Capri Holdings Ltd (CPRI) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the Michael Kors Holdings Limited fourth quarter and FY14 earnings 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 fourth 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.

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 fourth 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 fourth quarter performance, and update you on advances we have made in our strategic growth plans.

Then I will turn it over to Joe for a detailed review of our fourth quarter financial results and our outlook for FY15 first quarter and full year.

I am very pleased to report that we have had another record year at Michael Kors.

One of the reasons for our continued growth lies with our success in communicating our identity as a leading global luxury brand.

We have made Michael Kors synonymous with fashion leadership and jet-set luxury.

That philosophy is at the heart of everything we create from our products, to our stores and to our digital innovation.

By connecting with our customers globally, through consistently exciting products and communications, we have been able to build upon the foundation of Michael Kors jet-set vision.

The Michael Kors brand is now sought after by consumers around the world who are inspired to live the luxury jet-set lifestyle our brand embodies.

Now let's turn to our results.

For FY14, it was an outstanding year for Michael Kors.

We achieved earnings growth of over 60% in 2014, following approximately 130% growth in FY13, while continuing to make strategic investments in our business that will position us to achieve our long-term objectives.

We attribute our consistently strong financial results to the exceptional product offerings created by Michael Kors and our design team, and to our jet-set luxury shopping experience that continues to resonate with consumers globally.

In addition, we continued to build brand awareness throughout the world.

Based on a recent study, awareness in the US increased from 82% in 2013 to 89% in 2014.

Europe's brand awareness increased from 39% to 49% over the same period.

Lastly, brand awareness in Japan is 32%.

We have a tremendous opportunity to further increase brand awareness globally through various marketing channels, including traditional advertising, our eCommerce site, social media, and public relation events.

Focusing on our most recent quarter, we saw very healthy growth across all segments and geographies.

Total revenue in the fourth quarter grew 54% to $917 million.

Income from operations grew 58% to $246 million, and operating margin was nearly 27%.

This performance was the result of continued execution on our six key growth strategies.

First in North America, revenue grew 43% and comparable store sales increased 20.6%.

Second, we opened four new retail stores as we continue to expand our footprint in North America.

Third, we successfully converted 163 additional department store doors globally into branded shop-in-shops.

Fourth, in Europe, revenues grew 125% and comparable store sales increased 62.7%, and we opened four locations across the region.

Fifth, we continue to develop our business in Japan.

Revenues grew 89% during the quarter, and comparable store sales increased 50%, and we opened two locations during the quarter.

And sixth, we opened nine new locations through our regional licenses in the Far East.

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

Turning to our segment performance during the fourth quarter.

Retail net sales grew 50%, and global comparable store sales increased 26.2% representing our 32nd consecutive quarter of store growth, comp store growth.

Sales growth in the retail segment was driven by 101 new stores opening since the fourth quarter of last year.

10 of those stores were opened during the fourth quarter of 2014, and we ended the year with 405 company-owned retail stores globally.

Including 150 locations operated by our licensees, we ended the year with 555 stores and concessions in total.

In our wholesale segment, net sales grew 56%, driven by the strong performance of department stores and specialty stores in North America and Europe where we have continued to see strong demand for our luxury accessories and footwear products, as well as continued successful conversion of department store doors to branded shop-in-shops.

During the fourth quarter, we converted an additional 163 department store doors to shop-in-shops, and ended 2014 with approximately 1,560 global shop-in-shops in accessories, footwear, womenswear, and menswear combined.

We expect our shop-in-shop conversions to continue to contribute to our strong growth in our wholesale segment.

We anticipate opening 500 new shop-in-shops globally this year.

Our shop-in-shops are a compelling way to showcase the brand, highlight our luxury product, and create an exciting jet-set shopping experience for our customers.

Finally, revenues in our licensing segment increased 79%, driven by the strengthen our luxury watch, jewelry, fragrance, and eyewear business.

Our watch business continues to have strong performance, and we see momentum building in our jewelry business.

We believe that there is an opportunity to grow our watch and jewelry business globally.

We are focused on expanding these offerings in our retail stores and rolling out additional watch and jewelry shops in department stores.

At the end of 2014, we had approximately 125 watch and jewelry shops -- shop-in-shops, and continued to believe that there is an opportunity for 500 worldwide.

We continue to be pleased with the performance of our new fragrance and beauty collection in both North America and Europe, which exemplifies the sporty, sexy, glam aesthetic of the Michael Kors brand.

We plan to continue the global rollout of this new collection in additional markets in Europe, the Middle East and Latin America this calendar year, and additional markets in Asia next year.

