Capri Holdings Ltd (CPRI) 2013 Q2 法說會逐字稿

Hello, ladies and gentlemen.

Thank you for standing by.

Welcome to the Michael Kors Holdings Limited second quarter fiscal 2013 conference call.

At this time, all participants are in a listen-only mode.

Following the presentation, we will conduct a question-and-answer session.

Instructions will be provided at that time for you to queue up for questions.

As a reminder, today's conference is being recorded.

And now I'd like to turn the conference over to Ms. Krystyna Lack, Vice President, Treasurer.

Please go ahead, ma'am.

Good morning and thank you for joining us for our second quarter earnings call.

Presenting on today's call are John Idol, Chairman and Chief Executive Officer, who is calling in from Bangkok; and Joe Parsons, Chief Financial and Chief Operating Officer.

Before we begin, let me remind you that certain statements made on this call may constitute forward-looking statements which are subject to risks and uncertainties that could cause actual results to differ from those that we expect.

Those risks and uncertainties are described in today's press release and in the Company's registration statement on Form F-1 which are available on the Company's website, www.MichaelKors.com.

Investors should not assume that the statements made during the call will remain operative at a later time, and the Company undertakes no obligation to update any information discussed on the call.

I will now turn the call over to Michael Kors Chairman and Chief Executive Officer, Mr. John Idol.

Thank you, Krystyna.

Good morning, welcome to our second quarter fiscal 2013 earnings call.

With me today is Joe Parsons, Chief Financial and Chief Operating Officer.

I'll begin the discussion with a brief overview of the quarter and share with you an update on our strategic growth plans.

Joe will then provide a detailed review of our second quarter financial results.

Additionally, he will provide our outlook for the third quarter of fiscal 2013 and the full year.

We are extremely pleased with our second quarter performance across our retail, wholesale, and licensing segments throughout North America, Europe, and Asia.

Our results reflect the ongoing momentum of the Michael Kors brand, and the successful execution of our key growth strategies.

Michael Kors' creative vision and design leadership provides us the ability to maintain a unique position in the marketplace as we continue to expand our presence as a global luxury lifestyle brand.

Our performance was driven by continued growth in comparable store sales, strong performance of our new stores, successful conversion to shop-in-shops and department stores, and the advances in our international expansion strategy as we continue to build brand awareness.

We have a talented management team, strong infrastructure, and a healthy balance sheet that will enable us to successfully execute our strategic growth initiatives.

During the quarter, we continued to advance on our six key growth initiatives.

First, in North America, our 45% comparable store sales increase represents the 26th quarter of consecutive growth in this region.

Second, our retail expansion efforts continued in North America with 10 new stores opening in the quarter.

Third, we continued to convert North American wholesale department store doors into branded shop-in-shops.

Fourth, our presence in Europe expanded with additional retail and wholesale door openings.

Fifth, we continued to develop our business in Japan.

And sixth, we continue to build a foundation for growth other areas of the Far East through regional licenses.

I would now like to review a few financial highlights for our second quarter and then discuss our segments, our operations by region, and finally, our expansion in the Far East through our regional licenses.

Total revenue in the quarter grew 74%, $533 million, driven by strong performance in all segments of our luxury business.

On a combined basis, accessories, footwear, watches, jewelry, eyewear, and related products comprised 79% of our product mix in the second quarter.

Our higher mix of accessories category, unique among American designer luxury brands.

Gross margin expanded 200 basis points to 59% for the quarter, driven primarily by lower markdowns as our luxury products continue to generate strong sell-throughs.

Our income from operations grew 126% to $158 million for the second quarter compared to the same period last year.

Last year's second quarter results were adjusted for stock compensation expense associated with our private placement.

Turning to our segment results, retail net sales grew 82% to $242 million, and comparable store sales increased 45% globally.

This comp strength illustrates our brand power, compelling merchandise assortments, and an exceptional jet set store experience.

Retail sales growth was also driven by 66 store openings since the second quarter of last year, including 16 openings during the second quarter.

We ended the quarter with 269 Company-owned global retail stores including concessions.

Wholesale net sales increased 75% to $271 million in the second quarter.

Our product assortment continues to perform very well for our department store and specialty store customers, while our conversion to shop-in-shops in department stores provides a significant lift to sales.

In our accessories categories, we saw similar or greater comparable store sales increases as compared to our retail stores.

Both our footwear and women's wear lines continued to show strong performance during the quarter and these categories are well positioned to shine this holiday season with our Star Power collection, featuring luxury jewel tones, gorgeous fabrics, and gilded accessories.

Our licensing revenues increased 13% to $20 million, and grew 31% on a year-to-date basis, primarily driven by the continued strength in watches.

The second quarter was the one year mark for our jewelry business and we are very pleased with the performance of this new product category in our stores and at wholesale.

Jewelry represents a significant growth opportunity globally, and we look forward to expanding this category.

Additionally, our eyewear business continued to perform well this quarter and we believe this category also has great potential for the future growth.

For our operations by region, North America revenues increased 72% to $471 million, and comparable store sales increased 45%.

