Capri Holdings Ltd (CPRI) 2016 Q2 法說會逐字稿

Good day and welcome to the Michael Kors' second-quarter 2016 earnings conference call. Today's call is being recorded. I would like to turn the call over to Krystyna Lack. Please go ahead.

Good morning and thank you for joining us for our second-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 than 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' second-quarter FY16 earnings call. I will begin with a review of the quarter and then provide an update on some of our growth initiatives.

I'm pleased to report that our financial reports for the second quarter exceeded expectations, as we continue to expand the Michael Kors luxury brand worldwide. Total revenue increased 7% on a reported basis. And on a constant-currency basis, total revenue increased 12%, driven by increases in both our retail and wholesale segments across geographies.

We saw revenue growth of approximately 6% in the Americas, 21% in Europe, and 61% in Japan on a constant currency basis. Our EPS of $1.01, which included a $0.06 impact from foreign currency, was also better than anticipated for the quarter. Our retail sales grew 8%. And in constant currency our retail business grew 15%, driven by new store openings, strength in our North American digital flagships, and continued momentum in Europe and Japan.

Global comparable store sales decreased 8.5%, or 3.4% on a constant-currency basis, in line with expectations, and reflecting sequential improvements as compared to the first quarter. North American digital sales more than doubled compared to last year, as consumers continued to ship purchases to online and mobile channels. On a constant-currency basis we delivered a high single-digit comp increase in Europe and strong double-digit growth in Japan.

In our North American retail stores, comps declined in high single digits as we continued to see the impact from lower mall traffic and a shift to the online channel. If we included our US digital flagship sales in our comp base, our North American comparable store sales would have declined in the mid single-digit range.

Wholesale sales grew 8% in the second quarter, and in constant currency wholesale sales increased 12%, led by continued strength in our accessories category. In addition, our wholesale business expanded across geographies, with mid single-digit growth in both the Americas and Europe in constant currency, as well as further growth in the mid-Asian market.

Licensing revenue in the quarter declined due to lower sales of watches as we saw continued softness in this category. Revenue increased in a number of other areas of our licensing business in the second quarter, including fragrance, jewelry and eyewear categories.

Turning to our product categories, the accessories business in North America grew at a mid single-digit rate, with a double-digit increase in units sold, demonstrating continued growth of this category and the demand for the Michael Kors luxury brand. However, dollar growth was impacted by lower AUR due to increased demand for smaller size handbags, crossbodies and small leather goods, which carry lower price points.

We saw accelerated growth in footwear, although the warm weather tempered boot sales in the quarter. The watch business continues to remain under pressure in retail and wholesale. But we are excited by the introduction of several new watch styles, including a broader assortment of watches with leather bands and watches with new platings in navy and sable, which we believe is creating renewed desire for the category.

Now turning to some highlights of our strategic initiatives, we remain focused on growing our business globally through both retail and wholesale expansion, as well as our licensing partnerships. On the retail side, we are driving growth through the continued development of our digital flagships worldwide, as well as the expansion of our store footprint in the Americas, Europe, and Asia.

As I mentioned earlier, our North America digital business is growing rapidly. Desktop and mobile traffic has increased at a double-digit rate and conversion rates are strong, proving that our customers love the convenience of shopping and connecting with Michael Kors online and on the go.

We are seeing accessories and footwear emerge as dominant e-commerce categories, demonstrating the brand strength of these core luxury product lines. We believe the transition to online and mobile purchasing will continue worldwide, and we are poised to capitalize on this shift with the development of our digital platform to provide a global, multi-language, multi-currency e-commerce experience for our customers. The rollout of our digital flagships across Europe is expected to begin in fall of 2016, followed by Asia thereafter.

In Men's, we are encouraged by the early growth rates and acceptance of our product as we begin to build a world-class men's brand. Our Men's collection was initially introduced into the retail channel with the opening of our Soho flagship store nearly a year ago, providing the first dedicated jet set luxury experience for the Michael Kors man. We are pleased to announce the upcoming opening of three additional men's locations in Scottsdale's Fashion Square in Arizona, Garden State Plaza in Paramus, New Jersey, and San Francisco Center in California.

In Europe, we have begun to sell our Men's products in our recently opened Stockholm flagship and Amsterdam flagship locations, and we are pleased with the favorable response. Looking forward, we have already identified several additional prime locations in Roosevelt Field, New York, Memorial City in Houston Texas, World Trade Center in New York City, as well as London, Tokyo, Singapore and Taiwan. We remain excited about the long-term opportunity for this business with the potential for up to 500 freestanding stores or combined format locations worldwide.

Lastly, we're set to unlock the opportunity for Michael Kors in Korea as we transition this business in-house by the end of the year. We are well on our way to building the right infrastructure and developing an expansion strategy to position this business for long-term growth.

