Capri Holdings Ltd (CPRI) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Michael Kors Holdings Limited first-quarter 2015 conference call. (Operator Instructions). As a reminder, today's conference is being recorded. Now I would like to turn the conference over to Christina Lack, Vice President, Treasurer. You may begin.

Good morning and thank you for joining us for our first-quarter earnings call. Presenting on today's call are John Idol, Chairman and Chief Executive Officer and Joe Parsons, Chief Financial and Chief Operating Officer.

Before we begin, let me remind you that certain statements made on this call may constitute forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those that we expect. Those risks and uncertainties are described in today's press release and in the Company's SEC filings, which are available on the Company's website. Investors should not assume that 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' first-quarter fiscal year 2015 earnings call. With me today is Joe Parsons, Chief Financial and Chief Operating Officer. I will begin with a brief overview of our first-quarter performance and discuss our long-term growth opportunities as we continue to expand our presence as a leading global luxury fashion brand. I will then turn it over to Joe for a detailed review of our first-quarter financial results and our outlook for the second quarter and full year.

We are very pleased with our first-quarter results, which we believe demonstrate the great momentum in our brand and the significant growth opportunities that lie ahead. Michael and our design team continue to deliver an amazing diversified collection of fashion products that is resonating with consumers worldwide. This has positioned Michael Kors as a true luxury lifestyle brand with a compelling offering of handbags, small leather goods, footwear, ready-to-wear, watches, jewelry, eyewear and fragrance.

The strong performance across our productlines and geographies contributed to our financial results in the first quarter. Revenue grew 43% to $919 million and gross margin expanded 20 basis points. Income from operations grew 40% leading to an operating margin of more than 30%. We achieved these strong results as we continued to successfully execute on our six growth strategies.

First, revenue in North America grew 30% driven by a comparable store sales increase of 18.7%. We have been very successful in our North American business thus far and we are still building momentum. As we look ahead, we believe that we continue to have significant growth opportunity in this region driven by comparable store sales growth, new store openings and expansions, shop-in-shop conversions and expansions and the transition of our e-commerce business in-house. In addition, we believe that the extension of certain existing categories will fuel incremental growth of footwear, women's ready-to-wear and menswear.

Second, we are on track with our retail expansion in North America. During the first quarter, we opened 13 net new stores. Long term, we believe that the North American market can support 400 stores, excluding potential men's locations.

Third, we successfully converted 108 department store doors into branded shop-in-shops globally and ended the first quarter with 1,670 shop-in-shops worldwide. For fiscal year 2015, we now plan to convert 750 department store doors into shop-in-shops across all categories globally.

Fourth, in Europe, revenue grew 128% driven by a comparable store sales increase of 54.2% and the opening of 21 locations. We see great runway for growth in Europe. Over the long term, we continue to believe we can expand our store base to 200 locations and now believe this market can generate revenue of approximately $1.5 billion for Michael Kors. This growth will be driven in part by store openings in existing and new markets, the expansion of select retail locations, as well as the increased penetration of the wholesale business in this region.

Fifth, our business in Japan continues to develop. Revenue in the quarter grew 89%, driven by a comparable store sales increase of 48.8% and the opening of four new locations during the quarter. Looking forward, we continue to believe that this market can support 100 stores.

Sixth, we opened nine locations in the Far East region through our regional licenses, bringing our total to 112 stores. Stores in this region saw strong double-digit comparable store increases in the first quarter. Overall, there is a tremendous opportunity for us in Asia and we are in the early stages of growth and believe we could ultimately have 200 stores in this region in the long term.

In addition to these core strategies, we are just now starting to put together a greater emphasis on the men's business and you will see this clearly displayed in our new soon to open SoHo flagship store, which will feature an entire floor devoted to men's. From there, we will begin to test freestanding men's stores next year and believe that there may be the potential for as many as 500 men's stores worldwide over the long term. To lead the development of this important strategy, we recently brought Mark Brashear on board as President of the men's division. Mark's background with Hugo Boss and Nordstrom makes him a perfect fit to lead our men's expansion. With the right team in place, I believe that we have the potential to be a leading global menswear brand.

Turning to our segment performance for the quarter, retail net sales grew 48% with global comparable store sales increasing 24.2%. This marks our 33rd consecutive quarter of comp store sales growth, which is best-in-class performance and speaks to the continuing demand for our luxury products. Growth in the retail segment was driven by 115 new stores opening since the first quarter of last year with 38 net new store openings in the first quarter. We ended the quarter with 443 company-owned retail stores globally. In addition, we had 162 locations operated through our licensing partners bringing our total to 605 stores and concessions worldwide.

There is a great runway for growth in our retail business globally and we continue to strategically open new stores to ensure we are in the best cities and the right locations to serve our customer base. Ultimately, we believe that we can have 700 company-owned retail stores worldwide, which does not include potential men's locations.

We are also moving forward with our store expansion plans. We expanded or relocated a total of six locations globally, roughly doubling the average size of these stores to approximately 5,000 square feet. The larger stores enable us to have a more prominent presentation of footwear, ready-to-wear, watches and jewelry, which we believe will drive increased frequencies of visits and incremental purchases. We are pleased with the performance of these locations and we believe we can maintain high sales per square foot productivity in our expanded stores.

In our wholesale segment, net sales grew 40% driven by strong performance in both accessories and footwear, as well as the expansion of our European operations and the continued conversion of wholesale doors into branded shop-in-shops. For fiscal 2015, we now expect to open approximately 750 shop-in-shops worldwide in ready-to-wear, accessories and footwear. Overall, we are very pleased with both the first-quarter performance and the future opportunities in our wholesale segment.

Turning to our licensing segment, revenues increased 30% driven primarily by the strength in watches and jewelry, as well as growth in our fragrance business. We are expanding our watch and jewelry offering both in our retail stores and with our wholesale partners and rolled out an additional 30 watch and jewelry shop-in-shops in department stores worldwide during the first quarter. We now have 155 watch and jewelry shops globally and continue to believe that there is an opportunity for approximately 500 shop-in-shops globally over the long term.