We opened 10 stores during the quarter and ended the quarter with 214 locations.

As I mentioned earlier, we continue to convert department store locations into branded shop-in-shops, resulting in a significant increase in sales volume per door.

Europe continues to show strong growth.

While we recognize the European economy is weakening, we are benefiting from strong reception to our merchandise offering and increased brand awareness as demonstrated by our revenue increase of 97% to $57 million and a comparable store sales increase of 50%.

We opened four stores during the quarter and ended the quarter with 34 retail locations.

Distribution in our wholesale segment continued to expand, primarily through specialty store doors where sell-throughs remain very strong.

In Japan, our revenues increased 129% to $5 million, with comparable store sales of 17%.

We opened two stores in Japan during the second quarter and ended the quarter with 21 locations.

We continue to focus on developing our brand in this region.

Japanese marketplace will be a strong contributor to revenue and net income in the future.

Our brand is also expanding into regions in the Far East outside of Japan through regional partnerships.

In Korea, our most established market, we have 40 Michael Kors retail stores including concessions.

We also have licenses in Southeast Asia, primarily Singapore, Malaysia, and the Philippines, where there are 10 Michael Kors stores including concessions.

In greater China, our licensee operates 10 Michael Kors retail stores including concessions.

While it will take time to establish our brand in these regions, we believe that the Far East represents a meaningful growth opportunity for the Company.

We are making great strides in expanding our brand with licensees in other countries.

Through our licensing partners, we have 80 additional Michael Kors retail stores including concessions worldwide, including North America, Europe, the Middle East, Japan, Korea, Southeast Asia, and China.

There were 349 Michael Kors stores at the end of the second quarter worldwide.

In addition to our free-standing store growth, our travel retail business is developing rapidly as tourists worldwide are finding our merchandise at shops in the finest airports in the world.

Including free-standing stores, shop-in-shops, and stores operated through our licensing partners, there is a potential for 50 airport and duty-free shops worldwide.

Looking forward, the global luxury market is expected to maintain a healthy pace of growth and we are in a great position to capitalize on the opportunity as an international jet set luxury lifestyle brand.

I would now like to discuss growth opportunities for each region, starting with North America.

We expect to drive double-digit comp store sales growth, the introduction of new luxury merchandise led by Michael's runway inspiration, and continue to deliver our superior jet set in-store customer experience.

We are on track to open 40 to 50 stores this fiscal year, and believe there is potential for 400 locations in this region.

In our wholesale business, we will continue to increase sales through the ongoing conversion of department store doors to shop-in-shops and increased comp store sales.

In Europe, we will continue to build upon our momentum as a uniquely positioned pan-European luxury accessories brand.

Through our advertising, public relations, and social media activities, as well as expansion of our retail and wholesale presence, we continue to capture additional market share in the European accessories, footwear, watch, and apparel markets.

We remain on track to open 10 to 15 retail stores annually.

In addition, as we continue to gain brand recognition, we see significant opportunity to expand our wholesale business in Europe.

Long-term, we believe this region can support 100 retail stores (technical difficulty) -- and wholesale doors.

Japan is a key market for us.

We're taking a long-term view for the development of this region.

As one of the most important luxury markets in the world, we believe that the Michael Kors brand will resonate with the Japanese fashion consumer.

We are on track to open 10 locations this fiscal year, and believe that this market can ultimately support 100 retail stores including concessions.

Lastly, I would like to take a moment to express our sympathy for those that have been impacted by the devastating effects of Hurricane Sandy.

Our thoughts are with them as they continue to rebuild their homes, businesses and communities.

While remaining mindful of many personal challenges faced by all involved, we are focused on returning to normal operations.

We experienced disruptions in 55 of our highly productive stores on the East Coast, many of which reopened the next day and all of which were reopened on staggered schedules over the course of the week.

Today, many areas of the Northeast remain challenged.

It is difficult to predict when customer behavior in the affected areas will return to normal trend and what the lingering effects of the storm may have on sales performance in our third and fourth quarters.

Overall, demand for Michael Kors products worldwide remains very strong.

We are well positioned to fully capitalize on the important holiday season with compelling products and a highly motivated sales team in our stores and shop-in-shops globally.

Now I will turn the call over to Joe Parsons for additional analysis of our quarterly results.

Thank you, John, good morning.

I will begin with a review of our fiscal 2013 second quarter financial results, followed by our outlook for the third quarter and full year.

For the second quarter, total revenue grew 74% to $532.9 million, as compared to $305.5 million in the second quarter last year, with strong growth in each of our retail, wholesale, and licensing segments.

Retail net sales increased 82% to $242.3 million in the quarter, as compared to $133.4 million in the second quarter last year, driven by a comp store increase of 45.1% and the opening of 66 stores since the second quarter of last year.

The comp store performance was driven primarily by the strength of the accessories line.

Wholesale net sales grew 75% to $270.8 million for the second quarter, compared to $154.5 million in the same period last year.

This growth was again primarily the result of increased sales of our accessories business, driven by our unique design and merchandise assortment as we enhance our department and specialty store presence and continue the conversion of department store doors into shop-in-shops as well as expand our European operations.

