Capri Holdings Ltd (CPRI) 2014 Q1 法說會逐字稿

Good morning ladies and gentlemen.

Thank you for standing by.

Welcome to Michael Kors Holdings Limited first quarter fiscal 2014 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, Vice President, Treasurer.

You may begin.

Good morning and thank you for joining us for our first 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 SEC filings 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 first quarter fiscal 2014 earnings call.

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

I will begin with a brief overview of our first-quarter performance and share with you highlights on our strategic growth plans.

Joe will then provide a detailed review of our first-quarter financial results followed by an update on our outlook for fiscal 2014's second quarter and full year.

Michael Kors is off to a tremendous start in fiscal 2014 with exceptional first-quarter financial results and we are pleased with the strong momentum of our brand.

Total revenue in the first quarter grew 55% to $641 million.

Gross margin expanded 150 basis points and income from operations grew 77% to $198 million resulting in an operating margin of over 30%.

The brand's strength, innovative fashion design and luxury jet set in-store experience drove strong sales and earnings across all businesses and geographies.

Our performance was the result of continued execution on our growth strategies.

First, we delivered 25% comp store sales growth in North America.

Second, we expanded our retail footprint in North America with the opening of 18 stores during the first quarter.

Third, we continued to successfully convert department store doors into branded shop-in-shops globally.

Fourth, in Europe we delivered 56% comp store sales growth and expanded our presence with five new retail locations.

Fifth, in Japan we increased comp store sales by 23% and added one retail location as we look to further expand our brand awareness in this region.

And sixth, we continued our focus on other areas of the Far East through regional licenses opening 11 locations in this region during the quarter.

Now turning to our segment results for the first quarter.

Retail net sales grew 52% to $326 million and comparable store sales increased 27% globally reflecting the power of the Michael Kors brand and luxury product assortment that continues to resonate with customers and a unique jet set in-store experience.

Retail sales growth was attributable to 75 net new store openings since the first quarter of last year, 24 of which were opened during the first quarter of this year.

We ended the quarter with 328 Company-owned global retail stores and 442 including licensed locations.

We are pleased to announce that we have entered into the Brazil market with our very first store in Village Mall in Rio de Janeiro.

We have seen strong demand among Brazilian tourists traveling globally and therefore believe this will be an excellent market for the Michael Kors brand.

This store marks our further development of this region and we believe that we will ultimately have 40 concessions and freestanding retail stores in Central and South America.

I am also excited to announce that we opened the first Michael Kors store in DLF Emporio luxury mall in India last month through our licensed partner Genesis Luxury Fashion.

The New Delhi store is the first venture into this growing market where the sophisticated consumer will appreciate glamour, luxury and the versatility of the Michael Kors brand.

We believe this market will play a key role in the long-term global growth of the Company.

Wholesale net sales grew 59% to $291 million in the first quarter due to the strong demand for Michael Kors luxury products in department stores and specialty stores and our successful shop-in-shop conversions in department stores reaching approximately 1150 shop-in-shops globally in accessories, footwear, women's wear and men's wear.

Our accessories and footwear businesses both delivered exceptional performance during the quarter and we continued to see strong results in our women's wear line as well.

Our shop-in-shop highlight the Michael Kors brand appeal and we believe we are very well positioned to continue to achieve strong growth in the wholesale channel as we roll out these conversions.

In our licensing segment, revenues increased 41% to $25 million driven primarily by the continued strength in luxury watches and eyewear.

Additionally, we were pleased with the performance of our jewelry category during the first quarter.

As I mentioned on prior calls, we have a great opportunity to grow this category globally both in our retail stores as well as through the rollout of watch and jewelry shops in the wholesale channel.

At the end of the quarter, there were approximately 60 shop-in-shops for both watches and jewelry.

We believe that we will be able to open approximately 500 shop-in-shops globally for watches and jewelry.

In addition, we have launched a new Michael Kors fragrance and beauty collection this month offering our customers a trio of luxury fragrance products that exemplify the Sporty, Sexy, Glam aesthetics of the Michael Kors brand and suiting her every mood.

This global launch is starting in North America and extending to 20 countries this year, then expanding to South America and Asia next year.

The collection will further enhance our existing fragrance line and increase our global penetration in fragrance and cosmetics.

Turning to our operations by region.

In the first quarter, revenues in North America increased 46% to $552 million and comparable store sales increased 25%.

We now have 249 retail locations having opened 18 during the quarter.