We also continue to expand our fragrance offering. Our new men's fragrance, Michael Kors for Men, will launch in September and will be available exclusively through Macy's, as well as our own boutiques and website. The scent was created with the man on the go in mind and balances urban sophistication and rugged style. We are also launching an ad campaign to support the scent, including a thrilling TV spot, reminiscent of an action movie and print ads that exude jet set glamour.

Now for our operations by region. In North America, revenue grew 30% to $719 million during the quarter. Comparable store sales increased 18.7% and we opened 13 net new locations ending the quarter with 301 North American retail stores. Looking ahead, we remain on track to open 45 North American retail stores this fiscal year. We are also on track to bring our North American e-commerce site in-house this fall, which we see as a tremendous opportunity to grow our brand. Our new site will serve as a powerful marketing tool and will also allow us to more fully engage our customers every step of the way on their path to purchasing a Michael Kors luxury product.

In our North American wholesale business, overall growth was driven by comparable store sale increases primarily in accessories and footwear, which were similar to or greater than the increases in our retail stores. We also continued to successfully convert North American department store doors into shop-in-shops. We will continue these conversions going forward to create a world-class presentation of our brand within department stores.

Our brand is expanding internationally as well. In Europe, we saw revenue growth of 128% during the quarter to $185 million with a comparable store sales increase of 54.2%. We opened 21 stores in the region and ended the quarter with 101 retail locations across Europe. We continue to see a positive response from consumers as we are very pleased with the performance in this region.

In the wholesale business, strong sellthroughs continued in both department and specialty stores and comparable store sales, primarily in accessories and footwear, were similar to or higher than our retail store comp growth during the quarter. We clearly continue to gain strength in Europe as our exceptional product and unique jet set experience drive acceptance of our brand.

That said, we have only just begun to maximize our potential in this region. For fiscal year 2015, we expect to open 55 new stores in Europe and are on our way to 200 Michael Kors retail locations in the long term. We also anticipate that our wholesale business will continue to expand as we capture marketshare and increase our brand presence. In all, Europe is a very important and exciting piece of our growth strategy. This growth is coming from several categories, including accessories, footwear, ready-to-wear, as well as jewelry and watches. Based on the strong acceptance of our brand in Europe, as I said earlier, we now believe that we can reach revenue of approximately $1.5 billion over the long term in this region.

Turning to Japan, we continue to make steady progress with our business and remain excited about the great opportunity that this market provides for the Company. We are still in the early stages of building this business and remain focused on creating the strategic framework to support long-term growth. During the first quarter, revenue in Japan increased 89% to $15 million and comparable-store sales increased 48.8%. We opened four net new retail locations during the quarter and now have 41 locations in this market.

We also saw strong growth in the rest of the Far East with a double-digit comparable store increase in retail stores operated by our licensed partners. During the quarter, nine stores were opened in the Far East and we now have 112 Michael Kors retail locations in Greater China, Korea, Southeast Asia and Australia. Overall, Asia is an important region for development as we continue to grow our luxury brand globally. As such, we recently brought Stephane Lafay on board to serve as President of Asia. Stephane has a long history of building luxury businesses in the region, including his recent experience leading Tiffany's growth in Asia. He will be tasked with capitalizing on the momentum that we have created thus far to reach our long-term goals. As we have said, we believe that the Asian consumer is truly starting to understand the essence of Michael Kors as a global fashion luxury brand. Under Stephane's direction, we will continue to build the brand in this region and grow the business over the long term.

Finally, the travel retail business continues to be strong during the quarter. We now have 66 locations in the best airport and travel destinations worldwide and believe that we could ultimately have 100 travel retail shops globally.

In summary, we are off to a great start in fiscal 2015, but our focus goes well beyond one year. In order to support our growth objectives, we are making strategic investments in our business. We are building our store base, expanding or relocating select stores, building shop-in-shops, investing in marketing, as well as in our distribution centers and technology, to ensure we have the foundation to support our global growth. Looking forward, we have a long runway ahead of us to remain poised to deliver our long-term sales and earning growth objectives. 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 fiscal year 2015 first-quarter financial results followed by our outlook for the second quarter and full year. We exceeded our top and bottom-line expectations in the first quarter, reflecting strong demand for the Michael Kors brand and continued progress across our strategic growth initiatives. We are raising our full-year guidance primarily to reflect the better-than-expected performance in the first quarter, which I will discuss in more detail in a few minutes. We will continue to make strategic investments in our business to support our growth plans and position us to realize our long-term potential as a global luxury lifestyle brand.

Now turning to the first-quarter results, total revenue grew 43.4% to $919.2 million as compared to $640.9 million for the first quarter of last year with strong growth in each of our retail, wholesale and licensing segments. Retail net sales increased 47.5% to $480.2 million as compared to $325.7 million in the first quarter of last year resulting from a comp store increase of 24.2% and the opening of 115 net new stores since the first quarter of last year. Our comp store sales performance was driven by increases in traffic and conversion. We also saw strong performance across categories with the largest increase in accessories, primarily handbags and small leather goods.

Wholesale net sales grew 40.0% to $406.8 million in the first quarter compared to $290.6 million in the same period last year. The increase was led by accessories and footwear categories, as well as our continued conversion of wholesale doors to shop-in-shops and the expansion of our European operations.

In our licensing segment, revenue grew 30.5% to $32.1 million for the quarter as compared to $24.6 million last year, primarily driven by watches, as well as jewelry. As you know, we are transitioning our new eyewear partner, Luxottica, in January 2015 and we expect this transition to impact our royalties for at least two quarters. We are anticipating single-digit to low teen revenue growth in our third and fourth quarters in the licensing segment. Additionally, because amortizing expense is charged to licensing, we anticipate lower operating margins as the expense will be higher relative to the revenue increases in the licensing segment.