In our licensing segment, revenue grew 13% to $19.9 million for the quarter, as compared to $17.6 million last year, primarily driven by the continued strength in watches.

Gross profit increased 80% to $315.9 million, as compared to $175.1 million in last year's second quarter.

Gross margin expanded 200 basis points to 59.3%, driven primarily by lower in-store markdowns, discounts, and allowances, as well as a more favorable product mix shift to higher margin merchandise.

Total operating expenses grew 36% to $158.0 million in the quarter.

Total operating expenses for the second quarter of fiscal 2012 were $115.8 million that included a $10.7 million charge related to employee share option redemption associated with our private placement.

As a percentage of total revenue, total operating expenses decreased to 29.6% from 34.4% in last year's second quarter, excluding the previously mentioned charge.

SG&A expenses grew 36% to $145.7 million, compared to $107.3 million for the second quarter last year.

The dollar in increase was primarily due to increases in our retail occupancy and salary costs as we continued our retail store rollout and corporate employee related costs including stock compensation.

As a percentage of total revenue, SG&A expense decreased to 27.3%, compared to 31.6% for the second quarter of last year, excluding the employee share option redemption charge.

The improvement in the SG&A rate was primarily due to the leverage on strong sales.

Depreciation and amortization expense was $12.3 million during the second quarter, as compared to $8.5 million for the second quarter last year, primarily due to the buildout of new retail locations, new shop-in-shops, and investment in our IT infrastructure to support our growth.

As a result of these factors, income from operations was $157.9 million or 29.6% of total revenue.

Income from operations was $59.3 million for the second quarter of last year.

Excluding the aforementioned share option charge, income from operations as adjusted was $70.0 million or 22.9% as a percentage of total revenue for the second quarter of fiscal 2012.

Income taxes were $59.8 million in the second quarter, as compared to $21.9 million for the second quarter last year.

Our effective income tax rate was 37.9%, compared to 35.1% for the same period last year.

The increase in our effective tax rate resulted primarily due to an increase in taxable income in certain non-US subsidiaries during the second quarter of this year.

Net income increased 141% to $97.8 million for the second quarter, as compared to $40.6 million for the second quarter last year.

Diluted earnings per share were $0.49 based upon 200.2 million weighted average shares outstanding.

Net income for the second quarter of fiscal 2012 was $40.6 million or $0.22 per diluted share based on 187.6 million weighted average diluted shares outstanding.

Excluding the aforementioned share option charge, net income as adjusted was $47.5 million or $0.25 per diluted share.

Turning to the balance sheet.

At September 29, cash and cash equivalents net of $11.6 million of borrowings under our credit facility were $300.6 million.

This cash balance includes approximately $118 million of stock option proceeds related to the recent secondary offering which was paid out in the subsequent quarter.

At the end of the second quarter last year, cash and cash equivalents net of $16.2 million of borrowings were $3.1 million.

Inventories totaled $278.4 million, as compared to $146.7 million last year.

As we discussed last quarter, we will continue to see inventory growth outpace sales as we expand our retail and wholesale businesses, grow our replenishment business for basic merchandise, and broaden our production schedules.

Capital expenditures for the second quarter of fiscal 2013 totaled $25.5 million.

The majority of these expenditures relate to new store openings with the remainder being used for investments in connection with building new shop-in-shops and enhancing our information systems infrastructure.

We opened 16 stores in the quarter, 10 in North America, four in Europe, and two in Japan, and ended the quarter with 269 retail stores including concessions.

Turning to our outlook.

For the third quarter of fiscal 2013, we expect total revenues to be between $525 million and $535 million, assuming a mid-20% comp store sales increase.

We expect diluted earnings per share to be in the range of $0.37 to $0.39, assuming a tax rate of 38% and 202 million shares outstanding.

For fiscal 2013, total revenue for the year is now expected to be between $1.86 billion and $1.96 billion.

This reflects comp store sales increase of approximately 30%.

We now expect diluted earnings per share for fiscal 2013 in the range of $1.48 to $1.50 per share based upon an estimated tax rate of 38% and 201.2 million weighted average shares outstanding.

We continue to expect gross margin to be slightly lower in the second half of the fiscal year as markdown rates are anticipated to normalize.

SG&A dollars are expected to grow at a slightly higher rate as compared to the second quarter due to increased marketing spend and higher occupancy and salary costs as we continue the buildout of new retail stores and shop-in-shops and increase our corporate staff to accommodate our global growth.

Capital expenditures are expected to total approximately $140 million for fiscal 2013.

The decline from our previous guidance is due to lower than expected corporate spend and a shift in CapEx dollars in the next -- into the next fiscal year.

We are on track to open 70 retail locations in fiscal 2013, including approximately 45 in North America, 15 in Europe, and 10 in Japan.

In addition, our conversions of accessories doors to shop-in-shops are continuing at an accelerated pace and approximately one-half of our initial target of 1,000 doors will be completed this fiscal year.

Thank you, I will now turn the call back to John.

Thank you, Joe.

We are extremely pleased with our current growth trajectory.

