Capri Holdings Ltd (CPRI) 2016 Q4 法說會逐字稿

Welcome to the Michael Kors Holdings Limited fourth-quarter 2016 conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Krystyna Lack, Vice President, Treasurer.

Please go ahead, ma'am.

Thank you.

Good morning and thank you for joining us for our fiscal 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 FY16 earnings call.

Reflecting on FY16, we achieved another record year, with total revenue growth of 8%, reaching $4.7 billion, and an earnings per share increase of 4% to $4.44 per share.

On a constant currency basis, total revenue and EPS grew 12% and 8%, respectively.

I'm proud of the entire Michael Kors team and what we have accomplished over the course of the year.

Beyond delivering strong financial performance, we raised the level of fashion innovation and newness in our product assortments.

Michael and the design team elevated our product offering with new trend-leading silhouettes, textures, colors and materials, which were met with a positive response from our customers.

Our North American digital flagship business more than doubled in FY17.

We also launched our digital flagship in Canada and developed a global platform that will enable us to launch our digital flagships across international markets.

We opened a net total of 142 retail stores globally, 47 in the Americas and 95 internationally.

We also opened several flagship stores in renowned luxury retail locations across the globe, including the Ginza district in Tokyo, Beijing and Stockholm, with great success.

More recently, we opened our largest flagship location in Europe on Regent Street in London, featuring our latest store design concept and plan to open our Singapore flagship later this year.

We have developed a platform to support accelerated growth in Asia.

First, we transitioned our South Korean license in-house in January and have successfully integrated the region into our business.

We also established our Hong Kong wholesale distribution operations, which enable us to provide even greater service and support to our Asian customers.

In addition, we are pleased to announce that we have completed the acquisition of our Greater China license, which fits perfectly into our growth strategy in Asia.

We believe that Asia will ultimately be $1 billion market and that this acquisition is the cornerstone for our growth plan in this region.

We accelerated the rollout of our menswear line, with new and innovative designs in sportswear and leather goods.

While we are still in the early stages, we are pleased with the strong momentum in this business, as we expand our presence at retail and in the wholesale channel.

This is another area of business that we believe will drive long-term growth for the Company.

Finally, we continue to make enhancements to our infrastructure in order to support our long-term sustainable growth.

During the year, we took our North American e-commerce fulfillment operations in-house, enabling us to better and more efficiently service customers in this channel.

We also further enhanced our omnichannel capabilities, allowing us to capture additional sales as our customers' shopping behaviors change.

And to support our growth in Europe, we built out our distribution center in Venlo, Holland, with our e-commerce operations launching in mid-summer this year, and our operations for retail and wholesale going live in early calendar 2017.

We ended 2016 on a strong note, with fourth quarter total revenues and EPS growth ahead of our expectations.

Total revenue increased 11% on a reported basis and 12% on a constant currency basis, driven by growth in both our retail and wholesale channels, as well as across geographies.

Earnings per share increased 9% to $0.98 on a reported basis and grew 11% on a constant currency basis.

While slower mall traffic trends, the decline in tourism in North America, as well as certain European cities, and FX headwinds, all remained a challenge for the industry as a whole, we were able to deliver solid results which we believe is a testament to our world-class design team, exceptional product offerings, integrated marketing campaigns, and the lasting connection that we have fostered with our customers.

Our retail business delivered solid growth across geographies, driven by strong double-digit sales increases in our digital flagships and new store openings.

Our global comparable sales increased 0.3% on a reported basis.

In constant currency, comparable sales rose 1.5%, which was in line with our guidance and was primarily driven by strong performance in our accessories and footwear categories.

While we saw a slight decline in North American comps on a constant currency basis in the fourth quarter, Europe comps increased in the mid-single digits and comps in Japan rose in the strong double digits.

Mall traffic in North America continued to decline during the quarter.

However, we once again saw a significant increase in conversion rates in our own retail stores, as customers responded favorably to our new product offerings.

Sales in our digital flagships once again showed significant growth in the fourth quarter.

