Capri Holdings Ltd (CPRI) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by.

Welcome to the Michael Kors Holdings Limited third-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 would like to turn the conference over to Ms. Krystyna Lack.

Please go ahead.

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

Presenting on today's call are John Idol, Chairman and Chief Executive Officer, 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 and welcome to Michael Kors' third-quarter fiscal 2013 earnings call.

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

I will 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 third-quarter financial results.

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

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

The brand's strength, innovative fashion design and jet set in-store experience drove strong sales and earnings during the critical holiday season.

Through the creative vision and design leadership of Michael Kors, our talented design team once again delivered exciting designs for the holidays, creating a collaboration that encouraged customers to celebrate the season.

In addition, during the quarter we continued to successfully execute on six initiatives of our key growth strategies.

To quickly summarize --

First, in North America we delivered a 41% comparable store sales increase representing the 27th quarter of consecutive comp store growth in this region.

Second, we continued our retail expansion efforts in North America opening 14 new stores in the quarter.

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

Fourth, we expanded our presence in Europe with the addition of nine retail locations as well as new wholesale doors.

Fifth, we further developed our business in Japan.

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

Let me take a minute to review some financial highlights from our third quarter.

Total revenue in the quarter grew 70% to $637 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 80% of our product mix in the third quarter.

Gross margin expanded 80 basis points to 60.2% for the quarter driven primarily by lower markdowns as our luxury products continue to generate strong sell-throughs.

Our income from operations grew 139% to $205 million for the third quarter compared to the same period last year and excluding one-time charges.

Now turning to our segment results -- retail net sales grew 67% to $333 million and comparable store sales increased 41% globally.

Our consistently strong comps underscore our exceptional brand power, compelling luxury merchandising assortments and unique jet set in-store experience.

Retail sales growth was also driven by 66 net new store openings since the third quarter of last year, including 28 openings during the third quarter.

We ended the quarter with 297 company-owned global retail stores including concessions.

Wholesale net sales increased 77% to $274 million in the third quarter.

Strength in the wholesale segment during the quarter was driven by continued strong performance of our luxury products in department stores and specialty stores, as well as our conversion to shop in shops in department stores.

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

Both our footwear and womenswear lines showed strong performance during the quarter and these categories continued to be well-positioned as we encouraged customers to fall in love with Michael Kors this Valentine's Day.

In our licensing segment revenues increased 52% to $30 million primarily driven by the continued strength in our luxury watches, which saw accelerated growth as the quarter progressed.

We continue to be pleased with the performance of our jewelry category during the second year in both our stores and in wholesale.

And we believe that jewelry represents a significant global growth opportunity for the brand.

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

For our operations by region -- North American revenues increased 67% to $573 million and comparable store sales increased 41%.

We opened 14 stores during the quarter and ended the quarter with 228 locations.

In our wholesale business, in addition to generating strong comparable store sales, we continue to successfully convert department store locations into branded shop in shops, resulting in a significant increase in sales volume per door.

In Europe we are very pleased with the strong and growing acceptance of the Michael Kors brand despite a continued week overall European economy.

We believe that we continue to benefit from increasing brand awareness in this region as our strong product portfolio resonates well with the European consumer.

During the third quarter European revenue increased 112% to $58 million and comparable store sales increased 58%.

We opened nine stores during the quarter and ended the quarter with 43 retail locations.

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

In Japan, which we believe is a key growth market going forward; our revenues increased 103% to $6 million with comparable store sales increasing 11%.

We opened five stores in Japan during the third quarter and ended the quarter with 26 locations.

As I will discuss more in a minute, we are intently focused on developing our brand in this region and believe the Japanese marketplace will be a strong contributor to revenue and net income in the future.

In addition to our strong growth in Japan, our brand continues to expand into other regions in the Far East through regional partnerships.

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

In the third quarter we opened five new stores in the region bringing our total count including concessions to 65 locations.

We believe we can ultimately have 150 locations in the Far East including Greater China, Korea, Singapore, Malaysia, Indonesia and the Philippines.

Additionally on the international front, we are pleased to announce that we have entered into a joint venture agreement with Exclusive Brands International to create [MK Panama Holdings], which will facilitate our retail and wholesale expansion in Central and South America as well as the Caribbean.

While we are in the early stages of development, we believe we have the potential to open approximately 40 free-standing stores and concessions in this region.

We are excited about building our business in these markets and we believe it offers exceptional growth opportunity for the Michael Kors luxury brand.