Long-term, we expect to be one of the most significant brands in the luxury fragrance and beauty market globally.

We also saw strong performance in our eyewear business during the quarter.

As we previously announced, we have entered a new exclusive 10 year licensing agreement with Luxottica, the industry leader in eyewear.

We think they are an ideal partner for Michael Kors brand, as we continue to build the global expansion of our eyewear business and further enhance luxury business in optical and sunglass marketplace.

We are focused on building a strong core assortment of iconic shapes and hardware details to define our eyewear brand and reflect the Michael Kors aesthetic.

We are excited for the launch of our first collection with Luxottica in January 2015.

Turning to our operations by region.

In North America, revenue grew 43% to $739 million during the quarter, with comparable store sales increasing 20.6%.

We opened four new stores during the quarter, and ended the year with 288 North America retail stores.

In our North America wholesale business, we saw overall growth driven by comparable store sales increases in accessories and footwear, that were similar or greater to the comparable store sales increases in our owned retail stores.

Our continued successful conversion of department store locations to branded shop-in-shops also drove wholesale growth in the fourth quarter.

Looking to FY15, we anticipate opening 45 North America retail stores, and remain confident that the market can support 400 stores in the long-term.

We are also planning to expand the footprint in select retail stores in key major cities.

We are seeing an increasing customer demand for our luxury products, and we see an opportunity to expand certain categories including women's footwear, women's ready-to-wear, watches and jewelry in our stores.

As an example of this strategy, we are excited to be opening our new Soho flagship store later this year, which will be our largest store to date at approximately 21,000 square feet.

This location will have three floors.

The ground floor will feature our luxury accessories, watches, jewelry, fragrance, and eyewear.

The first floor will feature women's ready-to-wear and women's footwear.

The lower level will feature our men's full offering.

This will be the first store globally to showcase our men's ready-to-wear and leather collections.

On the wholesale side, we continue to convert department store doors to branded shop-in-shops in our accessories, footwear, womenswear and menswear business.

Internationally we continue to see our brand recognition expand, in both new and existing markets.

In Europe, we have seen great reception to the brand, as customers continue to embrace the jet-set luxury experience that Michael Kors brand embodies.

This increasing acceptance drove growth of more than 125% during the fourth quarter to $165 million.

Comparable store sales in Europe increased 62.7% during the fourth quarter, reflecting the exceptional product in our stores.

We also continued to expand our retail presence in Europe, opening 4 locations during the quarter, and ending the year with 80 retail locations in the region.

Our new store openings have been met with great excitement among consumers, and we are pleased with the performance that we continue to see in this region.

In our European wholesale business, we saw strong sell-throughs in both department and specialty stores during the quarter.

We continue to believe that we can capture market share in this region, as we expand our brand presence and grow our distribution.

For FY15, we expect to open 55 new stores in Europe.

Over the long-term, we see opportunity for 200 Michael Kors retail locations.

We also continue to see momentum build in our wholesale business and expect to further expand our presence in this channel.

As I have said in the past, we are excited about the opportunity in Europe, and believe that over the next several years we can achieve revenue in excess of $1 billion in this region.

Turning to Japan, we continue to be pleased with our steady progress.

Japan remains a great long-term opportunity and a key market for the Company.

We are in the early stages of developing our brand in Japan, and are cognizant that it will take time to fully realize the potential of the Michael Kors brand in the country.

That said, there is great momentum behind the business now.

During the fourth quarter revenues in Japan increased 88.5% to $13.4 million, and comparable store sales increased 50%.

We opened 2 retail locations during the quarter and now have 37 in Japan.

In FY15, we expect to open 10 additional locations, and believe that we can have 100 retail locations in Japan over the long-term.

The rest of the Far East region continued to show strong growth as well, with double-digit comp store growth in retail stores operated by our license partners.

We are continuing to build our brand awareness across the region, and we are further developing the market through our regional licenses.

During the quarter, we opened 9 stores in the Far East, bringing our total to 103 Michael Kors retail locations in Greater China, Korea, Southeast Asia, and Australia.

As I mentioned on our last call, we recently opened our new flagship store in China at Kerry Center on Nanjing Road.

This 6,000 square foot location is the largest of our retail stores in the region, and prominently showcases all of our luxury product categories across both our Michael Kors collection and MICHAEL Michael Kors lines.

As I mentioned earlier, we hosted an exclusive event to celebrate the opening of our Shanghai flagship store, and introduced the Michael Kors jet-set lifestyle to the Chinese consumer.

Guests were treated to a never-before-seen runway show featuring a signature Michael Kors jet-set collection that illustrates the sophisticated and global appeal of Michael Kors design philosophy.