We believe that our digital flagships represent a meaningful growth opportunity and we will continue to expand this business globally as we launch in Europe this fall.

We continue to build upon our omnichannel capabilities and remain focused on seamlessly integrating the customer shopping experience across all touchpoints, as well as taking steps to enhance our mobile shopping experience.

We look forward to seeing the benefit of these efforts over the coming year.

We are currently undertaking a project to significantly elevate our CRM and data science capabilities.

In parallel, we are investing in talent and technology in order to incorporate learning from the customer insights we are gaining.

We will continue to capitalize on our CRM capabilities and Michael's voice to gain a competitive advantage by evolving our customer-centric marketing.

In addition, data science-driven segmentation enables us to personalize Michael's message, allowing us to strengthen the relationship between our brand and our most loyal customers.

We believe that having a deep understanding of our customer behavior allows us to better excite and engage the customer, introducing services and products from our lifestyle portfolio curated just for her.

As you know, we have a strong and influential online presence, as consumers turn to Michael Kors for fashion insights and we continue to see our fan base grow across all social media platforms, further demonstrating the power of our brand.

Sales in our wholesale business grew 4% for the quarter on a reported basis, which was ahead of our expectations.

Europe wholesale sales were flat on a reported basis and grew 2% in constant currency, while in Asia, we saw significant growth of nearly 8 times -- 18 times to $27 million.

In North America, the department store channel remained challenged.

However, the new spring collection we introduced were well-received with strong sell-throughs in the fourth quarter.

We believe that the North America retail environment remains highly promotional, which is impacting the long-term brand equity of Michael Kors.

We will be actively decreasing our exposure to the wholesale channel by reducing inventory levels to focus on a higher level of full-price sell-throughs and a lower level of markdowns.

While this strategy is expected to result in a meaningful decrease in wholesale net sales in FY17, we believe that it is the right strategy for the overall health of our business long-term, as we protect our margins and brand equity.

In our licensing segment, revenue declined during the quarter due to lower sales of watches, as well as reduced sales in eyewear as we anniversaried our launch with Luxottica and the final quarter of shipments from Marchon last year.

That said, we are pleased with the favorable response that we have seen to our new slim, modern watch styles, particularly the Hartman and Jaryn case bodies, both of which are exceeding expectations.

In addition, our updated jewelry offering featuring padlock motifs as well as our watch and jewelry giftset boxes also continue to perform well.

In eyewear, our spring fashion styles, the new round Kendall and the Cat Abela were met with strong response and we are seeing positive sales momentum in our eyewear offerings globally.

We remain a global trend leader in watches and jewelry, with our entrance into the connected fashion accessories category.

This fall, we will introduce our new wearable technology accessories line, beginning with Michael Kors Access display smartwatches.

This launch is geared towards the fashion-focused consumer and features a smart timepiece that focuses on glamorous style and innovative design.

Michael Kors Access combines the cutting-edge technology that our partner, Google, is known for, with the chic and glamorous fashion aesthetics of the Michael Kors luxury brand.

These smartwatches will be available in two styles, the Dillon and Bradshaw, with price points between $395 and $595.

This is truly a unique accessory, featuring an exclusive custom display dial experience, which you can change with just a swipe.

With hundreds of different display options, you can set your watch face to a glittering pave that complements your outfit by night and switch to a digital chronograph that shows your fitness stats at the gym the next morning.

Certain watches will feature interchangeable wristbands and will be available for both men and women.

Powered by Google's Android Wear operating system, the touch screen display smartwatches include social media updates, text, phone call and e-mail alerts, app notifications, Smart Help from Google Now, voice control of device and services via Okay Google, and of course, built-in fitness tracking.

As part of our unified wearable strategy, we are also launching three styles of smart jewelry, the Crosby, Reed and Thompson, available in multiple colors, platings and in a variety of bands.

These modern styles are designed to give our customer a fitness tracker that is fashionable and that she will want to wear every day either alone or as a complement to her jewelry.