Growth in the wholesale business was driven by strong comparable store sales as well as the successful conversion of department store locations into branded shop-in-shops which result in a significant lift in sales volume per door.

Overall, we saw similar or greater comparable store sales increases in our wholesale channel as compared to our retail stores which speaks to the strong presence of our brand in department stores.

Going forward we expect to drive continued comp store sales growth in the region through our focus on delivering a superior jet-set in-store experience, an exciting new luxury product.

We are very excited about our fall collection as Michael and his team are taking on the city that never sleeps marrying urban athleticism and uptown polish as we look forward to a favorable response to our collections during the fall season.

In North America, we are on track to open 50 stores this fiscal 2014 and continue to see the potential for 400 locations in this region.

As we look at North America wholesale, we continue to convert department store shop-in-shops in accessories footwear and women's wear and are also expanding shop-in-shops in men's sportswear and men's leather goods.

These conversions coupled with comparable store sales growth should position us to deliver strong sales in the wholesale business during 2014.

In Europe, our luxury products are resonating with customers and our brand awareness continues to grow in this region.

The performance of our brand in Europe has exceeded our initial expectations which led to the doubling of our long-term store target.

During the quarter, revenue in this region increased 144% to $81 million and comparable store sales increased 56%.

We opened five retail stores in the first quarter bringing our total count to 49.

In our wholesale channel, we are pleased to see continued strong sellthroughs in both the department stores and specialty stores.

As brand awareness further expands and we grow our retail and wholesale presence, we will continue to capture market share in this region.

We plan to open 40 new stores in fiscal 2014.

Our long-term target store count is now 200 retail locations.

There is also a significant opportunity to grow our wholesale business and we continue to target 2000 doors in the long term.

As we continue to grow market share and expand distribution, we believe that we have the potential to generate sales in excess of $500 million in this region.

Turning to Japan, Japan remains a key market focus and a great long-term opportunity for us.

We are still in the early stages of developing brand awareness and achieving a level of maturity in this market.

First-quarter revenues increased 81% to $8 million and comparable store sales increased 23%.

We currently have 30 stores in Japan.

We opened one store during the quarter and plan to open approximately 7 locations in total this fiscal year.

We continue to believe we can ultimately operate 100 retail locations in this region.

The Far East also represents a significant market opportunity for the Company but much like Japan, we are in the very early stages of establishing the brand in this region.

That said, we are seeing positive results from stores in this region which gives us confidence in the long-term potential.

We continue to focus on growing in this market through regional partnerships particularly in Greater China, Korea, Singapore, Malaysia, Indonesia and the Philippines.

At the end of the first quarter, there were 77 Michael Kors retail locations in the Far East and we believe the region can support 200 retail locations in the long term.

Our travel business continues to grow as our luxury products are sold at the finest travel destinations in the world expanding our reach to the jet-set consumer.

At the end of the quarter, we had 32 trouble locations and believe there is 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 addition to growing our geographic presence through the expansion of our retail and wholesale channels, our brand awareness continued to expand across all regions over the last 12 months as more and more consumers have come to recognize the Michael Kors brand globally.

Based on a recent study in our largest markets, brand awareness in the US increased from 78% in 2012 to 82% in 2013.

And Europe's brand awareness increased from 36% to 39% over the same period.

We have tremendous opportunity to further increase our brand awareness through various marketing channels as we capitalize on our e-commerce site and continued growth and engagement in social media as well as through more traditional media.

Finally, as we have stated in the past, we are transitioning our North America e-commerce business in-house.

We will evolve our business over time into an Omni channel customer experience.

This will enable us to enhance our existing customers' experience as well as attract new customers to the Michael Kors brand with an expanded online product offering.

We continue to believe that e-commerce could ultimately represents a multimillion dollar channel opportunity and reach approximately 10% of our total retail revenues over the long-term.

In summary, we made considerable advances on our key growth strategies which pave the way for continued strong momentum in fiscal 2014 and beyond.

Our outstanding performance was largely a result of the creative vision of Michael Kors and his design team, our exceptional luxury product offering, a highly talented management team and our operational excellence.

Looking forward, our strong balance sheet and cash flow generation will enable us to make the necessary investments to reach our long-term growth targets.

We look forward to another year of strong growth as we continue to build Michael Kors into a global luxury lifestyle brand.

I will now turn the call over to Joe Parsons for additional financial analysis and results.

Thank you, John.

Good morning.

I will begin with a review of our fiscal 2014 first-quarter financial results followed by our outlook for the second quarter and the full year.