Finally, our travel retail business continues to grow rapidly as our luxury products are sold at shops in the finest airports in the world.

As of the end of the quarter we had 27 retail locations -- travel retail locations.

Although there is potential for 50 Airport and duty-free shops worldwide -- altogether there is a potential for 50 Airport and duty-free shops worldwide including freestanding stores, shop in shops and stores operated by specialists in the travel retail business.

In total we have 91 Michael Kors retail stores including concessions through various partnerships worldwide including North America and the Caribbean, Europe, the Middle East, Korea, Southeast Asia and greater China.

Including these locations there were 388 Michael Kors stores at the end of the third quarter worldwide.

Looking forward we expect the global luxury market to maintain a healthy pace of growth.

As an international jet set luxury lifestyle brand Michael Kors is in a great position to capitalize on this opportunity and we continue to see great potential for growth across our regions.

Starting with North America, we expect to continue to drive a double-digit comp store sales growth fueled by the introduction of new luxury merchandise paired with our focus on delivering a superior jet set in-store experience to every customer that walks through the door.

We remain on track to open approximately 40 stores in North America this fiscal year and believe there is a long-term potential for 400 locations in this region.

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

In terms of product categories we are thoughtfully expanding our menswear collection in both our retail and wholesale channels and see men's leather as a significant opportunity for us over the long-term.

In Europe we continue to capture additional market share in the accessories, footwear, watch and apparel markets by increasing brand awareness through our advertising, public relations and social media activities, as well as expansion of our retail and wholesale presence.

We remain on track to open 15 retail stores in Europe this year.

In addition, as we continue to gain brand recognition we see significant opportunity to expand our wholesale business in Europe through additional wholesale doors and shop in shop locations.

Long-term we believe this region can support 100 retail stores including concessions and 2,000 wholesale doors.

As I mentioned earlier, Japan is a key market for us and we see the development of this region as a long-term opportunity.

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

We are on track to open 10 to 50 locations in Japan this fiscal year and believe that this market can ultimately support 100 retail locations including concessions.

This region will take time to mature as we are in the early stages of developing brand awareness in this market.

Turning to the eCommerce business, we are working to bring our North American eCommerce site in-house in February 2014.

While Neiman Marcus has done an outstanding job with our website, we believe it is the right time to begin the transition process.

The new in-house eCommerce platform will enable us to create an omni-channel experience for our customers and offer a broader assortment of Michael Kors luxury products.

We are customers to have a consistent and exciting Michael Kors experience whether it is in our retail stores, in our wholesale channel or on our website.

In addition to enabling us to enhance communication with our existing customers, we believe this site will also provide us an opportunity to effectively engage new customers.

In the long-term we expect eCommerce to be a multi-million-dollar channel opportunity.

Overall our strong performance in the quarter was driven by continued growth in comparable store sales, strong performance of our new stores, successful conversion to shop in shops in 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 continue to successfully execute our strategic growth initiatives going forward.

In closing, according to the Luxury Goods Worldwide Market Study of 2012 the global luxury goods market is estimated to grow from $251 billion in 2011 to between $314 billion and $327 billion in 2015.

We believe that Michael Kors is very well positioned to fully capitalize on this global growth in the near-term and the long-term.

Demand for the brand remains strong as evidenced by our performance during the holiday season.

Our compelling products, jet set in-store experience and highly motivated sales team in our stores and shop in shops globally keep customers coming back for more exciting Michael Kors designs while also attracting new customers that are experiencing the brand for the first time.

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 third-quarter financial results followed by our outlook for the fourth quarter and the full year.

For the third-quarter total revenue grew 70.4% to $636.8 million as compared to $373.6 million in the third quarter last year with strong growth in each of our retail, wholesale and licensing segments.

Retail net sales increased 66.8% to $332.6 million in the quarter as compared to $199.4 million in the third quarter last year driven by a comp store increase of 41.4% and the opening of 66 net new stores since the third quarter of last year.

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

Wholesale net sales grew 77.4% to $274.3 million in the third quarter compared to $154.6 million in the same period last year.

Similar to retail, the increase was primarily the result of strong growth in our accessories business and women's ready to wear as we continue to enhance our unique design and merchandise assortment.

Also benefiting sales were the increased presence in our department store channel with the conversion of existing doors to shop in shops as well as expansion of our European operations.

In our licensing segment revenue grew 52.1% to $29.8 million for the quarter as compared to $19.6 million last year, primarily driven by the continued strength in watches.

