Capri Holdings Ltd (CPRI) 2014 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 FY14 conference call.

(Operator Instructions)

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

And now I would like to turn the conference over to Ms. Christina Lack, Vice President, Treasurer.

You may begin.

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 risk and uncertainties are described in today's press release and in the

Company's SEC filings which are available on the Company's website.

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, Christina.

Good morning and welcome to Michael Kors third-quarter FY14 earnings call.

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

I will begin with a brief overview of our third-quarter performance and update you on the advances we have made in our strategic growth plans.

Then, I'll turn it over to Joe for a detailed review of our third-quarter financial results and an update on our outlook for the fourth quarter and full year.

Our third-quarter results were outstanding as our exceptional product offering created by Michael Kors and our design teams, as well as our unique jet set shopping experience made Michael Kors the go to destination for the holiday season.

Michael's fashion messaging with our customers was strong and well executed throughout the holidays.

We communicated with our customer through e-mail, catalog, print, outdoor and social media, which effectively conveyed the glamour and luxury of our holiday offering, capturing the customers attention and generating strong demand globally.

During the quarter our strong momentum continued across all segments and geographies.

Revenue grew 59% to $1 billion, marking our first quarter with revenue in excess of $1 billion.

Gross margin expanded 100 basis points to 61%, income from operations grew 68% to $343 million and operating margin was nearly 34%.

We continued to execute on our six key growth strategies in the third quarter.

First, in North America, revenue grew 51% and comparable store sales increased 24%.

Second, we continued to expand our retail footprint in North America opening 20 new stores.

Third, we successfully converted 76 additional department store doors globally into branded shop-in-shops.

Fourth, in Europe, we believe brand recognition further expanded and our luxury products resonated with the consumer.

Revenues grew 144%.

Comparable store sales increased 73% and we opened 19 locations across the region.

Fifth, our business in Japan continued to develop.

Revenue grew 54% during the quarter.

Comparable store sales increased 18% and we opened four locations during the quarter.

And sixth, we further expanded our retail presence in the Far East opening seven new locations during the quarter to our regional licensees.

Stores in this region experienced double-digit increases in comparable sales.

Turning to our segment performance during the third quarter.

Retail net sales grew 51% over the prior period and global comparable store sales increased 28%, representing our 31st quarter of consecutive comp store growth.

Retail sales growth was driven by 98 new stores opened since the third quarter of last year.

We opened 43 of those stores during the third quarter of FY14 ending with 395 Company owned retail stores globally and 533 stores in total including locations operated by our licensees.

In our Wholesale segment, net sales grew 68%.

This increase was driven by our successful conversion of department store doors to shop-in-shops and continued strong performance in both department and specialty stores with particular high demand for our luxury accessories and footwear products.

During the third quarter we converted 76 department store doors to shop-in-shops ending the quarter with approximately 1400 shop-in-shops globally in accessories, footwear, women's wear and men's wear combined.

Our shop-in-shops remain a key strategy for highlighting the Michael Kors brand and bringing our jet set luxury experience to department store customers.

We believe that as we convert additional doors to shop-in-shops, more customers will discover the brand driving future growth in our Wholesale segment.

Finally, revenues in our Licensing segment increased 59% driven by continued strength in our luxury watch and eye wear businesses.

In addition, we are very pleased with the growing momentum in our jewelry business.

We see tremendous growth opportunity for watches and jewelry globally.

We will continue to expand these categories in our retail stores while we also rollout additional watch and jewelry shops in our wholesale channel.

At the end of the quarter, we had approximately 120 watch and jewelry shops, ultimately we believe that we can have 500 shop-in-shops worldwide.

Our fragrance and beauty launch was met with great response.

We launched the SPORTY SEXY GLAM collection in North America this past August which was met with much enthusiasm in both our retail stores and at Macy's where we have distributed the collection exclusively.

We subsequently launched the collection in Europe in the fall and saw similar response from our European consumer.

We are excited about the growth potential of our fragrance and beauty offering in Europe.

Importantly, we think that the fragrance launch is also helping to enhance brand awareness for Michael Kors in this region.

We plan to continue the global rollout of this new collection in additional markets in Europe, the Middle East and select markets in Asia in calendar 2014.

Over the next few years, we expect to be one of the most significant brands in the luxury fragrance and beauty market globally.

Turning to our operations by region.

In North America, revenue grew 51% to $863 million during the quarter with comparable store sales increasing 24%.

We grew our North America Retail presence to 284 stores with the opening of 20 stores during the quarter.

