Capri Holdings Ltd (CPRI) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Michael Kors Holdings Limited fourth-quarter 2015 conference call.

(Operator Instructions)

As a reminder, today's conference is being recorded. And now I'd like to turn the call over to Krystyna Lack, Vice President, Treasurer. You may begin.

Thank you. 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, Krystyna. Good morning and welcome to Michael Kors' fourth-quarter and FY15 earnings call. I will begin with a review of the fourth quarter and fiscal year, followed by an update on various growth initiatives. I will then turn the call over to Joe for a detailed discussion of our fourth-quarter financial results, and our outlook for first quarter and full year 2016.

During the fourth quarter, total revenue grew 18% and EPS increased 15%. Double-digit gains extended across our retail, wholesale and licensing segments. While we were pleased with the continued momentum in our overall business, comparable store sales declined 1.7% on a constant currency basis.

We attribute this primarily to a continuation of weak traffic trends in North America, including a reduction in tourist traffic, a decline in North American watch business, as well as a 90 basis point negative impact from shipping delays in our footwear, women's wear and small leather goods products associated with the recent West Coast port issues. Including e-commerce, our global comparable store sales would have been 160 basis points higher for the fourth quarter, and our expanded stores would have added another 40 basis points to our global comp.

While we are certainly focused on taking steps to drive improved comparable store sales performance in our retail stores, there continues to be exceptional growth in our digital e-commerce flagships, our wholesale business, and in our international markets, demonstrating the overall strength of our brand. Reflecting on FY15, I'm pleased to report we delivered top and bottom line growth in excess of 30%, which was in line with our full-year outlook.

Global comparable store sales for the year increased 11.9% on a constant currency basis. Including sales from our digital e-commerce flagship, our global comparable store sales would have been 120 basis points higher for the FY15, and our expanded stores would have added another 60 basis points to our global comp.

During the year, we saw strong growth across all our segments, our geographies, and our product lines. Notably, revenue growth in both Europe and Japan exceeded 70%, while revenue in North America, our most developed market, grew more than 20%, demonstrating the continued demand for our luxury brand globally.

In fact, the ongoing strength of Michael Kors brand is also illustrated in the growth of followers across social media sites worldwide. In the fourth quarter, on a year-over-year basis, Facebook followers increased 22%, Instagram followers increased 99%, Twitter followers increased 46%, and Weibo followers increased 120%, as consumers around the globe turned to Michael Kors for lifestyle and fashion inspiration.

In addition, we made meaningful progress across multiple strategic initiatives, as we continue to set the stage for sustainable, long-term growth. In FY15, we successfully launched our global digital e-commerce flagship in the US, which continued to exceed our expectation, with annual year-over-year sales growth of 63%. We expanded our global retail presence with the addition of 121 stores, including our largest flagship store to date in Soho, which includes our first ever dedicated men's floor, ending the year with 728 Michael Kors stores worldwide, including license locations.

We completed the expansion of 32 highly productive retail locations globally, contributing to top line growth. We increased global comparable store sales in our retail stores and our wholesale shop-in-shops. We continued to further penetrate our wholesale channel, with the conversion of 570 wholesale doors to shop-in-shops globally.

We expanded our market share in accessories, footwear, ready to wear and jewelry. We enhanced our technology infrastructure to support our global digital strategies and operations. And we continued to build a strong distribution center infrastructure worldwide to support our growth initiatives.

As we look ahead, we remain intently focused on driving the business forward by further building brand awareness, expanding our product offering and growing in each of our regions. Let me discuss some of the key areas that we expect will drive the business this year. We see continued growth in North America in FY16.

Retail momentum will be driven by our digital flagship strategies, as well as new store growth, with the addition of 30 locations. As you know, today, retail's environment is quickly evolving. The lines between brick and mortar and online are increasingly becoming blurred, and brand interaction and commerce happens across all devices and platforms.

In order to remain relevant, luxury brands must evolve in response to this channel shift from stores to online. We began our digital journey with the successful launch of our e-commerce flagship in the US in 2014, and we are pleased to announce that we launched our new digital flagship in Canada last month, which not only showcases the widest assortment of our luxury products, but also offers the broadest and deepest brand experience.

We continued to enhance functionalities and build an omnichannel strategy that connects our digital flagships with our in-store, mobile and social presence, focusing on omnichannel fulfillment and product personalization, with the launch of Kors Concierge. As we introduce digital devices into our stores, our sales associates will be empowered with the most extensive collection of our luxury products, allowing them to become personal stylists, and enabling them to drive customer engagement, as well as elevate our customers' jet-set shopping experience.

We expect our omnichannel initiatives, combined with retail expansion, to drive double-digit sales growth in our retail segment in FY16. We anticipate continued strength in our North American wholesale business, and we'll capitalize on the success of our shop-in-shops, with the conversion of an additional 500 doors across all categories. We anticipate single digit growth in this channel in FY16 as we continue to develop our handbag, ready to wear and footwear categories, as well as our men's business.

In our licensing segment, we anticipate continued deceleration in watch sales, due to what we believe is a cycle shift to our jewelry category, where we expect to see continued strength this year. Our watch category continues to evolve, and we expect to further elevate our offering with the introduction of new collections for the calendar 2016 spring season. These new lines, which will comprise approximately 30% of the assortment, will reflect product innovation, focused on new materials and metal treatments.

In our fragrance business and our new eyewear collection, we saw strong performance in FY15, and we expect to see continued momentum in these categories in FY16. As we further develop our categories, we anticipate mid single digit growth in North American licensing segment this fiscal year. In Europe, we expect to open 45 new retail stores and have continued to prepare our digital flagship launch next year.

