Q4 2019 Earnings Call
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Welcome to the fourth quarter 2019 fossil group incorporated earnings Conference call. My name is feel that and I will be your operator for today.
At this time all participants are in listen only mode. Later, we will conduct a question and answer session.
During the question and answer session. If you have a question. Please press Star then one using your Touchtone phone.
Please note that this conference is being recorded.
I will now turn the call over to Ms., Christine Greenie screening you may begin.
Hello, everyone and thank you for joining up with us today on the call or Kosta Kartsotis Chairman and CEO.
Jeff Boyer Chief Financial Officer, and Greg Mccauthy, Chief Commercial officer.
I would like to remind you that information made available during this conference call contain 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 could differ materially from such statements.
Is readily available in the Companys form 8-K, and 10-Q reports filed with the FCC.
In addition, fossil assumes no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise except as required by law.
Please note that you can find a reconciliation and other information regarding non-GAAP financial measures discussed on this call in fossils earnings release, which was filed today on form 8-K and is available in the Investor section of fossil group Dot com.
Now I'd like to turn the call over to the company's chairman and CEO Kosta Kartsotis.
Hello, everyone and thank you for joining us today I'll begin my remarks today with a discussion of Q4 and recap the highlights from 2019.
Then I'll provide our perspective on the current operating environment, how we plan to navigate our challenges and where we see opportunities to drive growth as we continue to transform fossils business model.
Before turning to my formal remarks, I would like to briefly comment on the Corona virus first and foremost we want to express the collective concern of our management onboard for the wellbeing of our fossil team members partners and their local communities that are being impacted by the crisis.
As it relates to our business the 2020 outlook for Jeff will take you through reflects our current assumptions based on what we know today.
As the situation unfolds, we will continue to monitor events closely and update our guidance if needed.
Turning back to last year, while there were a number of strategic and operational accomplishments in 2019, we are disappointed to close the year with our particularly challenging quarter.
The underperformance, primarily reflects lower than expected sales of our older generation connected product as well as ongoing softness in traditional wholesale principally in the United States.
Going into the holiday season, we anticipated that our previous generation connected products would be a significant growth driver has a strong value offering with a lower price point.
However, consumer response was negatively impacted by the combination of competitive pricing in the marketplace for value oriented product and to the strong response to our gen five offering which has much improved functionality.
To that end Genfive, our latest generation display product and our new hybrid HR product, both performed very well in the quarter.
In fact, we're pleased to note that we're seeing a great deal of enthusiasm for our latest technology on fashion designs.
Positive consumer reviews, and strong response to our offerings. In Q4 are further evidence that high performance technology combined with the latest fashion designs will drive consumer interest in purchases.
Our business in Asia delivered another quarter of double digit growth with strong performance in key markets, including China, and India, which grew 60% and 10% respectively.
While Asia on Gen five were bright spots in the quarter the softness in older generation Smartwatches pressured margins due to the promotional intensity and the $38 million write down of that inventory.
These factors drove operating profits significantly below our expectations.
Although we face considerable headwinds in 2019, our teams worked diligently to execute against our strategic priorities throughout the year.
First we completed our first new World fossil program 1.0, which over the last three years delivered $200 million of run rate improvement across gross margin in operating expense.
We also launched our newer fossil 2.0 transform to grow program, which is designed to drive operational efficiency and improved profitability, while also providing us with the ability to invest in topline growth opportunities.
In 2019, we achieved our plan to capture total benefits of $50 million, primarily through operating expense reductions.
From a product perspective, we delivered world class technology upgrades in connected watches and exciting new innovations across our traditional categories.
And our accelerated product drop strategy combined with a digital first marketing approach drove more consumer engagement than ever before.
We made big strides in Asia, we broadened our reached in key markets and delivered double digit growth.
We advanced our DTC and online marketplace businesses by optimizing our segment an assortment strategy.
We offset significant profit pressure from tariffs through adjustments to our sourcing base and to our product costing.
And we ended the year in solid financial condition with $200 million of cash and virtually no net debt.
As you know we have been operating in an extremely challenging environment for a number of years now as consumer interest and shopping patterns in the Washington accessory categories evolve.