Gross profit increased 43.9% to $571.6 million as compared to $397.3 million in last year's first quarter. Gross margin expanded 20 basis points to 62.2% reflecting a year-over-year increase of 63 basis points in our wholesale segment, primarily driven by a geographic mix shift, offset in part by a decrease of 48 basis points in our retail segment resulting from increased markdowns. Total operating expense grew 47.6% to $294.9 million in the first quarter of fiscal year 2015 as compared to $199.7 million last year. As a percent of total revenue, total operating expenses increased to 32.1% from 31.2% in last year's first quarter.

Selling, general and administrative expenses increased 44.7% to $265.9 million as compared to $183.7 million for the first quarter of last year. The increase in selling, general and administrative expense is primarily due to higher retail occupancy and salary costs related to new store openings, higher distribution costs as we continue to improve warehouse operations, increases in corporate employee-related costs and an increase in advertising and marketing expense.

As a percent of total revenue, selling, general and administrative expenses was 28.9% compared to 28.7% for the first quarter of last year. Depreciation and amortization expense was $29.0 million for the first quarter as compared to $16.0 million for the first quarter of last year, primarily due to the buildout of new retail locations and the expansion of existing locations, accelerated depreciation related to store expansions, new shop-in-shops, increase in lease rights purchased for our new European stores and investment in our infrastructure to support our growth.

Depreciation and amortization increased to 3.2% of total revenue during the first quarter compared to 2.5% for the same quarter last year. As John mentioned, we are strategically investing in our business, including building our store base, expanding or relocating select stores, converting and expanding shop-in-shops and improving our distribution centers and technology. As a result of these investments, you will see larger year-over-year increases in depreciation as a percentage of total revenue going forward. As a result of these factors, income from operations was $276.8 million, or 30.1% of total revenue as compared to $197.6 million or 30.8% of total revenue in the same period last year.

In the retail segment, operating margin declined 198 basis points. 150 basis points of the decline was due to an increase in retail operating costs attributable to accelerated depreciation expense associated with expansions and relocations, retail overhead costs, including preopening rent expense and higher e-commerce cost. The remainder was primarily due to a decrease in gross margins. For fiscal 2015, we believe that gross margins for the retail segment will decline approximately 50 basis points and operating margins for the retail segment will decline 100 basis points due to the continued investments that I mentioned earlier.

Wholesale operating margin expanded 100 basis points, primarily as a result of the gross margin improvement discussed earlier, as well as operating expense leverage.

Finally, the licensing segment margin decreased 330 basis points due to an increase in operating expenses, including advertising costs, as well as administrative expenses incurred in connection with the formation of our new licensing operations in Europe.

Income taxes were $88.3 million in the first quarter as compared to $72.1 million in the first quarter of last year. Our effective tax rate was 32.0% as compared to 36.6% in the same period last year. The decrease in our effective tax rate was primarily due to the increase in taxable income in certain non-US subsidiaries, which are subject to lower statutory tax rates.

Net income increased 50.2% to $187.7 million for the first quarter and diluted earnings per share were $0.91 based upon 207.2 million weighted average diluted shares outstanding. Net income for the first quarter of 2014 was $125.0 million, or $0.61 per diluted share based upon 204.3 million weighted average diluted shares outstanding.

Turning to the balance sheet, at the end of the quarter, cash and cash equivalents were $1.1 billion as compared to $639.2 million at the end of the first quarter last year. There were no outstanding borrowings under our credit facilities in either year. For the quarter, inventory increased $207.8 million, or 65.0%, versus last year, which compares to a 43.9% increase in our sales for the same time period.

As you know, we typically plan inventory growth in excess of our sales growth. During the first quarter, there were some factors that resulted in our current inventory levels. Approximately one-half of the additional inventory increase was related to the expansion of our retail business, including an additional 42 store openings and expansions planned for the first three quarters of this year as compared to the same period last year, inventory for comp store sales growth and the preparation of the e-commerce launch. The remainder was primarily related to timing differences due to early receipt of goods this year versus last year and in Europe, the increase in replenishment stock and a category mix shift towards higher priced goods. As we have stated in the past, given our stage of growth, our inventory increases will continue to outpace sales growth as we open and expand our retail stores, expand replenishment stock, convert shop-in-shops and roll out our e-commerce business.

Capital expenditures for the quarter totaled $43.2 million. These expenditures were related to global retail store expansion and renovation, construction and renovation of shop-in-shops, investment in infrastructure, systems infrastructure and expansion of our distribution and corporate facilities. We opened 38 net new stores in the quarter, 13 in North America, 21 in Europe and 4 in Japan and ended the quarter with 443 retail stores, including concessions. In addition, we expanded 6 locations globally, 5 in North America and 1 in Europe and converted 108 department store doors into shop-in-shops.

Turning to our outlook, for the second quarter of fiscal year 2015, we expect total revenue to be between $950 million and $960 million assuming a comp store increase in the high teens. We expect diluted earnings per share to be in the range of $0.85 to $0.87 assuming a tax rate of 32.5% and 208.0 million shares outstanding. We expect gross profit margin to be approximately 50 basis points lower compared to the second quarter last year and operating margin to decrease approximately 200 basis points as compared to the second quarter last year.

Operating expense during the second quarter are expected to be higher as compared to the same period last year due to increased retail operating costs associated with new and expanded stores, higher e-commerce costs, increased overhead costs relating to enhancements of our distribution center and technology and higher depreciation and amortization expense, including the impact of accelerated depreciation related to store expansions.