In wholesale, we, like many others, have seen the department store channel slowing, and we will be monitoring this business, carefully and managing our inventory to protect our brand and margins. However, our brand strength and compelling luxury product offerings have enabled us to maintain our leadership position in the space.

We expect continued growth in accessories business globally, as well as in our women's wear, footwear and men's categories as we further develop these businesses and extend our lifestyle presence. We also continue to benefit from the conversion of existing department store doors and shop-in-shop locations across product categories, capturing incremental sales as customers respond favorably to Michael Kors branded environments. We are on track to convert 600 shop-in-shops this year across all categories, and are particularly excited to have opened a new flagship men's shop within Macy's Herald Square, presenting our broadest product assortment in one of the most historic, well-recognized department store locations in the world.

In our licensing business we are excited about the recent launch of our new Gold fragrance collection, featuring a scent for every women ranging from feminine and seductive to sparkling and sensuous. Our men's fragrance offerings, as well as the expansion of key EMEA markets, are contributing to the growth we have seen this year in this category.

In eyewear we are pleased with our partnership with Luxottica and the customer's response we're seeing to our new eyewear collections, particularly with our iconic aviator style. Both of these categories offer consumers a number of great gifting items for this holiday season. We also see opportunity for long-term growth in fragrance and eyewear through both expanded distribution and increased penetration.

Another category that we are excited about is our new connected fashion accessories line, which will launch in fall 2016. There is a great opportunity to build a significant position in this growing category and become a fashion leader in the emerging tech space.

In addition, given the strong acceptance we have seen across international markets, we remain focused on expanding the Michael Kors luxury brand through our licensing partners. The Asia region continues to represent a significant growth opportunity for our Company. We continue to see strong results in the greater China business, with double-digit comp store growth in the second quarter.

Consumer response to our luxury product offering has been favorable, and we are excited to see our footwear business start to gain traction in this marketplace. We attribute the growth in part to our increasing brand awareness in the region, which we now believe is at approximately 50% in large cities.

Our strategic marketing efforts in the region are one of the key drivers of brand awareness. We are excited to be hosting a star-studded event in November with Vogue called Young China to celebrate the opening of our largest flagship location in Waiomao, Beijing, totaling 9,000 square feet. This media event will be attended by Michael himself, as well as key influencers from China's movie industry, and will spotlight our luxury, fashion, and amplify the glamour of Michael Kors jet-set luxury lifestyle.

The development and success of our China business is increasing demand for the Michael Kors brand throughout Asia and Europe, as Chinese consumers travel the globe and 50% to 60% of their purchases are outside of mainland China. As we look to the second half of the year, we believe we are well-positioned for the upcoming holiday season.

Michael and our design teams continue to create on-trend fashion products that embody the Michael Kors luxury brand. Our recent merchandise assortment truly reflect Michael's leadership in driving the latest fashion trends.

Our rich suede saddlebags, mini bucket bags and quilted bags emerged as top-selling items this past quarter. Merlot was a hit in all departments. Watches with leather bands and new metal platings in navy and sable were met with great response. And our active footwear and backpacks capitalized on the sport [lex] trend.

The positive response we're seeing from our customers gives us confidence that our new product introductions are taking hold. To celebrate the season with effortless glamour and style, our holiday gifting collections will continue to emphasize our on-trend fashion products. To highlight our new holiday merchandise, we are excited to be launching the Michael Kors Just Because marketing campaign to connect our customers with that special gift that is just right.

As we look ahead to spring 2016, we will continue to offer compelling on-trend fashion, with the introduction of our largest assortment of new handbag groups, as well as new watch offerings, reflecting the most expansive presentation of innovative materials we have used to date. In addition, our strong marketing program enables us to further engage customers with the brand, immerse them in the luxury lifestyle, and encourage them to shop our site and stores.

As we mentioned last quarter, we are excited about our new national advertising campaign that transport our customers to global cities, which represents the jet-set world of Michael Kors. Our integrated positioning through our content-rich website, compelling social media, global advertising, brand marketing, and media events and traditional print and outdoor advertising are designed to speak to our customers globally in an authentic voice, always emphasizing our luxury DNA, ultimately marrying brand equity and awareness, and translating that into conversion.

In summary, we are pleased with the success we achieved in the second quarter, with revenue growth of 7% on a reported basis and 12% on a constant-currency basis. Our digital flagship business in North America more than doubled. We drove sequential improvement in comp-store sales.

We continued to increase brand awareness in international markets. And we are seeing the acceptance of our newest handbag groups and watch styles. And we are capitalizing on our leadership position in the luxury market. While we expect the macro headwinds to continue in the near term, the Michael Kors brand remains incredibly strong and we are focused on continuing to execute our strategic initiatives to drive long-term growth.

Now, let me turn it over to Joe for a detailed review of our second-quarter financial results, and an update on our outlook.

Thank you, John. And good morning, everyone. Our financial results exceeded our guidance for the second quarter of FY16. Total revenue grew 6.9% to $1.1 billion.