In our North America Wholesale business, growth was driven by comparable store sales increases that were similar or greater to the comparable store sales increases in our Retail stores.

In addition, our combined successful conversion of department store locations to shop-in-shops helped drive wholesale growth during the quarter.

Looking ahead we are on pace to open 57 North America Retail stores this fiscal year and continue to believe that there is room in the market for 400 stores over the long term.

On the Wholesale side, we will continue to convert department store doors to branded shop-in-shops in our accessories, footwear, women's wear and men's wear businesses.

Internationally we are extremely excited about the strong reception to the Michael Kors brand that we are seeing as our recognition expands both in existing and new markets.

In Europe, more and more customers are embracing the glamour and luxury of the Michael Kors product driving revenue growth of more than 140% during the third quarter to $140 million.

Comparable store sales in the region increased 73%.

We believe this comp store increase reflects the compelling luxury product offering in our stores.

We continue to expand our presence in Europe in both new and existing markets to meet the growing demand for Michael Kors luxury products.

Our new store openings were met with great anticipation among consumers and the performance thus far has exceeded our expectations.

We ended the quarter with 76 Retail locations in this region.

Our European Wholesale business also continues to enjoy strong sell-throughs in both department and specialty stores.

As I've said in the past, we believe that we are well positioned to continue capturing market share in Europe as we further expand our brand presence in the region by growing both our store base and wholesale distribution.

In FY14, we are on pace to open 36 new stores in Europe.

Over the long term, we believe the market can support 200 Michael Kors Retail locations.

We see ongoing momentum in the Wholesale segment and look forward to further expanding our presence in this channel over the next several years.

Based on the strong results that we've seen recently, we believe that there is significant runway for growth in Europe.

We're very excited about the opportunity to expand the Michael Kors brand in the region.

Over the next few years, we believe that the European market will achieve revenue in excess of $1 billion.

Turning to Japan.

We remain pleased with the progress that we are making in the market.

As we've said in the past, Japan is a great long-term opportunity and a key market for the Company.

While we are still in the early stages and recognize that it will take some time to fully develop this market, we continue to see strong momentum in Japan.

During the third quarter, revenues increased 54% to $9 million and comparable store sales increased 18%.

We also opened four retail locations during the quarter and now have 35 in Japan.

We expect to open one additional location during FY14 and believe that we can have over 100 retail locations in Japan over the long term.

We continue to see strong performance in the rest of the Far East as well with double-digit comp store growth in retail stores operated by our licensed partners.

We are focused on continuing to build our brand awareness in the Far East and further developing the market through regional licenses.

During the quarter we opened seven stores across the region bringing our total to 94 Michael Kors Retail locations in Korea, Greater China, Southeast Asia and Australia.

We are excited to announce the opening of our new flagship store in Shanghai China at Carey Center on Nanjing Road.

This location is the largest of our luxury Retail stores in the region at approximately 5800 square feet and we believe it will be the premier destination for the Michael Kors brand in China.

Long term, we anticipate there will be 200 Retail locations in this region.

In Latin America, we are pleased with the progress of our retail expansion.

We opened two stores in the major Brazilian markets of Sao Palo and Curitiba during the quarter and currently have seven locations in this region with three in Brazil, one in Venezuela and three in the Caribbean.

We believe that there's considerable demand for Michael Kors brand in Latin America and we are excited to be expanding our presence across these markets.

Ultimately, we believe the Latin American market can support 40 Retail locations over the next several years.

Moving to our travel business.

At the end of the quarter we had 45 travel locations in some of the best airports and travel destinations in the world.

In total, we now believe that there is a potential for 75 travel retail shops worldwide, including freestanding stores, shop-in-shops and stores operated by specialists in travel retail business.

We believe the travel business is strong and continues to gain momentum particularly with the growth in the Asian tourism globally.

Finally we are on track to launch our new North America eCommerce site during the fall of 2014.

As I've mentioned before, we are working to transition the eCommerce platform in house in order to provide the consumer with a true omni channel experience.

Our new website will allow us to enhance the level of engagement between our online customers and the Michael Kors brand.

It will also serve as a great marketing tool that will give us the opportunity to develop new customer relationships.

We are seeing high double-digit increases in our worldwide search volume adding visitors to our existing website.

By bringing eCommerce in site -- in-house, we will be able to better focus on communications, marketing and sales strategies to capitalize on the online growth opportunity.

Over the long term, we believe that eCommerce can be a multi million dollar business for the Company and therefore believe that it is prudent to make the necessary investments in this business.

In summary, our momentum remains strong as reflected in our third-quarter performance.