This live event was made available across a wide network of social media platforms, and produced the highest level of engagement we have seen to date.

We are incredibly excited about building the brand in the Asia market, and believe that the resounding success of this event shows that the consumer is truly beginning to understand that the Michael Kors brand is a global fashion leader for men and women leading a jet-set lifestyle.

Importantly, events like this serve to build awareness for Michael Kors brand, not only in China but across the globe.

Overall, we believe that the Far East is an important and growing market.

The Asian consumer is traveling more, and spending more while traveling which bodes well for our brand, and we believe that we are well-positioned to capitalize on this growing trend, which brings us to our travel retail business.

The travel retail business is strong and continues to gain momentum.

We ended 2014 with 50 travel retail locations in some of the best airports and travel destinations in the world.

Over the long-term, we believe that there is potential for 75 travel retail shops worldwide, including free-standing stores, shop-in-shops, and stores operated by specialists in the travel retail business.

Finally, we are on track to launch our new North America eCommerce site this fall.

Increasingly, consumers are turning to our website, and to social media platforms to shop and connect with the Michael Kors brand.

In fact, we saw our reach continue to expand across all social media channels, including Facebook, Twitter, Instagram, and Weibo.

Our growing base of fans and followers on these platforms drove increased traffic to our website during the quarter, and these platforms will continue to build brand awareness globally.

There is a lot of momentum behind the eCommerce business.

We think it's an ideal time to launch the new site, which will serve as a powerful marketing tool enabling us to create a strong connection to Michael Kors customers, as well as reach a broader audience.

We are excited about the potential of this channel, and over time we believe that the eCommerce business can be a multi-million dollar platform for the Company.

In summary, FY14 was another year of exceptional growth for Michael Kors.

We exceeded our financial expectations, and continued to make progress on our strategic growth initiatives.

Overall, there is great momentum behind the Michael Kors luxury brand, and we are poised to achieve our long-term sales and earnings growth objectives as a premier brand in 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 fourth quarter financial results, followed by our outlook for the first quarter and full year of FY15.

For the fourth quarter, total revenue grew 53.6% to $917.5 million, as compared to $597.2 million for the fourth quarter of last year with strong growth in each of our retail, wholesale, and licensing segments.

Retail net sales increased 49.7% to $408.4 million, as compared to $272.7 million in the fourth quarter of last year, resulting from a comp store increase of 26.2%, and the opening of 101 new stores since the fourth quarter of last year.

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

Wholesale net sales grew 55.5% to $473.7 million in the fourth quarter, compared to $304.7 million in the same period last year.

The increase was lead by strength in our accessories and footwear categories, the continued successful conversion of existing doors to shop-in-shops, and the expansion of our European operations.

In our licensing segment, revenue grew 79.1% to $35.4 million for the quarter as compared to $19.8 million last year, primarily driven by the continued strength in watches.

Gross profit increased 54.2% to $549.4 million, as compared to $356.2 million in last year's fourth quarter.

Gross margin expanded 20 basis points to 59.9%, 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, the higher margin product, in addition to geographic mix.

Total operating expenses grew 51.1% to $303.5 million in the fourth quarter of FY14, as compared to $200.9 million last year.

As a percent of total revenue, total operating expenses decreased to 33.1% from 33.6% in last year's fourth quarter.

SG&A expenses increased 50.4% to $278.2 million, as compared to $185 million for the fourth 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, and increases in corporate employee-related costs.

As a percent of total revenue, SG&A expense was 30.3%, compared to 31% for the fourth quarter of last year.

Depreciation and amortization expense was $24 million during the fourth quarter as compared to $15.2 million for the fourth quarter of last year, primarily due to the build-out of new retail locations, new shop-in-shops, and investment in our infrastructure to support our growth.

As the result of these factors, income from operations was $245.9 million or 26.8% of total revenue, as compared to $155.3 million or 26% of total revenue in the same period last year.

Income taxes were $85 million in the fourth quarter, as compared to $53.5 million for the fourth quarter of last year.

Our effective tax rate was 34.6%, flat with the same period last year.

Net income increased 59.3% to $161 million for the fourth quarter, and diluted earnings per share were $0.78, based upon 207 million weighted average diluted shares outstanding.

Net income for the fourth quarter of FY13 was $101.1 million or $0.50 per diluted share, based upon 203.8 million weighted average diluted shares outstanding.

Turning to the balance sheet, while we continue to make significant investments in the Company both through CapEx and infrastructure SG&A expense, we are generating strong cash flow from operations.