As expected, foreign currency headwinds continued to impact our results this quarter. On a constant-currency basis, total revenue grew 12.3%. By region, in constant currency, revenue in the Americas increased 5.6%, Europe revenue increased 20.6%, and Japan revenue increased 60.7%.

In our retail segment, net sales increased 7.5% to $532.8 million. In constant currencies, net sales increased 14.7% driven by the opening of 116 net new stores since the second quarter of last year, and an increase in our North American digital flagship sales. Notably, we saw exceptional performance from our digital flagships, which generated a sales increase of 136% as compared to the sales of our previous outsourced sites.

Comp-store sales declined 8.5% on a reported basis. On a constant-currency basis, comp-store sales declined 3.4%, reflecting a sequential improvement in the first quarter. The decline is attributable to lower comp-store sales in North America, partially offset by an increase in comp sales in both Europe and Japan. If we included our US digital flagship sales in our comp base, our global comp-store sales would have decreased in the low single-digit range, on a constant-currency basis.

We added 39 new stores in the second quarter, 23 in the Americas, which included 18 previously opened stores from our Panama joint venture, which was consolidated for the first time this quarter, 12 in Europe, and 4 in Japan. In addition, we expanded or relocated 13 stores. We ended the quarter with 589 company-owned stores, including concessions, and 804 stores overall, including our licensed locations.

Wholesale net sales grew 7.8% to $554.0 million for the second quarter. On a constant-currency basis, wholesale sales increased 11.8%, driven by our accessories category and growth across our regions. During the second quarter, we converted 223 wholesale doors into shop-in-shops globally.

In our licensing segment, revenue decreased 8.1% to $43.2 million for the quarter, due to lower licensing revenue related to sales of watches, somewhat offset by a revenue increase related to sales of outerwear, jewelry and eyewear. We continued to open new watch and jewelry shop-in-shops during the quarter and ended the quarter with 310 shop-in-shops globally.

Gross profit grew 3.0% to $664.4 million. Gross margin declined 220 basis points to 58.8%, which includes an 89 basis point foreign currency impact. The decline in gross margin reflects a 280 basis point decline in retail gross margins, due to additional promotional activity in our North American retail business, a 130 basis point decline in wholesale gross margin due to additional wholesale allowances, partially offset by a geographic mix and lower licensing gross-margin dollars.

Total operating expenses grew 15.3% to $391.3 million. This increase was attributable to our global investments, including our retail expansion, our digital flagship initiatives, infrastructure investments for Korea in the men's business, the buildout of our European distribution center, and the continued investment in corporate systems and infrastructure.

As a percent of total revenue, total operating expenses increased 250 basis points to 34.6%. This was below the 440 to 490 basis points of deleverage in our guidance as sales exceeded our expectations, and depreciation expense and SG&A were somewhat lower than anticipated.

Selling, general and administrative expenses increased 13.0% to $345.2 million. The increase in SG&A expenses was largely due to the higher retail occupancy and salary costs related to new store openings, an increase in corporate and employee related expenses primarily due to an increase in our corporate staff to support our global growth, as well as other corporate occupancy and operations-related costs. As a percentage of total revenue SG&A expenses were 30.5% compared to 28.9% for the second quarter last year.

Depreciation and amortization expense increased 35.5% to $46.2 million for the second quarter, primarily due to new retail stores, new shop-in-shops, an increase in lease rights related to our new European stores and investments in our corporate facilities and IT infrastructure. As a result of these factors, income from operations was $273.1 million, or 24.2% of total revenues as compared to 28.9% of total revenue in the same period last year.

Retail operating margins declined 690 basis points, due to a 410 basis point increase in operating expenses attributable to higher store-related costs, corporate allocated expense, as well as higher depreciation and amortization expense, primarily attributable to new store openings, as well as to the decline in retail gross margins, as discussed earlier. Retail operating margin was also impacted by the growth of digital sales, as the e-commerce business carries a lower operating margin rate than retail stores. As the e-commerce business reaches scale, we do expect e-commerce margins to be more in line with that of our brick-and-mortar business.

Wholesale operating margin declined 220 basis points due to the decline in the wholesale gross margin, as discussed earlier, and an 80 basis point increase in operating expense attributable to higher depreciation expense. Licensing operating margin decreased 820 basis points, primarily due to higher advertising costs, corporate allocated expenses, and selling expenses relative to lower revenues.

Income taxes were $78.4 million in the quarter, and our effective tax rate was 28.9% as compared to 31.9% 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, as well as state-tax benefits.

Net income was $193.1 million for the second quarter, and diluted earnings per share were $1.01 based upon 191.5 million weighted average diluted shares outstanding. The unfavorable currency impact to EPS was $0.06 per share.