From a channel perspective wholesale in the U.S. and Europe remains difficult primarily in traditional watches. This is largely reflective of two major dynamics.
Juan the ongoing consumer transition from brick and mortar to online shopping and to the continued momentum behind the fashion cycle that is driving strengthened connected watches in place of women's accessories in watches.
Historically fossils largest share of market existed in mid tier price female fashion watches sold in the traditional department store channel.
The factors I, just mentioned around channel shifting consumer preference for technology have been disruptive to the mid price fashion watch segment as a whole and have certainly had a profound impact on our core female fashion customer.
In fact over the past four years women's watches sold to the wholesale channel in our Americas in Europe regions have contracted substantially.
In contrast, our fossil brand watch business in Americas in Europe over the same timeframe has remained relatively stable due to three major factors a healthier mix of men's and women's product a stronger direct business, including third party marketplaces, and our robust connected business.
Given the structural changes occurring across the industry and within our business in particular, we've been pivoting our model accordingly.
First we are deploying greater resources to the direct channel for both our owned and licensed businesses second we are accelerating our connected product offerings.
And third we are successfully driving growth in key APAC markets, including China, and India, where the developing middle class has an increasing desire for fashion watches.
Equally important we are taking actions to strengthen our operations and build scale as we evolve our model in tandem with industry dynamics as I just mentioned the contraction in wholesale channel has had a substantial impact on our business.
Looking back to just four years ago, our us on European wholesale channels represented over half of our worldwide net sales.
In 2019 this segment of wholesale made up roughly one third of the sales mix.
Over time, we anticipate that will shift even further with the us on European wholesale channels, ultimately representing less than 20% of worldwide sales.
Because we expect these secular trends will persist our mandate is to maximize topline growth opportunities outside of the traditional wholesale while at the same time transforming our financial model to improve profitability over the long term.
We expect to accomplish this by pulling levers across product channel and geography, and capturing efficiencies through new role fossil 2.0.
Let me provide some color.
This year, we're focusing on for strategic priorities that are expected to improve operational efficiency in 2020 and position the company to begin reverse in our topline trend and building scale in 2021.
Priority number one is delivering exceptional storytelling and innovation.
The path forward to change in our sales trajectory will come first and foremost from great product and unmatched creativity.
Although we will have fewer products stories in the market in 2020, we're going to tell them in boulder ways through focus digital marketing programs.
We've expanded our use of data and analytics, which is improving our ability to understand consumer trends and preferences and how to more effectively interact with the customer digitally.
We have significant opportunities in our traditional and connected watch categories and we're also refocusing our efforts on the jewelry category.
In 2020 will be refining our assortment levels and distribution strategy in connected watches to more closely reflect consumer preferences across channel and assortment.
Consumers are telling us that the shopping experience for connected product in traditional wholesale channels is not compelling to address this we will be launching connected LTE product this year and aggressively expanding in the CE and telecom channels, while reducing our connected presence in select wholesale accounts and brands.
We anticipate that the reduce assortment and distribution will be partially offset by expanded CE and telecom channels in 2020 with growth in 2021 and beyond.
Priority number two is driving commercial transformation. The consumer is increasingly gravitating to all things digital and we're moving quickly to improve our digital capabilities across the company.
This encompasses everything from multi brand omnichannel capabilities digital marketing and CRM to analysis targeting and retention.
The implementation of our new E. Commerce platform is in process now and brings us a robust set of tools to support a larger direct to consumer business in the coming years.
Importantly, the nature of our high dollar value small Q proposition will enable us to increase our DTC business without pressuring margins as often happens in other categories.
Our third strategic priority is to expand on our opportunity in China, and India, which as I mentioned earlier, both grew double digits in 2019.
The emerging middle class in these countries loves our categories and brands.
We've had great success with our localized marketing and segment and assortment approach and we see even more runway to accelerate growth in these markets going forward.
In China, specifically, our ability to combine great brands and marketing content, while partnering closely with the largest online marketplaces has proved to be a winning strategy with select brands. We expect to see continued momentum and growth as we bring this formula to an increasing number of our brands going forward.