Significant opportunity that lies ahead for the Company.

Uniquely positioned to continue to build our global luxury lifestyle brand that we have a tremendous opportunity for growth worldwide.

Thank you for participating in this call.

We will now open the call to questions.

(Operator Instructions)

Brian Tunick, JPMorgan.

Congrats on a great quarter.

Question on your comments regarding the storm.

I know a lot of people are talking about it here, but you guys were already a month into the quarter.

So just wondering maybe on the first part if you could talk about maybe how your business was trending in the month before the storm?

And then maybe talk about what you think are the biggest opportunities either in categories or maybe inventory positioning this holiday versus last year?

Thanks very much.

Sure.

Brian, the first question which is I think twofold, first, how were we trending before the storm, and our business was exactly on track (technical difficulty) report in the second quarter.

So we were really firing on all cylinders and that's globally.

So we did not see any change in the business.

Obviously, I'll address the second piece which is we have a number of highly productive stores that are being affected obviously in the Long Island area, in the New Jersey area in particular, that we just -- we don't know when those stores are going to return to normal.

There's gas lines as we're all aware of, and I think there's also a psychological effect on the people in the immediate metro New York area where their homes have been affected.

And so I think until people recover from some of this startling situation, we want to be cautious about what's going to happen in that region.

And again, I just can't sit here -- we just don't know when that will return and what the effect for the overall business is.

But beyond that region, business is very strong everywhere in the US, Canada, Europe, and Japan.

So we're pleased with our set-up for the holiday season.

In terms of categories, we're very excited about a few different things.

First off, we want to continue to emphasize that our watch business is very strong for us, and you know that's a significant part of our retail business in our own retail stores.

So that trend continues to be performing well for us.

And that's usually a very strong category for us during the holiday season.

Secondly, small leather goods, as you know, we've been putting greater emphasis on that category and building that to a greater percentage of our overall sales inside of our stores and we're reaching penetration levels that were (technical difficulty).

I think if you go into our stores, you'll see we're putting more emphasis on the category, everything from our feature tables when you walk into the stores to actually showing the SLGs in our handbag, in their own contained areas, but also cross-merchandising them in the handbag walls where we're getting excellent multiple sales with our strong service and our upselling program to the consumer.

And then lastly, I would say is really the item business.

We've had a very, very strong penetration with totes in our stores.

That's become really a go-to item for young girls, which has also added to our UPTs in our stores because she's not only buying a handbag from us, but many times she's buying a handbag and a tote which really has boded well for us.

So we're in a great inventory position in our key items.

We think we've got the right merchandise in terms of the trend, which I think we've been very good at not only being on trend, but also leading trend.

So we see a very bright Christmas ahead of us.

Kimberly Greenberger, Morgan Stanley.

Congratulations on a great quarter.

John, I'm wondering if you can talk to us about some of the comp drivers in the quarter?

You had indicated previously that incoming traffic into the stores has been the number one comp driver.

Did that hold up?

And then if you could just share with us the percentage of sales that you generate in the hurricane-impacted areas, that would be really helpful.

And lastly, in terms of the expectation that markdown rates will begin to normalize, are you seeing any evidence here so far this quarter that markdown rates are in fact starting to normalize or that is just an expectation of what might happen in the future?

Thanks so much.

Sure.

Let me go with the last question first, which is the markdown rates, because that's the easiest one.

We have not seen that happen yet.

We are anticipating, as we keep saying in each call, that at a point it's going to happen.

We don't know when that point is, but we have not seen that happen so far in the first month of selling quarter.

But again, we're up against big comps from last year at this period of time.

We have big inventory positions.

So we have to be prudent in our thought process.

Again, if the consumer responds the way that she has been to date, then obviously then the results will be potentially improved from what we've given guidance on.

And that's really what's happened in the last few quarters is we've continued to do better than what we had internally planned for.

And that's how we operated our business since we've been public.

So that's the first question.

I'll go to the drivers.

Traffic has maintained its same pace for us.

We have not seen any change in traffic, both domestically and internationally.

So we're really pleased with that.

So that's really been the number one, continuing to -- traffic doesn't pace at the same level as comp does, just so you're aware.

So you really take the traffic increase that we've had, which has run in the mid-30%s for us, which is really an extraordinary number in terms of traffic gains, and then you put that onto conversion, where our conversion rates are up very nicely in our stores.

And then the other thing that happened to us is our UPTs are up.

So our average transaction size is increasing slightly.

It's not large, but it's a nice number.

So all of a sudden you put those three together and that's really how you get to the comp.

But the main driver is continuing to be traffic, and so we haven't seen any change in that.

And lastly, the hurricane affected stores -- it's really too early to tell that because if you would have taken the 55 stores that were initially closed, you would have obviously been highly concerned.

But it's come down considerably.

The markets, again as you know, are New York and New Jersey.

New York City seems to be rebounding very quickly and by the way, these concerns that we have are not only for our own free-standing stores.

You have to remember, our department store partners operate in these regions as well.

So we've seen an effect in those department stores that are located in, again, the New Jersey and Long Island area in particular.

So we really can't ascertain what the percentage of it is.