As we noted last quarter, we obtained a 75% controlling interest in our Latin American joint venture, and are now consolidating MK Panama into our operations beginning this quarter. You can find the details of the acquisition described in note 3 of our 10-Q, which is scheduled to be filed tomorrow. For the second quarter, the impact of the consolidation to our sales and earnings results was not material.

Going forward, we do not expect MK Panama's operating results to have a meaningful impact on our consolidated financials. We are continuing to evaluate the acquired assets and there may be future adjustments taken against this business, which has not been included in our guidance.

Turning to the balance sheet, at the end of the quarter, cash and cash equivalents were $431.5 million, as compared to $1.0 billion last year. During the quarter, we repurchased approximately 9.4 million shares, totaling $400 million under our share repurchase authorization. To date, our buybacks totaled approximately 23.2 million shares and $1.2 billion.

We remain confident in our long-term growth outlook and free cash flow generation, and are pleased to announced that the Board of Directors has authorized the repurchase of an additional $500 million of the Company's ordinary shares. This increases our initial repurchase reauthorization to $2 billion, of which $758 million is available to us for future repurchases through March 2018.

Ex MK Panama, there were no outstanding borrowings under our credit facility in either year. I'm pleased to report that we have entered into an amended and restated credit facility on October 29, 2015, increasing the size to $1 billion and extending the maturity to October 2020. We believe this facility provides us with more flexibility to pursue our long-term operational and financial growth objectives, and may be used for general corporate purposes, share repurchases, and acquisition of licenses or fashion brands.

Inventory increased 15.2% compared to last year. Approximately $14 million of the increase related to our European inventory, which was valued 19% higher than the prior year due to the year-over-year currency exchange rate differential. Approximately $10 million was due to acceleration of holiday merchandise, resulting in higher in-transit inventory. And approximately $14 million was related to the consolidation of MK Panama.

The remainder is attributable to normal growth of our business, as we can continue to open stores, open shop-in-shops, expand e-commerce and our online channel capabilities and an increase replenishment program. As we look forward, we anticipate that the exchange rate differential in the MK Panama consolidation will continue into the third quarter, and that our inventory will increase at a rate higher than the sales increase.

Capital expenditures for the quarter were $87.5 million, and were related to the buildout of our new retail stores and shop-in-shops, as well as investments in our information technology, distribution system enhancements, our corporate offices and other infrastructure improvements.

Turning to our outlook for the third quarter, we expect total revenues to be between $1.33 billion and $1.35 billion. On a constant-currency basis, total revenue is expected to increase in the mid single-digit range, assuming a $42 million impact from the change in foreign currency rates. We expect a mid single-digit comp-store decrease on a reported basis, and a low single-digit decrease in constant currency.

Operating expenses as a percentage of total revenue is expected to increase 200 to get 240 basis points in the third quarter due to our global investments. We expect diluted earnings per share could be in the range of $1.44 to $1.48, assuming a tax rate of approximately 28.5% and 187.0 million shares outstanding. We expect foreign currency to impact net income by approximately $11 million, and EPS by approximately $0.06 for the third quarter.

For the full FY, we now expect revenue of $4.6 billion to $4.65 billion. On a constant-currency basis, total revenue is expected to increase in the low double-digit range, assuming a $164 million impact from the change in foreign currency rates. We expect a mid single-digit comp-store decrease on a reported basis, and a low single-digit decrease in constant currency.

Our revised revenue expectation reflects our tempered outlook for the second half of the year. While we believe our product and marketing efforts will benefit our business longer term, we are taking a more prudent stance in the second half. We expect the sequential improvement in comp-store sales in the third and fourth quarters to be driven by the inclusion of US digital sales on the comp basis, the rollout of Kors Concierge in our stores, the launch of our new national advertising campaign, the introduction of new innovative product offerings for the holiday and spring 2016, diminished FX headwinds, and easier year-over-year comparisons.

As we stated previously, we anticipate the 53rd week to add approximately $40 million of additional sales this FY. We expect international gross margin to remain under pressure in the third and fourth quarters as favorable hedging contracts we entered into last year expire.

Operating expense as a percentage total revenue is expected to increase 200 to 220 basis points for the year. We expect the increase in operating expense as a percent of total revenue to continue to moderate as compared to the first half of the year, as the rate of spend slows, and we begin to anniversary the investments we made in 2015.

We now expect diluted earnings per share to be in the range of $4.38 to $4.42 for the year, assuming a tax rate of approximately 29% and 191.5 million shares outstanding. We expect foreign currency to impact net income by approximately $36 million and EPS by approximately $0.19 for the year.

I will now turn the call back to John for closing remarks.

Thank you, Joe. In summary we continue to see ample opportunity for long-term growth in our business around the world, driven by our luxury fashion product, strong brand, and our powerful business model. We remain focused on maintaining our leadership position within the global luxury market, driving expansion of our direct-to-consumer business through digital flagships and retail stores, building our wholesale presence through shop-in-shop conversions, expanding internationally through our regional licenses, and driving growth across our key product categories.