At March 29, 2014, cash and cash equivalents were $955.1 million, over 2 times the prior year balance of $472.5 million.

Free cash flow for FY14 was $416.3 million, as compared to $217.2 million in FY13.

The cash balance is primarily being driven by the increase in earnings.

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

Inventory totaled $426.9 million, and is compared to $266.9 million last year, an increase of 60%.

The growth in inventory was driven by increased sales as compared to the fourth quarter of last year, new stores, as well as our continued build-out of new shop-in-shops.

Capital expenditures for the quarter totaled $57.8 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 systems and distribution infrastructure.

We opened 10 stores in the quarter, 4 in North America, 4 in Europe and 2 in Japan, and ended the quarter with 405 retail stores including concessions.

Turning to our outlook.

For the first quarter of FY15, we expect total revenue to be between $840 million and $850 million, assuming a comp store increase of approximately 20%.

We expect diluted earnings per share to be in the range of $0.78 to $0.80, assuming a tax rate of 33.5% and 207.5 million shares outstanding.

We expect the first quarter gross margin rate to be slightly lower than last year, and operating expense rate to be moderately higher than last year.

For FY15, we expect total revenue to be between $4 billion and $4.1 billion, assuming a comp store increase in the high teens.

We expect diluted earnings per share to be in the range of $3.85 to $3.91, assuming a tax rate of approximately 33.5%, and 208.6 million shares outstanding.

Capital expenditures are expected to total approximately $400 million for FY15.

We expect to open 110 retail locations, including 45 in North America, 55 in Europe, and 10 in Japan in large select locations in key major cities, continue with our shop-in-shops conversions, and investment in infrastructure and systems.

In summary, we made great progress in our strategic growth initiatives during the fourth quarter.

We continue to invest in the Company, and are making plans for new warehouses and systems in all of our international locations.

Our strong cash position will allow us to make these investments in our infrastructure, in order to support our global expansion.

Overall, we believe that Michael Kors is well-positioned for continued long-term growth.

I will now turn the call back to John Idol.

Thank you, Joe.

In closing, there is strong momentum and significant runway for growth at Michael Kors.

We not only delivered excellent results in FY14, but we made strides in enhancing our infrastructure and strengthening our foundation, so that we can deliver upon our growth objectives for 2015 and beyond.

Everything we do embodies our jet-set luxury brand, as we continue to evolve and elevate Michael Kors products and retail experience to appeal to our fashion consumers.

There is a tremendous growth potential in each business, region and product category, and we are well-positioned to capitalize on these opportunities.

Our strong momentum and leading position within the rapidly expanding global luxury market gives us confidence that we can continue to deliver double-digit revenue and earnings per share growth over the long-term.

We will now open up the call for questions.

Thank you.

(Operator Instructions)

We will take our first question from Kimberly Greenberger with Morgan Stanley.

Oh, thank you.

Sorry, I had a problem getting my mute off.

Good morning, and congratulations on a really fine cap to a great year.

John, I am wondering if you can talk about, or Joe specifically on the segment reporting margins?

There was a huge increase in wholesale, a decline in retail, and a big increase in licensing.

Is that a reclassification of, or a change in the methodology in the way you are calculating those?

That would be super helpful.

And then John, if you look out to the upcoming fiscal year, given that you are talking about still very strong revenue and earnings growth, what are the things that you are seeing out in the market that are the most exciting over the next four quarters?

And is there some start to the normalization of markdowns that you are seeing beginning here in Q1, given the outlook you have for -- it sounds like a slight decline in gross margin?

Thanks.

So I will start with the operating profit margins.

There was no change in the methodology.

We do continue to see very strong operating margins in wholesale.

Because of the performance in wholesale (technical difficulties) there are very limited markdowns in allowances.

The licensing will tend to change a little bit because we charge our advertising expense to licensing, therefore licensing may change somewhat due to the timing of our advertising expense.

So good morning, Kimberly, and thank you for those kind remarks about our quarter.

We were very excited to see the results in the fourth quarter.

Obviously, given everything that was being talked about in the retail environment, we believe that we were probably best-in-class in terms of performance in our own freestanding stores, and obviously the strength in our shop-in-shops and department stores globally.

Looking forward in 2015, FY15, we are really excited about a number of things.

Number one, our freestanding stores continue to deliver -- there is some background noise if someone could mute their phone or whatever.

We are very excited about what is happening in our freestanding stores.

And again, we are capturing market share both here in the US and internationally, and it is really driven by our product.

First and foremost, always Michael and the team are continuing to be setting the trend and the tone for exciting fashion products, everything from our collection runway to our Michael lines.