Our fourth priority is continuing to implement new were fossil 2.0.
In 2019, we conducted a comprehensive review of our operating model and our leadership team has been working with a sense of urgency to drive greater efficiency in our processes and workstreams throughout the organization.
Notably, we see significant opportunity to reengineer, our supply chain, we plan to drive improvement in our into in manufacturing and distribution capabilities, which will allow us to reduce lead times lower costs and enhance our overall competitiveness.
A major initiatives in 2020 include implementing an advanced demand planning and a more sophisticated open to buy a process.
Cost reduction is also a critical component of newer fossil 2.0 in 2020, we expect to capture benefits totaling $65 million with 15 million coming from gross margin improvement and 50 million coming from operating expense reduction.
Theres no questions the headwinds and traditional wholesale will continue for some time.
Our direct to consumer business is stable and with our expanded digital capabilities, we expect to see solid growth in this channel in 2020.
Our work on segmented Assortments is paying off with growth is expected to significantly accelerate globally in third party marketplaces.
And we anticipate that Asia will continued growing at double digits. Given this backdrop, we're working urgently to optimize and right size. Our cost structure. These actions are important not only to improving profitability, but they will also provide more capacity to invest in our biggest areas of growth going forward as I close I want to thank our.
Teams for their hard work and strong commitment to the company the entire organizations working diligently on the priorities I outlined earlier.
We believe the innovation, we're bringing to market across our categories and are increasing focus on digital will generate improvements in sales trends over time.
We know that transformation does not happen overnight.
We are fortunate to have great brands products and people to help us accomplish our goal of stabilized in the topline as quickly as possible.
Additionally, our strong balance sheet and cash flow provides us with the financial flexibility and runway, we need to pivot our business model and work towards restoring growth and profitability.
Now I'll turn the call over to Jeff to discuss our Q4 financials on our 2020 outlook.
Thanks Kosta.
At a high level sales came in at the low end of our expectations, principally due to ongoing challenges and us wholesale as well as soft performance of our older generation connected product.
We continued to improve our cost structure, but gross margin was impacted by promotional intensity and charges related to the write down of inventory, which put substantial pressure on profitability in the quarter.
Q4 sales came in at $712 million.
Thats down 10% versus a year ago and 9% in constant currency.
The topline was negatively impacted by continued challenges in traditional wholesale store closures license brand exits and weaker than expected performance an older generation connected product.
Excluding store closures and business exits, which were roughly a 160 basis point headwind underlying core sales declined high single digits consistent with performance in both the second and third quarters.
Looking at performance by region strong growth in Asia was more than offset by double digit declines in the Americas in EMEA.
On a constant currency basis net sales in Asia increased 11%.
Reflecting growth of 61% in mainland China in double digit increases in India in Korea.
Our exceptional growth rate in China is attributable to ongoing strength in the Emporio Armani brand and the success of our integrated wholesale in ecommerce marketplace approach.
In the Americas sales declined 16% driven primarily by the wholesale channel.
Within wholesale department stores have been the most challenged with sell in and sell outperformance declining more than 20% in Q4.
We are able to partially offset the declines with strong growth in ecommerce market places in the U.S.
In Europe sales declined 9% in constant currency, reflecting softness in the wholesale channel.
Similar to the US department stores in independence within EMEA continue to face headwinds, while our ecommerce marketplace business is stable.
Moving now to our direct to consumer business retail comp sales decreased 3%.
While full price comps were down high single digits in the quarter.
Outlook comps were positive driven by more effective promotions.
Within ecommerce international strength was offset by softness in the Americas.
Primarily resulting from underperformance in older generation connected product.
Turning to category performance in Q4.
Watches declined 8% in constant currency with traditional watch sales declining low single digits similar to our third quarter trend.
Connected watch sales, which represented 18% of total walk sales in the quarter decreased double digits.
This is largely due to underperformance in older generation display watch sales and reduce liquidation levels versus a year ago.
Fourth quarter gross margin came in at 43.3%, reflecting a decline of 970 basis points from last year.
Of that amount approximately 530 basis points is attributable to a onetime noncash charge of 38 million related to the write down of older generation connected inventory.