As we look ahead, we believe that there is continued growth for Michael Kors luxury brand. And we remain on track to achieve our long-term goals.

I will now open up the call for questions.

(Operator Instructions)

Kimberly Geenberger, Morgan Stanley.

Great, thank you. Good morning. It is so nice to see some stabilization, particularly in the comp number.

I'm wondering if you could talk about e-commerce, John. I think you mentioned that it 136% in the quarter. I believe you took the platform in-house early September last year so I would assume the growth in the quarter was distorted to July and August since you're anniversarying the big pickup that you had seen in September. But maybe you could just help us out with that.

And then I'm wondering on the wholesale channel -- it sounds like a very prudent move to pull back on the inventory there -- I'm wondering if you can talk about the pacing of how you pull the inventory back a bit in the wholesale channel. And are you doing it both in the North American market and Europe, or is it largely concentrated in North America? Thanks.

Thank you, Kimberly, and good morning. Kimberly, we are very pleased with what is happening with our e-commerce business since we brought it in-house. Obviously the numbers are very strong in terms of the growth rates and the conversion rates, as well. What we're really seeing is the engagement of the customer.

And I have to be frank with you, we are, I think, at the very early stages of what we are going to be able to achieve with this platform. We are operationally in great shape. I think the site itself is quite exciting. We're going to do a lot of things over the next six months or so to improve our mobile experience. We don't think that is where it really needs to be.

And, secondly, what we are going to be able to do through our analytics and CRM, with truly presenting our styling capabilities and Michael's messaging with the various communication vehicles that we are developing to taylor the experience for our customer, we think the opportunity is, quite frankly, very large for us. Basically it's all systems go in terms of what we are seeing, both in North America and Canada. Both platforms are operating at a very high productivity rate.

And as we said on the call, we're bringing on Europe in the fall and we will actually bring up Korea and Japan, not too far after that. So we will be, I think, in a very strong position. We told you two years ago that we were going to make a very big investment in systems, people, and in the distribution of facilities to be able to handle all of this. And we are there. We consider ourselves to be a company who will ultimately be best in class in this category.

Secondly, on the inventory side, the pullback on inventory is predominantly in North America. The department store business in North America is suffering some of the same challenges that we have seen in terms of the traffic in shopping malls. So that's got us taking a more prudent approach to how much inventory we actually have sitting in the stores.

That being said, our e-commerce business with all of our department store partners is really quite extraordinary. And I think we're all just learning how we can turn these inventories faster and supply the customer with a very strong experience, both online and in-store. Again, that being said, we find the environment to be a little more promotional than we would like, so that being said we would like to have less inventory in the stores and have less of our brand appearing on sale, in particular in that channel of distribution. You will see that pullback happen between now -- you will start to see a little bit of it in Q3 and Q4 and it will more normalize itself by June or July, which we think is the right thing for us to do, given the climate and what we want to do in terms of keeping the health of the brand.

Kimberly, I want to mention one last thing. I made a highlight of it in the call and I think it's an important issue. We continue to outperform in our categories, whether that's accessories, footwear or women's ready to wear. We are outperforming our competitors in the department store channel by a fairly significant amount. We are quite proud of that.

That is under the whole cloud of the fact that we said that we grew the North American handbag business in the low single digits. That's at retail, both in our online stores and department stores. But high double digits in terms of units. So, the idea that people are not buying handbags I do not believe is a correct concept. They happen to be the fashion trend of smaller bags.

So, if we were selling X percent of $350, $400 and $500 handbags at this time last year, we're selling less of those because we are selling a lot more in particular of crossbodies and large wallets. That is what the consumer, in particular, the millennial, is viewing as a fashion trend. So, that has an impact on AUR, so therefore we are selling a lot of Michael Kors product to people. Young people think they have bought a handbag. It is not that we are not selling handbags. In fact, we are selling a lot more handbags.

So, I think there is really a misnomer about what is happening in the marketplace. We believe that the handbag market in North America is, again, growing at the low single digits, but very, very high numbers in terms of units. I think as you all are looking at the business, you should do some analysis on that, and we can share any insights we have with you, as well. Thank you, Kimberly.

Thanks so much.

Omar Saad, Evercore ISI

Good morning. Thanks for all the information. John, I wanted to talk about the moderated comp expectations for the back half from last quarter to this quarter, trying to understand how much of it is top down, the macro environment, the consumer environment, or is it maybe the smaller handbag trend accelerating, or other internal things, if you could add there. And then I have one follow-up.

Okay, sure. Omar, first off, we are pleased with what is happening with the sequential performance of our comp store trends. In fact, our comp stores through October are getting better, again from what we just reported. So, we are pleased with what is happening with the trend in the marketplace.

It's two things in North America. It is, without question, smaller handbags. Again, I want to really hit home on this point, so you all understand.

