 2009 fiscal fourth quarter, our reported net sales growth and earnings per share will benefit in comparison to the prior year fourth quarter.

For a more complete discussion of the risks facing our business, see “Part I, Item 1A” of our Annual Report on Form 10-K for the fiscal year ended January 3, 2009.

Significant Accounting Policies and Estimates

The preparation of financial statements in conformity with Accounting Principles Generally Accepted in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to product returns, self-insured reserves, bad debts, inventories, long-lived asset impairment, impairment of goodwill and income taxes. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no changes to the significant accounting policies disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K filed for the fiscal year ended January 3, 2009.

Newly Issued Accounting Standard Updates

In August 2009, the FASB issued ASU 2009-5, Fair Value Measurements and Disclosures (Topic 820) Measuring Liabilities at Fair Value (“ASU 2009-5”). ASU 2009-5 provides amendments to Subtopic 820-10, Fair Value Measurements and Disclosures-Overall, for the fair value measurement of liabilities. ASU 2009-5 clarifies that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value. ASU 2009-5 is effective for interim and annual periods ending after October 3, 2009. We do not expect the adoption of ASU 2009-5 to have a material impact on our consolidated results of operations or financial position.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS 167”). SFAS 167 has yet to be codified within The FASB Accounting Standards Codification (“Codification”). SFAS 167 improves financial reporting by enterprises involved with variable interest entities. The FASB undertook this project to address (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (“Interpretation 46(R)”), as a result of the elimination of the qualifying special-purpose entity concept in FASB Statement No. 166, Accounting for Transfers of Financial Assets, and (2) constituent concerns about the application of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under Interpretation 46(R) do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. SFAS 167 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009. We do not expect the adoption of SFAS 167 to have a material impact on our consolidated results of operations or financial position.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets — an Amendment of FASB Statement No. 140 (“SFAS 166”). SFAS 166 has yet to be codified within the Codification. SFAS 166 improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial asset; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS 166 is effective for financial statements as of the beginning of the first annual reporting period that begins after November 15, 2009, with applications to transfers occurring on or after the effective date. Additionally, the disclosure provisions of SFAS 166 should be applied to transfers that occurred both before and after the effective date of SFAS 166. We do not expect the adoption of SFAS 166 to have a material impact on our consolidated results of operations or financial position.

Newly Adopted Accounting Standard Codification

In August 2009, FASB issued ASU 2009-4 Accounting for Redeemable Equity Instruments — an Amendment to Section 480-10-S99 (“ASU 2009-4”). ASU 2009-4 represents an SEC update to Section 480-10-S99 Distinguishing Liabilities from Equity. The adoption of guidance within ASU 2009-4 did not have a material impact on our consolidated results of operations or financial position.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — A Replacement of FASB Statement No. 162, (now codified within ASC 105, Generally Accepted Accounting Principles (“ASC 105”)). ASC 105 establishes the Codification as the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. All guidance contained in the Codification carries an equal level of authority. Following this statement, FASB will not issue new standards in the form of statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates, which will serve only to: (1) update the Codification; (2) provide background information about the guidance; and (3) provide the bases for conclusions on the change(s) in the Codification. ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification supersedes all existing non-SEC accounting and reporting standards. The adoption of ASC 105 did not have any impact on our consolidated results of operations or financial position.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, (now codified within ASC 855, Subsequent Events (“ASC 855”)). ASC 855 establishes the general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 was effective for the Company on April 5, 2009. The adoption of ASC 855 did not have a material impact on our consolidated results of operations or financial position. Refer to Note 1, Financial Statement Policies, of this Form 10-Q for the enhanced disclosures required by the adoption of ASC 855.

In April 2009, the FASB issued Staff Position (“FSP”) 115-2 and FSP 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (now codified within ASC 320, Investments — Debt and Equity Securities (“ASC 320”)). ASC 320 provides greater clarity about the credit and noncredit component of an other-than-temporary impairment event and more effectively communicates when an other-than-temporary impairment event has occurred. ASC 320 amends the other-than-temporary impairment model for debt securities. The impairment model for equity securities was not affected. Under ASC 320, an other-than-temporary impairment must be recognized through earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost basis. This standard is effective for interim periods ending after June 15, 2009. The adoption of ASC 320 did not have a material impact on our consolidated results of operations or financial position.

In April 2009, the FASB issued FSP 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (now codified within ASC 820, Fair Value Measurements and Disclosures (“ASC 820”)). ASC 820 provides guidelines for making fair value measurements more consistent and provides additional authoritative guidance in determining whether a market is active or inactive and whether a transaction is distressed. ASC 820 is applied to all assets and liabilities (i.e., financial and non-financial) and requires enhanced disclosures. This standard is effective for periods ending after June 15, 2009. The adoption of ASC 820 did not have a material impact on our consolidated results of operations or financial position.

In April 2009, the FASB issued FSP 107-1 and Accounting Principles Board 28-1, Interim Disclosures about Fair Value of Financial Instruments (now codified within ASC 825, Financial Instruments (“ASC 825”)). ASC 825 requires disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. ASC 825 is effective for interim periods ending after June 15, 2009. The adoption of ASC 825 did not have a material impact on our consolidated results of operations or financial position. Refer to Note 1, Financial Statement Policies, of this Form 10-Q for the enhanced disclosures required by the adoption of ASC 825.