In the first quarter, total revenue grew 54.5% to $640.9 million as compared to $414.9 million in the first quarter of last year with strong growth in each of our retail, wholesale and licensing segments.

Retail net sales increased 51.5% to $325.7 million as compared to $215.0 million in the first quarter of last year driven by a comp store increase of 27.3% and the opening of 75 new stores since the first quarter of last year.

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

Wholesale net sales grew 59.3% to $290.6 million in the first quarter compared to $182.4 million in the same period last year.

The increase was primarily the result of strong growth in accessories and footwear, the continued successful conversion of existing doors to shop-in-shops and the expansion of our European operations.

In our licensing segment, revenue grew 40.7% to $24.6 million in the quarter as compared to $17.5 million last year, primarily driven by the continued strength in watches and eyewear.

Gross profit increased 58.3% to $397.3 million as compared to $251.0 million in last year's first quarter.

Gross margin expanded 150 basis points to 62.0% reflecting 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 product and geographic mix.

Total operating expenses grew 43.6% to $199.7 million in the first quarter of our fiscal 2014 as compared to $139.1 million last year.

As a percentage of total revenue, total operating expenses decreased to 31.2% from 33.5% in last year's first quarter.

SG&A expense increased 45.8% to $183.7 million as compared to $126.0 million for the first quarter last year.

The increase in SG&A expense was primarily due to higher retail occupancy and salary cost related to new store openings, an increase in advertising and marketing spend, and increases in corporate employee related costs.

As a percent of total revenue, SG&A expense was 28.7% compared to 30.4% for the first quarter of last year.

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

Depreciation and amortization expense was $16.0 million during the first quarter as compared to $13.1 million in the first quarter of last year primarily due to the buildout 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 $197.6 million or 30.8% of total revenue as compared to $111.9 million or 27.0% of total revenue in the same period last year.

Income taxes were $72.1 million in the first quarter as compared to $43.2 million for the first quarter last year.

Our effective tax rate was 36.6% as compared to 38.6% 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 were subject to lower statutory income tax rates.

Net income increased 82.1% to $125.0 million in the first quarter.

Diluted earnings per share were $0.61 based upon 204.3 million weighted average diluted shares outstanding.

Net income for the first quarter of fiscal 2013 was $68.6 million or $0.34 per diluted share based upon 199.4 million weighted average diluted shares outstanding.

Turning to the balance sheet, at June 29, 2013, cash and cash equivalents were $639.2 million.

We had no borrowings under our credit facility.

At the end of the first quarter last year, cash and cash equivalents net of $27.7 million of borrowings were $134.4 million.

Inventory totaled $319.5 million and is compared to $246.6 million last year, an increase of 29.5%.

Capital expenditures during the first quarter totaled $33.3 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 and distribution infrastructure.

We opened 24 stores in the quarter, 18 in North America, five in Europe and one in Japan and ended the quarter with 328 retail stores including concessions.

Turning to our outlook, in the second quarter of fiscal 2014, we expect total revenues to be between $695 million and $705 million assuming a comp store increase in the range of 15% to 20%.

We expect diluted earnings per share to be in the range of $0.62 to $0.64 assuming a tax rate of 36% and 204.5 million shares outstanding.

We expect the second quarter gross margin rate to be similar to last year and the SG&A rate to be slightly higher than last year.

For fiscal 2014, we now expect total revenue to be between $2.8 billion and $2.9 billion assuming comps store sales increase of approximately 20%.

We now expect diluted earnings per share to be in the range of $2.67 to $2.69 assuming a tax rate of 36% and 204.8 million shares outstanding.

Our capital spend remains on track.

We expect to open approximately 100 retail locations in fiscal 2014 including 53 in North America, 40 in Europe and seven in Japan and continue our shop-in-shop conversions as well as investment in our infrastructure and systems including bringing e-commerce in-house.

Our first quarter financial performance was strong and our balance sheet remains healthy.

Based upon our strong start to fiscal 2014, we remain very excited about our growth prospects for this fiscal year and beyond.

Thank you.

I will now turn the call back to John Idol.

Thank you, Joe.

In closing, we were pleased to see the continued strong demand from Michael Kors luxury products offerings worldwide.

We remain focused on driving continued comparable store sales growth, expanding our retail base, capitalizing on the e-commerce opportunity, converting our department store doors to shop-in-shops, and growing our brand internationally.

We are more excited than ever about our prospects for the future.