And then, so we continue to see that as our cornerstone for strength.

Secondly, we think that we have really become a leader also in social media, and the way that we are communicating to our customers.

Again, whether that is through Facebook or Instagram or Twitter or, we are very focused now on Weibo, and how we are going to continue to talk to her and him around the globe.

Thirdly, the thing that excites us is the eCommerce business coming in-house.

As you know, there is definitively a trend where consumers are spending more time, not necessarily buying always online for the various brands but shopping.

For sure, they are shopping more online before they actually make their purchases.

So we believe that our eCommerce, our internet site is really not only critical for us from a growth revenue standpoint, but also from an ability to excite and engage our customer in a shopping experience, before they have ever even come into the stores.

And we will be talking in the quarters ahead about some very exciting technology that we are rolling out to our stores to complement that experience online.

In terms of normalization, our trends kind of remain the same.

We are off to a very good start again, in our first quarter.

So I am not sure we are yet seeing what you are mentioning.

And by the way, we have specifically said to you, it is going to come.

It is going to come.

We just haven't seen it yet, and hence the strong operating profit, strong gross margins in the Company that you can see us delivering on today's call and projecting out into the future.

Thanks so much, and good luck for the second quarter, first quarter.

Thank you.

Thank you.

We will move on to our next question, Brian Tunick with JPMorgan.

Good morning.

This is [Bilun Boyner] filling in for Brian.

Thanks for taking our questions.

I wanted to ask on your comp guidance, specifically how you are thinking about the traffic versus ticket or UPTs particularly for North America, maybe in terms of the product mix?

Is there anything you could share with us on your outlook for accessories versus non-accessories mix, and touch on performance of adjacent categories like jewelry, fragrance, and maybe comment on if you see an uptick to UPTs from those?

And finally from a pricing perspective, do you see any shift towards higher price points, or are any of your changes to AURs from a mix shift?

Thanks.

Okay.

Let me see if I answer all those things, if I understood them all.

First, off good morning.

We view traffic as a very important barometer of our growth, and we experienced double-digit comp store traffic globally, which we were very pleased to see.

We are equally as focused on conversion.

And I am also proud to say that we experienced double-digit conversion globally and in North America.

So we continue to look at those matrix as the most important matrix in us being able to achieve our comp store growth.

We have never really looked to drive up -- and I am going to talk about the average transaction.

Average transactions in our stores have remained relatively flat for the past almost since 2007 when we opened one of our first lifestyle stores.

So that is not something that we are really looking to do.

We think that one of the great things about Michael Kors is that you can come in and have an amazing fashion experience and want to come back multiple times, because your whole purchase for your season isn't taken in one visit with us.

In terms of accessories, clearly, the small leather goods business continues to outpace the actual hand bag business in terms of growth, and part of that is driven by the smaller bags also, which we classify into the small leather goods business.

So it's not just money pieces we are talking about, but it is products that are referred to sometimes as swing packs.

And those products are from a fashion trend standpoint, they are on fire right now.

Jewelry continues to be a very, very strong category inside of our owned stores, and then of course in the department stores and our specialty store distribution, and we see just tremendous growth opportunity in that business.

We actually believe that it could be 50% to 60% the size of our watch business.

And as you know globally, we believe we are one of the top 10 watch companies in the world today.

So we think that would put us as one of the top three or four jewelry companies, if we can really achieve our growth -- our goals over the next three to five years.

Again, lot of that will be driven by our freestanding stores, and some expansion that we are putting around the watch and jewelry category in our own freestanding stores.

And then, really on the pricing side, the only place that we expect to see higher prices on a go-forward basis, will really be in our collection hand bag business.

We are seeing great response to that category.

That is really in our kind of $1000 and up category.

And as especially as we build these larger flagship stores or enlarge some of our existing lifestyle stores, that category becomes more relevant for us.

And so in general, as you know, the higher priced luxury bags have moved up in pricing.

We don't expect that for the MICHAEL Michael Kors line, but we do expect that for our Michael Kors collection line.

Great.

Thank you very much.

Best of luck.

Thank you.

We will move on to our next question from Omar Saad with ISI Group.

Hello, thanks.

Two quick questions.

Great job by the way.

I guess, the first question is on the retail segment, the operating margins, do you -- they were under pressure a little bit in the fourth quarter, do you expect them to kind of stabilize and maybe rebound going forward, and given that calendar 1Q was kind of funky with all the weather and the Easter shift?

And then my second question is, as you look out at your revenue guidance for the year, I think high teens comps, 21% to 24% overall top line growth, that is probably the smallest spread that you have seen, at least since being a public Company.