On the wholesale side, we plan to expand distribution through shop-in-shops and specialty stores in existing countries, as well as new markets. We are well positioned to increase our market share in the handbag category, where today, we only hold a single digit market share position. Footwear is quickly becoming an emerging growth story across Europe, as we are seeing strong response to our collection across the region.

In addition, we expect continued strength in our licensed categories, as we see solid gains in watches, eyewear and jewelry. Although foreign currency rates will continue to be a headwind this year, we believe our strategic initiatives in Europe will contribute to double-digit revenue growth on a constant currency basis in FY16.

Asia remains a tremendous growth opportunity for the Company. We are very excited about the opening of our 5,000 square foot flagship store in Kobe in April, and the planned opening of our 7,800 square foot flagship in Ginza later this year. These stores will further heighten our presence in Japan, and enhance our luxury brand positioning in this market. We plan to open a total of 10 stores in Japan in FY16, and drive revenue growth through our compelling luxury product offering and jet-set in-store experience.

Moving to Korea, we are set to unlock the market opportunity in this region, beginning with the transition of our retail business in the fourth quarter of FY16. Our investments this year will center on building the right infrastructure and developing an expansion strategy to position this business for long-term growth. In Hong Kong, we recently established local distribution, where we now are able to provide a greater level of service to select Asian customers, which were previously serviced out of North America, and further capture growth in this region.

Turning to our regional license business, throughout the Far East, we were pleased with the strong performance in China and Southeast Asia, which saw strong double-digit comp growth in FY15. We believe that more consumers are now recognizing Michael Kors as a fashion leader, and our luxury brand is quickly becoming a significant factor in this region. We will capitalize on our accelerating brand awareness in this market, and expect to see continued growth this fiscal year with the opening of 40 locations, as well as strong comp store sales increases.

We believe that our travel retail stores are another effective way to raise brand awareness, and this business continues to perform well. We see opportunity to raise visibility of the Michael Kors brand to the luxury travel customer, as we optimize our presence in premier travel destinations around the world.

And finally, in our men's business, we are pleased to announce the addition of Marcel Ostwald as Senior Vice President of Menswear Design, coming to us from Hugo Boss, where he was Senior Head of Creative Management and Concept Design for Boss Sportswear. We look forward to Marcel bringing his design talent and experience to Michael Kors. Working in collaboration with Michael, Marcel will be responsible for developing the product vision, ultimately driving the men's business to global success.

We have begun to make strides in our men's ready to wear and leather goods, and have designed our FY16 marketing campaign to build brand awareness through increased visibility in print ads, social media, and outdoor marketing, all of which will showcase our product, and offer a glimpse into the world of the Michael Kors man. We are very excited to deliver another luxury fashion shopping experience to customers worldwide, with the opening of 10 men's retail locations and approximately 90 shop-in-shops globally in FY16.

Looking beyond FY16, we see ample opportunity to drive double-digit top line growth through multiple initiatives. First, we will continue to drive our direct to consumer presence with the ongoing development of our digital flagship strategy, in addition to growing our retail store base. We expect our North American digital flagship to generate strong double-digit gains, and plan to expand our global digital presence with the launch of our flagships in Europe and Asia.

The investments we are making in our digital strategy will ensure is the most expansive expression of our luxury fashion brand, and will support the growth of this channel, ultimately reaching 20% of our retail sales long term. In addition to our digital growth, we continue to see potential for 700 stores globally, including 400 in North America, 200 in Europe, and 100 in Japan, not including the men's stores or the Korea locations.

We also see a moderate level of comparable store sales growth contributing to our overall growth of our retail segment, driven by newness across all product categories, enhanced marketing programs, and an exceptional jet-set shopping experience, all channels and platforms. Second, in our wholesale channel, we see continued momentum through comparable store sales increases and shop-in-shop conversions in North America and Europe.

Third, to support our growth objectives across our segments and geographies, we will continue to invest in effective marketing programs. Our digital flagships, along with our growing social media presence, will remain instrumental in maintaining our engagement with our customers, as well as enabling us to broaden our consumer reach globally. In addition, we will continue to invest in national advertising, direct marketing, and our direct mail catalogs.

Fourth, maintaining a strong assortment of luxury products will also enable us to drive sustainable growth. We expect global demand for our accessories products to remain strong, and we see additional opportunity to further build our footwear and women's ready to wear business. In addition, we are very excited about our men's business, and continue to believe -- and view this as a $1 billion global opportunity.

In our licensed product categories, we see exciting developments in wearable technology and believe that we can become a leading brand in connected fashion accessories. We will also increase our penetration in jewelry, fragrance and eyewear, to fully realize those product potentials. And lastly, we see significant opportunity in our international markets, as we grow brand awareness, launch our digital flagships, and execute our strategic initiatives.

We continue to see Europe as a $1.5 billion market, Japan as a $300 million market, and Korea as a $100 million opportunity long term. In addition, we see strengthening our presence across Asia through our regional licenses, where we are seeing strong demand for Michael Kors product continue to rise. As we capitalize on our top line growth opportunities, begin to leverage strategic investments, and continue to use our strong balance sheet to buy back shares, we remain confident that we will deliver double-digit top line and bottom line growth in FY17. I'd now like to turn the call over to Joe Parsons to discuss the fourth quarter performance.

Thank you, John. Good morning. I will begin with a review of our FY15 fourth quarter financial results, followed by our outlook for the first quarter and full year 2016.

I am pleased to report that we continued to see double-digit top and bottom line growth during the fourth quarter, with strong performance across all of our segments, geographies, and product lines. Total revenue grew 17.8% to $1.1 billion, as compared to $917.5 million last year. On a constant currency basis, total revenue grew 23.3%.