We had anticipated that are lower priced older generation product represented a strong value offering and would account for nearly 70% of our connected sales volume in the quarter.
However, Gen four product sales were lower than anticipated as consumer opted for the much improved tuck functionality in gen five and we faced more aggressive competitive pricing in the marketplace for value oriented connected product.
This led to an inventory imbalance with a much higher level of older generation inventory.
Portion of which we now anticipate we'll need to be liquidated.
Fourth quarter margins also reflect the following factors.
Increased markdown activity to move older generation connected product.
Higher inventory at cost largely due to increased tariffs in freight.
Softness in retail margins driven by promotions.
And the unfavorable impact of currency.
These pressures were partially offset by margin optimization efforts through our neutral fossil programs as well as favorable regional and product mix.
Selling general and administrative expenses were 304 million in the fourth quarter, reflecting a decline of 41 million versus a year ago.
We continued to make solid progress against our cost reduction targets in the quarter.
And delivered full year operating expense reduction of 45 million from our new profile. So 2.0 program.
As a reminder, key areas of expense focus include corporate and regional overhead stores in indirect spend.
In 2019, we closed a total of 45 stores ending the year with 451 fossil locations.
Income tax expenses in the fourth quarter or approximately $1 million.
The negative effective tax rate was driven mainly by the recognition of deferred tax asset valuation allowances and an unfavorable impact from the guilty revision of the tax cuts and job SEC.
Income tax expense in the prior year was 14 million on pretax income of 62 million.
For the fourth quarter, we reported a net loss of 14 cents per diluted share, which included new world fossil restructuring charges of eight cents per diluted share.
Last year, our fourth quarter EPS was 94 cents and included restructuring charges of seven cents.
Currencies, including both the translation impact on operating earnings and the impact of foreign currency in hedging contracts had an unfavorable one cents impact on our EPS in the fourth quarter.
Moving to the balance sheet and cash flow. We ended 2019 with 200 million of cash and cash equivalents.
Yearend inventory levels were up 20% versus 2018.
Primarily reflecting the underperformance in older generation connected watches.
Additionally, you may recall that we had lower levels of connected inventory exiting last year due to the timing of 2018 product launches.
We ended the year with net debt, a $5 million as compared to net cash of $7 million last year.
The increase in our net debt position was largely driven by our higher inventory levels.
We continue to maintain a low net leverage ratio of 0.8 times.
Our adjusted EBITDA for the quarter was 62 million, resulting in a trailing 12 month adjusted EBITDA of 169 million.
We recently reached an agreement with our primary term loan b creditor to revise our quarterly net debt leverage covenant metrics for 2020 and for the first three quarters of fiscal 2021.
This adjustment takes into consideration our expectation for higher revolving debt requirements to support ongoing and seasonal inventory levels through this time period.
Now, let me turn to our 2020 outlook.
As Kosta mentioned, we recognize the significant disruption underway in the traditional wholesale channel and in our categories.
We're pivoting quickly to accelerate major growth areas, such as Asia direct to consumer and connected.
Importantly were taken actions that will allow us to appropriately controlled margin costs in inventory, while transforming our business for future growth.
We expect full year sales to decline in the range of 11.5% to 4.5%.
This includes headwinds of approximately 130 basis points related to store closures and 50 basis points from currency as our guidance is based on prevailing rates for the year when the pound at $1.10 Dollarsthirty respectively.
Our sales guidance anticipates continued double digit core sales growth in Asia and modest growth in the global direct to consumer channel, while wholesale declines in the Americas in EMEA are expected to persist.
From a category lands, we expect to return to growth in jewelry in 2020 with moderated declines in leathers and watches.
Within watches we anticipate that connected will be down modestly given the refinements to assortment and distribution that Kosta mentioned.
Turning to gross margin, excluding the inventory write down in Q4 of 2019, we expect to see modest year over year expansion in 2020.
This will be driven by higher connected margins beneficial channel mix and improvements from neuro fossil 2.0.
Partially offset by increased promotional activity and the negative impact of tariffs.