Smart jewelry will feature activity tracking, sleep monitoring, and link remote control functionality, and will be priced from $95 to $145.

Initially, the wearable technology will be a small piece of our overall business in terms of revenue.

However, as I've said in the past, based on our previous success in watches and jewelry, we believe that we can quickly become a fashion leader in this category.

Long term, the wearable technology category will become a pivotal component of our watch and jewelry business.

In addition, we are pleased to announce the Fall debut of a new fragrance for women called [Wanderlust].

The new scent will have global appeal, evoking infinite desire for adventure, romance and discovery.

The new fragrance line will initially be offered exclusively in our North America wholesale stores before becoming available globally in both our retail stores and through our wholesale partners.

We will be supporting the launch with a compelling marketing campaign which includes print, TV and social media, featuring Lily Aldridge and Wouter Peelen.

We believe this new collection will allow us to capitalize on the growing momentum in fragrance and beauty and further increase our penetration in this category.

Turning to our product categories.

We saw growth in our accessories category, led by new handbag groups introduced this Spring, including our denim styles, the Quilted Sloan Shoulder Bag, our Savannah Satchel and Hayley Tote.

In addition, our backpacks continued to resonate well with customers.

Total accessory sales on a retail basis grew at low double digits globally.

In North America, we saw weakness in the category in the wholesale channel.

However, we experienced strong double-digit growth in accessories in our own retail stores.

While the momentum in our small bags, crossbodies and small leathergoods, as well as promotional activity continued to impact AUR in the quarter.

Units sold increased double digits once again, which indicates continued demand for our luxury product offering.

We also saw another solid quarter for growth in our footwear business, as Michael Kors has become a dominant brand in this category.

We offered a broad array of styles, with performance led by the strength in fashion, active footwear as well as Espadrilles and casual sandals, including our MK Slides and [warm] platform styles.

Customers also responded well to new designs, detailing, particularly the perforated floral designs of the Olivia Active Slip-On and denim styles of Ollie High-Top Sneaker and Darci Espadrille.

We were extremely pleased with the performance of our Men's sportswear and leathergoods business, which is showing strong momentum.

The Men's Collection embodies effortless style with a modern edge for the confident, connected, and adventurous Michael Kors man.

While Men's is still a small portion of our overall revenue, I am confident that this will be an integral part of our business, as we evolve into a leading Men's luxury brand.

During the year, we opened 117 shop-in-shops globally.

In addition, we extended our Men's presence at retail with the opening of two standalone stores as well as through the addition of our Men's offering in nine of our existing stores in North America, Europe and Asia.

During FY17, we plan to open approximately 10 retail locations and 150 Men's shops -- shop-in-shops globally.

Long-term, we continue to believe that our of Men's business represents a $1 billion revenue opportunity for Michael Kors.

Turning to our international business.

As announced in our press release this morning, we completed the acquisition of our Greater China license and are extremely excited about the tremendous growth opportunity this market has to offer.

We believe that by taking direct control of this market, we can better leverage our infrastructure across Asia and make a greater impact on the expansion of our business in this region.

As you know, we have been working diligently over the past several years to build the infrastructure, establish the brand, and grow the acceptance of Michael Kors across Asia.

We believe that we are on a strong trajectory with a rapidly growing following among Chinese, Japanese, Korean and Southeast Asian consumers.

This makes it an ideal time for us to take direct control of the China operations, integrate it into our business, and unlock the enormous potential in this market.

For the most recent year, Michael Kors product was available in 97 Company-operated and travel retail doors across mainland China, Hong Kong, Macau, and Taiwan.

The Greater China business generated nearly $200 million in revenue.

Long-term, we believe that the China business represents a $500 million revenue opportunity, based on our assessment of the market and the growing demand for the Michael Kors brand.

In addition, we are pleased to see the strong trends in our Korea business since we took the license in-house in the -- this past January.

Customer demand for Michael Kors brand is growing and we will continue to invest in this region through new store expansion.