For the fiscal year 2015, we expect total revenue to be between $4.25 billion and $4.35 billion assuming a comp store increase in the high teens. We expect diluted earnings per share to be in the range of $4 to $4.05 representing approximately 26% growth versus fiscal year 2014. The expected diluted earnings per share range assumes a tax rate of approximately 32.5% and 208.4 million shares outstanding. We expect gross margin to be approximately 50 basis points lower and operating margin to decrease approximately 150 to 200 basis points as compared to fiscal year 2014. The operating expense increase for the year will be associated with the investments I described earlier.

Capital expenditures are expected to total approximately $400 million for fiscal year 2015. The majority of these expected expenditures related to new retail store planned openings for the year with the remainder being used for investments in connection with developing new shop-in-shops, buildout of our corporate offices and distribution centers and enhancing our information system infrastructure. We expect to open 110 retail locations, including 45 in North America, 55 in Europe and 10 in Japan, expand and/or relocate 41 retail stores globally in select locations in key cities and convert 750 shop-in-shops.

In summary, we continue to make progress on our strategic initiatives as we invest in the business and remain well-positioned for long-term growth. I will now turn the call back to John Idol.

Thank you, Joe. In closing, we are extremely pleased with the strong momentum we have behind our brand. As we solidify our leading position within the global luxury market, we are investing in our Company to enable us to fully capitalize on the long-term potential in our business segments across our categories and throughout our geographic regions.

When we look at our growth opportunities, we see ample runway in North America, our largest market, as well as in our emerging regions, including Europe, Asia and Latin America. Our ability to achieve our long-term potential, first and foremost, stems from our product offering. We continue to deliver luxury product assortments with the highest quality standards that our customers demand and trust. We are a leader in the global luxury market, but we still have enormous growth potential ahead of us.

Handbags and small leather goods represent approximately 70% of our global net sales. We see additional growth opportunity in our less-developed categories. Today, men's and women's ready-to-wear combined represent 13% of our global net sales. Footwear is 10% and watches and jewelry are 7% combined. We believe that there is an opportunity to expand marketshare in each of these categories given their current size and the great performance in our stores and shop-in-shops.

The driving force behind our product is Michael himself, an iconic designer who has his finger on the pulse of global luxury fashion. People around the world look to him for fashion and style cues and trust him to create products that make them look and feel fabulous. Michael's motto is why not have it all and the passion for design that is embodied in every product, combined with its unique Michael Kors experience, makes you feel like you can have that. It is this attitude that has made Michael Kors synonymous with fashion leadership and jet set luxury.

And finally, our jet set luxury in-store experience creates a state of mind for consumers embodying glamour and style. Our consumer aspires to have a lifestyle that is on-the-go. Our jet set philosophy enables us to give each customer a luxury experience and to create a personal attachment to the brand. In the end, we believe the ultimate luxury in life is to feel great about yourself. And that is how we make consumers feel every time they wear the Michael Kors brand or step into a Michael Kors store.

When you combine all these unique facets of our business, it is clear why Michael Kors has multiple geographic and product expansion opportunities as a global luxury fashion brand. For fiscal 2015, we are poised to achieve 30% plus projected revenue growth and 26% projected earnings growth. At the same time, we are positioning ourselves to deliver sustainable double-digit revenue and earnings growth over the long term. We will now open up the call for questions.

(Operator Instructions). Kimberly Greenberger, Morgan Stanley.

Great, thank you. Good morning. Really terrific result this morning. John and Joe, congratulations. John, I am wondering if you can talk about the progress on bringing e-commerce in-house and what you have planned for that business and any way to sort of integrate e-commerce with your in-store experience here over the next one to two years.

First off, thank you, Kimberly. We are very proud of that quarter. And I just might add that I think we delivered best-in-class results given what other retailers have reported. And I might also add we delivered best-in-class results in what other luxury retailers reported. Many time analysts look at us compared to only one company and I think the analysts should look at us compared to the global luxury marketplace and look at the results that we achieved.

The e-commerce business is really exciting. We are on track to launch the e-commerce site in the beginning of September. So please all of you go on and shop, we would be very appreciative. This site looks phenomenal and as I've said to you previously, we really did not think we were best-in-class in our current e-commerce experience. So that experience will now be what we believe will be best-in-class in terms of a shopping experience, also in terms of the branding experience, in particular our Destination Kors portion of our website, which really will tell you everything about what is happening with the brand around the world, what is going with Michael's fashion advice and we are really very powerful that way with consumers. They look to us as almost their personal stylist and again, not many companies have that ability. Certain companies are brands. We are a fashion leadership company globally.

And the integration will be through omnichannel and that will come on through the balance of the year where we will be able to create a seamless experience for the consumer. When they shop online, we can deliver it from the store, we can deliver it from the website and as you know, this is becoming more and more of a competitive issue in the marketplace and the speed at which you can deliver product. So we are working very, very diligently on that and I'd say that would be more of first part of next year where, again, we are going to try and take a leadership position in how we give service to that customer. We believe that part of being a luxury brand is service and that is going to mean speed to delivery in-house.

And then lastly I just might add that we view this as very substantial for the business long term. We ultimately think that this can be up to 20% of our global revenues generated in the retail side from e-commerce. It is going to take us some time to reach that goal, but that is our goal and we think that that will really enhance our overall experience with our customer.

Terrific. Can I just ask one quick follow-up? I'm wondering if you have an update on --.

Kimberly, can you speak up? We can't hear you.

Sorry. I hear the sirens in the background there. Typical New York day. So I am wondering if you could just update us on the China business, your thinking. Have you considered the timeframe in which you might consider bringing that business in-house?

Yes, so let me talk about Asia first in total. As you know, we are very pleased with what is happening in Japan. You saw excellent comp store results there and that is very similar to what is happening in Asia. Not only are we seeing that in Asia, but we are seeing the Asian consumer traveling. We are seeing her all throughout Europe in our larger tourist destinations, obviously, France, London and certain parts of Italy and then in our airport locations. So they are fast becoming our number one traveling customer for us overtaking what used to be Brazilian and Russian. So we know that this is taking hold. And as I am sure you are aware, it is estimated that 50% of all the luxury goods purchased by Chinese in particular are purchased outside of Mainland China.