Gross profit increased 72.8% to $383.5 million as compared to $221.9 million in last year's third quarter.

Gross margin expanded 80 basis points to 60.2% with strong year-over-year gross margin increases in both our retail and wholesale segments.

The margin increase was driven primarily by lower in-store markdowns, discounts and allowances as well as a more favorable product mix shift to higher margin merchandise in both segments.

Total operating expenses were $178.6 million in the third quarter of fiscal 2013.

Total operating expenses for the third quarter of fiscal 2012 were $157.3 million or $136.2 million excluding one-time charges of $15.9 million related to equity compensations for periods prior to the third quarter and $5.2 million in IPO-related costs.

As a percentage of total revenues total operating expenses decreased to 28.0% from 36.5% in last year's third quarter excluding the one-time charges.

For the third quarter of 2013 SG&A expenses increased 34.7% to $164.8 million as compared to $122.3 million for the third quarter last year excluding the one-time charges I just mentioned.

The increase in SG&A expense for this year's third quarter was primarily due to higher retail occupancy and salary costs related to new store openings.

As a percent of total revenue SG&A expense was 25.9% compared to 32.7% for the third quarter of last year excluding the one-time charges.

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

Depreciation and amortization expense was $13.8 million during the third quarter as compared to $10.6 million for the third quarter last year, primarily due to the build out of new retail locations, new shop in shops and investments in our IT infrastructure to support our growth.

As a result of these factors income from operations was $204.8 million or 32.2% of total revenue.

Income from operations was $64.6 million in the third quarter of last year.

For the third quarter of fiscal 2012, excluding the one-time charges mentioned earlier, operating income was $85.7 million or 22.9% of total revenue.

Income taxes were $73.0 million in the third quarter as compared to $27.3 million for the third quarter last year.

Our effective tax rate was 36.0% compared to 41.2% for the same period last year.

The decrease in our effective tax rate was primarily due to the increase in taxable income in certain of our non-US subsidiaries, which are subject to lower statutory income tax rates during the three months ended December 29, 2012.

Net income was $130.0 million in the third quarter as compared to $39.0 million for the third quarter last year.

Diluted earnings per share were $0.64 based upon 202.8 million weighted average shares outstanding.

Net income for the third quarter of 2012, excluding the aforementioned one-time charges, was $53.6 million or $0.28 per diluted share.

Turning to the balance sheet, at December 29, 2012 cash and cash equivalents were $405.8 million; we had no borrowings under our credit facility.

At the end of the third quarter last year cash and cash equivalents net of $15.5 million of borrowings were $90.1 million.

I would like to note that subsequent to the end of the quarter we completed the refinancing of our credit facility.

The new revolving credit facility is a $200 million unsecured cash flow agreement with a five-year term that provides for more flexibility as the business continues to grow.

You can find a more detailed description of the terms in the agreement in our financial statements which will be filed later today.

Inventories totaled $290.2 million as compared to $160.8 million last year, an increase of 80%.

As we said in prior calls, we expect inventory growth to outpace sales as we expand our retail and wholesale businesses, grow our replenishment business for basic merchandise and broaden our production schedule.

Capital expenditures during the third quarter totaled $32.0 million, the majority of these expenditures related to new store openings with the remainder being used for investments in connection with building new shop in shops and enhancing our information system infrastructure.

We opened 28 stores in the quarter, 14 in North America, nine in Europe and five in Japan and ended the quarter with 297 retail stores including concessions.

Turning to our outlook, for the fourth quarter of fiscal 2013 we expect total revenues to be between $515 million and $525 million, assuming a low- to mid-20% comp store sales increase.

We expect diluted earnings per share to be in the range of $0.32 to $0.34 assuming a tax rate of 38% and 203.5 million shares outstanding.

For fiscal 2013 total revenue for the year is now expected to be approximately $2.1 billion, this reflects a mid-30% comp store sales increase.

We now expect diluted earnings per share for fiscal 2013 in the range of $1.80 to $1.82 per share based upon an estimated tax rate of 38% and 201.5 million weighted average shares outstanding.

We expect gross margin to increase modestly over last year, but I would note that fourth-quarter gross margin is seasonally lower than third quarter by a couple hundred basis points.

SG&A is expected to grow about the same rate as the third quarter excluding any one-time items.

Capital expenditures are expected to total approximately $130 million for fiscal 2013.

We expect to open approximately eight retail locations in the fourth quarter including approximately four in North America, one in Europe and three in Japan.