We currently have 36 retail stores and concession shops in South Korea and believe we can ultimately expand to 50 locations, generating revenues of approximately $100 million.

Turning to other Asia regions.

We are extremely pleased with the ongoing momentum in Japan, as we continue to seek double-digit revenue gains and growing brand awareness.

We continue to believe that Japan will ultimately reach $300 million in revenue.

In Hong Kong, where we established distribution operations to suit -- service duty-free retail locations and our Southeast Asian licensed operations, we see $100 million revenue opportunity as we continue to grow this business.

Combined, our Asian markets, in total, represent a $1 billion opportunity for the Company.

In conclusion, Michael Kors remains a leader in the global luxury fashion market with multiple long-term growth opportunities, including expansion across Asia, the launch of our digital flagships worldwide and the continued development of our Men's business.

In FY17, we expect our results to be challenged by a difficult retail environment, pressured by weak traffic and tourism trends.

We will respond by carefully managing our exposure to the US wholesale channel, maintaining disciplined inventory controls, and remaining committed to our relentless focus on designing world-class fashion product, driving brand engagement, with compelling marketing programs and delivering a jet set luxury shopping experience in our stores and our digital flagships.

In addition, as our new $1 billion share repurchase program demonstrates, we are committed to enhancing shareholder value over the long term.

Now let me turn it over to Joe for a detailed review of our fourth quarter financial results and our outlook for FY17.

Thank you, John, and good morning, everyone.

We are pleased to report revenue and EPS results above our guidance.

Total revenue grew 10.9% to $1.2 billion on a reported basis.

On a constant currency basis, total revenue grew 11.7%, driven by increases across the Americas, Europe, and Asia, of 5.1%, 18.1%, and 212.1%, respectively.

As a reminder, our FY16 is a 53-week period versus a 52-week period in the prior year.

As such, the results of our FY16 fourth quarter and full year include approximately $34 million of additional retail sales.

Comp sales calculations exclude the 53rd week.

In our retail segment, net sales increased 22% on a reported basis.

In constant currency, retail net sales increased 23.4%, driven primarily by the opening of 142 net new stores since the fourth quarter of last year, and strong performance of our digital flagships.

Comp sales increased 0.3% on a reported basis.

In constant currency, comp sales increased 1.5%.

The increase is attributable to the positive comps in Europe and Japan, partially offset by a slight decrease in North America.

Our US digital flagship sales contributed 380 basis points to our North American comp performance in the quarter on a constant currency basis.

In our wholesale segment, net sales grew 3.5%.

On a constant currency basis, wholesale sales increased 4%, driven primarily by our footwear and accessories category as well as Men's, and growth in international markets.

In our licensing segment, revenue decreased 13.6%, as expected, due to lower sales of watches as well as lower revenue related to eyewear as we anniversaried our launch with Luxottica and the final quarter of shipments from Marchon last year.

Gross margin declined 20 basis points to 58.2%, which included a negative foreign currency transaction impact of approximately 100 basis points.

The decline in gross margin is primarily due to a 120 basis point decline in retail gross margins, attributable to additional markdowns, largely offset by gross margin benefits related to changes in geographic and segment mix, as we saw a 32.9%.

increase in sales from regions outside of the Americas and a 22% increase in retail net sales.

Total operating expenses grew 20.9%.

As a percentage of total revenue, total operating expenses increased 310 basis points to 37.8%, primarily due to our investments in new stores, e-commerce and the omnichannel capabilities, the buildout of our Men's and Korea businesses, new shop-in-shops and infrastructure improvements, as well as impairment charges related to retail and wholesale fixed assets.

Income from operations was $244.1 million, or 20.4% of total revenue as compared to 23.7% of total revenue in the same period last year.

Retail operating margin declined 360 basis points due to the decline of retail gross margins, as discussed earlier, and a 240 basis point increase in operating expenses, primarily due to higher depreciation related to the fixed asset write-off mentioned earlier as well as investments in our new stores and digital flagships.