We had an extremely successful holiday selling season which we believe speaks to the strength of our brand.

We've exceeded our financial expectations and continue to execute on our strategic growth initiatives.

We believe that we are well positioned for the long-term growth as we further expand the Michael Kors brand within the global luxury market.

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

Thank you, John.

Good morning.

I will begin with a review of our FY14 third-quarter financial results followed by our outlook for the fourth quarter and the full year.

For the third quarter, total revenue grew 59% to $1 billion as compared to $636.8 million in the third quarter of last year with strong growth in each of our Retail, Wholesale and Licensing segments.

Retail net sales increased 51.3% to $503.4 million as compared to $332.6 million in the third quarter last year driven by a comp store increase of 27.8% and the opening of 98 new stores since the third quarter of last year.

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

Wholesale net sales grew 68.2% to $461.4 million in the third quarter compared to $274.3 million in the same period last year.

The increase was primarily the result of strong growth in our 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 59% to $47.4 million for the quarter as compared to $29.8 million last year primarily driven by the continued strength in watches.

Gross profit increased 61.6% to $619.5 million as compared to $383.5 million in last years' third quarter.

Gross margin expanded 100 basis points to 61.2% reflecting the strong year-over-year gross margin increases in both our Retail and Wholesale segments.

The margin increase was driven primarily by favorable product mix shift to higher margin product in addition to geographic mix and lower product costs in select items.

Total operating expenses grew 54.7% to $276.3 million in the third quarter of FY14 as compared to $178.6 million last year.

As a percent of total revenue, total operating expenses decreased to 27.3% from 28% in last years' third quarter.

SG&A expenses increased 54.5% to $254.6 million as compared to $164.8 million for the third quarter last year.

The increase in SG&A expense is primarily due to higher retail occupancy and salary costs related to new store openings; an increase in advertising and marketing expense; higher distribution costs, a portion of which was related to the disruption in our US distribution facility; and increases in corporate employee related costs.

As a percent of total revenue, SG&A expense was 25.2% compared to 25.9% for the third quarter of last year.

I would note that shipping from our US distribution facility has returned to a regular cadence as we addressed the disruption early in the quarter.

Going forward, we expect to incur additional distribution expense as we look to identify further efficiencies and implement process improvements.

Depreciation and amortization expense was $21.7 million during the third quarter as compared to $13.8 million for the third quarter of last year, primarily due to the build out of new retail locations, new shop-in-shops and investments in our infrastructure to support our growth.

As a result of these factors, income from operations was $343.2 million or 33.9% of total revenue as compared to $204.8 million or 32.2% of total revenue in the same period last year.

Income taxes were $113.5 million in the third quarter as compared to $73 million for the third quarter of last year.

Our effective tax rate was 33.1% as compared to 36% 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 and receiving an income tax benefit related to the restructuring of certain of our foreign operations during the quarter partially offset by certain adjustments related to blended State income tax rates.

Net income increased 76.6% to $229.6 million in the third quarter and diluted earnings per share were $1.11 based upon 206.1 million weighted average diluted shares outstanding.

Net income for the third quarter of FY13 was $130 million, or $0.62 per diluted share based upon 202.8 million weighted average diluted shares outstanding.

Turning to the balance sheet.

At December 28, 2013, cash and cash equivalents were $828.3 million as compared to $405.8 million at the end of the third quarter last year.

There were no outstanding borrowings under our credit facilities in either year.

Inventory totaled $431.6 million and is compared to $290.2 million last year, an increase of 48.7%.

Capital expenditures during the quarter totaled $53.4 million.

A 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 43 stores in the quarter, 20 in North America, 19 in Europe, and 4 in Japan and ended the quarter with 395 retail stores including concessions.

Turning to our outlook.

For the fourth quarter of 2014, we expect total revenue to be between $790 million and $800 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 $0.63 to $0.65, assuming a tax rate of 33.5% and 206.8 million shares outstanding.

We expect the fourth-quarter gross margin rate to be slightly higher than last year and operating expense rate to be moderately higher than last year.

For FY14, we now expect total revenue to be between $3.18 billion and $3.19 billion assuming comp store increases of approximately 25%.

We now expect diluted earnings per share to be in the range of $3.07 to $3.09, assuming a tax rate of approximately 34% and 205.6 million shares outstanding.

Capital expenditures are expected to total approximately $200 million for FY14.

We expect to open nine additional retail locations in the fourth quarter, including four in North America, four in Europe, and one in Japan, and continue with our shop-in-shops conversions and investment in infrastructure and systems.