In addition, our conversions in North American accessories doors to shop in shops are continuing on track and approximately one half of our initial target of a 1,000 doors will be completed this fiscal year.

Overall we are extremely pleased with our financial performance this quarter.

We remain excited about our long-term growth potential supported by our strong balance sheet and cash flow generation.

Thank you.

I will now turn the call back to John Idol.

Thank you, Joe.

We are delighted with the strong momentum in the Michael Kors brand.

We believe that our unique position in the global luxury lifestyle category combined with our healthy financial position will enable us to capitalize on significant growth opportunities that lie ahead.

We will now open up the call to questions.

(Operator Instructions).

Kimberly Greenberger, Morgan Stanley.

Good morning and congratulations on a really fantastic quarter.

John, and Joe, I'm wondering if you can comment on a couple of things.

The comp drivers in the quarter -- are traffic trends still running up mid-20%s or higher and the primary driver of your comp or are there some other metrics that are kicking in there?

My second question is on department store markdowns.

The department stores seem to be a little more promotional this year than maybe they were last year.

And I'm wondering if all of the markdown allowances that would be afforded to the department stores during the holiday season were accounted for in your third quarter or are there any left over for the fourth quarter?

Thank you, Kimberly.

I will talk to your first question which is the comp drivers.

And we really saw tremendous acceleration in the fourth quarter as the holiday season built.

And I think that again really says a lot for the consumer's response to Michael's designs.

Again, I think we were -- we had the right product in the right stores at the right time and our design teams did an amazing job of putting that together.

And of course really the desirability of the product -- I think we were very top of mind for gift giving during the holiday season on peoples' gift giving lists.

So number one driver of comps was small leather goods, again we are seeing that triple-digit increase as we had talked about before.

The handbag business for us had very, very strong acceleration during the fourth -- our third quarter, retailer's fourth quarter.

So we were very pleased with the results there.

And our watch business was outstanding again -- and again, coming off of very, very large comps for the last two years in a row.

So all those categories really delivered.

And then on the new front was jewelry which, in both our wholesale channel and our own stores, had a very nice performance during the holiday season.

And we think we are at the very beginning stages of watch could develop into a significant business for us globally in jewelry.

Traffic trends continue about the same, so we were pleased again to see where that was.

And our conversions are around the same.

So really the metrics all stayed about the same and our average transactions were about the same.

So it is all working pretty much the same sequentially as we have seen in the previous quarters.

Regarding markdowns, I have to correct you in a comment -- actually in our department store channel markdowns were done this year versus last year.

So I have heard this comment a few different times about something about markdowns; we are on the exact same cadence as we were in all the previous quarters.

And in fact and the department store channel we had lower markdowns, which meant that our consumer responded better to our product.

I think you might be confused with our competitors who were very promotional during the fourth -- the retailer fourth quarter and our third quarter.

And we, in fact, chose not to participate in that activity and I think that boded well for us and continues to say a lot about the brand.

Terrific.

my last question is just on the new store lease that you signed in Soho.

This new store seems to be a bit bigger than what we've seen from you in the past.

And I'm wondering if you have any particular strategies in mind on that particular location?

Sure.

There are probably 10 locations around the world that we are going to be looking very carefully at in terms of larger format stores.

It is obviously -- it's New York, it's London, it's -- Paris we actually have the ability to expand the store with the current real estate that is there -- Tokyo, et cetera.

And those are really for two things; obviously they are great opportunities for us to add volume for the Company.

And secondly, it gives us an opportunity to really present the brand in its fullest presentation.

So we had been looking for quite some time down in Soho for a larger format store because our store down there is just very, very, very productive as well as our Bleecker Street store.

And when this opportunity came up we took it and, to be honest with you, it also afforded us the opportunity to do men's in the store, which is -- will be an interesting test for us.

We do have a men's business that is comprised of tailored clothing, dress furnishings, sportswear and now our new introduction of men's leather accessories, which very small early indications we've had some very strong results with.

So this door will be something that we'll see if there is more opportunity for us in the future.

And we like the fact that the Soho market is a very strong men's market.

So it will tell us a lot there.

Thank you.

Terrific.

And good luck for the rest of the year.

Brian Tunick, JPMorgan.

Thanks and I will add my congrats as well to everyone on the team.

I guess two questions; first maybe for John.

Sort of what you have seen over the past 12 months, has it changed your longer-term view of what kind of mix you think the business ultimately will look like, retail versus wholesale or accessories versus apparel?