But what I'm very pleased to report is that the New York City business is excellent.

So that's, again, that's a huge percentage of this operating area.

Randy Konik, Jefferies.

Just a couple questions.

Just first on the -- you gave the number for the accessories percent of total, I think it was 79%.

And last quarter it was 79%, but it rose on a year over year basis.

Can you just give us your thoughts on where do we see that number trending over the next few years?

And then my next question is regarding your licensing piece of revenues, we had Fossil report a week or two ago and talk about some push-out in orders or so forth.

Just give us your additional color on like how you see watch category from your standpoint, not just for the Kors brand but in general?

And then lastly, can you just give us an update on how you're thinking about the long-term outlet strategy from a channel distribution standpoint?

Thanks, appreciate it.

So I would -- again, this is really a little bit more of our dream than the accurate percentage, but we would like the business -- the accessories business to represent 85% of our total sales on a going forward basis.

That's just naturally going to happen, as we've talked about in the past, as we open more of our own lifestyle stores where that percentage is more or less there today -- that the overall Company's sales will trend towards that area.

And then secondly -- and of course you know that's something that we like because it's higher margin for the Company.

Secondly, we think that retail, even though today retail and wholesale are very similar in size, retail long-term will become in our estimation 75% of the business.

And again, our wholesale business has just tracked much faster than we had anticipated, A, because of the shop-in-shop installations.

And B, our comp store performance as we indicated in the call is running at or in many cases higher than what we were even reporting in our own free-standing stores.

So those two factors are keeping the wholesale business slightly larger than we had anticipated at this point in time.

The second question regarding -- let me first start by saying we have not seen any -- I saw one analyst wrote something about the potential of orders being pushed back.

We have not seen that at all.

Again, our sell-throughs are excellent.

We typically have the opposite problem that our partners are asking us for more inventory, more quickly.

So we don't see that going on and I have not seen that for our part of the business at Fossil either.

Again, our watch sales continue to be the number one performing brand in almost every department store in the United States.

We're reaching similar penetrations in Europe where we're becoming either the one, two, or three brand in the stores there.

And I also might add that we're -- very encouraging news in Japan, we've seen some excellent performance on watches.

And we're reaching similar rates of sales there in terms of achievement of performance versus our competitors.

And that really sends a good signal to us because that was one of the lead things that really helped drive our brand awareness in the United States and also in Europe, is the development of the watch business.

So we feel good about that category.

And of course we talked about jewelry.

Excellent start to that business, both domestically and internationally.

We've begun to launch the jewelry in certain stores in Europe and the results are really better than we had anticipated.

So all that bodes well for us.

The last question, in terms of outlet, we said it before, outlet for us is typically going to be one to three.

We use the outlet to return merchandise from our own free-standing stores and then we do make for the outlets as well.

But our core focus is on our full price stores.

We're fairly neutral to the development because we are so profitable in our own free-standing stores.

So we don't see the need to over-develop that channel given the profitability of our full price stores, and obviously the comps that we're achieving in our full price stores.

Erin Murphy, Piper Jaffray.

Let me add my congratulations on a fantastic quarter.

John, I was just hoping maybe you could speak a little bit more on the role of social media and the role that it has played in really driving that customer awareness to the acquisition process?

How quickly do you see the return on investments that you make in this channel?

And then along that same vein, I was just curious if you could talk about the recent hire on your board of directors, Judy Gibbons?

It just seems that that's a very complementary fit given her background in e-commerce and digital media.

Maybe talk about the process there for longer term growth in e-commerce, both domestically and abroad?

Thank you very much.

Sure.

So, social media, as you're aware, is obviously a very hot button in marketing today.

We are right at about -- and I think we told you this during the IPO, we've really frozen our print budget domestically for sure and internationally the print budget is growing, but we really see that as being 50% or less of our marketing dollars and our communication.

There's obviously a very big push on the social media side and we think we are doing a very good job at that.

We have over approximately 1 million people following us on Twitter today.

And I think we are either number two or number three on Twitter in terms of a designer followed, which is really amazing that we look back almost two years ago, I think we could have been at zero.

I don't remember the exact number, but it was pretty low.

We're a little over 2 million fans on Facebook.

We anticipate being able to get that number to well over 5 million by this time next year.

And the good news is, is we know that's building brand awareness for us, both domestically and internationally.

In particular, as you know, Facebook I think it's about 40% of the people on Facebook are outside the United States, 40% or 50%.

So we like that because that helps drive our international brand awareness.

And what we're working on very carefully with all this, because social media is wonderful, but you have to be able to figure out how to get that to convert to actual sales, both in your stores and online.

We're working very closely with Facebook.

I think they've announced a few different times publicly that we are one of their closest beta partners on a number of different projects.

And so we see a bright future with them and with the development of certain other social media platforms to help drive traffic to our stores and drive traffic to our website.

Obviously, we can very quantitatively find the development on our website.

Secondly, I'll go to the website.

We'll be making an announcement this week that we have hired a very senior individual to join the Company to help our e-commerce global rollout.

And that person will be reporting to Jaryn Bloom, the President of our retail business.