In summary, we continue to make progress on our strategic growth initiatives during a very strong third quarter.

We believe that Michael Kors is well positioned for continued long-term growth.

Thank you.

I will now turn the call back to John Idol.

Thank you, Joe.

In closing, we remain focused on continuing to grow the Company by driving comparable store sales growth, expanding our Retail store base globally, capitalizing on our eCommerce opportunity, continuing to convert department store doors to branded shop-in-shops and growing our brand internationally.

We are very pleased with our momentum going into the fourth quarter and expect to deliver record results for FY14.

We will now open up the call for questions.

(Operator Instructions)

Lindsay Drucker Mann, Goldman Sachs.

I wanted to ask first on holiday.

Obviously you guys had very strong results and clearly gained a whole lot of share with good performance in the quarter.

Can you give us any color on things like pace of mark downs, what you saw happening through your Retail partners at the Wholesale level, any detail on how your business fared, maybe more color in light of the very challenging industry back drop, understanding that you had very strong results?

And then secondly, Joe if you could clarify if in the Wholesale division what sort of revenue or margin impact happened from the push forward of shipments that were delayed from the September quarter?

Thanks.

Good morning, Lindsay.

Lindsay, the -- we had double-digit traffic increases in our stores and we also had double-digit conversion increases in our stores.

So we were very pleased with the results during the quarter.

In terms of styles that we had on the floor, we were about even this year versus last year in terms of the amount of skews that were on the floor.

We were a slight bit higher in terms of dollars in terms of mark downs this year versus last year, and a fair amount of that was driven quite frankly from some of the late deliveries we had coming out of the distribution center.

But we had goods arriving slightly later than we had anticipated, that was primarily in our Wholesale distribution.

So all in all it really wasn't anything materially different for us on a year-to-year basis from the promotional standard and cadence.

Obviously there was a tremendous amount of promotion going on around us, and as we typically do, we opted not to really participate in that and our customer responded to Michael and our design teams' amazing product.

And I think we're seeing similar response in the very beginning of our new deliveries for the spring season, as well.

So we think as long as we stay focused on being on trend, with the right product, she's excited and she's stimulated to come purchase Michael Kors luxury products.

And I'll turn the second question over to Joe.

Yes as John just mentioned there was a disruption primarily related to the Wholesale side of women's ready-to-wear.

As John mentioned, we had a lot of deliveries at the same time.

We had not disclosed that number and we don't consider it to be significant.

Okay, thank you.

Kimberly Greenberger, Morgan Stanley.

Congratulations on a really fantastic quarter.

John I'm wondering if you can step back for a second and talk to us about how you think about investing behind the brand to sustain the brand momentum over the longer term.

It's obviously clear coming out of this quarter that there's a tremendous amount of current momentum, but talk to us about how you think about managing the brand for the longer term.

And what kind of infrastructure investments are you in the process of making and do you expect to need to make over the next couple of years in order to be able to build this into a real global brand powerhouse?

Sure, I'll start -- thanks, first off, good morning, Kimberly.

Sustaining the momentum is something we obviously get up and think about every day of the week and we don't think about it just from a US perspective, we think about it from a global perspective.

I think -- I know many of you are tracking our following on things like Facebook and Twitter and Instagram, we're very proud of the fact that we cleared over 10 million Facebook fans recently.

We're in the 1.5 million range for Twitter and Instagram.

And we think that continuing to build our platform socially is one of our priorities because it gives us one of the greatest global reaches, so I'd say that's probably our number one priority.

Our number two priority is the development of our own website in-house.

While everyone talks about the amount of sales transacted during the holiday season over the website, and we certainly enjoyed that as well seeing strong double-digit increases far in excess of what our comp stores were.

So obviously people are actively purchasing more online than they have in the past.

But it is a place where people come to shop.

And when you hear a lot about mall traffic being off, and clearly that was a theme that you heard during the holiday season, what is happening, we believe, is that people are actually shopping first online, doing their selection, and then coming in in many cases still into the store to buy and they know what they want.

They're very clear about what they see in size, color, price, everything, and we see that happening not only domestically but internationally.

So we have a significant amount of traffic that's coming through our website from all over the world as she is shopping for our brand.

And by the way, some of that shopping is even before she's traveling.

So as you know travel -- the tourism business is an extremely important business for us on a global basis and she gets ready for her trip that she might be taking to Paris or to London or to Sao Palo, or wherever she's going, and she's shopping beforehand knowing what she's going to purchase during that trip.

So we think that by focusing on social, focusing on our own web development, and then lastly we think opening Retail stores in major cities and in secondary cities is critical to the brand development.