Are you expecting to slow -- the wholesale business or the shop-in-shop conversions or new store openings?

I am just kind of wondering, that spread between comp store sales growth that you expect, and the overall revenue number seems a bit small.

Thanks.

Let me just address one thing in the operating margins in retail.

Actually our gross margins in retail were very similar on a year-on-year basis.

So that wasn't where -- what you are seeing in some of those operating margin declines is actually where we are taking rents of existing of stores early, retail locations that we might not have opened.

So you have something like Soho sitting without any sales and the rents starting.

So there is some things inside of that -- so we really didn't see anymore promotional activities in our business, so it wasn't that we had pressure on our retail business from a sales or markdown strategies.

We saw the same kind of sell-throughs in wholesale we did in retail.

And also, Europe again, as we are taking buildings in advance, and some of the other start up costs going along with the expansion in Europe, that is really what us impacting more of the operating on retail.

And I think you will see that more normalize out over the next couple of quarters, especially as we get some of these stores open.

That being said, we are also looking at additional fairly large flagships in Europe which will go through a similar situations with us.

And we have told you in past calls, this is very difficult for us to kind of time those things.

Rolling out in malls is relatively simple -- not simple, but it's easier for us to predict, and we also have shorter construction periods.

When you get into buildings, especially whether it's here in North America, the building that we are building in Soho, we are probably six months late due to construction issues and things.

When you get into these buildings, there is a lot more going on than you anticipate.

So there will be some of that fluctuation and we will hopefully be a little bit more clear in the next call, and define how that breaks out.

In terms of the comps and our overall top line growth, honestly comp store growth accounts for a very large piece of the retail growth.

Opening 50 stores is impressive, and it's nice -- I am sorry, well, opening a 100 stores impressive and nice, but it doesn't move the needle as much for us as comp store growth does.

So I think both in wholesale and in retail, comp store growth remains a critical measure for success for us on a go-forward basis.

Thanks, John, that's really helpful.

We will take our next question from Oliver Chen with Citigroup.

Hello, everyone this is Nancy Hilliker in for Oliver Chen.

Congratulations on a -- the strong quarter.

Our question is related to the margin impact you said is influenced by a mix shift in product and geography.

Can you talk about the impact that will have the rest of the year?

And also, if you could talk to us a little bit about eCommerce, is that factored into guidance in terms of top line and margins, and also what percent of sales do you anticipate that might be this year, that would be great?

Thank you.

Nancy, I am not sure we said that there was a margin impact.

Can you just maybe define your question a little more?

I will take that question.

So we did say that there was a positive impact due to both product mix and geographic mix, and this is a trend that we have been talking about for quite a long time.

We have said for some time that both product and geographic mix was going to have a positive impact, and we are seeing some of that.

So this year -- this quarter, our total accessories, which we define as everything other than ready-to-wear increased from 80% last year to 85% this year.

And obviously, we had accelerated growth in Europe relative to the growth in North America which has a positive impact.

So, yes, that is a trend that we have discussed in the past and we do believe that that will continue to have a positive impact in the Company's operations.

In terms of eCommerce, John obviously talked about the eCommerce and the impact.

And yes, the numbers are included in the projections, however, eCommerce, we don't break out at this point, and they are not going to have a significant impact in terms of revenue or operating income.

It is more the aspects that John has discussed, which we believe will be the short-term positive impacts from putting eCommerce in.

And eCommerce, just so everyone knows is, will not be a positive impact to our EPS in the first year due to all the investments that we are making.

We really see that as having a more positive impact over the next two to three years.

Thanks so much, and congratulations again.

Thank you.

Our next question comes from Erinn Murphy with Piper Jaffray.

Great, thank you.

Good morning, and congratulations on a great quarter.

John, just for you, you made a very interesting higher (inaudible), you brought in a Senior Vice President of Global Operations.

Could you just provide a little bit more context on something of her priorities as she starts there?

And then, Joe, a follow-up on the guidance.

You did mentioned the gross margin slightly down in Q1, operating expenses a little bit higher in Q1.

I may have missed this, but could you just quantify how you are thinking about margins for the full year?

And then, as we take a step back longer-term, are you still thinking about longer-term sales growth in that kind of low to mid 20% range and income growth in the 25%-plus range?

Thank you.

So actually I will take the SVP Global Operations who reports to me.

She -- her main focus is on our distribution centers today.

So we continue to work on the Whittier distribution center to ensure that it will be ready to provide distribution in North America over the next several years.

We then have a next major project of putting in a new warehouse, which is going to be owned and run by us in Europe.