Thank you for joining us.

We will now open up the call for questions.

(Operator Instructions).

Kimberly Greenberger, Morgan Stanley.

Thank you.

Good morning and congratulations on a really excellent quarter.

John, I am hoping you can talk to us about the building cash balance that you have got going on.

It looks like your cash generation is far in excess of what you need to grow the business.

Do you have any plans for that cash?

And if you could comment specifically on any plans that you might have as it relates to Michael Kors Far East Holdings that would be great.

Thanks.

Sure, Kimberly.

I think we've talked before about the cash.

Joe and I feel strongly about a few different things.

First and foremost, there are some opportunities that we are going to look at in the future for some of our licenses that are coming to term that we may end up bringing in-house.

Again that is out over the next few years.

So as we look at that, that would be our first priority for our use of cash.

Secondly, we would long-term look at whether there would see some type of share repurchase.

And thirdly, obviously a dividend.

We are not prepared to make any of these decisions as we sit here today but we are obviously always looking at our cash and trying to create the maximum value for our shareholders.

In terms of the Far East Holdings which is the Greater China license, that business is in its very early stages of development and as we have said previously, I would say our main goal on any acquisition that we made into the Company would be that it would be accretive to the Company.

If it wasn't immediately, it would be in the very, very short-term.

So today that would not be the fact in that business so I think that is something that we would not be looking at currently.

Thanks so much for that.

If I could just follow up.

In terms of what you are seeing going on out in the marketplace today, are there any sort of indications that you are seeing any kind of slow down here in the second quarter so far or any kind of normalizing markdown rates that you have talked about in the past that may in fact come up at any point?

As you know we don't typically go forward in terms of projections on the next quarter.

The only thing I can continue to tell you is that in the quarter we just reported on, we saw excellent sellthroughs of our product again, probably slightly higher than we had anticipated the actual sellthroughs; hence why you see a little bit of the inventory leaner than we probably would have liked to be sitting here right at this point in time.

So given what we have seen historically, we look forward to a bright future.

We do anticipate normalization happening.

I know we keep telling you about that each call.

I don't know when that is and hopefully it doesn't happen but the reality is it will come at some point in time.

Thanks so much, John.

Brian Tunick, JPMorgan.

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

I guess two quick ones.

Just on the brand awareness in Europe going from 36% to 39%, can you maybe talk about some of your benchmarks and some of your competitors there?

Maybe tied into that, Joe, on the gross margin comment about geographic mix and product mix, can you give us more color on what exactly might be the delta between the gross margins in those higher-margin categories and countries?

Thanks very much.

Okay, I will answer the first question.

We have said I think on previous calls the real kind of threshold for us to grab solid momentum in a marketplace is 50% plus brand awareness so we still have a ways to go obviously in Europe.

There is one market and by the way that is an aggregate of all of Europe.

In the UK for example, we broke over the 50% mark in brand awareness so we are very pleased.

And by the way in that market as an example, we believe in accessible luxury we are now the number one market leader in that market again.

So we see that really as the threshold and then we look at that by individual country and Italy might be lower than it is in Germany for an example.

I can't really speak to the competitors' brand awareness per se but I can tell you that as we have told you in calls before, there is really no one today in the accessible luxury category who has established a Pan-European strong foothold in the marketplace.

We believe we are going to be that company and if we are not there today, we are darn close to it and we are seeing that happen in almost every country.

Again, we can't talk to the specialty store performance but in department stores, we are either the number one performing accessible luxury brand or we are number two.

We are usually in one of those two places and accelerating as you can see by our performance.

So we have a long way to go in Europe.

We have stated that we think there is a greater than $500 million opportunity in that market.

We have also stated that we believe we can double our store count and the performance is all there and we are continuing to remain very, very excited about the marketplace.

I just might further add, our brand is doing well in places like Spain, like Greece, like Italy, in marketplaces that many companies today are having difficulty with due to the economic situation.

Our brand is resonating and sellthroughs are excellent and comps store performance is excellent.

I will turn it over to Joe.

So, Brian, as you know, we don't actually disclose margins by segment.

It is generally considered that the European gross margins are higher than North American gross margins and Japan gross margins are even higher than that.

Our European business grew 144% for the quarter, our Japan business grew 81% for the quarter.

So our business is still dominated by North America but that growth rate will have some impact on the gross margin.

Brian, I would add further to that what is really going to be the piece that is even going to move the needle more is as retail becomes a greater percentage to our business.