Just curious if you've changed your thinking there?

And maybe for Joe, just as we think about SG&A over the next 12, 18 months and you are bringing eCom in house and you are trying to ramp up marketing -- any ROI that you guys can talk about from building brand awareness either domestically or in Europe or Japan?

Sort of where are you now in brand awareness?

Thanks so much.

Okay, so the first question regarding the mix -- let me just to speak to wholesale versus retail.

Again, we ultimately believe long-term the Company will be 75-plus-percent retail.

Obviously we keep saying that we think that mix is going to start to show up in the financials and every time we report the wholesale business continues to grow at very, very accelerated paces.

And that isn't 100% by design, to be honest with you, it has just been the way the consumer has been responding to the product and in particular to the shop in shop installations that have gone in.

And I might add not just for the accessories.

If you have been to Macy's Herald Square and you have seen our new shoe shop that has gone in, the results are extraordinary what has happened in our shoe business.

And we will expand shoe shops, not to the degree we have accessories shops, but we are going to begin to open more shoe shops across the United States and internationally.

And then secondly, on the additional shops, as we've indicated in the call, our women's ready-to-wear business is performing at a very healthy pace.

And we are very pleased with that, we have made some product adjustments that are really resonating with the consumer.

And I think both of the footwear and the women's ready-to-wear are just feeling the overall brand presence and resonating with the consumer as they further get deep into the lifestyle brand of Michael Kors.

So we believe a retail will ultimately be 75%.

And in terms of the actual mix, we are a little more excited than we were before about women's ready-to-wear.

Again, it is a very large opportunity inside the United States and we are seeing some real strong gains on that.

You will see some expansion of that in some of our retail stores as well; the new Soho store will have a full floor dedicated to women's ready-to-wear.

And in certain locations where we can expand it given spaces in certain mall environments we will do that.

Again, you are not going to see the mix change dramatically, but we think it positions us in a fashion leadership position.

As I told you guys back from when we went public, we are a fashion company and I think that is one of our strengths is Michael's leadership, our runway fashion show which happens tomorrow, the fact that consumers look to us to really be someone who helps put their wardrobe together and we think ready-to-wear is a very strong component of that.

I'm going to -- before I turn it over to Joe, in terms of ROI on brand awareness, our marketing and public relations team is doing an incredible job.

I think you can see -- this is public information, we have 4 million Facebook finance, we have over 1 million Twitter fans, I think it is over 100,000 followers on Pinterest.

We've got a team who has arrived in this Company who has done an outstanding job with building our social media presence and that complements the strong presence we had in our print and outdoor.

And we are seeing growth on a regular basis in terms of brand awareness and we think that is going to continue.

We released our brand awareness numbers the last call and we only do that on an annual basis.

So if you refer back to the last numbers we went to, that will tell you kind of where we are.

Joe.

And in terms of SG&A, as we've said any number of times, we are not attempting to get leverage right now; we are aggressively investing in the business.

It appears that we are getting leverage because our sales are coming in higher than what our expectations are.

But we are indeed investing very heavily in the Company and it is very consistent with what we've told you before.

An obvious example is eCommerce where we are bringing it in-house, we are building the platforms, we are building the infrastructure and we are building the team to run that business.

We are also -- Brian, as we've told you and other analysts, we are strengthening the management team.

So a lot of senior positions being added to the Company because when you are where you are today, $2 billion, and obviously we expect rapid growth to continue, we need great management on a global basis in all of our regions.

And we think we have been able to attract that kind of management and you will see some of that show up in the SG&A as well.

Terrific, that is very helpful.

Thanks so much and good luck, guys.

Erinn Murphy, Piper Jaffray.

Great, thank you and let me add my congratulations.

I wanted to focus a little bit on Europe, John, if you could speak to that.

I mean, you are just doing a fantastic job of really developing a pan-European brand.

Could you maybe help us appreciate kind of the major markets that you are in today, what you are learning about that consumer both the local consumer as well as the tourist consumer?

And how should we be sizing up some of the biggest market opportunities in that space?

Erinn, that is a good question.

So, it was little hard to hear; I will just repeat it for the group.

Erinn was just asking about the European business and could I discuss sizing up the opportunities and how we are doing as a pan-European designer company.

So we are very excited, as we have told you for quite some time.

And I know there is not a lot of companies who get up and say we are really excited about Europe, but we are really excited about Europe.

And first and foremost, Michael's designs are resonating globally and you have to have great product that people appreciate for a brand to be successful.