In June 2008, the FASB issued Staff Position - Emerging Issues Task Force 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (now codified within ASC 260, Earnings Per Share (“ASC 260”)). Under ASC 260, unvested share based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. ASC 260 was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years and requires retrospective application. The adoption of ASC 260 did not have a material impact on our earnings per share calculations.

In April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of Intangible Assets (now codified within ASC 350, Intangibles — Goodwill and Other (“ASC 350”)). ASC 350 provides guidance for determining the useful life of a recognized intangible asset and requires enhanced disclosures so that users of financial statements are able to assess the extent to which the expected future cash flows associated with the asset are affected by our intent and/or ability to renew or extend the arrangement. ASC 350 was effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The adoption of ASC 350 on January 4, 2009 did not have a material impact on our consolidated results of operations or financial position.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (now codified within ASC 815 Derivatives and Hedging (“ASC 815”)). ASC 815 requires enhanced disclosures about an entity’s derivative and hedging activities aimed at improving the transparency of financial reporting. ASC 815 was effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of ASC 815 did not have any impact on our consolidated results of operations or financial position. Refer to Note 7, Derivatives and Risk Management, of this Form 10-Q for the enhanced disclosures required by the adoption of ASC 815.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (now codified within ASC 805, Business Combinations (“ASC 805”)). ASC 805 establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the fair value of identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date. ASC 805 significantly changes the accounting for business combinations in a number of areas, including the treatment of contingent consideration, preacquisition contingencies, transaction costs and restructuring costs. In addition, under ASC 805, changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. The provisions of this standard will apply to any acquisitions we complete on or after December 15, 2008. The adoption of ASC 805 did not have any impact on our consolidated results of operations or financial position.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51 (now codified within ASC 810, Consolidation (“ASC 810”)). ASC 810 changes the accounting and reporting for minority interests, which is recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions with minority interest holders. The provisions of ASC 810 were applied to all noncontrolling interests prospectively, except for the presentation and disclosure requirements, which were applied retrospectively to all periods presented and have been disclosed as such in our condensed consolidated financial statements herein. ASC 810 became effective for fiscal years beginning on or after December 15, 2008. We adopted ASC 810 effective January 4, 2009. Upon adoption of ASC 810, we recognized noncontrolling interests as equity in the condensed consolidated balance sheets, and reflected net income attributable to noncontrolling interests in consolidated net income. We have provided, in Note 8, Controlling and Noncontrolling Interests, a summary of changes in equity attributable to controlling and noncontrolling interests.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (now codified within ASC 820). ASC 820 provides guidance for using fair value to measure assets and liabilities. Under ASC 820, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC 820 became effective for financial statements issued for fiscal years beginning after November 15, 2007; however, the FASB provided a one year deferral for implementation of the standard for non-recurring, non-financial assets and liabilities. We adopted ASC 820 for non-financial assets and non-financial liabilities effective January 4, 2009, which did not have any effect on our consolidated results of operations or financial position.

Results of Operations

The following table sets forth, for the periods indicated, (i) the percentages of our net sales represented by certain line items from our condensed consolidated statements of income and (ii) the percentage changes in these line items between the periods indicated.

	Percentage of Net Sales
	For the 13 Weeks Ended				Percentage
	October 3, 2009		October 4, 2008		Change

Net sales	100.0	%	100.0	%	(6.9	)%
Cost of sales	44.7		45.3		(8.1	)
Gross profit	55.3		54.7		(6.0	)
Operating expenses:
Selling and distribution	30.2		29.4		(4.5	)
General and administrative	10.0		9.7		(4.2	)
Operating income	15.1		15.6		(10.0	)
Interest expense	—		—		—
Other income (expense) - net	(0.4	)	(0.7	)	38.3
Income before income taxes	14.7		14.9		(8.7	)
Provision for income taxes	5.0		5.7		(18.5	)
Net income	9.7		9.2		(2.6	)
Net income attributable to noncontrolling interest	0.3		0.3		21.1
Net income attributable to Fossil, Inc.	9.4	%	8.9	%	(3.3	)%

	Percentage of Net Sales
	For the 39 Weeks Ended				Percentage
	October 3, 2009		October 4, 2008		Change

Net sales	100.0	%	100.0	%	(8.8	)%
Cost of sales	46.4		45.6		(7.3	)
Gross profit	53.6		54.4		(10.1	)
Operating expenses:
Selling and distribution	32.4		30.5		(3.1	)
General and administrative	11.1		10.7		(5.7	)
Operating income	10.1		13.2		(29.9	)
Interest expense	—		—		—
Other income (expense) - net	0.7		(0.3	)	(320.9	)
Income before income taxes	10.8		12.9		(22.9	)
Provision for income taxes	3.8		4.3		(20.1	)
Net income	7.0		8.6		(24.3	)
Net income attributable to noncontrolling interest	0.3		0.4		(17.2	)
Net income attributable to Fossil, Inc.	6.7	%	8.2	%	(24.6	)%

Net Sales. The following table sets forth consolidated net sales by segment (excluding Corporate, which had no net sales), and components of certain segments, and the percentage relationship of the components to consolidated net sales for the periods indicated:

	Amounts in Millions				Percentage of Total
	For the 13 Weeks Ended				For the 13 Weeks Ended
	October 3, 2009		October 4, 2008		October 3, 2009		October 4, 2008

International wholesale:
Europe	$	111.3	$	135.5	29.2	%	33.1	%
Other	60.4		72.0		15.8	%