The US dollar further strengthened since our last call, resulting in a larger than anticipated impact on our sales. By region, in North America revenue increased 13.7% and on a constant currency basis, rose 14.3%.

In Europe, revenue grew 33.5%, and on a consistent stand currency basis, increased 59.5%. In Japan, revenue rose 42.7%, and on a constant currency basis, increased 65.0%.

By segment, retail net sales increased 14.9% to $469.4 million, driven by the opening of 121 net new stores since the fourth quarter of last year, and 44% growth in our digital e-commerce flagship stores, partially offset by a comp store sales decrease of 5.8%. On a constant currency basis, retail net sales increased 21.1%, and comp store sales decreased 1.7%.

By region, comp store sales declined 6.7% in North America, declined 5.6% in Europe, and grew 12.4% in Japan. On a constant currency basis, comp store sales declined 5.8% in North America, increased 11% in Europe, and grew 30% in Japan.

While our North American comp store sale results for the quarter did not meet our expectations, performance was impacted by several factors: First, we saw a continuation of weak mall traffic trends in North America, and weaker tourism traffic globally. In particular, we saw fewer tourists traveling to key US cities in the Northeast and Southeast regions, as well as fewer Middle Eastern and Russian travelers in Europe.

Second, we saw a decline in sales in the watch category, particularly in North America, following many years of sequential growth, due to what we believe is a category shift to our jewelry collection. That said, the AUR for jewelry is substantially lower than watches.

Third, shipping delays for footwear, ready to wear and small leather goods associated with the West Coast port issues negatively impacted our comp performance by approximately 90 basis points. Our US digital e-commerce flagship performed exceptionally well, with 44% sales growth during the quarter.

Our sales in this channel were driven by strong growth in both traffic and conversion, and performance was led by our handbags and small leather goods, as well as our ready to wear and footwear categories. As you know, the e-commerce warehouse experienced severe weather-related damage, which prevented us from shipping goods for approximately five weeks.

While we took steps to mitigate the impact by shipping goods from stores in other facilities, we believe this incident impacted our digital sales by approximately $7 million. Excluding this impact, e-commerce sales would have added 480 basis points to our North American comp, and 380 basis points to our global comp.

I would also note that we suspended our digital marketing efforts during this period. While we began marketing once we resumed shipping, we expect a residual impact going forward into the first quarter, as it will take time to re-engage our customers and for trends to return to levels seen prior to this event. Lastly, excluding the expanded or relocated stores from a comp base negatively impacted our global comp sales results by approximately 40 basis points.

We opened 17 net new stores in the quarter, 6 in North America, 8 in Europe, and 3 in Japan. In addition, we expanded or relocated two stores. We ended the year with 526 Company-owned retail stores.

In addition, our licensing partners operated 202 Michael Kors stores around the world, including 134 stores in the Far East, bringing our overall presence to 728 locations worldwide. Wholesale net sales grew 20.4% to $570.4 million for the fourth quarter, reflecting the continued demand for our brand globally. On a constant currency basis, wholesale revenues increased 25.8%. The momentum was led by accessory categories, as well as our continued conversion of wholesale doors to shop-in-shops, and the expansion of our European operations.

On a global basis, our accessories and footwear businesses comped at a double-digit rate during the quarter, and we saw continued gains in women's ready to wear. We converted an additional 103 wholesale stores into shop-in-shops globally, ending the year with 2,132 accessories, footwear, women's wear, and menswear shop-in-shops worldwide.

As John noted earlier, we recently established distribution operations in Hong Kong for certain Asian customers. As a result of this change, approximately $100 million of sales previously recorded in North America wholesale will now be reflected in Asia's wholesale sales.

In our licensing segment, revenue grew 16.5% to $41.3 million for the quarter. The growth was led by our jewelry category, as well as eyewear, our North American watch business was softer during the quarter. We opened 31 new watch and jewelry shop-in-shops during the quarter, and ended the year with 261 shop-in-shops globally.

Gross profit grew 14.8% to $630.8 million. Gross margin was 58.4% versus 59.9% for the same period last year. The 150 basis point decline is attributable to additional markdowns and allowances, as well as a 50 basis point foreign currency impact.

Total operating expenses grew 23.4% to $374.7 million. As a percent of total revenue, total operating expenses increased to 34.7% from 33.1%.

Selling, general and administrative expenses increased 20.5% to $336.8 million. The increase in selling, general and administrative expenses was largely due to the higher retail occupancy and salary cost related to new store openings, costs related to corporate management additions as we continue to build the Michael Kors team to support global growth, higher costs related to our digital strategies including our new customer call center, an increase in litigation cost, and an increase in advertising and marketing expense. As a percent of total revenue, selling, general and administrative expenses were 31.2%, compared to 30.5% for the fourth quarter of last year.

Depreciation and amortization expense increased 58% to $37.9 million for the fourth quarter, primarily due to the build-out of new retail locations, the expansion of existing locations, and our corporate New York offices, including accelerated depreciation relating to these expansions, new shop-in-shops, an increase in lease rights purchased for our new European stores, and investments in our distribution and IT infrastructure. As a result of these factors, income from operations was $256.2 million, or 23.7% of total revenue, as compared to $245.9 million or 26.8% of total revenue in the same period last year.

Operating margin for the retail segment contracted 660 basis points. 380 basis points of the decline was due to an increase in general corporate operating costs, including costs related to our digital flagship, higher litigation-related costs, and higher retail occupancy and salary costs.

120 basis points is attributable to higher depreciation and amortization expenses related to new stores, expanded stores and lease rights. The remainder is due to 165 basis point decline in gross margin, primarily due to higher level of markdowns and the impact of currency fluctuations on the cost of goods sold.