When we are selling high double digits in terms of additional units, that means people are buying a lot more Michael Kors product. The same thing may be happening to some of our competitors. That's just trend. So we're losing actual performance of the stores just because the customer thinks that they bought a handbag. So, that's the first thing.

And then the second thing is, the moderation from our previous guidance also reflects the continuation of what we think is impacting us, is the tourist traffic. Both in the department stores and in the retail channel, we have huge doors, whether it's in New York, whether it's in the southern Florida area, all of us are now being impacted in parts of Texas because of oil prices there. That's a little bit less tourist but some of its related to the Mexicans shopping across border with the peso to the dollar.

So, these are things we don't see going away so quickly, even though we will be lapsing the changing currency, which will have probably to its largest effect in Q4 at the tail end of that. That's just something we think we're going to be a little bit more prudent about.

Again, both in retail and wholesale, we just like to have a lot less markdown inventory in the stores. We don't think that's good for the brand long term. And we can still achieve our financial targets. As you can see, our new range annually still puts us, if you take the middle of that range, at the low end of our previous guidance. So, we're still going to achieve our financial objectives and we're going to do it a prudent way that is going to protect the health of the brand and be respectful of what is happening in the environment.

Thanks. That's really helpful. And then you've talked about in the past, you have some new product launches, innovation and pushing the fashion envelope. Can you help us understand the timing in both the handbag and the watch category, can you help us understand the timing of when we might expect some of that? I think on the marketing side, too, all of that flow-through and maybe drive an inflection in the comp.

It is happening now, Omar. We are seeing an inflection in the sequential improvement in the comp. As I said on the call, saddlebags -- we are probably going to run out even before the holiday season. Merlot -- we're probably going to run out before the fashion season.

We've got some great new handbag styles that have hit. They are really getting some excellent traction. The whole crossbody piece of the business, I want to tell you, we are excited about it. We are less excited about the lower transaction values, but we are on trend.

All of the consumer research that we are doing, our customer says -- we love Michael Kors, we want to buy Michael Kors -- and they are actually buying more Michael Kors. They're just buying a smaller average price point unit for us. So, we're seeing that happen.

The biggest piece of that is going to hit for the spring season where we've got 22 new handbag groups that we are introducing. Obviously all of those won't be at retail. But you're going to see a major change in the way the product looks in the stores. And that is not just because of the comp store trend, I want to be clear. That is because that is what is happening in the handbag and the fashion business.

Our luxury competitors around the world are doing great jobs, certain of them, in really updating product and making it exciting and compelling for the customer. And that's what the customer wants today. When we are delivering units, they get excited.

And I want to say we are seeing that in the watch business, in a business that is clearly challenged, and the customer has voted a little bit more for the iPhone and a little bit less for the watch. All of a sudden, when Michael was the one who really drove it, said let's go after the leather watchband business in a big way, we're getting excellent sell-throughs on that. Our new platings, sable and navy, excellent sell-throughs on that. So, that is just saying to us, she is ready to shop, but we better be a fashion leader and on trend to inspire here.

So, we like what we see in the stores. And I want to leave you with this call that we're kind of excited about what we see happening out there right now. Thanks, Omar.

Thanks, John. Nice job.

Erinn Murphy, Piper Jaffray.

Thanks, good morning. I was hoping you could speak a little bit about what you are seeing in Europe. It looks like the sales overall, I know there were some pretty stiff FX headwinds decelerate in the second quarter, and maybe it was led a little bit more by wholesale. Could you just talk about what you are seeing in wholesale channel in Europe? And then I have a follow-up. Thank you.

Yes. Thanks, Erinn. Erinn, I remember about three or four years ago when the conversation of sequential deceleration came up. Our business is going to sequentially decline, whether it's North America or Europe in the quarters, just because we're getting bigger. We are doing over $1 billion in Europe, which is incredibly impressive to have built that in basically six years. And we have high brand awareness, great customer loyalty.

We're looking at our newest developed market that we went after this year, Italy. Business is literally on fire, running strong double-digit comp growth there. So, I would tell you that our business in Europe is very, very strong.

Leave the FX headwinds out of this a second. There are a couple factors impacting the business in Europe, and that is, first and foremost, the Russian tourist, who is a very large piece of our business has not been traveling, as you well know. The second piece is, there is a Middle Eastern tourist issue that they are not traveling as much as they did, and we had a very nice business with them. So, both of those individual markets, if I go in and look at our Middle Eastern market and our Russia market, are doing exceptional double-digit comp store growth in both of those markets because the customer is not coming into Europe, they are shopping in those markets. So, we've picked some of that up through our wholesale channel. But they tend to spend a little bit more when they are traveling and a little bit less fluidly when they are in their country.

And then there is some challenge in the UK, and that is more of a pound to the euro situation, where, again, the tourists are traveling a little less into the UK because of the strength of the pound -- i.e. the US dollar. So, again, we really like what we see going on in Europe. And some of our department store businesses -- in particular, Galeries Lafayette, just fantastic; Rinascente, fantastic. I can go through the areas.