Wholesale operating margin declined 190 basis points, primarily due to higher operating expenses related to the fixed asset write-off noted earlier.

Licensing operating margin increased 80 basis points, primarily due to lower advertising costs during the quarter, partially offset by higher costs associated with intellectual property protection.

Income taxes were $69.2 million in the quarter, and our effective tax rate was 28.2% as compared to 29.4% in the same period last year.

The decrease in our effective tax rate was primarily due to the increase in taxable income in certain of our non-US subsidiaries, which are subject to lower statutory income tax rates.

Net income was $177 million for the fourth quarter, and diluted earnings per share were $0.98.

The unfavorable currency impact on EPS was $0.02 per share.

Turning to our balance sheet.

At the end of the quarter, cash and cash equivalents were $702 million.

During the quarter, we repurchased approximately 3.7 million shares, totaling $200 million under our share repurchase program.

Since the inception of this program in 2014, we have repurchased almost 32 million shares, or 15% of our outstanding shares, totaling approximately $1.6 billion.

As of April 2, 2016, the remaining availability under the Company's share repurchase program was $358.1 million.

We are very pleased to announce that the Company's Board of Directors authorized a new $1 billion share repurchase program, which replaces the remaining balance of the previous program authorized in October 2014.

The new authorization further demonstrates our confidence in our long-term business outlook.

We will continue to use the strength of our balance sheet and future cash flows to repurchase additional shares and drive value for our shareholders.

Inventory increased 5.2% versus last year, representing a slower growth rate than total revenue in the fourth quarter.

Capital expenditures for the quarter totaled $79 million and were related to the buildout of new retail stores and shop-in-shops as well as investments in our distribution facilities, our corporate offices and other infrastructure improvements.

We added 45 net new stores in the fourth quarter.

We opened two locations in the Americas; six in Europe; and 41 in Asia, which includes the 36 stores we assumed in South Korea; and closed four locations in Brazil.

In addition, we expanded or relocated three stores and converted 136 wholesale doors into shop-in-shops globally.

Before turning to our outlook for next year, let me provide you with some insight into the acquisition of the Greater China license, which was completed on May 31, for $500 million in cash, subject to certain adjustments.

We had said earlier on that meaningful investment and dedicated resources would be required to develop the China business, given the complexity of this market.

We also indicated that once this business had reached a certain size and level of profitability, we would consider bringing it in-house.

Following considerable evaluation, we determined that based upon the size of the operations, the level of brand recognition Michael Kors has reached and the platform that has been established, it is the right time to acquire the China business.

This acquisition will enable us to leverage the infrastructure and the team to further expand our presence and meaningfully grow our business across Asia.

We believe that Asia represents a $1 billion revenue opportunity and with this acquisition, we are positioned to capitalize on the growth potential in the market.

The Greater China business generated total revenue of $197 million last fiscal year and had a network of 91 Company-operated stores and six travel retail locations across China, Hong Kong, Macau, and Taiwan.

For FY17, we expect the acquisition to contribute approximately $200 million to retail net sales, reflecting sales for the 10-month period following the closing, and to be neutral to earnings per share on a GAAP basis and accretive on a non-GAAP basis, excluding one-time acquisition costs.

The acquisition is expected to be accretive beginning in FY18 and thereafter.

Overall, we believe that this strategic acquisition was the right decision for our Company and for our long-term growth.

Turning to our outlook.

For the full FY17, we expect total revenue to be flat versus the prior year.

As we look across the businesses, we expect retail net sales to increase in the mid-teens percentage range for the year, driven by growth in our digital flagships and new store openings, in addition to the acquisition of the China business.

Comp sales are expected to decline in the low single digits.

Wholesale sales are expected to decline in the high-teens percentage range.

As John discussed earlier, the North American retail environment remains highly promotional.

We will be reducing inventory in this channel in order to protect our margins and brand image.

We believe that this will lead to faster inventory returns of new product and a decrease in markdown activity, which will ultimately result in higher gross margins and improve the overall health of the business.