And following that, we are then considering a new warehouse in North America.

In addition to that, we are looking at a new warehouse in Canada, and looking at our distribution.

In particular, she is focused on fulfillment for the eCommerce.

So she has got a lot of things on her plate, and consistent with what we have discussed about building the infrastructure, she will be focused on doing that.

In terms of the gross margin, we have talked about that for some time.

We will be having some normalization we believe, and hence the slight decrease despite the positive trends that I have talked about, in particular the growth of Europe, and then that is going to be consistent with the full year.

In terms of operating expense, I believe I have talked to everybody about kind of accidental leverage in the past.

It looks like we are attempting to obtain leverage.

In fact, we are expecting to reinvest in the Company.

And so, we are doing a lot of investments, and that will drive a slight increase in operating expenses.

Great, thank you.

And then just on the longer-term?

Yes, on the longer-term, we have provided guidance for FY15.

And beyond that, we have said that we believe that given our runway for growth and in particular in Europe and ultimately what Asia will provide us, that we do think that we have double-digit comp store capability.

We think that we have double-digit revenue and double-digit EPS.

We are not prepared to guide to a specific number at this point, but we feel really good about all of our opportunities.

And then, of course, we spoke -- I think it was two calls ago about the growing importance of the men's business in our Company and what that will mean for us long-term.

We think that is a $1 billion opportunity, and I have kind of went through that $300 million in men's sportswear, $300 million in men's leather goods, and then $300 million to $400 million in men's watches.

Now we won't have revenue growth because of the men's watches, but that will be clearly a licensing income opportunity for the Company.

So we see that as a big priority for us.

We will be announcing shortly that there will be freestanding men's stores that we are going to be opening globally.

It is a little premature to talk about the locations, and how many and when, but that is in our strategy.

So we are taking the men's business very seriously.

As you know many of our global luxury competitors derive very high percentages of their sales from men's and in particular leather.

But we think there is a great sportswear opportunity out there for us as well.

So we think that will provide additional growth for the Company over the long-term.

Great, thank you, and best of luck.

Thank you.

Our next question comes from Paul Lejuez from Wells Fargo.

Hello, thanks.

Just back on eCom for a second.

Sorry if I missed this, but will you be including eCom sales in your comps this year, or will you wait until you run it for a year before you include it?

And then second, just regarding Japan and China, how are customers responding differently to product?

What are the main differences between what the customers are looking for in your Asian stores versus US and Europe?

And just wondering what the brand awareness is in China?

Thanks.

ECommerce will not be in comp, and it will be reported in retail revenues, and it will comp when it is 53 weeks old or whatever, just like we would report any other comp store.

And obviously, we will -- as eCommerce gets up and running, we will talk a little bit more granular about it in the conference call.

It is just too early days for us to really -- to be able to give you a lot of guidance on it, because quite frankly we are going to learn our way through it.

We have a nice size business that we are transferring over from Neiman Marcus to ourselves.

So it gives us a good based platform to operate on, but it is not something today that will significantly impact our revenues.

As it relates to Japan and Chinese consumers, I would actually put them in two different buckets.

The interesting thing for us is the best sellers in the United States are the best sellers in Europe are the best sellers in Asia, so it really doesn't change globally.

What you have is in particular, I will start with handbags.

Handbags whether it's in Japan, we might have some color variations that need to be addressed, the color pink is very important in Japan.

Sizing issues are very important.

Obviously, there is certain height differences between people in North America, Europe and in Japan.

So those modifications we do in merchandising adjustments.

In watches, we obviously have a much more broader presentation of our demi watches as opposed to our larger watches, which you will find again more broadly embraced in North America and in Europe.

And in footwear and Japan, there is obviously some different sizing issues, so we have wider lasts, et cetera.

So we are doing all those things.

Japan is just going to take us time, because the consumer really needs to understand what does American luxury mean.

There is not a great history in Asia of American luxury.

I would tip my hat to Tiffany.

I think they have done a brilliant job of defining American luxury.

But there is not a lot of other companies who have done that and done that well.

And so, we are really working very hard at trying to do that.

In China, there is very -- there is not a lot of differentiation between the product again that is selling there, versus what is selling in US and Europe.

It is much more closely aligned.

And so, we don't have to make a tremendous amount of merchandising changes there, again, there are some tweaks we are making.

Obviously, there is not a lot of people with blonde hair in that region of the world.

So we are selling certain colors differently than we would sell if we are in Norway or in different northern regions of Europe, et cetera.

So we do make some of those changes.

And again, we have merchandising teams on the ground in all the various regions around the world, so we are close to the business.