And our jet set imagery and the fact that Michael is always looking to create glamorous, chic and sexy product is resonating with this customer very well.

There is an interesting thing that is going on for us.

We have told you in the past that, for example, legacy stores for the past almost five years are doing as well as our new stores and that is relevant to our comp stores.

We have another interesting thing that is happening in Europe.

Our business is strong right across Europe.

So whether it is in Greece, whether it is in Spain, whether it's in Italy -- obviously what are very difficult markets, our business is very strong there.

And our business is obviously strong in the UK and in Germany and in France.

Also interesting, we are doing very well in France which is very unusual for American brands that typically have a difficult time there.

Again, I prefaced this all by talking about product and I think Michael is really delivering on that.

So we take inspiration from our runway product sometimes to put into the Michael line or sometimes it is Michael's innovating new product inside the Michael line that you see anywhere else in the Company.

We really focus internally on discussing what does she want to wear in Scandinavia?

What does she want to wear in Paris?

What does she look like in London?

So our Company is geared towards thinking about not only the European market but obviously the Asian markets as well.

So we continue to believe that Europe is a $500 million opportunity for us.

We just came back from a multi-country, multi-city tour.

We are very comfortable with the ability to open 100 stores in that marketplace.

And as we mentioned to you on the last call, we might be looking longer-term at an opportunity that is greater than that.

We are still in the early days of assessing, but some of the indications are pointing to opportunities beyond what we had initially thought about.

So all in all I think that as there are a few other American companies that have been quite successful building pan-European brands, I think you will see a Michael Kors in that same category.

Thank you, I appreciate that.

And just a quick follow-up.

Just in terms of the health of your vendor base.

I mean clearly with the pace of growth that you are expanding and growing at, I'm just curious if you are expanding the either vendor base or just strengthening those relationships within your existing vendor base and how we should be thinking about that longer-term?

Thank you so much.

We certainly are looking at expansion in certain categories of the vendor base.

And we have got some very strong relationships with obviously our existing vendors who are growing with us.

But as we move forward we will definitively have to expand that.

We are going to do it selectively.

I think again one of the reasons why we have been able to deliver these comp store sales growths is because we are so closely aligned with our existing vendor base.

And they have been very, very helpful in responding when we needed things done quickly.

So we want to make sure that we are continuing that relationship with them and then bringing on some additional vendors as the business continues to scale.

Thank you, Erinn.

Lindsay Drucker Mann, Goldman Sachs.

I just had first a quick question on eCommerce.

As you guys think about bringing that platform in, Joe, I was hoping maybe you could expand on some of the incremental costs associated with that move and then also how much revenue that is generating right now that you would plan to bring onto your P&L and also from an earnings accretion perspective what the implications of that might be.

And then as you bring it in-house, how you might expect to make any changes to your merchandising or perhaps marketing use of the website?

Thanks.

I think in terms of -- I'm going to turn it over to John, but I think in terms of the incremental expenses, we are not going to detail that.

We do include it in obviously the overall costs that we have in our guidance for CapEx.

So you will see all those costs in what we are guiding you to.

John, do you want to talk about the --?

Yes.

Let me just -- Lindsay, look, we believe that ultimately, in North America, the Web could account for as much as 10% of our revenues -- of retail revenues.

So that is a goal.

I can't tell you when we are going to get there; I can only tell you it is a goal for us.

And I think that is a realistic goal because of the -- there is a lot of precedence out there with other retailers who are operating Web businesses that are at that level and obviously there are certain ones that are operating much higher than that.

So that can give you an idea of where we are thinking of trying to get to.

I don't think we can really begin to tell you that until we have the business in our hands and we are operating it fully ourselves.

And I would expect that to be kind of third, maybe even after fourth quarter of next calendar year of 2014.

I think we will have a real good handle on how quickly we can scale that up.

And the second thing is we will definitely have broadened assortments on the website.

We are building an entirely new website that will -- that you will see in February; again, our creative team here is doing an extraordinary job of putting that site together.

We think we are going to have a much better brand experience today.

I do not to give us a very high marks for our brand experience on our website.

I give us high marks for our shopping experience -- our site is very easy to shop.

And -- but I don't give us high marks on our brand experience.

So we think we are going to greatly enhance that presentation.

And lastly, what we know today is that there is a tremendous amount of people who come to the site to actually are browsing the site to shop in the stores.

So as important as the eCommerce piece of this is, equally as important is the omni-channel piece where we want to be able to create an ability for the consumer to not only shop online but to be able to get something from the store, to reserve it at the store, et cetera.