The outlook for lower wholesale sales is also due to the integration of the China business.

As a reminder, in 2016, wholesale sales through our Greater China licensee totaled $62.8 million.

Lastly, we expect licensing revenue to decline in the mid-teens percentage range as a result of continued softness in the watch category and a decrease in licensing revenue related to the acquisition of the Greater China license.

For FY16, licensing revenue from Greater China license totaled $7.6 million.

By geography, we anticipate a high single digit decline in total revenue for the Americas region due to lower wholesale and licensing revenue.

We expect continued revenue expansion in our international markets with a high single-digit increase in Europe and a triple-digit increase in Asia.

We expect gross margin expansion in 2017 of 110 to 140 basis points, as we continue to benefit from changes in geographic and segment mix.

This will be offset by an increase in operating expense.

We expect deleverage in -- on operating expense as we continue to invest in our long-term growth, including upgrading our CRM systems, launching our digital flagship in Europe, building infrastructure in our China and Korea businesses, expanding our Men's business, and transitioning to our Venlo warehouse as we plan to operate two facilities until we fully transition to our new facility in early calendar 2017.

In addition, we expect to incur $15 million of one-time transaction costs and other contingency payments related to the acquisition of our Greater China licensee, and $3 million of one-time costs related to the closure of certain locations in Latin America.

As a result, FY17 operating margin is expected to be approximately 21.5% on a non-GAAP basis, excluding the one-time costs mentioned earlier.

On a GAAP basis, operating margin is expected to be approximately 21%.

We expect diluted earnings per share to be in the range of $4.56 to $4.64 for the year on a non-GAAP basis, excluding the one-time cost noted earlier, and $4.47 to $4.55 on a GAAP basis, including the one-time costs.

This assumes a tax rate of approximately 21% and 171 million shares outstanding.

Capital expenditures are expected to total approximately $250 million for the FY17 and will focus on ongoing investments in global digital strategies and omnichannel capabilities.

Global retail expansion, including approximately 15 new stores in the Americas, 20 in Europe and 40 in Asia; the conversion of approximately 275 wholesale shops and shops globally; and the Company's global distribution infrastructure, information systems and corporate facilities.

For the first quarter, we expect total revenue to be between $940 million and $955 million,(sic-see press release �$950 million�) and a mid-single digit decrease in comps sales.

We expect a decline in gross margin of approximately 100 basis points.

We anticipate an increase in operating expense as we continue to invest in our international expansion, digital flagships and global infrastructure.

Operating expense as a percent of total revenue is expected to increase 690 to 740 basis points on a non-GAAP basis, excluding one-time costs I noted earlier, resulting in operating margin of approximately 17%.

On a GAAP basis, including the one-time costs, operating expense as a percentage of total revenue, is expected to increase 880 basis points to 930 basis points, resulting in an operating margin of approximately 15%.

We expect diluted earnings per share to be in the range of $0.70 to $0.74 on a non-GAAP basis, excluding the one-time costs noted earlier, and $0.62 to $0.66 on a GAAP basis, including the one-time costs.

This assumes a tax rate of approximately 21% and 177 million shares outstanding.

During FY17, we will be resetting our base in our North America wholesale business and expect to resume sales growth in FY18.

As we reduce our lower margin North American wholesale business and gain other margin benefits associated with favorable geographic and segment mix, we expect to see continued gross margin expansion in FY18.

We continue to believe that we will be poised to deliver both sales and earnings growth over the long-term.

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

Thank you, Joe.

Our business model remains strong and we remain focused on delivering the luxury fashion product and exceptional shopping experience that customers have come to expect from Michael Kors, both online and in our stores.

While we expect FY17 to be a challenging year, we will manage our business prudently through this period and we will continue to execute on our multiple growth strategies.

We have enormous potential to build our Asia business with the acquisition of our Greater China license in addition to the expansion in South Korea, Japan and Southeast Asia, which, combined, represents a $1 billion market opportunity.