For full year 2020, we expect to capture gross margin benefits under new role fossil of approximately $15 million.
Gross margins are expected to be relatively consistent on a sequential basis throughout 2020.
With some year over year pressure in the first half and improvement in the second half.
Moving now to operating expenses, we expect our new role fossil initiatives to deliver approximately 50 million of operating expense reduction in 2020.
Cost savings are expected to be driven by organizational efficiencies as well as lower spending levels.
The anticipated reductions will be partially offset by incentive compensation included in our 2020 plan.
We expect to incur $35 million of charges related to restructuring efforts in 2020, including severance and related costs.
On a sequential basis first quarter operating expense is expected to be down slightly to last year, including restructuring expenses of approximately 12 million.
Moving beyond the first quarter expenses are expected to decline at roughly the rate of sales as the impact of neural fossil benefits is realized therefore for the full year, we expect operating margin to range between negative, 1.5% and positive, 1.5%, which includes $35 million of expense or roughly.
150 basis points related to restructuring charges.
First quarter operating margin is expected to range from negative 14% to negative 10% inclusive of $12 million of restructuring charges or roughly 300 basis points.
For the full year, we expect interest expense of approximately 32 million and we're planning capex at 25 million.
We expect to carry elevated levels of inventory through the first half of the year as we work through the higher levels of Gen four connected product.
Before we open the call to questions I want to Echo Kosta settlement regarding the krona virus and reiterate that because this is such a dynamic situation that guidance, we're providing today may need to be revise if the crisis extends beyond Q1.
Now I'll ask the operator to open the call to questions operator.
Thank you we will now begin the question and answer session. Maybe have a question. Please press Star then one on your Touchtone phone.
If you wish to be removed from the question Q. Please press the pound side or the ASCII.
If you are using a speaker phone you may need to be kept dance at first before passing the numbers.
Once again, if you have a question. Please press Star then one on your Touchtone phone.
Okay.
We have a question from.
Rob Joe from Wells Fargo.
Hey, good morning, everyone.
Yes, My first questions to start we'll go first quarter could you elaborate on I know your Asia guide for the year I think is double digits. You said, Jeff what are you planning Asia in Q1, given the headwinds from from from providers I was curious.
Yes, we are expecting the APAC region should be down double digits.
Just low low double digits overall.
We got off to a very good start in January and had anticipated the typical.
Lowdown during Chinese new year.
You see the virus situation has had an impact on the business. So for the remainder of the quarter, we forecasted that down fairly significantly puts us down low double digits in the first quarter for a Pat.
Got it a few more or less okay.
I think you'll give some color, but can you can you give a little bit more explicit guidance on the wearables outlook.
I know its decline the last two quarters, what are you planning Wearables in Q1, and then how do you expect that.
To progress through the year.
Yes, we are expected to be down on the full year overall.
On a minor contraction, both and assortment rationalization as we focus on some of the key brands and skews and also on a.
Distribution rationalization as well we focused on.
Channels of our business that can drive the business overall.
Don't have the specifics we're right in front of me on the Q1.
All on it but I'd tell you would be down probably for the year roughly about to about 10%.
So some contraction.
Further contraction.
One thing I would add icon Wearables is as we mentioned, we're seeing very strong reviews and sell throughs on Gen five.
And when you stand back and look at where we are in Wearables right now, especially with the new product out there. So we obviously had a product issue last year, but our capabilities our software are.
Programs, our roadmap just our overall capabilities much greater than it was last couple of years and the reviews and sell throughs. We're getting just lead us to believe that have a much better opportunity going forward. So at some of the for us to be excited about.
Yes, I mean to stick with bad I mean, I mean, it sounds like the new generation product keeps keeps working interest maybe out of getting the second inventory write down you've had I think in the last in as many years is there anything you guys are working on to do better at.
Managing the lifecycle of your wearable big moving to try to understand like.
Thank you kind of get more comfortable managing inventory yep category.
Absolutely Weve.
Go ahead go ahead, Jeff on Craig, Yes, It does Greg Let me, let me provide a little bit more color.
We've positioned the business for Q4, it was clear that the mark was developing into two distinct tiers of product.