Wholesale operating margin decreased 30 basis points, due to the 105 basis point decrease in gross profit margin, primarily due to higher discounts on allowances, partially offset by lower selling and distribution expenses. Finally, the licensing segment operating margin decreased 380 basis points, due to an increase in operating expense, primarily higher advertising costs.

Income taxes were $76.1 million in the quarter, as compared to $85 million last year. Our effective tax rate was 29.4%, as compared to 34.6% in the same period last year. The decrease in our effective tax rate was primarily due to the increase of taxable income in certain non-US subsidiaries, which are subject to lower statutory tax rates.

Net income increased 13.4% to $182.6 million for the fourth quarter, and diluted earnings per share were $0.90, based upon 203.2 million weighted average diluted shares outstanding. The unfavorable currency impact to EPS was $0.06 per share. Net income for the fourth quarter of last year was $161 million or $0.78 per diluted share, based upon 207 million weighted average diluted shares outstanding.

Turning to the balance sheet at the end of the quarter, cash and cash equivalents were $978.9 million, as compared to $971.2 million at the end of last year. There were no outstanding borrowings under our credit facility in either year.

We continue to use our strong balance sheet and cash flows to repurchase additional shares under our $1 billion share repurchase program. During the quarter, we repurchased 1.4 million shares totaling $92 million, bringing our total repurchase to 6.8 million shares totaling $491.9 million for FY15.

We remain confident in our long-term growth outlook and free cash flow generation, and are pleased to announce that the Board of Directors has authorized the repurchase of an additional $500 million of the Company's ordinary shares, and has extended the program through May 2017. This increases the initial repurchase authorization to $1.5 billion, of which $1 billion is available to us for future repurchase over the next two years. As we demonstrated this past year, we will continue to use the strength of our balance sheet and future cash flows to repurchase additional shares, and drive value for shareholders.

For the quarter, inventory increased 21.8% versus last year, and was in line with sales growth. As we stated previously, our inventory growth fluctuates from quarter to quarter, but we generally expect our inventory increase to outpace sales growth, as we further develop our digital flagships, open and expand our retail stores, expand replenishment stock, and convert shop-in-shops.

Capital expenditures for the quarter totaled $73.5 million. These expenditures were related to global retail store expansions and renovations, corporate office renovation, construction and renovation of shop-in-shops, investment in our distribution facilities, and enhancement of our information system infrastructure.

Turning to our outlook, we expect foreign currency to remain a headwind for FY16. In addition to the translation impact, we are exposed to transaction risk, as our international businesses purchase goods and services in US dollars.

While we partially hedge purchases through forward contracts, many of our favorable contracts will be expiring in the early part of the fiscal year, resulting in higher cost of goods. Our largest currency exposures are the Euro, Canadian dollar and Japanese yen.

FY16 will be an investment year, centered on infrastructure enhancements and new growth initiatives for the Company, as we remain focused on our long-term, sustainable growth. We expect to see higher SG&A and depreciation expense driven by further development of our global digital flagships and omnichannel capabilities; infrastructure investment in the transition of our Korean business; infrastructure investment in the development of our men's business; occupancy and overhead costs related to our global retail store expansions; the build-out of our European distribution center as well as improvements to our existing distribution network; and continued corporate investment with the addition of key executives, expansion of our IT capabilities; as well as additional corporate occupancy costs.

While these investments will put near term pressure on operating margins, particularly in the first quarter, we believe that they are critical in creating the foundation for continued double-digit top and bottom line growth. For the first quarter of FY16, we expect total revenues to be between $930 million and $950 million.

On a constant currency basis, total revenue is expected to increase in the high single digit range, assuming a $60 million impact from the change in foreign currency rates. We expect a low double-digit comp store decrease on a reported basis and a mid single digit decrease in constant currency.

Operating expense as a percentage of total revenue is expected to increase 550 basis points to 600 basis points in the first quarter, primarily due to the global investments I described earlier. We expect diluted earnings per share to be in the range of $0.74 to $0.78, assuming a tax rate of approximately 29% and 202.5 million shares outstanding. We expect foreign currency to impact net income by approximately $14 million, and EPS by approximately $0.07 for the first quarter.

We anticipate that revenue growth will accelerate in the second half of the year, due to a number of factors on a reported basis: First, we believe that the FX headwinds will diminish during the year. The average Euro to US dollar rate last year for the first quarter was $1.37 weakening to $1.13 average in the fourth quarter.

Second, we will have a full-year effect of operating the US digital flagship, and nearly a full year of the Canadian digital flagship as compared to FY15, when the US digital flagship was operational for half the year and was affected by the warehouse disruption. Third, we plan to open new stores and shop-in-shops that will provide incremental sales during the year.

Fourth, we are planning to add compelling new products to our assortment, and create excitement in our marketing plans, which we believe will further drive sales. Finally, we anticipate that the 53rd week to add approximately $40 million of additional sales, or approximately $0.03 per share.

As a result, for FY16, we expect total revenue to be between $4.7 billion and $4.8 billion. On a constant currency basis, total revenue is expected to increase in the low to mid teens range, assuming a $200 million impact from the change in foreign currency rates. We expect flat comp store sales on a reported basis, and a low single digit increase on a constant currency basis.

We believe that comp store sales will continue to be challenged by current trends in mall traffic and the recent slowdown in tourism, in addition to the deceleration in watch sales, while we expect digital sales to provide a benefit in the second half of the year. Operating expense as a percent of total revenue is expected to increase 110 basis points to 140 basis points for the year, due to the global investments I described earlier. We expect the increase in operating expense as a percent of total revenue to moderate in the second half of the year, as the rate of spend slows, and we begin to anniversary the investments that we made in 2015.