We are extremely pleased with the growing momentum of our Men's business and remain confident that this has the long-term potential to be a $1 billion business.

We look forward to a successful launch of our wearable technology, Michael Kors Access, and we believe we are well positioned to capitalize on the tremendous growth in this category.

In addition, we will continue to expand our retail business, both domestically and internationally, through our global digital flagships and retail stores.

Overall, we remain confident that we will continue to expand the Michael Kors business worldwide and as our new $1 billion stock repurchase authorization demonstrates, we remain committed to driving earnings per share growth and delivering shareholder value over the long term.

With that, I will now open the call for questions.

Thank you.

(Operator Instructions)

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

Great.

Thank you.

Good morning and congratulations on a very solid finish to the year here, John.

Thank you.

I wanted to ask about your wholesale strategy.

Obviously, there's a lot of detailed information in the outlook.

Could you just let us know what does the negative high teens global wholesale guidance for the upcoming year, what does that imply for North America?

And I noticed you started delivering some Exclusively Ours product into your stores here over the last month or two.

It seems like you're also working to differentiate product between your retail channel and your wholesale channel.

Could you just expand on that strategy and your thinking there?

And then lastly, looking at the China acquisition, how are you feeling about the composition and location of stores?

Are you generally happy with the number of stores and the current locations or do you think there might be an opportunity to reposition some of the stores by area within Greater China?

Thanks so much.

First off, thank you, Kimberly.

And again, for the broader group, I know we scheduled this call to be an hour-and-a-half and I think you can understand why now, with the acquisition of China and year-end and a lot of strategic changes we're making, so I thought it was a good idea to give the full-time for people to ask questions.

Kimberly, on your first question regarding our wholesale strategy, the majority of the wholesale decline will happen in North America.

And the -- as Joe indicated before, I think it's about $63 million of the wholesale decline belongs to the acquisition of China and so you have to kind of factor that into the numbers.

And let me just explain to you what our thinking is.

Again, first off, we have built a very solid business with department stores, not only domestically but internationally.

We think the channel is a very strong channel across the world, great banners that we operate our brand inside of, and we support them 100% in good times and in difficult times.

That being said, what has happened in North America, in particular, and you're starting to see a little bit of it in Europe, is that as mall traffic has declined, stores have taken an aggressive position on promotional activity to generate volume and traffic into their buildings.

And we have seen that magnify over the last 12 months.

And we believe that, that long term is not healthy for the Michael Kors brand.

And as I've said to you before, and we just said in the script, we grew our handbag business globally.

That's -- so our customer -- and that's in dollars; our customer continues to respond to the brand.

I see constant communication from various press-related things about the brand is dead or losing its vibrancy, et cetera.

And that's just flat-out not true.

And along with that, we're shipping double-digit unit increases.

So we think that, that's too many units going into the marketplace and we believe that by us reducing the amount of product going into the wholesale channel, we will actually create a healthier environment for our department store customers and partners and ourselves.

There will be less product.

There will be more demand.

And that demand will be more full-price versus sale.

And I want to further add that many of you had the opportunity to come up and see our Fall product offerings.

We're really excited about that.

The -- our own stores, our retail partners have let us know that we're heading in the right direction in terms of trend.

I also mentioned to you we're the second or third largest handbag company in the world.

So we have an obligation and we have an authority to really set the tone for fashion and for luxury.

And we're going to use that authority and tone.

We have 750 Company-owned stores, 100 stores that are licensed, so we have an 850 store network globally that is incredibly positioned and the power of that, with what Michael and the design team are going to be delivering for Fall season, we've already seen the beginning of that in Spring, we think is going to continue to propel the business forward.

And we're very, very pleased about that.

So we think the strategy that we're taking, while, obviously, reduces our revenue on the top line is going to be much healthier for us.

Joe indicated that we're actually going to have a gross margin expansion and that's because as we look at geography and retail tilting, that's a better thing for us.

So we just like the strategy all together.

I want to be 100% clear.

We believe in our department store partners.