And that's really the complete 360 degree experience for our customer.

We want them to be able to have a great visual experience with us online.

We want them to have a great experience with us in store.

And then we want to be able to communicate with them, and be able to obviously send them information about new products that are arriving in the store, and be able to thank them for being a customer of us.

And there's a lot of different ways we can communicate with them with our e-commerce platform.

And you'll see a complete redesign of our website that will be starting in the spring of next year.

So there's a lot in works there.

And lastly, yes, Judy was brought onto the board for her experience.

She is really a talented individual.

As you probably saw from her resume, she's had experience at some of the most impressive technology companies in the world.

We specifically wanted to have a board member who had that background so that they could give us a lot of insight into investments that other companies have made, developments, and successes and failures so that we can learn from that.

So Judy is a wonderful addition and we're proud to have her as a member of the board of directors at Michael Kors.

Paul Lejuez, Nomura.

Can you talk about the comp performance in malls versus outlets?

And can you just remind us how many outlet stores you have today, how many openings this year will be in that channel?

And also if you could maybe talk about the price -- which price strata of handbags are growing the fastest?

And then last, John, anything you're not happy with in the business today?

Thanks.

A lot of things.

The first question was about comp for outlet versus full price.

And they're pretty similar.

We don't -- again, we're not -- the good news is our full price stores are performing as we said before very similar to our outlet stores.

Sales per foot is very, very similar.

And I think you all can probably calculate, we don't put it out there, but you can get a pretty good idea of the sales productivities that we're running at on a global basis, and we're very proud of the fact that we are running very close to some of the most prestigious luxury companies in the world in terms of productivity.

So we think that bodes well for us.

Comp store sales growth for us is the engine for the Company.

I'll remind everyone, it's not going to continue at these kind of paces.

We just (technical difficulty) -- guidance for that or for us to plan internally to be at that basis.

In terms of the number of outlet stores that we have today, Joe, do you want to just read that number off?

Yes, worldwide we have 69 outlets (sic -- see press release 89 outlets) today.

That would be in North America --

I'm sorry, I apologize, 89.

How about in the US, Joe?

Joe?

In the US, we have 67.

And then the price strategy, for us there's really in the handbag category it's -- I would say it's the $300 to $350 that is really driving the largest amount of sales for the Company.

We do have some tote businesses that are in that $250 range, $225 range which has been quite strong for the Company as well.

But predominantly in handbags, we seem to do our greatest volumes in that price point.

Our customer I think really appreciates the quality that we put into our product.

We don't have as high gross margins as some of our other competitors, and we understand, we believe that quality is first.

And so a lot -- we believe there's a lot of quality in our product, the leathers we use, the hardware that we use, and we're always wanting to design the best product first.

And we think that the customer appreciates that.

I think you see that in the same thing, whether it's our watches or whether it's our small leather goods or footwear or women's ready to wear.

Interestingly enough, women's ready to wear, we're putting more quality into the product.

We're trying to take the brand really up at even a higher level, and what's interesting is the customer is responding.

Where we thought before there were certain price limitations, again, you can't be completely blind to that, but the customer is really responding to quality and obviously design first and foremost in that.

So I think I -- did I miss any of your questions?

The last one, John, was just if there's anything in the business that you're not happy with right now.

I've said to you guys before, I think we are one of the best companies in the industry in terms of design.

I think Michael's leadership is extraordinary.

His vision, our design teams, I think our selling in our stores is best-in-class in the industry.

I think our store design is best-in-class.

What I'm not happy with is our e-commerce business.

We are behind where we should be.

We really need to be on a global platform given the fact the size and scale of our Company worldwide and what this represents as an opportunity.

So we're behind on that category.

We're making the right moves, obviously hiring Judy.

We're going to make our announcement next week or later this week on a very senior individual who will be joining the Company to run e-commerce.

And then we'll be announcing probably sometime in the spring season about when e-commerce will come back in-house, and along with that, it'll be -- we'll have a global schedule that we'll be discussing.

So, many of our competitors are well ahead of us on that, and I believe the opportunity is much greater than what I had originally estimated.

We're seeing certain retailers today that we do business with, our partners, who are running between 10% and 20% of their sales online, both their own company and then of course Michael Kors sales.

So you can take a look at those numbers and then our retail numbers, and it really warrants a very significant potential long-term opportunity for the Company.

Omar Saad, ISI Group.

Hoping you could maybe discuss a little bit what you're seeing out there in the competitive landscape?

The obvious success you guys are having, is that having an impact?

Are you seeing response from some of the other companies out there?

Or are you of the view that there's plenty of room for everybody given the strength in the category, not just in North America but globally?

Would love your thoughts.

Thanks.

Sure.

I think the first piece of news, again, and I know you guys clearly follow a couple of our big competitors who are domestic here, and then obviously we don't view those as being our only competitors.

There's obviously the international luxury competitors who are for us equally as important.

The accessories business is growing.

It's just -- whether it's in the US retail channel, whether it's in the US department store channel, whether it's in the European channels, it continues to be one of the best performing categories for the luxury companies and for department stores or luxury department stores.