And as you know since the IPO, we have said that we believe ultimately 75% plus of our business will be retail which carries the highest gross margin in the Company depending -- even depending on the regions.

So that ultimately will be the thing that even moves the mix more.

Lindsay Drucker Mann, Goldman Sachs.

Good morning, everyone.

I just wanted to ask two questions.

First of all, store mix, I don't remember hearing you say this in your script but can you talk about -- you talked about some disproportionate growth in some of the categories you are earlier in.

Can you talk about whether your store mix has shifted much in terms of mix between jewelry, watches, handbags, etc.?

Thanks, Lindsay.

The mix really hasn't changed a lot.

We -- obviously jewelry has become a percentage inside the store which that really happened last year and that business is growing very nicely for us.

So the mix is about the same.

As a Company, we ran about 84% of our business in the quarter on accessories, so that's accessories, footwear, eyewear, watches and fragrance so that accounted for 84% of the Company's business so we really are an accessory driven company while our lifestyle accessories is leading the way.

And in our stores, the category that comped the largest for us was small leather goods and then handbags.

So again, that is what's really driving the business for us and the mix hasn't really shifted dramatically.

Okay.

Thanks.

And then on North American margin, you talked about part of the gross margin benefit being a shift into higher margin products.

Can you talk about that?

And then also Joe, you talked about I think deleveraging on SG&A for the next quarter.

Where are the big areas that you expect to be spending?

So in terms of the product mix, we obviously don't disclose the gross margin by product although we have mentioned previously that small leather goods and accessories are the highest margin business that we have.

So as we have increased this 84% that John mentioned from 80%, that is what is driving that improvement.

And then on SG&A?

Thanks.

In terms of SG&A, actually our SG&A is going to be slightly higher as a percent in the second quarter.

What would be the big areas of spending?

That is really a result of obviously the investments that we are making in the Internet, additional investments that we are making in communications in the Company, that is everything from social media to increase in advertising in both the domestic and international markets and investment in infrastructure.

We have told you since the Company went public we would always make sure that we were making investments for the long-term, not just trying to make short-term decisions to make quarterly numbers.

So we are envisioning this Company as a very, very sizable entity over the next five to 10 years so we have to build that sound foundation to be able to support that.

Thanks very much.

(inaudible), Wells Fargo.

Thanks.

Just wondering in the European business what customers are buying over there versus here in the US?

How is that mix of business different?

And then also wondering about the full price for factory channel here, did you see any divergence in trend this quarter?

Thanks, guys.

Thank you, Paul.

The mix basically globally, we don't see a whole lot of difference in terms of what the consumer is buying on a global basis.

Our best sellers here in North America are the same best sellers in Europe, are the same best sellers in Asia.

There is some differentiation in certain color trends and the amount of hardware for example on women's ready-to-wear where certain consumers like more of that in Europe versus what that is in the United States.

But in general, our mix is not wildly divergent and that really is in the handbag category, small leather goods, watches, jewelry and footwear and apparel.

It is pretty similar across the board.

In terms of the full price and outlets and I also want to talk about legacy stores for a second, the trend still continues.

We have reported before that our legacy stores are performing pretty close to the same rate as our newer store openings and we look at that almost six years back.

So we are very pleased with the fact that the consumer is resonating whether the store is five to six years old or whether it is a store that is one-year-old.

Then in terms of channel mix, we saw a double-digit increase in both of our channel mixes and we see that as being consistent with where we have been in the past.

Did one outperform the other, John?

You know, we don't disclose that in the breakdown but you can just analyze that for us to have a 27% comp store growth on a global basis and we basically have three to one outlet versus full price.

You can't have the smaller channel driving volume wise the bigger channel and reach those kind of comps.

So I think you can come to that conclusion.

Thanks and good luck.

Randy Konik, Jefferies.

Great, thanks a lot.

Two questions.

I guess, John, you mentioned something before about potentially taking some licenses in-house.

Could you elaborate a little bit about what potential categories you would be looking and what potential categories you wouldn't be looking at to take in-house?

Second, when you look at your largest competitor and their share in North America is around 30% or what have you and when you think about your full price versus outlet channel distribution strategy, do you think the distribution potentially that you have laid out there, do you think that is enough to then overtake them as the number one player in the category?

How do you think about your number two position getting to potentially the number one position in the space?

Thanks.

The licensees that I was mentioning before are regional licenses so we have everything from full licenses to joint ventures and like many companies over time, we would look to if those were accretive to the Company and if we had the operational expertise in those marketplaces to bring those businesses in-house, we would do that.