But we are going to, over the years, we're probably today the largest accessible luxury handbag company in Europe. And we told you we would get there about three years ago and we are probably there today. As we have either the number one or number two position in the marketplace, we will grow, but it just won't be at the same growth rate that we have seen before.

But overall, we really like the response that we are still having with the brand in the markets, especially as we enter some of these new markets. Customers are responding with great enthusiasm.

Great, thank you for that. And then just domestically, it looks like you guys are pretty close to your 400-door women's market in terms of units in the US market. Can you just talk about if that's still the goal longer term, that 400-door target? And then as your men's initiative starts to ramp, how do you think about the potential, particularly in the North American market, and then globally for the men's initiative? Thank you.

North America, yes, we said we would be at 400. That will actually probably change just slightly because -- not North American womens -- the Americas will change slightly because you will see the South American numbers reported in the our Americas numbers, just so you know. But, no, we have no intent of going beyond that. And we are close to it. We'll open a few more stores and then that rollout will be complete.

Again as we have said to you many times, because you have all questioned us regularly, I might say, on why do open more stores. We are profitable when we open more stores. And people, while online shopping is absolutely a trend and it's going to move the needle for the Company, people will still go out and shop in a store. That won't, at least while I am alive, have evaporated. So, we will be in the right cities, in the right locations, and feel good about that.

And then in terms of men's, I would say to you that we are going to open these six or seven stores in North America, we've got about three/four on the docket in Europe, and then a handful in Asia. And then we've got about 75 shop-in-shops going in in North America, and I don't remember the exact number in Europe. I would say we will get these all in place, and then we will hold a little bit just to make sure we understand what the performances are, productivities, how we are going to go about doing this.

We are really excited. I can't wait to show you guys the new fall line that is coming with Marcel Ostwald joining us. As you know, he headed sportswear design for Hugo Boss. So, we are really excited about what is coming product-wise.

We've got a whole new marketing campaign that Michael has developed, that will include some significant television advertising for men's, because men's, it's not a traditional magazine-driven communication market. So, what we're going to do digitally and on TV with men's, I think you will be quite impressed with. So we are deadly serious about the men's business. You have heard me say before it's a $1 billion opportunity. Of that $1 billion we think $300 million of it is in leather goods.

If you go down to Macy's Herald Square, you can see our leather goods shop there. You're going to see quite a few more openings as we move forward. So, this is an area of business, it's going to take us a couple years to grow it, but once it gets going, this will be a very nice additional growth vehicle for the Company. Thank you, Erinn.

Simeon Siegel, Nomura Securities.

Thanks, good morning, guys. John, given your comment about AUR declines as a function of mix, how are the like-for-like AURs? And then just given the commentary on the units versus the price, can you just quantify any of the composition or give any color around the composition of that North American or consolidated comp at all? And then just quickly, a follow-up -- given the discussions around margin concerns, you have actually had some relative stability, I would say, around that wholesale. It seems to be holding in better. Can you talk about the comfort you have around that number? Thanks.

Yes, let me start with the AUR side. The AUR in the quarter in our North American retail business was down approximately 15%. I would say about 60% of that that is driven by smaller handbags. And I would say the balance of that is driven by additional promotional activity inside the stores.

We see that starting to stabilize, in particular in the third and fourth quarter, because, remember, we are lapping some of this stuff starting to happen. The world got a little more promotional, less holiday season, got really promotional into our Q4, calendar Q1. And then the small handbag things started around that time.

So, we see in our retail business, in North America in particular, we think margins are going to start to stabilize in Q3 and Q4. You have seen a sequential 1% to 2% decline in gross margins in the retail business, and we think that is going to stabilize for us. We feel pretty good about that. And we think this AUR situation -- we will be lapping it, as well.

The other thing I might add that also impacted -- again, I don't want to sound defensive, but a lot of people are writing about our comp stores decline and it's all about the handbags -- the watches are having an enormous impact on our comp store decline. Our handbag business is relatively healthy. And I think the industry is relatively healthy. It is not growing at the high single-digit rate it used to, but when you look at the amount of handbags that are being purchased, the interest by the customer, we feel good about that.

We will start to lap the comp store decline in watches also, coming soon. And, remember, our average watch sale was between $200 and $225, so that actually impacts our average transaction inside of our stores. Once we start to lap some of that, again, we feel pretty good about that situation, as well.

And your second question was, or was that it?

That was it.

Joan Payson, Barclays Capital.

Good morning. Could you talk a little bit about, in terms of the domestic comp trend, what you have seen in terms of the outlets versus the full-priced stores? And then just turning to China, John, I know you had a few comments about the rising brand awareness there but could you provide any update on the revenue sizing of that business, as well as thoughts on timing for taking it in-house?