So Stephane has joined the Company. We are going to be analyzing certain changes in arrangements with certain licenses that are actually coming due shortly and other ones that we might convert into joint ventures or in 100% takebacks into the Company. So we are not really ready to discuss that yet, but you can be assured that some of that will be on the horizon in the not-too-distant future.

Terrific. Thank you and good luck here.

Thanks, Kimberly.

Brian Tunick, JPMorgan.

Thanks. Good morning, all. Add my congrats as well. I guess one question for John and one for Joe. I guess, John, on Europe, can you maybe update us sort of on where are you from a brand awareness perspective, where are the share gains coming from now and as importantly as you try to be a $1.5 billion opportunity in Europe, where does that share come from? And then maybe just, Joe, on the gross margins at retail, I think you said down 50 basis points. Just curious there, is that mix shift, markdowns, competition? Just maybe give us a little more color. You did say ultimately gross margins would start coming down, but just curious what is going on there. Thanks very much.

Okay, Brian, well, first off, thank you for joining the call today. Number one, as we've said in the past, marketshare in the US is at around 89% just as a frame of reference -- I'm sorry -- brand awareness, brand awareness is around 89% and in Europe, brand awareness is now at approximately 49%. So we have always said to everyone that once we kind of get north of that 50% area, you really start to see an inflection develop. The only market that we are north of 50% is in the UK and we are kind of on the cusp in Germany. The balance of the markets are still in kind of the 30% to 40% range, 40%, 45%. So lots of opportunity for growth there.

So marketshare, and this is a really good point and I'm glad you raised it. Obviously, we've said in previous calls where was that marketshare coming from and in our opinion, at that point in time, it was coming from a lot of smaller regional players. We don't believe that is true today. We actually know that we are today taking marketshare from the leading luxury companies. In Europe, as I am sure you are aware, we sit on the best street locations next to the finest luxury companies that many of you cover and we are watching. We are watching the customers go into those stores, come into our stores, shop and leave with shopping bags from Michael Kors and they might be carrying those other luxury shopping bags as well.

So in Europe, we are definitively taking marketshare from that category and by the way, we are seeing the same thing happen in Asia as well. So we feel really good about our opportunity. We will probably just tip north of $1 billion next year for the European business. So that is already -- no one has built a business of this size that quickly and with the sustainability of which we are building it in terms of the locations and the way we are building the brand with the consumers is really extraordinary. And that is being done by obviously our 10,000 employees around the world.

I am going to touch on the gross margin for one second and then turn it over to Joe as well. The gross margin in North America, because I'd like to just clarify some reports that I read, which were actually incorrect, we had the same amount of SKUs on sale this year as we did last year. So whomever wrote the earlier reports, that is incorrect. Secondly, we did not take any different position on our markdowns inside the stores as we did last year at the same point in time. So we are very proud of the fact that we decided not to enter into the deep discounting fray that obviously occurred in the second calendar quarter due to excess inventories by a lot of retailers.

That being said, what we did have is we did try to bring some fall merchandise in early into our stores in the latter part of May, early part of June to try to get a jump on the fashion trend. That did not really work for us to be frank. So we'll kind of probably look at that on a go-forward basis and especially after there was a long winter, I think people were really ready to continue to buy spring a little bit longer than they were previously. And we just anticipate that a more normal pace for the business is really what is relevant and hence the guidance for the margin. And again, we don't think that 0.5% is anything significant. We have always said that our margins are probably a little outsized both in gross margin and in operating margin somewhat because of the very, very quick sellthroughs that we had and secondly, because of the fact that we've had, as Joe has mentioned many times, accidental leverage. And I will let him speak about that.

Yes, the business has just been so good. I really don't have a lot to add -- historically, it has been so strong. I don't have a lot to add other than we are seeing the trends today and we are feeling very good about the business, but we think that we are anticipating this 50 basis points decline.

And by the way, one last thing, Brian, too, our handbag and small leather goods business continues to comp at the rates you saw in our report and/or higher. So again, it just shows the strength of the brand and the business with the consumer and I'll talk a little bit later about that in the call. Thank you, Brian.

Erinn Murphy, Piper Jaffray.

Great, thank you, good morning and congrats on a very solid first quarter. I guess, John, first for you, as you think about the comp drivers during the first quarter, could you just maybe speak to how the trends varied between April, May and June in the US, as well as in Europe? And then as we head into the back-to-school fall season, what product categories and launches are you most excited about as you think about fueling this growth?

Erinn, we actually had a very good April and May. June was a little softer for us and as I said, that was really sadly self-inflicted. We brought that fall merchandise in early. You may have seen it in the stores. It just wasn't the right thing to do in hindsight. That being said, we converted very quickly. As you know, we are fast and we moved out of that product quickly and then have our new camouflage delivery on the floor right now and I might add that we are off to a very successful start in July so far. So our customer is super, super smart. We've always told you that fashion is what leads our Company. That is what is leading us globally. Many people write about us and competitors against this and that, why is Michael Kors successful. It is because of our product category.

So then what you talk about in terms of what are we excited about for the fall season, again, what is interesting is two really big drivers for us that are kind of coming on stronger than we continue to anticipate is our shoe business did excellent during the quarter, both in our own retail stores and in the wholesale environment. And then also the jewelry business continues to be strong. What we like about those two businesses, they are just bringing more customers into our stores shopping different categories and hence, that is why we are going to upsize -- Joe mentioned earlier in the call we are going to upsize approximately 41 stores and the primary reason we are doing that is really we are not enlarging the handbag spaces in the stores, we are enlarging watches and jewelry, footwear and our women's ready-to-wear. And the early results of that are quite strong.