When you open in secondary markets, and we've talked about this in the past, and you see the kind of numbers we're putting on, what does that tell you?

That tells you that the customer a, has a pent-up demand for our product.

But b, there's probably in some of these locations not as many options for her to buy luxury product.

So we think that's why the development of our brand will continue to be sustained on a global basis.

On an infrastructure side, we're about to embark on a very significant infrastructure upgrade in the Company starting with expansion of distribution facilities.

We will stand up a minimum of three brand new very large facilities over the next 24 months.

One in the United States to help support our Retail growth, and we will have an independent facility for our Retail distribution, both to our stores and for eCommerce.

Second, we will stand up a very new and large facility in Europe to support the obviously very rapid growth we have there, and that facility will handle Wholesale, Retail and Internet.

And thirdly, we will invest in a brand new facility in Canada.

We have a very substantial and growing business in Canada and that infrastructure needs upgrading, as well.

So we think between what we're doing to continue to build brand awareness, continue to develop luxury product, again we think we have some of the highest quality products in the industry, and lead by Michael and his great design team.

And then lastly the money that we're going to spend on the back of the infrastructure, we think that this Company will be well positioned for many years of future growth.

Thanks so much.

Brian Tunick, JPMorgan.

Thanks, guys, and I'll add my congrats as well.

It's pretty amazing in this environment.

Two questions for you guys, number one on product mix.

If you could give us some update of how the holiday shook out non-accessories versus accessories?

And as you look forward what categories do you think have still the biggest runway for growth?

And then the second question really on the international margin side, can you remind us what size does Europe or Japan need to get to to reach parity of your domestic EBIT margins?

Thanks so much.

Okay, thank you, Brian.

Good morning.

We ran north of 85% of our business during the fourth quarter, again, in what we term accessories.

So accessories for us is handbags, small leather goods, footwear, watches, eye wear and fragrance.

And those categories are continuing to grow really right across the board.

I forgot to mention jewelry, as well.

The dominant category for us during the holiday season in terms of dollar growth and percentage growth was handbags and small leather goods.

So that clearly drove the predominant amount of our business right across the board domestically, internationally, et cetera.

The second biggest category for us was watches, and again we saw double-digit increase in our watch business and we continue to see that business moving ahead very nicely.

So those two categories were really the two driving forces and that's obviously in our Retail stores.

On a Wholesale side, what we're seeing is really an extraordinary development.

Our footwear business as we reported to you in the past is really becoming a dominant player.

The same way we are a dominant player in the Wholesale channel in handbags, we're a dominant player in watches.

We think we're reaching that same level of dominance in footwear, but with tremendous runway for growth.

I think we've reported to you in the past that we have -- we are going to install approximately 150 shop-in-shops for footwear over the next 12 months across many domestic and international retailers.

I think you've been down to Macy's to see our extraordinary presentation which is really positioning us for the future of what footwear can look like in our wholesale partner distribution.

And that's being embraced by our partners.

So I would say to you that that's one of the real big strong growth categories for us.

And then our women's ready-to-wear is doing very well.

We had some difficulty in the fourth quarter and that was really due to some shipping issues.

But in general that category is also moving ahead very nicely for us.

So and then lastly, going back to our own Retail stores and Wholesale combined, the jewelry opportunity is enormous.

We believe that we will, over the next two to three years, become one of the leading players in that market.

And as you know, when you look at certain of our other competitors in that business, they're anywhere between $1 billion and $3 billion.

So we see that as a category that we can ultimately grow to those kinds of levels.

So again, lots of opportunity for the Company for growth in product categories.

And then lastly is the mens, we've said before we think that we can reach $1 billion, about one-third of that coming in our Wholesale sportswear business, about one-third of that coming in the men's leather goods business, and then one-third of that coming from the watch business.

So we have a long way to go in terms of growth, products and continuing to build the brand.

And I'll let Joe talk about the margin.

And, Brian, as you know, we don't disclose regional either gross margin or operating margin or EBIT margins.

We have talked in general that consistent with the industry, our margins in Europe -- and our gross margins in Europe will tend to be somewhat higher than the US gross margins.

And that as the business -- the operating expenses are also going to be somewhat higher.

As the business grows, we expect that that business will be more profitable, but we are not there yet and we've not disclosed what the time frame for that is.

Erinn Murphy of Piper Jaffrey.

Great, thank you, good morning and congratulations on a great quarter.

John, wanted you to maybe focus a little bit more on Europe.

If you could talk a bit more about the mechanics in that market.