We expect diluted earnings per share to be in the range of $4.40 to $4.50, assuming a tax rate of approximately 29% and 200 million shares outstanding. We expect foreign currency to impact net income by approximately $39 million, and EPS by approximately $0.20 for the year.

I would note that going forward, we will be recording comp store sales on a global basis, which better represents management's view of our Company as an expanding global business. Our focus is on driving top and bottom line growth for the long term.

To that end, in addition to driving comp store sales, we have multiple levers in both the domestic and international markets, such as our global digital flagships, expansion of our independent traded categories such as footwear and men's, square footage expansion, and capitalizing on the opportunities in our wholesale and licensing businesses. Overall, we take a global view of our business, as we look at our long-term growth potential, focusing on the areas where we see the greatest opportunities.

Capital expenditures are expected to total approximately $400 million in FY16. The expenditures will focus on retail expansion with continued investment in our global digital strategies, the opening of 85 stores globally, as well as the transition and development of our Korean business. We expect 30 new stores in North America, 45 in Europe, and 10 stores in Japan. The development of our men's business, the expansion of wholesale business with the conversion of 600 shop-in-shops globally, continued investment in our distribution infrastructure and information systems, and the renovation of our New York corporate offices.

In summary, we were very pleased with the advances we made on our strategic initiatives in FY15, despite the challenging macro environment and foreign currency headwinds, and we believe that we have multiple growth opportunities ahead of us. We will continue to strategically invest in our business this year to support our initiatives, and maintain our leadership position within the global luxury market, ultimately driving double-digit revenue and EPS growth in FY17. I will now turn the call back to John Idol.

Thank you, Joe. In closing, we have a powerful business model, consisting of a leading fashion brand within the global luxury market, multiple distribution channels, and geographic diversity. While we are faced with some challenging market conditions, our brand is strong, and our luxury products continue to resonate with consumers worldwide.

We remain focused on executing our strategic initiatives to continue to build brand awareness and expand the Michael Kors fashion brand globally. We will continue to grow our presence in the domestic and international markets through the development of our global digital flagships, as well as our successful retail and wholesale strategies.

We will expand upon our ready to wear and footwear categories, and fully develop our global men's business. We will capitalize on wearable technology in watches and other categories, as innovation and demand in this area continue to advance. And we will continue to deliver compelling fashion product that excites our customers with an exceptional shopping experience, that embodies the jet-set glamour and excellence of the Michael Kors luxury brand.

We remain confident that these multiple growth initiatives will enable us to resume double-digit top and bottom line growth in 2017. With that, I will now open the call for questions.

(Operator Instructions)

We'll go first to Kimberly Greenberger with Morgan Stanley.

Great. Thank you so much. Good morning. John and Joe, it looks like you're expecting some level of acceleration in comp, as we get into the back half of the year. I'm wondering if you can just talk about the drivers. Is it a function of easy comparisons, or are there specific initiatives that you've got, in order to drive better comps in the back half?

And if you could just speak to the deleverage expected in SG&A in the first fiscal quarter. It sounds like it's expected to be the most deleverage of the full year, based on your annual guidance. And is that just a function of the June quarter being a low revenue quarter and therefore, the deleverage eases beyond that? If you could just give us some color around that, that would be great.

Sure. Good morning, Kimberly. I'll take the first question. I'll let Joe handle the second one.

On the first, the back half of the year, one of the biggest contributors that comp number is going to be the fact that we'll be reporting the e-commerce sales fully baked into our numbers, so that will improve in terms of a total. And again, if you look at our comp store sales even in this quarter, when you add back the e-commerce and some of our stores that we had upsized, and sadly the port issue, and on a constant currency basis, we were basically close to flat in our comp stores. While we did have difficulty in North America, it really isn't as bad as was reflected, when we're not reporting a total number with the comp stores, including our e-commerce business.

And then secondly, we do have some -- what we think are some strategic and exciting initiatives for our fiscal third and fourth quarter. First, we will be launching Kors Concierge in the third quarter which will give all of our -- not all, but a significant amount of our selling associates technology, that they will be able to create some significant upsell inside our stores.

And then secondly, we have a very, very strong program in the third quarter around gifting, which is an area, after doing consumer research, that we're finding our customer is continuing to clamor for from Michael Kors, especially in that holiday season. And we think we missed a fair amount of that last year. So we think those initiatives will help to really guide us to a more favorable comp store performance in third and fourth quarter, in particular.

In terms of the SG&A and deleverage, you are correct. We anticipate that Q1 will be the lowest revenue quarter of our year. As you know, we're anticipating a growth during the year. Then, as I mentioned in the call, our projects that we're working on are actually going to be anniversaried, as we go through the year. The projects that we started in 2015, so that the deleverage will not be as large for the full year as it is -- as we're reflecting in Q1.

Great. Thank you. And then just to wrap up for me, I'm wondering if you could speak to share repurchases so far. You've had two quarters now of repurchasing.

As you look out to the upcoming fiscal year, I know you haven't baked any share repurchases into your guidance, maybe you could just share with us your philosophy around the timing and pace of share buybacks? Thank you so much.

Sure, Kimberly. I'll take that one. I think we did bake some of that into the guidance. I think we have reported 200 million shares for the year.

But that being said, we believe, as a management team and as a Company, that our stock price is significantly undervalued. We have, I think, the best performance of any Company in the global luxury field today, and when we're reporting our earnings, I think it's very, very clean, in terms of the way that we are performing. And clearly, the marketplace has not responded to our performance.

And while we are very concerned about that issue, we think that's only going to make it that much more interesting for us to continue to repurchase shares. And I would say we'll probably do it aggressively, because as much as the market continues to undervalue our Company, myself and the management team and the Board feels that's just the wrong perspective on a very, very successful and strong Company that we've built globally.