And so that is something that we are going to look at over time.

Again, we have been very clear and open about the reason why we actually did regional partnerships, licenses and/or joint ventures because when you are trying to grow out a business at the pace that we are having our three big markets being the US, Europe and Japan, that is all we felt like we could handle operationally inside the Company and do it well.

And I think we have shown that to be true.

And our partners in the various territories are excellent operators with great resources and quite frankly, they have done an amazing job for us also building the brand, establishing the Company.

So whether that is something we end up doing or not I can't sit here and say but it is certainly something that we look at on a regular basis.

Going to the market share, to be honest with you, we are not as focused on the market share number as I know you all are.

We are looking at our individual comp store -- let me go back, we are interested in focusing on product first, building brand awareness second.

And thirdly, we are interested in our comp store growth.

We certainly like the idea that we can continue to grow because we know the handbag, the accessories category, is growing about 10% domestically and somewhere in the high single digits globally.

So we know that bears very well for our future growth.

But we are not -- our aspiration is not to be the number one market share leader in the United States, and we like our mix.

As I said before, our full price to outlet is about 3 to 1, which is the way we see our business continuing.

We think that it is most important for us to focus on our full-price business, which I think we have shown that we focus on that but whether it is in our own stores or in our department store channel.

And I think we have also shown that while many of our competitors have been very promotional for many, many quarters now, we have chosen not to react to that across the channels, and I think our consumer has responded.

We believe product is first, and we have the incredible leadership of Michael Kors and our outstanding design team and that, strengthened by outstanding employee base here who is focused on delivering high comp store results, we think that will continue to deliver this 20% to 25% top line and bottom line that we've said we were able to achieve over the next few years.

Can you hear me?

Can I follow up?

Sure.

So I guess to be clear, so there is not any plans to change anything from a product license perspective, just potentially regionally on a geographic scale.

Yes.

And then with regards to your distribution strategy, there is no plans to change the ratio of full price to outlet; is that correct?

That is correct.

And just to clarify again, we are not looking to currently buy or bring back any licenses in-house.

That is helpful.

Product licenses, product licenses.

That is helpful.

Thank you.

Bob Drbul, Barclays.

Good morning.

I just have two questions.

The first one is on the comps for the quarter, what portion of the comp came from traffic?

The second question is, can you talk a little bit about tourist traffic in the US and has it changed in terms of the mix of tourist customers for your business?

Sure.

We were very pleased with the comp store increase again high double digit comp store growth -- I am sorry traffic -- traffic growth and we were also very pleased with our conversion.

Our conversions increased as well.

Again, you hear us talk many times in the conference calls about our jet-set service.

We believe that is one of our strengths in our business not just domestically but globally.

I am sure many of you on this call have been into our stores; our employees have excellent training, they are highly motivated, they really are brand ambassadors and quite frankly, they are able to consult on fashion with our customers who really want to engage with us I think in a unique way in terms of building a wardrobe for themselves.

So I think that is one of the reasons why we have continued to see that conversion rate go up.

And the traffic is driven by increasing brand awareness and obviously it is driven by great products that Michael and the design teams are really putting together and I think we are doing a great job of informing our customers that it is there.

Tourists, is a very, very big piece of our business globally.

We obviously see it in the big markets in the United States being New York, Miami, certain parts of Los Angeles, San Francisco and it is a growing part of the business in those markets.

It is even more important in Europe.

Obviously in the major cities being London, Paris, Madrid, Barcelona.

And the summer season with lots of people traveling from all over Europe and all over the world.

I think we have told you before that one of the significant training factors that we have in our stores is the amount of languages that we typically speak when you enter certain of the marketplaces.

We have stores where we are speaking over 12 languages in the individual building and that is important when people come into the building that they feel comfortable that a sales associate can really converse with them and help them engage in the transaction.

So that continues to be a big focus for us and then of course, we are also handling tourists through the airports and the duty-free shopping areas globally and you heard us talk about that in the call.

And we think that is a very important part of really having the customer get to know the Michael Kors brand as they see it in the best airports, in the best streets around the world and of course, through e-commerce as well.

Thank you.

Oliver Chen, Citi.

Great results.

Following up on your comments regarding design and the change to the urban athleticism, to us it looks like there is less color.

It is more of a sophisticated look versus what you have been famous for with a lot of color.

Could you just comment on strategy there and if it is a strategic effort in relation to how you build awareness and SKU breadth and what you think about that?