So there is a lot that is going to go into this beyond just eCommerce.

And then lastly, I'll give you a pretty startling fact.

We are running close to 40% of our eCommerce traffic today from international visitors, which we cannot fulfill those orders today.

So I can't -- it's so exciting to us that all these people internationally are searching, are coming, they are browsing, and we think there is just tremendous opportunity for us to grow internationally on the site.

So we expect to bring up North America and Canada in February of 2014, Europe will probably come on right behind that in let's say six months, hopefully earlier, and Japan that will be behind that.

China will be a bit further down the road, that is with a whole different platform that we have to execute to put that into place.

So that will probably be closer to 2015.

Erika Maschmeyer, Robert W. Baird.

Thank you and congratulations.

Your Q4 comp guidance -- does that represent how you are planning the business?

Is there any specific reason that we should see deceleration?

Has there been any impact from the recent storms?

Yes, I smile slightly when you say deceleration.

To plan 20% plus comp store growth I think is pretty healthy.

And so, we consider that to be still a very, very strong growth trajectory for the brand.

And as we have said in the past, if the consumer is there and she wants more we have been -- we have shown signs of being able to fill her needs.

Again, this 40% comp store growth is not going to go on forever, I want to reiterate that strongly.

So we do plan the business at that level; obviously we are guiding to that so we are planning to that.

We do have the ability to do better if the product -- if the consumer is there.

But I would be thinking in those kinds of ranges going forward because it's -- I think it is unlikely that we will continue to operate at those kinds of levels.

I might add also that, as we said in the earnings statements, we saw that or higher in the department store channel, which was really exciting for us, because we have our own sales associates in many of the shops but not all the shops.

So be able to hit those comp stores and higher inside of our -- in particular our accessories business and very healthy comps in our ready-to-wear business and our shoe business at wholesale, I think again really says a lot about the -- the way the brand is resonating with the customers.

Thank you.

Omar Saad, ISI Group.

Thanks, nice job, guys.

John, (multiple speakers).

Omar, can you speak up?

It is hard to hear you.

Absolutely.

I wanted to follow up on the last question actually.

As you think about planning the business, obviously you are taking a little bit more conservative approach, but you've obviously been able to execute and do a lot of chasing.

Can you talk about the supply chain and how you've been able to develop a supply chain that has that flexibility and allows you to kind of mitigate inventory risk as you plan it out and think about where the comps come in and where you are able to take them to?

Could you just give us a little bit more insight on the supply chain?

And then I have one of follow-up question.

Sure.

And, Omar, and for the rest of the analysts, I'm not trying to be defensive here, but we are not planning conservatively.

Again, 20% plus comp store growth is we think is pretty impressive growth and that is the way we have been planning the business all along.

What happens is the consumer responds higher to then what we are planning the business.

So again, I'm not trying to be combative, but it is really the way we look at the business.

Supply chain is -- we have a very close relationship with a lot of vendors around the world.

So they understand our potential to swing up in the business.

And so, what we do is we work ahead with them.

We are obviously working with them 30 days, 60 days in advance and letting them know where the trends are heading.

Certain suppliers might keep additional materials on hand, all at their expense, to be able to feed us the product.

And you will see that not only in our handbag and small leather goods businesses, but you will see that in our shoe business and in some cases our ready-to-wear business.

So we feel very confident that our current supply chain network is capable of continuing to support our existing growth and help us if we need to accelerate that growth.

Understood, great.

And I appreciate those nuances, John.

And then just thinking about over the next couple years, it sounds like Japan, you are getting a little bit more confident there.

Europe obviously incredible eCommerce, categories like jewelry, other new categories.

Maybe men's, beauty, who knows.

Like what are the big kind of -- over the next few years what are the biggest chunks of growth that you are most excited about?

Well, first and foremost obviously the North American growth continues to be the biggest dollar increase that you will see over the next two to three years just by the sheer size of the market and the store growth opportunity.

Second for me is Europe and I am very -- I think everyone in the Company is thrilled at our response rates.

And I forgot when -- I think Erinn asked the question earlier, it is amazing the tourist business that we are doing in our stores globally.

And I think we have done an excellent job.

So if you go to our store in Paris, we probably speak seven to eight languages in the store.

If you go to our store on Bond Street the same thing, we are speaking Portuguese, we are speaking Russian, we are speaking Mandarin, we are speaking -- so we are very focused on the traveling tourist.