So yes, we will end up with 400 stores in North America and I've seen the comment that we are opening too many stores, which we would absolutely disagree with and in fact, we will be pretty much complete with our North American store rollout within the next 24 months or so. And then what we are going to be doing is really looking at upsizing our best stores, our high productivity locations and that expansion will come from our product extensions.

So again, we think we are poised to continue our growth in North America and have the right strategy to do that and I might also add we never changed our strategy in this Company since 2006, 2007. So everything that we have been saying since before our IPO, during our IPO and to this day is exactly what we are doing in terms of our pace and in terms of how we are building out the business.

That's great to hear. And if I could just follow up on the watch business. I mean it continues to be a standout, as you mentioned, just continued stellar productivity there. How do you think about some of the longer-term drivers and then how are you thinking about the potential iWatch launch this fall and any potential participation in that smartwatch category? Thank you.

Sure. The watch business is just like the rest of our businesses. We have to have newness, we have to have excitement to stimulate the customer. We know our loyal customer has somewhere between two and three watches that they are purchasing from us and we've got to excite her to want a third and a fourth and a fifth. And we think we do that well. You certainly saw with our Watch Hunger Stop campaign, that was just an extraordinary success for us, both the good that we are doing around the world and the fact that people just love the whole colored dial story. So colored dials have been really, really strong for us and we see that continuing into the fall season. And again, that is just another way of exciting her about Michael Kors watches and we have some amazing things coming actually for spring season on that category.

But the eyewear business, I mean we have got just a brilliant partner in Luxottica. They have developed an entirely new line. By the way, we had already a very sizable eyewear business. We didn't talk about it a lot, so it is substantial and hence why Joe mentioned the impact in our licensing area because it was a very sizable business for us. So we go through the transition and with the support of everything from LensCrafters, to Sunglass Hut, to their global distribution network, Luxottica is turning out to be an amazing partner and I think we are going to be one of the leaders in the world in both sun and in optical due to our great partnership. Thank you, Erinn.

Simeon Siegel, Nomura Securities.

Great, thanks, good morning. So John, to your point about the gross margins, I mean you guys still beat the gross margin guidance you had given. Can you talk about where the beat came from? And then can you just quantify how much retail operating margin pressure you may have felt from the preopening expenses and/or the e-commerce spend this quarter? Thanks.

I will turn that over to Joe.

So the beat for the guidance, again, as we've always said, the margins are going to be impacted most by markdowns. So the decrease was a markdown, but the beat was primarily related to that, somewhat due to the strength of our European business, which, as you know, has a slightly higher margin. In terms of the operating margins, all those items that we mentioned are going to be impacting operating margin. As John mentioned, we are definitely investing in the Company and the investments that we are doing do have an impact in the operating margins. We feel very good about those investments, but they do, as I say, impact operating margins.

Simon, I might add, we have said all along from, again, the day we went public, we never believed that a 30% operating margin was a sustainable margin for the Company. And by the way, we don't want that. So I want to be very clear, let no one be misunderstanding. We don't think that is the right way to run our business. We need more investment, we are building this Company for the long term. We are not here for a quarter-by-quarter situation. We are here to build something that is very sustainable and to do that, you have to invest. We are investing in people. You saw amazing talent that we are bringing to this Company. We have some more announcements to make that I think will even further strengthen the bench here.

We are investing in distribution facilities. When you are growing as fast as us and putting on $800 million to $900 million a year, you need to invest in state-of-the-art distribution facilities. You need to upgrade your technology. By the way, bringing in e-commerce in-house, I don't know how anyone could assume that that is not going to impact our operating margin. Those are all the right things to do to build a business.

And then, lastly, the impact of the development of these stores, the expansions. We are going to have accelerated write-offs on these stores. That is going to impact our DNA. So again, these are all good things that we are doing to build this business and to build this Company, which I hope that you all will understand and respect and don't just look at the little changes in a bp here and there. That is not what drives the business. What drives the business is good strategic investment and also building your brand with the consumer, which, again, I will talk about a little bit more at the end of the call.

Great, thanks.

Faye Landes, Cowen & Company.

Hello. I echo the congratulations. Can you just do us a favor and go back and give us a little bit more texture on the inventory increase? Because although you have talked -- you have said that, in the past, inventory will grow faster than sales, this is a big percentage. So if you could just break that out a little bit more and what is different this time than in previous -- like in the previous quarters?

You are correct. It is a big increase relative to the increase in revenues. However, our increases in inventory in the past have varied from our increases in sales as well. So we are very comfortable with what happened. As we said, if you kind of take the inventory increase at a revenue increase level, the amount in excess of that, about half of it relates to building up retail and building up retail commerce. Another half of that relates to timing. We accelerated production and brought goods in earlier this year. And also as Europe becomes bigger, we are investing more in inventories in Europe. So in Europe, we have a buildup of replenishment and we also -- Europe has transitioned as a percent of business more to accessories and therefore, the inventory cost is higher as we develop the business.

Okay. And also just one quick question. On the early fall receipts, did that impact the results in June or in July? I just want to make that --.

So the receipts are really not impacting the sales. John talked a little bit about deliveries into our retail stores, which did have some impact late in the quarter, but the inventory receipts themselves --

Not in terms of inventory, I'm talking -- I'm segue -- I'm sorry -- in terms of sales and margins. The fact that the early fall receipts were not as well-received as you expected because of weather, etc., for whatever various issues --.

Faye, let me explain. So we timed and planned to have those receipts in the stores in June. As I said, that didn't work for us and we took that out of the stores very rapidly. And that immediately impacted the traffic in the stores, etc. So we feel really good about moving quickly. When Joe is talking about the early receipts of merchandise --.

No, I understand the difference. I understand there's a --.

Let me just explain, Faye. It is also what is called in-transit. So there is times when we have a fair amount of in-transit inventory. So the in-transit he is referring to is actually goods that we will receipt physically in the warehouse. These goods are on the water, so they are actually not in our warehouse yet.