Secondly, if you could speak to watches and how they comped relative to your overall comp and what you see as the evolution in that category?

Thanks.

Sure.

I think you are referring in terms of color to the new floor set that just happened about two weeks ago.

We came off of two very big seasons of color.

Obviously the spring season and the summer season were all about color and this new floor set -- and you know our floor sets typically last about six to eight weeks in our retail stores -- definitely has transitioned into this urban athleticism and I have to tell you the initial results and the initial response to the consumer has been excellent.

So I think it is a palate cleanser.

At any point in time Michael is very, very clear about always wanting to deliver newness and excitement.

We are seeing also a lot of high ticket items transacting right now for us.

Leather jackets are very strong, some of our new higher end handbag introductions are very strong and so the customer is really reacting to more of the luxury point of view in the product.

And so I think that quite frankly, his timing and vision for this delivery are excellent.

In terms of the watch category, the watch category globally, you can see from our licensing results really trended very, very well.

We are probably the number one watch brand in almost every department store in the United States today.

We are also trending at similar levels to that in Europe.

So again, we have seen excellent results.

We also told you that we have 60 shops today and those shops are either watches or jewelry, some of them are actually combined together.

We think globally we can have 500 of those.

So we are as excited about the watch business and the results that we have had in the watch business as we have for the past quarters that we have been reporting to you about the watch business.

And the final question was about the handbags and SKU breadth.

Are you comfortable with the composition in terms of a number of silhouettes you have going forward and any strategy there?

Thank you.

Yes, you know the interesting thing for us is and I think you are probably aware, our stores average around 2500 square feet in the full price stores.

We are getting some larger stores where we can because our productivity levels are quite high on the sales per square foot basis.

But our handbag walls really haven't changed in our stores so we closely study the SKUs that are inside of our stores and we have to continue to maximize those styles because our walls don't get any bigger inside of most of our stores.

So we are very comfortable with the amount of SKUs but we are also challenging ourselves every single day to create SKUs that will produce more volume and create more desire for the luxury customer on a global basis and I think we are seeing that happen.

Thank you.

Best regards.

Erinn Murphy, Piper Jaffray.

Great, thank you.

Let me add my congratulations on the great start to the year.

John, I was hoping maybe we could focus back on Europe.

Could you just maybe compare and contrast the real estate environment there currently relative to the US?

As you think about kind of the pipeline for 40 doors this year, can you just maybe talk about the preopening kind of pattern there I guess again in context to the US?

And then for Joe, how should we think about the balance of the openings for the next three quarters in Europe?

Erinn, I'm actually going to take both of those questions because I think they are one and the same.

The environment in the US is obviously -- it is a little easier for us to project out the US openings because we are dealing with predominantly mall locations and it is the big developers, it is Simon, it is [Mastritch], is that Group -- GGP, which we have excellent relationships with them and we are working very closely together on store openings as far as three years out.

So while it moves from quarter to quarter or from season to season, we have pretty good visibility on that.

Europe is a little more difficult because the mix is much higher, much more driven by street locations and there you are dealing as we've talk to you about in the past, individual owners of buildings and so it gets a little more complicated.

We feel very comfortable with the 40 store openings.

We have not and won't project stores by quarter both in Europe and the United States.

It is a little tricky to do that.

But we feel very comfortable that the opportunity is there for us to open the 40 stores and most of those leases are either signed or in the process of being signed as we speak.

Thank you.

That is very helpful.

John, I guess just a follow-up for you, are there any as we think about the global expansion that is really behind the longer-term growth, is there any key hires that still need to be made or incremental hires as we look out over the next year or two?

You are going to continue to see us bring on both at the lower management levels and higher management levels more people because we are obviously growing very, very fast.

We are I think 7500 employees today, something like that.

I'm not exact.

And we will be at 10,000 employees before you blink an eye given our growth.

So our greatest need in the company is for talent and executives to run our global business.

So you will continue to see as add to that talent.

I think we talked over the last few calls about the hires that we have made with our Head of Operations globally reporting to Joe Parsons and our Head of e-Commerce reporting to Jaryn Bloom, and so on and so forth some very, very significant hires and you will see more of that happen.

Great, thank you.

Best of luck.

Mark Altschwager, Robert W. Baird.

Great, thank you for taking the question and congratulations on a great quarter.

I just want to touch a little bit on the men's business.

Looking at the opportunity over the next few years, how do you see the product mix evolving?