And so, we like what is happening in Europe from a tourist standpoint, and then of course we also like what is happening in the local markets.

I'm going to give you an example.

We just opened a store in Poland in a mall called [Muktoff].

And the numbers are just staggering what we are doing in the store.

And here is a marketplace that -- it's not the typical London, Paris, Madrid markets.

And we are really seeing the power of the product; it is even beyond the brand.

I think the customer is first responding to the product and secondly they are responding to the brand.

So that would be our second market for us.

I would say -- in terms of dollar volume I would say the Web would be third.

That will be the next big exciting opportunity.

We will be able to scale but more quickly than Japan.

And I think it will reach profitability relatively quickly for us.

And then I would put Japan as the fourth market in terms of our level of excitement and the excitement of [trust] is always based around sales and profitability.

Again, we are many years out from being profitable in Japan, but we have made this commitment, we are going to invest and we do think that is a multi-hundred million dollar opportunity for the Company over the next few years.

Joan Payson, Barclays.

Good morning and congratulations.

Just first off, to think a little bit more about the comp trends during the quarter; you mentioned that watches accelerated as you got further through.

But what was that similarly for overall comps, what was the monthly trend and then how have you been tracking quarter to date?

And then as a follow-up, just in terms of the retail basis, you have gained scale on that.

What have been the learnings or surprises and how is that shaping the opening of new stores?

The launch comps are slightly below our overall comps.

And again, the watch business was more developed I think than any other business in our stores, quite frankly, over the last years.

But not significantly below.

But it was above our internal projections and estimates and I think even Fossil's internal estimates.

And the same thing happened with our wholesale accounts.

The watch business was just -- far outpaced what we had anticipated, in particular in Europe, the watch business in Europe is really gaining some significant traction.

So we are very pleased with what is happening there not only in our own retail stores but in our wholesale accounts.

So I think we continue to view the watch business as a part of the jewelry business.

Today it is a fashion accessory for the consumer and I will also tell you -- maybe Kosta will talk about it in his 9 o'clock call -- but the freestanding shop in shops that we are putting in in the department stores for watches and jewelry are having the same kind of effects that we are seeing in the handbag and accessory shops in terms of amazing comp story increases and really hitting some significant numbers and side of these stores.

So we are very pleased.

We are not going to talk about quarter to date trends, but obviously we had an outstanding fourth quarter.

Third quarter.

I'm sorry, third quarter.

I keep thinking the retailer fourth quarter, I apologize.

And then in terms of new store openings, we are seeing the same trends that we have seen all along.

New stores are coming out of the gate very strong.

There has really been no change in that and we are obviously opening in the United States in more B and C markets, as we have told you in the past.

And Europe we have been focused on more of the A markets.

So we see no change in any of our strategies in terms of new store openings.

Okay.

Oliver Chen, Citi.

Congratulations, thanks for taking my question.

Regarding the watch business and what you see as the longer-term prospects there.

With taking eCommerce in-house is the watch business something you would consider down the line?

Also, could you speak to us a little bit about the differences in your portfolio with regards to price points?

Some people in the sector have been speaking to better performance at higher price points.

Yes.

First off, in terms of the watch business, we are very comfortable with our relationship with Fossil and Kosta Kartsotis' leadership of that Company is outstanding and the teams that are there that we work with -- we are very, very comfortable with our relationship.

So we see nothing but growth together going forward in the future, so that is not something that is on our agenda.

Secondly, in terms of the price points, unlike other companies, we have always had higher price points in our stores.

I think one of the reasons why our stores are called Michael Kors and not MICHAEL Michael Kors, because obviously a large part of the product is MICHAEL Michael Kors sold in the stores, is because we sell our collection handbags inside the stores, which are on average let's say $800 to $1,500.

And that has always accounted for a very nice piece of business in our stores.

So we sell what we call collection level price points.

Remember, on Bond Street we are sitting across from Gucci and Prada and Vuitton, and in Macy's we are sitting across from Gucci and Prada and Vuitton.

So we need to have and have always had not only accessible luxury price points, but we have had luxury price points in our stores.

That's always been a strong performer for us and we continue that as the ethos of the brand comes from the designer collection level pricing which is where Michael started the brand over 30 years ago.

So, I am going to have to say that is going to be our last question.

And I want to thank everyone for participating in the call today.

And we look forward to speaking to you on our next earnings call to discuss Michael Kors' results.

Thank you very much.

This does conclude today's conference.

Thank you for your participation.