It seems like you guys are really shaking things up across the continent in a very positive way.

Maybe help us understand Europe important strategically as you further build brand awareness in newer markets even like Latin America, China given the tourist flow there.

And then specific to the holiday quarter in Europe, could you share perspective on what you thought from a local versus tourist consumer there?

Sure, I'll start with Europe first, and good morning, Erinn.

Good morning.

Europe was an extraordinary holiday season for us.

While there was conversation about traffic in the United States, the traffic flows in Europe were just extraordinary and I think that speaks to two things.

Number one, we've talked before about where we are building the business and who we are taking market share from, et cetera.

And I know lots of conversation has been around one of our main competitors.

But in fact we think we're taking, beginning to take market share from many luxury, very large luxury companies that some of you cover.

And in particular in Europe, we have two sets of competitors.

We have very large luxury players and then we have all these regional players that are across the board.

We clearly are becoming the number one, and if we're not already there, the number one accessible luxury hand bag Company in the market.

But we are also by virtue of where we're opening our Retail locations on streets next to all of the very large significant and heritage luxury companies, we are starting to take market share there.

And we think the customer is resonating with the Michael Kors product design.

Michael has been on trend and really season after season, delivery after delivery delivering exciting product.

The European consumer has always been very astute at what fashion is and having the right products for the right season, so we think that's really where we are dominating.

And the second issue is, again, just like in the United States, our jet set in store training programs and our sales associates we think are far outshining our competitors.

We are there to be a fashion consultant for our consumer and we think she's really responding to that.

So we're very pleased with what we saw happen in Europe and are seeing happening and it's right across the board.

Again I keep telling you in all the calls, our business is excellent in Spain, our business is excellent in Italy, our business is excellent in Greece and a lot of the countries that you would think would be being hit by the economic downturns, which they are.

But you know there's still money being spent in these markets and consumers are responding to the right product, presented in the right way and delivered in the fashion environment.

We're at the very beginning stages of understanding what's happening in Latin America.

We know she desires our product.

We have very high brand awareness in the Latin American market which is quite interesting.

We never ran any ads, we never had any stores there, so our initial results are quite outstanding.

And so we're very comfortable with where we're going to be in the Latin America market.

China is going to take us time.

We're very new to the market.

We're only there a few years and obviously there's a lot of competition and we're late to the market so that will take us many years to develop.

But what we do see is in our travel Retail reports, they're popping up as anywhere between number two and three in the airports for us.

So that means she's searching us and in other duty free locations and she's very interested in getting the product.

And so we think it bodes extremely well for our long-term future in that marketplace.

Thank you, that's helpful.

Could I sneak in one more for Joe?

How do you think about prioritization of cash usage?

You should have about $1 billion plus cash by the end of this year, could you help us think about the priorities there?

Thank you, guys.

Yes, as John mentioned, we have a lot of projects that were going on.

And in addition to the projects that John mentioned, we will begin investigating what our replacement for our legacy system here is, so we have a lot of investments to do in the Company.

In our minds, we will not think about utilization of cash other than investment in the Company until the cash balance becomes about 10% of our market cap.

Thank you, guys, and best of luck.

Thank you.

Omar Saad, ISI Group.

So wanted to talk about -- you got all of the strength going on in your business right now, Europe, North America.

As you think two or three steps ahead, can I ask you about mens, how you feel the brand -- obviously men are half the population, how you feel the brand is set up with the male consumer?

And maybe some initial things you're working on to get the male consumer more familiar with it?

And does the brand have too much of a feminine edge to it to really generate a big men's business, have you started to think about that or address it?

And any color around that as you think about the next evolution of where the growth is going to come from.

Sure, thank you, Omar, good question.

Omar, we talked if you remember all the way back to the road show, the waterfall, and we first considered the North American market our primary market and still plenty of room to grow in there.

But over time in the North American market we'll mature and that's why we felt very strongly investing heavily in Europe because, as we've said we think that's an opportunity to be $1 billion for us in the not too distant future and there may even be upside from there.

So again we feel that that's the next stage of the role of the waterfall.

Then the next piece is going to be Asia.

There will be some acquisitions of or certain licenses will come due and so we'll bring some of those things in-house.

Japan's going to come on stream which we think is going to be a very big business for us on a go-forward basis.

So that takes us over the next few years.

And then lastly, we really believe in the men's business and we have a small men's business today but it's doing quite well.

It's really gotten entrenched very nicely in the best retailers in the United States being Bloomingdales and Neiman Marcus and Sachs.

And then in Europe we started to roll it out.