And then are there certain categories that lend themselves better to the retail versus the wholesale channel?

Then you talked about the brand awareness studies, have you looked at the awareness among men versus women?

Okay.

I'm glad you brought up the men's category.

Men's is going to be a very significant opportunity for this Company.

As you know, we have a small and successful men's business today primarily driven by men's sportswear and it is carried in the finest retailers here in the United States that being Saks, Nieman, Nordstrom and Bloomingdale.

We like what we see happening in that business.

We have launched it in Europe, we are in about 145 specialty stores and department stores in Europe and the results have been encouraging there as well.

We think there is a very large opening in men's sportswear for a more contemporary updated brand that is not really being talked to buy many other companies globally and so we feel a great response from the retailers about that opportunity as well.

So you will see us accelerating that business over the next few years and we will be making some announcements about some hires in that business shortly.

So that is the first cornerstone to that business.

There is actually three cornerstones.

The second is our men's leather goods.

As you know, that is a very fast-growing marketplace globally, a little less so in the United States but more in Europe and in Asia where the men's leather goods business is very important.

We are very proud to be announcing that there will be a number of men's leather good shops opening in select department stores that maybe we will talk about on the next call that will I think really position the beginning of our men's leather good business.

So we see that as a significant opportunity for the Company globally.

The third pillar is that in our watch business, we are predominately female driven; about 90% of that business is being driven by women's watches.

And traditionally in the global luxury watch business, as much as 50% of that business could come from menswear though imagine if we get the men's business right in total for the Company what that could mean for the size of our watch business.

We think it is an enormous opportunity in watches.

So in total between all three categories, it will be north of $1 billion what we think the opportunity is.

Over an extended period of time, it is going take us some time to get to that but those three categories collectively could account for that much volume for us.

So we are planting the seeds, we are making the investments and it is going to take us time but we are very serious about the men's business and the opportunity it holds for our Company.

In terms of doing brand awareness studies, it is too early for us to do that and we have talked to you about that before.

We just have to get our seeds planted, continue to believe in Michael's design vision and our management talent to be able to execute this and we will be successful.

And then lastly, we have announced that in our new store in Soho which will open up in spring of next year, there will be an entire floor devoted to menswear and that will include significant presentations in the three categories I just mentioned, sportswear, watches and then leather goods.

And we are looking at some other large format stores where we will have the capability of potentially having a men's floor/environment in that store.

So again, stay tuned all future opportunity for the Company but adds potential upside for us.

Very helpful, thank you and best of luck.

Omar Saad, ISI Group.

Operator, I think we lost him.

Dana Telsey, Telsey Advisory Group.

Good morning, everyone, and congratulations on the terrific results.

Can you give any more color on the performance of retail and wholesale?

You mentioned that they are similar.

On the wholesale shop-in-shops as you evolve to the lifestyle offering in those in-store shops, what are you seeing in terms of sellthrough throughout the department store?

Is it helping in that department and others?

And how are you seeing pricing on the different categories changing this year?

Thank you.

Thank you, Dana.

By the way, this will be the last question.

Dana, the shop-in-shops, it has been about the same.

We have said before we get about a 3 to 1 lift in the existing store when we add a shop-in-shop into that.

We have also been running at and in most cases higher than our own store comps in the department stores which is really quite exciting for us so we will continue to focus on that.

Again as you are probably aware, we have a lot of our own sales associates out in the department stores selling, that is both in the accessories areas and in our women's ready-to-wear areas and now in some of our men's shops as well.

And we think that is a very important part of our development is the experience that the consumer has with the sales associate when they come into the shop.

It is not just about the product but it is also about the whole experience that you have.

So -- and I think the product mix is going to stay the same inside of our shop-in-shops.

I think the one area where we are trying to understand a little bit better is in the watches and jewelry where we have, as I said to you before, certain shops have watches and jewelry combined, certain are separated.

We are learning a little bit more about that but we are very, very pleased with the comp store results there as well.

So when you think about shops for us, think about accessories.

We are opening footwear shop-in-shops now.

We are opening women's ready-to-wear shop-in-shops.

We are opening watch and jewelry shop-in-shops and now we are focused on also men's shop-in-shops.

More men's shop-in-shops will be really built in the Europe arena than they will be in the US but another great opportunity for us.

I would like to say thank you very much for everyone joining us on the call today and we look forward to speaking to you on our next conference call.

Thank you very much.

This does conclude today's conference call.

Thank you all for your participation.