So you can see the different data that comes out about the growth of luxury, and we believe that data's pointing to the fact that actually the accessories category is growing faster than other categories inside of luxury.

So we think there's plenty of room for us to grow.

We've seen certain people do certain things promotionally and we've opted not to participate in that, and we think that sends the wrong message to our customer.

We've said to you before that we are building this on a luxury platform and to start doing those kinds of things really I think sends the wrong message to the consumer about your brand.

So we see this category as still maintaining and growing.

And in particular, we're so excited about what's happening in Europe.

You can see the numbers are just outstanding.

And Michael Kors I think by this time next year, we anticipate being the number one accessible luxury handbag Company in Europe.

And to really get there from four years ago is quite an extraordinary feat.

And we're expecting similar things from our watch business in Europe, where today we believe Michael Kors will be the number one selling designer watch brand in the world.

As you know, Fossil's reported its shipments, but we think we're going to potentially do almost $1 billion at retail in watches on a global basis.

So that's an incredible number, and that just leads the way for us in other marketplaces for our other categories of business to develop.

Joan Payson, Barclays.

Good morning and congratulations.

First off, to talk a little more about the European business, as you've been building that out, which markets are you most highly concentrated in right now and which markets are you more focused on developing?

Good news for us so far is -- let me just start by saying that the business in Europe has been balanced in terms of the consumer response.

So a lot of times American companies go to Europe and they have a good response in the UK and then they don't have a very good response in Germany or in other markets.

So we've really seen the response, whether it be Spain, believe it or not, even with the very difficult economy there, we're running strong comp store sales, not only in our own stores, but we have a number of concessions in El Corte Ingles which -- (technical difficulty).

Hello?

Excuse me just one second.

And the area where we are the least developed in Europe is Italy where we only have one store that's actually a license of a collection store.

So that's an area where we see a big opportunity for us and we can grow.

And again, I know many times people are concerned about the environment in some of these marketplaces.

The market share is still there to be taken, and we think we're positioned really in the right way for that.

So the net conclusion is we're feeling very good about the brand all across the marketplace and there's plenty of opportunity for us to grow.

Blair Pearson, Robert W. Baird.

A couple of quick ones.

First, on the shop-in-shops, you mentioned 1,000 potential for accessories.

Have you started to plan or quantify the potential for footwear and apparel shops, and could you update us on how many of those you have today?

Sure.

Joe, you have the number there, correct?

We really haven't gone through and talked specifically about how many apparel and footwear shops we have.

But let me just say to you that apparel will ultimately have the potential to be in the same amount of shops that we have with handbags.

So ultimately, we think we can have 1,000 shops with accessories.

We think we can ultimately have 1,000 shops with women's ready to wear.

I think I mentioned to you during the recent secondary that our women's ready to wear business has gotten very healthy.

We're one of the best performing women's ready to wear brands in the department stores.

And again, that's the predominant piece of our ready to wear business is in the department store category and of course then specialty stores inside of Europe.

The footwear shop-in-shop situation, we only have a handful, I think it's 10.

But you're probably aware, we opened up a new footwear shop in Macy's at Herald Square and the results are extraordinary.

So we really didn't know what that would mean for us, but we're certainly having some very serious discussions with a number of department store partners, both domestically and internationally, given the success of what we've seen happen there about the potential for those shops.

So I think we can report maybe in the next six months a little bit more about what the development is and the potential of those as opportunities for us.

Okay, thank you.

And then just lastly on fragrance, I don't think you've talked about that a lot so far.

But you've had a competitor recently discussing a push into that area.

Do you have any updated thoughts on the opportunity there or what your plans are?

The question was asked before, I apologize.

And I should have said when the question was asked what we're disappointed about, I should have added fragrance to that.

We do not have a developed fragrance business.

We have a great partner which is Estee Lauder, but we have a very underdeveloped fragrance business.

We have some pretty significant plans with Estee Lauder to make a very major push into that category next fall season.

We'll be making some public announcements about that on the next call -- on the next conference call.

But you can be you assured that given the size of our Company, that's a very big potential opportunity for us.

And of course, we have not factored that growth into any of our projections as we've told you in the past.

We view that as if it happens, it's just going to be excellent upside.

Oliver Chen, Citi.

Regarding the comp and the evolution of your guidance, it sounds like the traffic was up mid-30%s, the conversion is up, and UPT is up.

So what's the difference in terms of your outlook for the mid-20%s versus the comp that you just posted of 45.1%?

Secondly, could you speak to your thoughts on the watch mix evolution as a percentage of total?

Do you expect that to hold year over year similarly?

And lastly, if you could give us from a bigger picture perspective, what's happening, are you getting new customers to the table with watches or is she or he buying multiples?

Sure, okay.

Let me start.

So when you're coming off of 45% comps and 40% comps, whatever, high-30%s comps, we've told you before, we just can't plan a business that way.

We are able to react because of certain relationships we have with our manufacturers or certain partners who are supporting us in certain businesses.

So we have the capability of overperforming to the comps that we are giving guidance on, but that is our internal plan.