Sure. We don't break out the full price and the outlets, Joan, as you know. But I will tell you that the traffic in outlets has also seen a sequential decline, although modest. It has been very, very small. The larger decline in traffic is in full-priced shopping malls and the smaller piece of it is in outlets.

And what's interesting now is, the traffic decline and the comps are starting to marry up a little bit. At one point the traffic decline was higher than the comp decline, and then the comp decline got higher than the traffic decline and that was driven by AUR. Now, as I said to you, that is why you are hearing me feel positive. It kind of is evening out. Our conversion rates are up. They are up significantly, by the way.

I have to take my hat off, I want to complement our 7,000 employees out selling around the world. These people are doing a great job and that is one of our incredible strengths. You may remember from the IPO our jet-set training, the way that we really work with our teams.

We've announced the Kors Concierge, which we piloted starting, really, this week. It's going to be an incredible tool for these people to really act as not only a brand ambassador, but really to be a styling consultant. Again, we will show this to guys because I think you will be quite impressed with what the technology gives our sales associates, from not only a product point of view but also information about who the customer is, what they bought previously, et cetera, all at their fingertips.

I think that is going to help us with comps, because traffic is going to continue to decline, we know that, although I think moderate at a certain point. And if we can continue to keep our transaction and conversion levels up, which we have been able to do -- or get our transaction level stabilized and get our conversion rates up, which we've been able to do that -- I think that's where you're going to see the comps turn for us. So, again, we feel pretty excited about that, along with the launch of the new products.

Asia in general is doing great for us. I will just make that as an overall statement. You saw the comps in Japan. We reported that we have strong double-digit comps in China. And then in Southeast Asia, pretty much similar -- strong double-digit comps, one or two markets are high single-digit comps. The whole region for us is fantastic.

What is interesting is in China, Hong Kong and Macau are not exactly flourishing, as we speak, but when we look at our China comps, we are running strong double-digit comps, even with Macau and Hong Kong suffering from lower tourist traffic. As it relates to the repurchase, we have always said we will look at it when the business reaches scale on a profitability level that would be accretive to the Company. I will tell you that the business is obviously growing very rapidly. We report in the Q the size every quarter of the business because we report the royalties earned and the wholesale that we ship. So, you can see the growth of the business.

We are going to be a significant player in China. And really excited about the new Huamao 9,000 square foot store that we are opening. Michael will be there in November. The events that we are putting on, the team that we have on the ground, it just further gives us great confidence that this region, potentially over the next few years, will probably be larger even than Europe for us. Thank you.

Dana Telsey, Telsey Advisory Group.

Good morning, everyone. Can you talk a little bit about when you commented on the gross margin, how do you see the buckets underneath the gross margin, whether it's markdowns in department stores, what's happening in retail, and the complexion with the overall smaller handbags that's going on with the lower AUR. How do you see that for the holiday quarter and go forward in each of the channels? Thank you.

Dana, I don't think we would talk about it by quarter. I would rather just talk about it as a trend. I would say to you that the gross margin in retail, we believe is going to stabilize. I've said that you. We are feeling pretty good about that. We think we've got a pretty clear picture on that.

We are going to take some price increases on some of our small leather goods, because we've been actually slightly underpriced compared to some of our other luxury competitors, and also on some of our crossbodies. So we think that will get us some margin improvement there. And as I said, we're lapsing the promotional environment. So, I would say that that is going to remain in a pretty good place.

And we will probably have a little sequential decline in wholesale gross margin, and that is a result of higher allowances to department stores. But, again, we think that will be not highly significant, as we look out, and especially as we begin to pull back some of the inventories. That is really more of a North America thing. We don't see that as a European or -- we have a very sizable business in Asia now, growing, to our license partners and through the duty-free operating channels, as well.

I would like to thank everyone for joining us on the call today. I think you can sense a lot of enthusiasm from us here at Michael Kors. And that is based around -- I want to first start with the incredible product that Michael and the design teams have been putting forth. And what we are feeling good about is the fact that that product is resonating. We are both delivering great new fashion innovation and we are delivering trend. Those are two things that are important to being successful, and Michael and our design teams have done that.

Secondly, we are really excited about our execution of what's happening in the digital world for us. I also want to layer on to that what is going to come with Kors Concierge, and give our already 7,000 amazing employees around the world, who are selling every day of the week to our fashion customers, an outstanding tool to help deliver a better jet-set experience.

And, third, I want to say that we believe that we will be lapping some of the headwinds that we have seen over the past 12 months, and, therefore, we will have slightly easier comparisons. And additionally we think we will have a little bit more of a platform to begin to launch off of.

So, with those things resonating in front of us and the growth of our international business, Michael Kors is going to be an exciting company to watch. And we are looking forward to reporting to you in the next quarter and delivering another outstanding set of results. Thank you very much.

This does conclude today's conference call. Thank you all for your participation. You may now disconnect.