And I think you know us as a Company, we move very, very rapidly in terms of making changes to adjust to the different marketplaces.

But again, we see the brand really starting to gain some traction with the Japanese and the Chinese, and we see them interestingly enough, traveling a lot, and we see them in our travel destinations.

And we are watching very closely how they are purchasing, and it is starting to accelerate nicely.

Brand awareness?

Yes.

We haven't done it yet in China, mainly because we know the answer to the question, and we will do it this year.

We know it's very low.

We really only been at this for 2.5 years in China, so we are just not even focused on that for the moment.

But we will do the brand awareness study this coming up year, and then begin to build off of it at that point.

Thanks, good luck.

We will take our next question from Randy Konik with Jefferies.

Okay, great.

Thanks a lot.

I guess, my first question is regarding -- just going back to the margin commentary.

So are you just making a statement that you expect, I guess, Joe when you look at the model, that we should expect year-over-year improvement in the retail segment operating margins on a sequential go-forward basis, given that we will start to get these stores opened in Europe?

And then just longer-term, how should we be thinking about the retail segment operating margin potential, versus the wholesale segment operating margin potential?

And then, I guess, just lastly how should we be thinking about the revenue split of the $1 billion potential in Europe between wholesale and retail?

Thanks.

This is John.

I am going to address that, just for a moment.

It is going to be a little difficult to predict the actual quarter by quarter operating margin for retail as I said before, due to some of the timing of the openings of stores and certain investments that we are making in retail regions, in particular in Europe where it impacts us.

So we really don't see any dramatic sequential change in the gross margins and the operating margins.

They are going to, as we pointed to you we think they will be down slightly next year, only because as we have talked about normalization we think will ultimately be more of a factor in the business.

But when you look at our gross profit for the fourth quarter which was 59.9% against last year's 59.7%, we are really about flat.

So it moved around a little bit in the mix and categories, but it is really not something that we are planning to have dramatically decline or dramatically increase in either direction.

What we will see happen over time, and especially over the next two years, retail is going to become a bigger part of the total business of the Company, where today retail and wholesale are roughly equal.

Over the long-term, we have told you that retail will probably look more like 70%, 75% maybe as high as 80% of our Company's business, and you are going to start to see that happen over the next kind of two to three years.

Then you will see some change that will be reflected, because that will impact the profitability, and in particular the gross margin of the Company, because the retail division has higher gross margins than the wholesale division.

So in terms of the retail split in Europe, we will, as you know the European wholesale business is going to be very important part of our business.

It is primarily the specialty shops, it is a very clean and strong business, but eventually, Europe will be slightly more retail than it will be wholesale.

Got it.

Can you hear me?

Yes.

I am sorry.

So just to be clear, from a end of FY14 year retail operating margin versus and where the wholesale operating margin kind of sat for the whole year, do you see room for the retail operating margin to continue to move higher, and the wholesale operating margin to continue to move higher long-term?

So in terms of retail as John mentioned, the start-up of the European business tends to be a little bit more expensive, so therefore the retail operating margins tend to have some pressure on them.

We kind of accelerated our roll out in Europe in FY14.

We again in FY15 have a significant rollout of retail stores in Europe.

After that, I believe that there will be a upside to the European, to the retail operating margins.

On the wholesale operating margins, we don't have that upside potential.

And as a matter of fact, my expectation would be that the wholesale operating margins would come down as the business normalizes, and we have more normal markdowns and allowance cadence.

Okay.

That's very helpful.

Thank you.

And just to further clarify, because I do believe there is a bit of misconception, at least I am hearing a theme from the questions.

At the year-end, our retail operating margins are roughly flat as a percentage on a year-on-year basis, and our wholesale margins operating margins were up slightly.

And so, again to reiterate what Joe said, we don't think next year our operating margins in retail will change significantly higher or lower, so I think they are relatively consistent.

And if anything, we would say our wholesale would come down slightly from where it is today, given normalization.

So I just want to make sure everyone is clear, because our gross margins in actual, in our retail business increased this year.

So I want to repeat that.

Our gross margins in retail actually increased this year.

And the reason why I want to point that out is, that points out the health of the business for the Company.

Thank you.

That concludes today's question and answer session.

I will turn the conference back over to Mr. John Idol for any additional or closing remarks.

I want to thank everyone for joining us today.

And I want to, again applaud our 10,000 employees around the world who helped deliver some extraordinary results for FY14, and they are poised, ready and excited to deliver very exciting results for this Company in FY15.

We look forward to speaking to you on the next call.

Have a great day.

That concludes today's conference.

We thank you for your participation.