And I might also add that while we are disappointed that we're not delivering a double-digit bottom line this year, when you really add back constant currency, take this to constant currency, our top line revenue would be about 14%, and our bottom line revenue would be about 10%. So we will once again deliver a double-digit top line and bottom line, which we had originally forecasted, but unfortunately, the Euro in particular and the yen deteriorated significantly from late January on.

And I would also add one thing to that as well. That deterioration in the Euro and the Canadian dollar is where we see the greatest impact to our North American comps. Two things that really impacted our North American comps were tourism, which New York City, the business is very difficult, certain parts of the Southeast and Las Vegas, where we've seen traditionally very, very strong European traffic in particular. That affected us. And you could almost tie it right back to when the currency started declining.

And then of course the watch sales, which really did catch us off guard, in terms of the amount of decline. So our handbag business is very strong. Our footwear business is excellent.

All of our core businesses are quite strong. So again, we think that bodes well for the future, and that gives our Board and myself as the rest of the management team great confidence that we will use our balance sheet in a very significant way to take advantage of what we think is just an incorrect perception on the stock price.

We'll go next to Robbie Ohmes with Bank of America - Merrill Lynch.

Good morning. Thanks for taking my question. A couple things. First, John, given everything that's going on out there, can you comment on how the competitors look like they're responding? Do you think it's going to have to get more promotional from where it is?

And then another question I would have is, can you give us some color on maybe some of the trends you're seeing in your core handbag business? Is there still shifting to lower price point, smaller handbags, or how do you feel about how the trends in that core business could play out, as you move through the seasons this year? Thanks.

Thank you, Robbie. Let me just start with the environment today. I would say that our wholesale business, I would just start with that, because that is a very significant part of our business, and I know that most of the dialogue that we have is around our Company-owned domestic stores, but we have a very, very large business in North American wholesale, which continues to perform at very, very strong rates.

And we are performing better than our competitors in that channel, and we really don't see that channel as being more promotional than it was the last three years, to be quite frank with you. There are a few retailers who are doing some additional price matching of one another, but that really hasn't been something that has significantly increased our business or been the driver for the business, at least in terms of our perception.

We do believe that certain of our competitors in the accessories business, while they state that they are reducing certain of their sale postures, we see tremendous amount of sale activities in their full line stores. We see the continued use of flash sales which we do not do.

We see a lot of things to drive customers into the stores that, as you know, we've taken a posture since we started this Company, that we wouldn't do. We take our markdowns on product, the same thing we've been doing since we started the business. So we in our own full price stores, have made the decision, that is not a posture that we want to engage in.

I do think that has had some effect on our business, but I think the greater issue is that our handbag business continues to grow at very, very nice rates, and the fact that our footwear business is growing at very, very substantial rates as well. Now, that's somewhat offset by our watch business, which you would have to refer to as a core business.

And that business is definitely seeing a decline in the North American market. We're not seeing that in the European and Asian market. Actually, the business is accelerating at a very, very nice pace. And we believe part of that's shift to the jewelry category where we're, again, our jewelry business is very, very strong.

The negative to that is the transaction in jewelry is significantly lower, it's more than half less than the watch businesses. So we're very attuned to the fact that we're going to have to do something to re-engage the customer in that classification. We are the leader of the fashion watch business in the United States, and fast approaching that in other parts of the world.

We have an obligation to come up with really exciting, compelling product, and we think we've got a pretty good handle on what we're going to do for that in Q4 of our fiscal year. And we also as we look out to 2016, we see the wearable technology space as a place that we're going to be able to play and compete, and offer great excitement for our customer.

And John, just on the handbag outlook, do you see anything reinvigorating the category for you and others, as you look out to maybe the fall season of this year?

I think the category on, I would say a North American basis, is probably in the low single digits for growth, and I don't see anything that's going to wildly accelerate that. The category is growing, but it's definitely growing more slowly than it grew in the past probably five or six years on that side.

On the other side, we see great growth opportunity in Europe. As we stated in the call, we have a single digit market share in that marketplace, and we know that we could probably get ourselves to at least a double-digit market share. So plenty of upside for us there, and some very significant market in terms of size.

And then as you know, we're excited about our business in Asia, but we are in early, early days of developing that marketplace, and many of our competitors can run 30% to 40% of their total business out of that market.

So look, North America's going to grow more slowly. We know that, and we have said that since we went public. And then we have these two other phenomenal marketplaces which are Europe and Asia, to continue to grow our handbag business, our footwear business, our women's accessories business, and our really exciting business based around men's, that we think long term is going to be a great growth opportunity for us.

We'll go next to Randy Konik with Jefferies.

Great. Thanks a lot. So I guess when I'm looking at the name here at these levels, it looks like based on your enterprise value, A, your market cap's now in parity with your main competitor, and your enterprise value is trading at the low end of the industry. So can you give us some of the thought process around what you think about minimum levels of free cash flow generation you see in the business and/or EBITDA? What does the CapEx picture look like going forward?

And you spoke a lot on the call about, it sounds like you're very confident about the global growth and the cash flow generation prospects of the business. Is there any thought process on alternative capital structure for the business at this time? Thanks.

Randy, I think we're very happy with our free cash flow generation. We've got an incredibly strong balance sheet. We have leveraged that balance sheet to buy quite a bit of stock back over the past six months, and we're not going to look at any type of capital restructuring.

We think that, again, the marketplace has significantly undervalued the shares of the Company, and therefore, this is going to be an outstanding opportunity for certain investors going forward. And we will use our balance sheet to show our commitment, and to deliver increased value to our shareholders.