We're in about 150 specialty stores and we're doing quite well there.

We have shop installations going on in Europe.

And we would expect in the next 30 days that we will have announced a new men's President from a very successful large global men's company and we think that's going to be an important further step.

The next thing that you will see in terms of mens is we will be launching a men's fragrance for the fall season.

That'll be accompanied by tremendous advertising.

And so between what we're doing in shop-in-shops in the stores, between what we're going to do with men's fragrance and you're going to see a very major push on men's watches.

Typically mens, our men's watch competitors and again we think of the Swiss luxury companies as our men's watch competitors because today we're one of the top 10 selling watch brands in the world.

Typically our competitors will do 50% of their business in men's watches and 50% in womens and we are not at that level today.

We see that as a huge opportunity.

So over the next 24 months, you're going to see a significant push in the men's business, we have a very clear vision of who the Michael Kors man is.

I think you'll start to see that resonate in our advertising both in print, outdoor and then of course online on our own website and socially.

So I think we've been patient about how we were going to go about this, but we view it as a sizeable opportunity for the Company, and we think we'll be positioned in a very good segment to achieve that.

And by the way most of that volume long term for us we think will come internationally and a little less so domestically.

All right, excellent, appreciate the insight.

Paul Lejuez, Wells Fargo.

Hi thanks, guys, congrats.

Wanted to ask you about your average price points and your handbags this holiday season versus last year, how you're thinking about that going forward?

Do you think you have an opportunity to move price points higher or shift some of the mix into higher price point hand bag categories?

Thanks.

Good morning, Paul, thank you.

The -- we've said this for the past three years, we really haven't changed our pricing on almost all of our products in the Company.

We think our customer appreciates the fact that we are offering them incredibly high quality for a value that still is luxury pricing, but she knows that it's something that she can come back and access on a regular basis.

Our AURs in our Retail stores have not changed since 2007.

Our average transaction, it's really quite extraordinary, and that was with also the adding of jewelry which is a lower price point as a purchase.

UPTs have gone up slightly but our overall average transaction remains about identical.

And the other thing I might point out is since the day we started in this Company, we always had luxury price points, so we have everything from $10,000 crocodile bags to a $248 jet set tote.

So we've always had a luxury offering in our accessories.

We're very proud of the fact that we've just recently brought our luxury footwear back in-house, it was licensed and we're producing that in-house and we're having excellent response to that.

So we believe in the luxury category.

We have the Michael Kors runway collection which will be shown here very shortly in New York.

And that's where we come from as a Company is from a luxury background, as Michael's beginning of the Company.

So we have that in our women's ready-to-wear.

We have it in our handbags, we have it in our footwear, and we will continue to make sure that that product is represented in basically all of our lifestyle stores in handbags, to some degree in shoes and select stores with the women's ready-to-wear.

Randy Konik, Jefferies.

Quick question.

You guys, I guess first for John, you've given us some frame of reference of how you're thinking about the opportunity from a revenue perspective in Europe above $1 billion, I think Asia above $1 billion.

How do you think about the US market of what the revenue opportunity is from a total market share, total revenue perspective?

And then for Joe, how should we be thinking about the CapEx run rate of the Company given the distribution center projects?

And then can you walk us through how you're going to be taking on these projects without disrupting the Company?

Thanks.

Thanks, Randy.

Randy, first off, one minor correction, we did not say $1 billion in Asia.

I think you were thinking of mens that we talked about $1 billion.

We have not put a revenue projection on Asia yet.

The total revenue in the United States, we have not guided to a number there.

I think what we've said is and you've seen our consistent commitment to double-digit comp store growth, and we see that as a continuing goal for us.

And obviously we've been able to achieve that goal, and we do that with a lot of precision, first with product, again lead by Michael's genius design vision.

But really secondly, by an amazing group.

We have almost 10,000 employees worldwide today lead by outstanding Senior Management Team.

And we are very focused on planning and on having the right product in the right stores at the right time.

And we think we're very good at that.

So again we think that the market has substantial opportunity for growth both in store count and in shop count in terms of department stores.

And we think that the market will continue to grow at a double-digit rate for us.

Again we will give you guidance on the fourth quarter for where we're going to be.

But the market has plenty of room for us to continue to grow and again -- there's been a lot of market share information.

Again when you compare Michael Kors numbers to our competitors, remember we do a lot of business in not just handbags.

So again if you're comparing market share to market share sometimes I see the analysis are not really done correctly because they compare our total revenues to other competitors who are more of a hand bag company.

So we feel great about that.