And we think it's, as I said earlier, it's not prudent to all of a sudden plan that we're going to run 45% comps.

And then the only other issue is that we're going up against some very large comps as we start heading into especially the third quarter.

The numbers are just bigger in terms of raw dollars and not just percentage.

So really, those are the two driving factors.

We want to plan prudently internally.

And by the way we're very proud to plan at mid-20%s comp.

We still think that's still best-in-class.

I don't think there's many even luxury retailers who are forecasting guidance at that level.

And secondly, we think that we're going up against just bigger dollars, so that in and of itself is an issue that we have to be mindful of.

The watch mix will probably decline slightly as a percent to our total in the stores, and that's really mainly because the handbags and small leather goods is growing at a faster pace than the watches are.

We told you that SLGs, small leather goods, I'm sorry, in our stores is growing at triple digits.

That's just in and of itself going to take up percentage.

Our handbags business is really getting stronger each quarter, and you can see that through our department store comps and whatnot.

So that is going to push it down, but it's not a significant number.

And as we told you, we anticipated jewelry to get to 5% of our overall store sales within two to three years.

We're there almost today.

So that category just came on so much stronger than we had anticipated.

The watch mix, we really get two types of customers in watches.

The first customer is the loyal customer and she really accumulates watches.

She comes in and she might start with a Gold Runway, and then she might want a Rose Gold.

And then she might come back and acquire a Stainless Runway watch, or she might move on to the new Camille watch which has been an excellent performer for us in our wholesale and in our own free-standing stores.

So we know she owns, in many cases, as many as three Michael Kors watches.

That's the one category of business.

And then I think you've probably seen some data out there that Michael Kors is very much on the wish list for especially young girls.

And what's great for us is our younger category of customer continues to grow, and she definitely enters us typically through a watch or through a small leather good.

Typically, not through a handbag because just the price of it.

And it's a little more young feeling with the watch and the small leather good.

So that's one of the great things about our watch business is we think it continues to bring and help us acquire new Michael Kors customers, not only domestically but internationally.

I was in Germany recently, and we have a very, very strong business with a company called Christ.

And many months there we're either the number two, or in some weeks we've actually opinion number one performing watch brand in the company.

And again, German customers are finding us actually through the watches even before they find us through the accessories.

So a great lead-in for us.

And we know also when fragrance comes on, that's going to even further impact our brand awareness.

You look at the success we've achieved in brand awareness without a fragrance, it's really extraordinary because many companies have huge brand awareness and it's based upon fragrance, not even the points of distribution that they might have in their core product.

Corinna Freedman, Wedbush Securities.

Quick question on the retail store openings for the second half.

Could you tell us how that will flow for the third quarter and fourth quarter?

If you could give us an update on any unique holiday marketing that you're planning?

And an update on men's and other categories?

Thanks.

First, we don't typically guide with the store opening by quarter.

And the reason for that is because many times construction projects move or quite frankly we might accelerate a project.

So both in the shop-in-shops and the store breakdowns, we don't guide quarters.

So that's the first answer.

I'm going to go to men's second.

It's very interesting.

We have a men's sportswear business and a men's tailored clothing business.

And the men's business for us in the United States between licensed products and our own Company-owned is over $100 million.

So we have an acceptance to men's sportswear and tailored clothing in shirts and ties.

We are rolling that out in Europe as we speak, very slowly, very quietly, not with a major push.

But we're finding great reception to our men's sportswear.

And so what happened is we've started to introduce the men's leather products, and you can see that down at Macy's Herald Square and at some of our flagship stores in America and internationally.

Initial feedback on that product has been very good.

So again, we don't view this as any major growth opportunity today, but we do think that in the future you can definitely look at luxury goods companies and their percentage of mens' products and you can without question count on the fact that over the next few years that will be a business that we will enter and be deep with.

Lastly, in terms of holiday marketing, again, we are very driven first and foremost from paid search in terms of our web, excellent results from that.

Secondly is our e-mail blast to our customer which have strong returns both in our website but even more importantly to our own free-standing stores.

And then lastly, we have a very strong catalog business.

Many of our competitors have either exited that business or never really went into it in a strong way.

We literally send millions of catalogs a year, and we think that's been a real key push for our consumer.

We can see what it does in terms of our in-store performance when we drop catalogs, we get a very strong spike, we also get a very strong spike to our website.

And we also think that it really delivers the message that Michael Kors is the fashion resource for many Americans and Europeans and Japanese.

So people keep that catalog at home or they actually come into the store with it, shopping with product, and that's been a strong driver for us and we're going to use that again very successfully during the holiday season.

And now at this time I'd like to turn the call back over to John for any additional or closing remarks.

I'd like to thank you all for being with us on this call today.

Again, I want to reiterate Michael Kors is one of the very unique luxury lifestyle brands that has the ability to have significant growth in the future, and we believe that we're doing a very strong job in executing both in North America and now in Europe and the beginnings of growth in Japan.

So we look forward to sharing additional information with you on our future conference calls.

Thank you very much.

Again, ladies and gentlemen, thank you for your participation.

This will conclude today's conference call.