I guess could I just maybe ask, Joe, is there -- can we get some color on what the CapEx profile of the business should look like, from current guidance? Should it change all that much in the years ahead?

So, Randy, as you know, we're a Company that's continued to invest in ourselves, and we've had significant CapEx in the future and -- or in the past, excuse me, in terms of investing over the last couple of years. We've increased that CapEx. So we are forecasting $400 million of CapEx for FY16 and we would assume that we would continue to have consistent -- again, consistent with our past practice, continued significant investment in the Company.

We'll go next to Omar Saad with Evercore ISI.

Thanks. Good morning. Wanted to ask a clarification question. To be clear, on the comp guidance for 1Q and the full fiscal year, that includes e-commerce as part of the total comp that you're guiding to, and that you're going to report?

Omar, in Q1 and Q2 you really won't have -- Q1 you'll have nothing including the e-commerce, and in Q2, you'll have just a very tiny, tiny piece of it. It's really Q3 and Q4 that you have the actual -- it's on a GAAP basis, reported in the comp guidance -- in the comp reported numbers, sorry.

Got you. Okay. And then as we look back to the past quarter, when we spoke to you on February 5, a month or so into the quarter, you were still thinking mid single digit comps system-wide for the business and brand. Did something change dramatically after that point, or was it a confluence of these various factors that you talked about? Maybe elaborate on some of the promotional strategies in your own stores, how that could have impacted sell-through and same store sales results?

Sure. As I said a few minutes ago, you can almost trace it back to when the Euro started its precipitous decline. All of a sudden, the tourism really dropped for us. We had seen some minor declines in Q3 in tourism, but we didn't think it was going to be as precipitous as what we saw happen. And in January, things were okay, and then February, March, business got extremely difficult.

The other thing that happened, Randy, you have to remember, we shut the marketing off on online, and that drives a lot of people into stores. Maybe that was the right decision, maybe that was the wrong decision, but we just didn't want to be frustrating the customer, sending out e-mails, sending out all kinds of communication. So those two things really impacted the business.

And then thirdly, the watch sales. Watch sales, again -- our handbag business is healthy. Our shoe business is healthy. Our women's ready business is healthy.

Our watch business is not healthy, in North America. Outside of North America, it is. And we did see a shift in our business to jewelry.

So whether that's something that's cyclical, whether that's something that's a trend, whether that's something that's driven around other entries into the category, we're not exactly 100% sure. We've gone out and done a lot of consumer research around it.

The customer's still saying very, very positive things about the brand, and their intent to buy Michael Kors. And interestingly enough, some of that intent is shifting into other categories.

One of the things that popped up in our consumer information was eyewear. And we're obviously in a very aggressive mode with Luxottica launching eyewear, and we got really good feedback from the customer. So I think that, again, we have given guidance for Q1, given the fact that we are concerned about the trend that we saw coming out of Q4, and hopefully that business trend will improve, and hopefully we've got some initiatives that are based around some new and exciting product trends that are starting to happen for us, that will help drive that.

In terms of product and promotion in the stores, again, we're not doing anything different. We're not doing friends and family. We're not doing take an additional 20 off with a coupon, with whatever. We're not doing flash sales. We just don't think that's the right thing for us to do.

And quite frankly, our competitors are doing it, and they're doing it on a regular basis, and while they all claim that they're doing it less, they're still doing it. And I think that we're probably at a competitive disadvantage. But we'd rather build a quality business with the consumer in terms of what the Michael Kors brand stands for than to go down a path that I think we will be sorry for long term, because as you hear our competitors talking about, they're doing everything we can to get out of those things, and that's not a conversation that we want to be having with you.

That's really helpful, John. Really quickly, it was helpful you that gave us -- quantified some of the drags on the comp store numbers, FX and the West Coast port issue. Can you give us a glimpse into the drag just from the watches, because one of the isolated brands is watches. How much --?

Omar, you cut out. We couldn't hear what you said, something about the drag on the watches.

Sales.

Omar, you cut out again. You said something about the drag on the watches.

The watch drag on comp numbers, comp store sales in the quarter, how much of the -- how much of a drag was the watch slowdown?

We're not going to break it out, but its was significant. It was a significant portion of the comp decline.

Thanks.

We'll go next to Dana Telsey with Telsey Advisory Group.

Good morning, everyone. Can you talk a little bit about store openings, how you're thinking about size of store, productivity of existing stores, and also how some of the new flagships that you've opened in New York are doing, and what your plans are go forward on the real estate side? Thank you.

Sure. Thank you. Good morning, Dana. Dana, we have consistently said since the day we went public that we would have 700 stores worldwide.

We know the locations, we know the developers, we know the street names and none of that's changed at all. And when you really look at that on a global basis, it's the right number, given our profile of business. And in 90% of the cases, we're sitting next to really fantastic retailers who are in the luxury category, so we feel good about that.

Our store size isn't really going to change that much. We up-sized about 30 stores, 30, 35 stores this past year, and we're going to do about the same this coming-up year. We're doing that in certain strategic locations.

One that we're very excited about is we're going to be up-sizing Region Street this year, a store that's way overproductive for its space, and so that's a good example of the type of store that we'll do. We've upsized certain very high end luxury mall locations, as well, and we're pleased with the results of that.

I wouldn't say that's what we're going to do chain-wide. Actually, I will say that's not what we're going to do chain-wide.

So still the average lifestyle store is around 2,500 square feet, and we did start to implement some of these larger stores so we could show footwear and women's ready to wear in a better format. And those stores are around 5,000 square feet. And again, in the right marketplaces we'll look at that, but it is not a strategy that we have said we're going to go chain-wide and start to upsize stores on a global basis.

On the outlet front, John, any updates there in terms of openings, or what your game plan is?