Right. Yes, no, I understand, I understand. I am just saying in terms of -- I think there is going to be a lot of focus after this call on your comments on the early fall product that did not sell through the way that you liked and then you moved quickly, etc. I just wanted to clarify where that shows up in the numbers, (multiple speakers).

It is already in our guidance, Faye. It's all done.

But I'm saying, so it's a July issue?

No, some of it was in June. We did take markdowns in the store in June and we moved on. And you would have seen that. And also I might add too that remember we have e-commerce now as well, which we did not have at this time last year. So you are going to see e-commerce showing up in our inventories for at least three quarters until the revenues really catch up with where the inventory levels are because we kind of don't know how big the e-commerce business is. We have an idea based upon our previous relationship with Neiman Marcus, but we just don't know exactly how big that is going to be. So there will be some mismatching for a period of time as we get comfortable with that business.

Omar Saad, ISI Group.

Hey, thanks. Nice quarter, guys. A technical question. So just to be clear, you guys made a bit of a mistake this quarter on this early fall -- decision to go early with fall. You were able to cycle through it, take some markdowns. You were able to still expand gross margins in the quarter and then it sounds like you are off to a good start with the new product in the second quarter. Is that all a fair characterization?

Yes, but you should identify that to a month, the month of June, which is what the question was asked earlier. So it is not the quarter. There was one month worth of delivery that we -- by the way, that is very similar to what we've done in the past where we had a transition group. We just brought it in a few weeks earlier and we found out the customer didn't respond to that.

Understood. But you were able to react and respond and you are back on track?

Yes, exactly.

Okay. And then another kind of clarification question. I think the implied EBIT margin guidance for the full year that you gave on the last call, the fourth-quarter call, I think down about 80 or 100 bps, something like that, and I think today you are guiding to EBIT margins for the full year down 150 to 200. Is really the biggest part of the differential opportunities to accelerate investment to support the further growth and all the opportunities that you guys have?

Yes, that's correct. Clearly, we are continuing to invest. We have some accelerated depreciation for the stores that we are going to change. So yes, we have developed our point of view in terms of the operating margin since fourth quarter.

But the primary change is not some sort of fundamental change in how you view the gross margin cadence?

It is not.

Thanks, guys.

It is really, as John has said, we are investing in this Company for the future and that is what is driving that.

That's great. Thanks, guys.

Paul Lejuez, Wells Fargo.

Hey, thanks, guys. Hey, can you talk about the average price point of a handbag in the US versus Europe versus Japan and how has that changed over the last couple quarters on a year-over-year basis or even years and what do you expect going forward? How should we think about average price points? Thanks.

As we have said in the past, really average price points have not changed dramatically in the Company. They are almost flat. Our average transaction is running about flat. Average price point is up just slightly a tick and that is really more because of the consumer responding to certain higher-priced handbags from us. That is not a strategic change on our part. We still offer product from more or less in the $250 to $450 range. That is kind of our range of sweet spot with really $350 being the core price point for us.

And then in SLGs, again, that average is ticking up a little bit there because of crossbodies being a bigger percentage of our small leather goods business, but we don't really view anything there as being different and then, of course, in Europe, our product is more expensive due to VAT and our operating expenses are a bit more -- a bit higher in Europe as a percent to total. So therefore, we run the product at a higher price. And then in Asia, it is obviously the most expensive and again, that is really driven from real estate costs and what it costs to operate in department stores in certain markets where we have concessions and/or freestanding stores, which have typically higher rents, in particular, the North America and in some cases even than Europe.

Right, and the steady price points that you've talked about, you are seeing that across geographies, you are not seeing the average price point be higher in Europe and Japan relative to themselves?

No, no. It all runs pretty much about the same.

And we shouldn't expect any change in the future in that number as well?

No.

Cool. Thank you. Good luck.

Thank you.

Adrienne Tennant, Janney Capital Markets.

Hi, good morning and congratulations on the quarter. I guess my question is, from a longer-term perspective, if 30% is not the sort of right op margin number that we should be thinking about, how long should the investment phase last and where should we think about kind of those margins settling in? And then really quickly, the mid-teen comp assumption for the year would assume ongoing deceleration. I am just wondering why that might be. Thank you very much.

Okay. So two things. Let me just discuss the comp first and then the operating margin. I think you've seen us give guidance before and I think, fortunately, we have been able to do better than the guidance. And as we've said to you in the past, we like to guide with what we know that we can deliver. And then if the consumer is there, as she has been and demanding our product, we have been able, through our factory relationships and other situations with the way we flow product, be able to achieve those comp stores.

So I think we are planning as we had from the beginning of the year and if the product continues to have strong results that we are seeing then you might see us do better. So we view our double-digit comp store growth as still being best-in-class. I don't think there is any other luxury retailer in the world who is delivering the kind of comp store results that we are. And I think you all, the investment community, need to look at that as a very positive sign for the strength of the business.

Let me just point out something on that note and then we will come to the operating margin. There is a number of people who are picking and choosing little spots to discuss trends in the business and we can't come out and respond to every single piece of information like that. But I will tell you that traffic to our website with us, by the way, backing off of marketing as we were transitioning, is up 26%. Our CRM database went up 69% in the quarter. Our Facebook fans went up 160% in the quarter. Our Instagram fans went up 155%. Our Twitter fans went up 58% and that is on a like-for-like quarter. So I think Michael Kors is still feeling a very, very strong momentum both domestically and globally and even in search for Michael Kors, the name, was up over 20% in the quarter. So I think that just resonates to the brand and what the potentials are if the consumer continues to respond that way. But we are always going to plan where we think we can deliver on and then hopefully exceed that.