The first is just the latest Tac.
Which is largely full price with a high consumer willingness to pay an older generation or less featured products at sharper price points and what we're hearing from a lot of our channel partners was the focus on the opening price point sharp price point business to be able to drive unit volume and traffic to the stores. So.
So we actually positioned our inventory.
Such that we had 70% of our inventory roughly in Gen. Four in sport and only 30% in our lead us tech offering.
Which was that gen five and our hybrid HR thinking that that mix represented the channels desirable we've had optimize the consumer responded very differently than channel expectation. So our gen five and hybrid HR products, both of which have 4.34 0.4 stars.
Really really well done.
By our engineering teams across the world Forex exceeded expectations in any any channel that carry those was very happy with the results, but the price competition in the lower tier was much greater than we had expected or frankly any of the channel partners had had expected and that drove not only in or lower low.
Overall, the lower margin than we expected Thats why we took the charge. So although we are disappointed though in the commercial outcome for Q4, we proven our teams prove the success in the stellar reviews of Gen five at how to reach our that.
We belong in the category, we're a leader in the business and we just need to keep pivoting with a focus on three things.
The first from a product perspective, we're going to stand for the latest technology.
We're going to bring those to market with the best designs from the best brands in a focused way focused on full price sales as opposed to the 70 30 split that we had.
For.
We're going to do that as well with our engineering teams that have proven that they can they can really take the lead end to end Gen. Five with the first product where they took the engineering lead end to end on both hardware and software, which is why we had higher quality product with features like iPhone compatibility and stand battery life nodes that are really only found on our west watches.
So the next 24 months of innovation that we've got an eye sight on it are all built by this engineering team off that platform. So thats our product focus latest tech full price.
And best brands second is from a channel perspective.
We are we went pretty broad in our distribution. So we're in direct to consumer see traditional wholesale and online marketplaces, and there's just a clear segmentation that starting to emerge where there are certain channels that are set up to sell these products well where they can they have.
Better sales process more customer engagement or more customer support.
So that that's the channel that's online marketplaces, largely in our own direct to consumer stores. Those are doing really well and traditional wholesale we're going to have a top dog approach, we're going to we're going to focus on trying to get the pop up environments that we can provide that engagement, but where that's not the case, we will will dramatically pull back.
So that we just are selling where these products sell well.
That will also have a side benefit of getting our traditional wholesale teens refocused on high margin traditional watches and jewelry, which are sold much better in that environment and then third from a geographic perspective, while we'll continue competing in the U.S market and see it as it's still a huge opportunity.
The fact is that iOS as much more dominant here and international Android is significantly more dominant so we'll be doubling down our growth in international markets, where Android has a much larger market share of the of the smartphone market, which will allow us to capture much larger go after much larger addressable market. So.
In summary, smartwatch market continues to grow we're just now seeing our best products, both from our exceptional internal engineering and watching teams, we're going to reposition the business. This year with the right product in the right locations and write geographies.
We are confident the best is yet to come here.
Got it thanks, Greg is less than the balance sheet I can add one more.
And it's been a few things just the term loan amendment details.
And also.
In that case, so there is potential leverage covenant violation that would come up in Q2, I'm just kind of curious what exactly was going all the way.
With the amendment and what's going on there and then as quickly.
Sorry.
Yes, I like the amendments complete so we have that in place right now with a broader net leverage ratio metric. So its 2.7 times for the next four quarters all of this year net debt.
I'm over over EBITDA.
And some of that drawn by the inventory levels that we have also we got into the conversation given some of the business issues out there right now with the but the front of IRS I want to make sure at some protection on that.
It continues on into next year at 2.25 for the first three quarters of the year reverts back to the 1.5 times net debt leverage for Q4 of 2021.
On it so when a good position with that so thats all done and behind us at this point.
So it's not about it not unlevered.
Okay.
Got it. Thank you Doug and then lastly, I will help us with Capex DNA and based on your guys will get into a negative free cash flow number for this year can you correct, you're going to help me out with the free cash number.
So you should have some modest free cash flow over.
Overall on a capex of about 25 million.
Overall on it.