And just one thing before I turn the second piece over to Joe, we will continue to make very significant senior hires in the Company to support our growth and we're bringing on people who will help us really execute many of these large projects that we talked about.

And let me add to what John said.

We have learned lessons, we are continuing to understand what our infrastructure should be like.

Hiring people is difficult today, but we are continuing to build up the infrastructure that we need to get these projects done and are very focused on that.

In terms of our CapEx in the future, we, as you know, don't disclose anything other than one year out or the year that we're in in the fourth quarter we will disclose -- or we will guide you to the next year.

So I can not give you further guidance to that other than to say, one, it's the Company's philosophy to, at this point, to continue to invest heavily in the Company.

And second is, as we've indicated, we had a lot of significant projects continuing in addition to our regular program of building retail and shop-in-shops and investing in the systems.

So you can expect continued significant CapEx in the future.

Yes, and Randy one last point and to earlier question that Kimberly asked, I've said this before and I know it always doesn't make everyone happy when I say it, but we're not as concerned about the percentage of operating margin.

That is not our concern.

Our concern is revenue growth, sustainability of the brand and investment in the brand and then, obviously, bottom line EPS growth.

If our operating margins contract, which over time I would think they would given our investment in infrastructure, yet the top line is growing and the EPS is growing, we would think that would be the appropriate thing.

Again we have not been able to catch up to many of the needs than the Company has just because the Company is growing so fast.

So there will be a normalization.

We've talked about normalization of sales in terms of mark downs, et cetera, and there will be a normalization of expense to revenue ratios.

I think we'll take one more question.

Dana Telsey, Telsey Advisory Group.

Operator, why don't we take one other question.

Oliver Chen, Citi.

Hi guys, congratulations.

Regarding the environment and your comments earlier, where are -- were the in-store mark downs versus last year?

If you could also help us understand the evolution of the SKU profile, and if you see the number of silhouettes evolving over time?

And lastly, if you could give us some thoughts on what you saw in trends and factory versus full price, we'd appreciate it?

Thank you.

So first off good morning Oliver.

As I said to you earlier, we had the same amount of SKUs on the floor in total this year versus last year in terms of mark downs.

So we really didn't have a desire to become more promotional, that is not our philosophy in the Company and it's not something that we think we need -- we think we always need is better product, more exciting product, and really giving our consumer a way to be stimulated and excited to buy something new from our Company.

So that's our first strategy.

In terms of SKUs, the Company's line will grow in size because of the Internet.

We're very excited when the Internet comes in-house, we don't have any place today that we can show all the products that we produce and we're super excited about the ability to have a format to be able to present that.

We also have some very large format stores that are opening, we think we've told you previously about our 22,000 square foot store that's going to open in Soho in September.

And that will be our largest store globally presenting the largest assortment of our merchandise of accessories, watches, jewelry, women's ready-to-wear, footwear, and handbags, and, I'm sorry, and men's wear.

What we're also excited about in that store is, and you will see this in some new stores being built, we are going to take our format up to approximately 4,000 to 5,000 feet in a number of locations.

And that is really to present additional watch and jewelry space, to present additional footwear space, we really are excited about having what we call a salon approach inside of our stores.

And then as I've said to you before our women's ready-to-wear is experiencing great results, and we see that as an opportunity for us to be able to present properly, again inside a limited amount of our own stores.

And then lastly, we enjoyed double-digit comp store increases in all of our formats across the world.

So again, the consumer resonated with product in both of the formats.

And as you know, we're much more concentrated on our full price format because we believe that that's where the core growth of the Company is and we think that's the way we should be focusing our efforts.

Thank you.

And on the eCom side when we work through our models, which quarter will model the revenue upside in terms of that build and how might the productivity ramp?

Well we're not going to give, for the moment, a range.

We'll talk about that in the fourth-quarter call in terms of the size.

But assume it starts in August 1 is when we will turn the switch on, and please pray for us that that transition goes smoothly.

We certainly are praying every day, but we're excited.

And I just might add on that, it took us a little longer than we had anticipated but we have built the ability to have a global platform.

So once the platform is complete, we will bring up the United States and Canada simultaneously, we will then move on to Europe and Japan and then we will then move on to other parts of the Far East Asia -- Far East.

But the good news for us is that we will have a global platform.

So we spent a lot of money, a lot of time to get it right hopefully the first time so that we can really roll this out and grow the platform.

On that note, I'd like to thank everyone for participating in the call this morning, and we look forward to speaking to you, again, for our forth quarter and FY14 earnings update.

Thank you.

That does conclude today's conference.

We thank you for your participation.