Secondly, as it relates to the operating margins, I would tell you that we think that 28% to 29% range is a more sustainable range for us. Investment will go on forever. That is the right place to be and, by the way, that is still, by all metrics that we look at, still incredibly best-in-class in terms of operating margin.

It is, yes.

So again, I hope that you all -- I know you love to all look at sequential deceleration, but remember it is the fact that we are going to deliver a 30% top line and a 25% bottom line this year and we've said that we are going to continue to have double-digit top-line and bottom-line growth in this Company. Again, I don't see many luxury retail companies out forecasting that type of growth.

Great, thank you very much for the color. That's helpful.

Dana Telsey, TAG.

Good morning, everyone and congratulations on the terrific results. As you look at -- just a couple quick questions. How did ticket perform in the quarter and any other timing changes in the second half of the calendar year that we should look to in terms of the timing of bringing in goods? And lastly, just the SoHo store opening, when do you expect that to open and how is the impact of those costs on overall operating expenses? Thank you.

Ticket is exactly the same. From 2007 to where we are today, it is almost identical. It moves a little bit. It has been climbing a tad, but nothing to really call significant at all. Average transaction -- UPTs has gone up and I've mentioned that to you for the past year or so and that was really driven by jewelry, people coming in and buying more product in total. So we feel good about that.

The timing thing, let me just explain this again. The reason why we tried to do this, the fall delivery is a good example, is because we don't want to compete in the markdown arena. Again, both at our wholesale business and in our retail business, we remain on the same cadence. So every day of the week, we try to think about how to sell more full-price product. I saw an analyst wrote a note about the unmentioned 500 stores, which, by the way, is exactly what we have been in all those department stores since we've been operating in this Company. We've been upsizing those shop-in-shops and guess what, they sell mostly full-price product. So again, I think there has been a little misdirection that needs to be looked at. And again, what we are trying to do is we are trying to sell more full-price product.

So we are going to push the envelope. We are going to try and get new fashion in the stores earlier and are we going to make some mistakes at times? Absolutely. That is what fashion is about and so that timing issue for us -- same thing we do, by the way, in the holiday season in January. We try to get out of the sale product as quickly as possible and we try to bring spring product into our stores in January. Sometimes that works, sometimes that doesn't work depending on how the weather is outside, depending on what the season was before. But, again, I want you to know we are not going to back off being a fashion company, trying to deliver newness and trying to excite our customer. That is our competitive edge, period, end of story. That is why we are winning around the globe.

And in terms of the SoHo store, that timing has now moved to October, sadly. It is going to be spectacular and I do want to tell you we are going to hold an Analyst Day at the store when it is completed and we are going to invite you all in and talk about the future direction of this Company. In particular, we are going to walk you through the men's line and what we are doing there and some of the exciting developments we have. But it is really going to be a cornerstone project for us. And as I also mentioned, there will be a couple more of those level stores that we are working on. Again, that is not our real strategy; our real strategy is to go to the 5,000 foot stores, going from 2,500 to 5,000, but there are a few locations globally where we think we could have a slightly larger flagship store and incorporate men's, women's together. But, as we said on the call earlier, most of the men's projects will be freestanding stores that we are working on and quite frankly have a few locations already identified.

Thank you.

Camilo Lyon, Canaccord Genuity.

Thanks and also congrats on the great quarter. I just wanted one final clarification on this gross margin concern as I think that is going to be a highly debated topic. As you think about the guidance that you spoke about, down 50 basis points for the year, it seems like a lot of the markdowns on the fall line have already been taken. Maybe a little bit seeps into Q2. How are you approaching the promotional landscape around back to school and holiday and more importantly, how are you viewing your relationships with your wholesale partners and how they are planning their business from a markdown cadence perspective?

So again, I want to reiterate I think 0.5% of gross margin movement off of a very high gross margin is -- I wouldn't view that as -- you may view that as highly debatable. We will take the position that that is not given the fact that we are a luxury goods company growing our business. But we are going to take the exact same point of view that we have always taken. We are not going to become more promotional. That is not what we have built this Company on and I think our consumer has responded to that.

And so we -- by the way, we don't participate in a back-to-school promotional cadence. We never have, never will. What we will do is we will introduce great new product. For example, backpacks are becoming quite strong today and those are leather backpacks as well and so we have got a whole collection of those that happen to be retailing quite strong for us. So we will do things like that. We will increase our assortment of flats that way we can take advantage of some of the younger customer who might need those schools for back to school. Again, we are focused on trying to excite customers with fashion, not with price. That is not how we are going to win as a luxury company.

Thank you for that clarity. And could you just -- one more point on that. Could you just clarify then what is the main driver for the gross margin decline expectation?

Sure. As we've said earlier on the call, we believe that there's just some more normalized selling rates that are happening inside the store. Those were unsustainable gross margins. We told everyone that for multiple quarters. We also told everyone that the operating margins were not sustainable. And we had planned them to come down, so I said that to you guys in previous conversations. I think the shock and the reality of seeing that has everyone a bit unfocused, in my opinion, because you are not focusing on what is the true development of this business. We've put on 20% plus comp store growth. We had 43% top-line sales. We are adding stores. We are growing the business to $1.5 billion in Europe. When you focus on only one little detail, that is not the whole picture of the Company.

And the other thing that I want to end on though is remember we don't compete with one Company in the world and I believe that many, and I'm going to say this, many analysts are just focused on that and I think it's wrong. I think you need to focus on the fact that there are a lot of luxury goods companies in the world. There is a very large luxury market in the world and we don't compete in just one category, as we said earlier. 70% of our business is coming from handbags and small leather goods, 30% is coming from other categories and those categories are growing very, very quickly for us. So look at some of the other luxury players and what percentages they run in some of those categories and I think you might see opportunity for Michael Kors in its growth and development.

I want to thank everyone for participating in the call today. Look forward to speaking to you all and hopefully on the next call that we are altogether. Thank you very much.

This concludes today's conference. Thank you for your participation.