The depreciation number is roughly 50 million or so 45 50 million on depreciation.
And as you can appreciate with a bit of extra inventory ending fiscal 19 that'll be reduced will drive some working capital benefits.
Personally to work with you look closer on to get the specifics on that EBITDA.
Calculation.
Thank you very much as.
Okay. Thanks Ike.
As a reminder of the have any questions. Please press star one using your Touchtone phone. If you are using a speaker phone you may need to pick up the his first before pressing the numbers. Our next question comes from Dana Telsey from Telsey Advisory.
Good morning.
Back a little bit about wholesale.
What you're seeing.
Alex impacted globally.
Do you foresee bottoms assortment and then can you give us any update on the life.
On any timing.
Jason and particularly how what's happening with the cores Brian. Thank you.
On the discount channel discussion I think we've commented that were largely expect in the trends to continue and both.
Europe, and Americas, which means we quoted the sell through issue in Americas in selling and sell out issues being down about 20%. So we're still forecasting that for most of this year and Americas wholesale and then on EMEA EMEA isn't impacted quite as much that's more in the mid teens contraction. We have so that are both still in.
Our forecasts and underline numbers those numbers largely or what's impacting overall contracts and as we make the change in the pivot to a more direct business model.
Through third party marketplaces, as well as as web sites on it. So that's that's kind of channel discussion.
Strengthen in those channels, the DTC channel as well as geographically the strengthen and APAC, we expect will will rebound and not in the second half of the year on licensed brands I would tell you theres not a lot new to report continue to work closely with the license brands have great relationships. There continue to work with our course partners.
The opportunity for watches and jewelry, both in the wholesale channel as well as in in the boutiques.
And that relationship continues very strong from an exploration standpoint, those no no major expirations coming up at this point in time and no major issues that we see on our license land portfolio as we move through some of these transformation efforts that were going through.
I would just add Jeff that we just like we have historically, we stopped great relationships with both our wholesale accounts on our licensing partners. So.
We're focused across the board with them on driving growth across channels within traditional wholesale.
Especially in the U.S. is definitely more promotional and and trends are challenging, but we do see a lot opportunity to continue to stabilize the business with just better product and better storytelling.
And so we've challenged our teams to create excitement for consumers and both brick and mortar and online.
And then, especially online we see tremendous growth opportunity globally in the marketplace.
Businesses that we're in and frankly now with our digital transformation, that's accelerating with our Salesforce platform.
So you're you're going to both in wholesale online marketplaces, and DTCC digital bring to life the right product in the right storytelling.
This year, but also as we go into future years.
And I would add also we continue to look at the marketplaces evolves and.
We probably over the next couple of years, we'll be adding additional licenses and change some of our portfolio as we continue to evolve the business.
And then just on the Corona virus.
We are.
The fact factories.
Part given diversification and manufacturing how do you see that playing out.
Good day fluid situation is still underway.
Actually our factories are coming back online nicely slower than we had anticipated.
Estimate right now that the capacity right now is about.
50%.
Spec to have the factories and the underlying component suppliers up to full speed by the end of March.
On it we've been prioritizing key products on it.
As you can tell from our inventory position, we're actually in a very good inventory position to manage through this process.
We pulled some inventory ahead because of Chinese new year's anyway on and the inventory that we have as good quality and we're prioritizing production for key products that continue to sell so we feel pretty good about our factories coming up to speed in China and being at full speed but into the.
End of the first quarter.
Thank you.
Thanks Dennis.
Thank you I will now like to turn the call back to the management for closing remarks.
Before we sign off we wish to again express our concern for all those affected by the current virus.
Despite this near term issue, we want to emphasize that we have every confidence that our transformation initiative will be successful over the long term.
We have innovative products talented people and great partners, we have a capital light business that generates good cash flow with no net debt at the year end.
We're planning 2020 based on current market trends, but we will be driving our three major growth engines of connected Asia and DTC to achieve topline stabilization as quickly as possible.
We appreciate your continued support and look forward to updating you on the next quarter. Thank you very much.
Thank you ladies and gentlemen. This concludes today's conference. We thank you for participating you may now disconnect.
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