Game plan remains exactly the same. We said that in North America we would open, I believe the number's 125 stores, and when we get to that level, we'll be done. And again, unlike our competitors who have a lot more stores than we do, we'll be finished and complete with that. And in Europe, it's significantly less.

So today, if you look at our global footprint, we have 373 full-price stores, and 153 outlet stores, and long term, the full price number will get a lot larger and there's only a handful of additional locations that we feel appropriate for an outlet store for us. And again, we're very careful. We do not want to turn our business -- we run a full price retail business very successfully, very profitably, and we will continue to stay focused on that as our key strategy, and we will use the outlets for clearance of merchandise.

In a marketplace like Europe it's really important for us, because we don't have certain of the other channels of selling off our excess inventories, the way that we do here in the United States. And so again, we're going to use it appropriately and judiciously.

Thank you.

We'll take our last question from Oliver Chen from Cowen and Company.

Thanks a lot. Your handbag market shares are really impressive in North America. Could you just articulate the runway you may have in terms of the price tiers, and where you see opportunity in terms of growing share?

And also, regarding the markdowns and allowances, which you have been speaking about for a while now, were there discernible differences between the channels in terms of wholesale versus retail, and is this kind of the evolution as you expand your product breadth, and thinking about that? And then I just had a final question on digital.

Okay. So our market share in North America is -- we're somewhere in the number two, number three range, we estimate today. We're still not the number one market share in North America, and I've told you, we don't aspire to be the number one market share.

I would say our market share growth in North America will -- accessories in particular, will grow very slowly on a go-forward basis, because we think that if the way that you would have to grow the market share additionally in North America would be very promotionally driven, and we don't want to do that, and we're comfortable with that. So we've got a very solid, steady business, it's going to grow in a steady basis, and we know the customer's responding and saying very positive and favorable things about the brand in North America, as well as outside North America.

We feel that the footwear business we are definitely underpenetrated, in terms of market share. This is low, low, low single digits in North America. This is a huge opportunity for footwear, and I would tell you that in terms of a volume, top line, and a business that we feel comfortable putting our foot on the accelerator a bit more on, is definitely footwear, and we know the customer is saying yes to us really across the entire region here, and as we stated in Europe, it's starting to come on quite strong as well.

So I think that our thought process is just be steady, keep the brand in the right place. And then in terms of allowances, the channel that had a little higher allowances was our -- markdowns was our own free-standing stores, and that's going to be a bit natural because for us to the drive additional business in our own free-standing stores, we have to offer more fashion. We have to be a little newer, a little fresher. We have to take a few more chances and we've got a couple things that are really starting to cook for us, in terms of new handbag groups.

We're starting to see soft bags emerge. We've got a new bag out called Riley, which you've probably been seeing in our national ads, and that bag is really starting to get some traction. As, we believe, the fashion leader in accessible luxury, we've got to get out there and give new product to our customers.

You're going to see that in watches, as I stated earlier. We're going to change 30% of our entire watch assortment for the spring season, and that's going to be focused on one of our real core strengths, which is our mixed materials program.

As you know, we're one of the only companies in the world that really do that well, whether it's our tortoise or our acetate clear watches, which are really hot right now. We didn't probably focus on that as heavily as we had in the past with metals, so we're going to really shift our mix there, and so I think that's going to help drive our comp store growth. But that will come with a little bit of margin pressure, which I think we've given you guidance on in particular our own free-standing stores.

Okay. And John, we've also seen really attractive innovation online, in terms of you really engaging the customer. How are you thinking about the integration of your bricks and mortar plus online, and what can be done in terms of the customer experience being omnichannel, and the opportunity to ensure that she can get what she wants, where she wants it?

Thank you. Oliver, I know you joined us the other day at the Wharton presentation, so you know our thoughts on this. We believe luxury companies have to embrace the digital circle, as we view it. And we view it as really a 360-degree communication, engagement, and relationship with the customer.

So first, we think that the single most important vision of the Michael Kors Company and brand is through our digital flagship. And we also believe it's going to become 20% of our business globally over the next three to five years. So this is why we're making all this investment. And it's absolutely having some pretty significant impact on our SG&A corporately, and in particular, in the operating income of our retail business.

And what we think is not only do you have to create that experience online, but you have to create that experience in stores. Many people continue to say, well, why do you open stores if digital is going to be so important? Number one, it's 20%, it's not 100%.

Number two, people still will did into a store and shop, but when you can only offer in your own store 30% or 40% of your entire assortment, that customer becomes disappointed. And now, with Kors Concierge being rolled out, and by the way, it will take probably about a full year to roll out all of North America starting in October, November in our own store, in about 35, 40 stores, and then we'll roll out the balance of the chain.

Our sales associates are going to be able to engage the customer as a personal stylist. We think that is a very big differentiator from having a sales associate on the floor. We already think our people have amazing training, and are really excited to work with our clients, but this is going to be on a whole different level. They're going to become your personal stylist.

Lastly, omni has really -- is going to change the game for all of us in terms of being able to -- people want things quickly and they want it when they want it, and if you're not going to be able to deliver it to them in that manner, then they're absolutely going to go somewhere else and get the experience and the service from another retailer. And we want to be best-in-class.

We do not view ourselves as best-in-class on this. We view ourselves as behind, but making a very significant effort to move forward on this platform, and hopefully within the next 18 months, we will be up digitally with e-commerce platforms globally, probably with the exception of China. And that will be -- by the way on a unified platform inside the Company, which we think will be a real advantage for our business, as we grow going forward.

All right, I'd like to thank everyone for joining us today and look forward to updating you on our future progress at Michael Kors. Thank you very much.

This does conclude today's conference. Thank you for your participation.