We think they're doing a great job with our brand and we want to continue to be one of the great assets that they have to help bring customers into their building and we like their customers.

We think they're terrific Kors loyalists.

Secondly, in terms of the Exclusively Ours, the strategy there is to do two things.

Number one, yes, to distinguish a bit between our free-standing stores and some of our department store shops around the world.

And secondly, to be able to have product that could be promoted less, quite frankly.

And you're going to actually see even more of that coming for the Fall season and certain groups that will not be promoted, both in our own stores and in the department store environment as well.

We know that the promotional activity is even more prevalent from a visibility standpoint for the customer because of digital.

So we've got to take a different approach to how the customer sees our product and really stand behind the newness.

We give that product an opportunity to develop and market behind that.

And on your third question regarding China, we have -- our license has built out an extraordinary network of stores.

We are in the best locations, just like we are in the United States, just like we are in Europe.

We sit next to the finest luxury brands from Europe, whether it's Vuitton or Prada or Gucci.

We're right in the same shopping mall, same streets, et cetera.

I would also say that we got lucky.

We did not have an over-development of Hong Kong, in particular, which, as you know, is struggling as a marketplace.

So the good news for us is we only have a handful of locations there.

So that presents an opportunity for the future but it also really avoids a very big negative, as you know, many companies are suffering in that marketplace.

Mainland China and Taiwan are double-digit comps, just moving along very, very nicely and the brand has tremendous opportunity to grow in those marketplaces.

And lastly, just on that note, as you know, the Chinese are traveling all over the world, so again, even as we build out the business in the region, there's even more to come for us across the globe with that customer.

So thank you very much, Kimberly, and great questions.

Great.

Thank you so much, John.

We'll go next to Erinn Murphy with Piper Jaffray.

Great.

Thanks.

Good morning.

I guess just following up on Kimberly's question on wholesale, could you maybe parse out a little bit more in North America, what you're seeing in terms of the account base?

Are you closing doors or is it just a strict pullback across several categories?

And then if you could just maybe speak a little bit more in detail on the wholesale side.

What are you assuming in terms of some of the category reduction?

Should we assume that watches is maybe greater than some of the other categories or is it fairly smooth across the various categories?

Sure.

Thank you, Erinn.

Let me start with your first question, which is the doors.

As you know, most of the locations that we're in today in our department store partners are shop-in-shops, and there are no shop-in-shop closings.

So we are highly productive, just like our free-standing stores, where we're top 10 in almost every single mall around the world in terms of our productivity per square foot, we're in the same position and obviously, in certain categories, we're number one in terms of -- in department stores, we're number one in terms of sales per square foot in those various departments.

So that's not an issue at all.

The real issue for us is analyzing the amount of inventory that is being sold on sale versus full price.

That's what we have to look at and we believe that selling more product at full price is better for our brand image and better for our margins long term.

So again, as Joe indicated earlier, this is a reset for us that will take probably 12, maybe a little bit longer than that, 15 months to get through.

But we ultimately believe that as a luxury fashion-led brand, we don't want it to be about price.

We want it to be about new product introduction.

And in terms of you asked about categories, I would say the predominant reduction will be coming from our accessories category.

That's where we see, as I said to you earlier, that's -- just too many units moving into the marketplace.

Now, while we love the fact that consumers are responding to our product and buying more of it by a lot and, again, all of our consumer research shows that the brand engagement and the brand loyalty is at highest levels that it's ever been and your analysis that you do annually indicated the same thing.

So we just -- we don't like the amount of product that's ending up out in the marketplace.

So this is not an issue of doors or anything like that.

This is really more an issue of having the right amount of product, given where we want to get back to in terms of full-price selling versus promotional selling.

Got it.

Thank you for that.

And then I just have two follow-ups.

One, maybe John, for you on Europe.

There was a pick-up in comps this quarter to mid single from the low single-digit increase last quarter.

Just could you break out maybe trends by regions?

And then Joe, for you, two clarifications on the guidance for FY17?

Are you assuming any incremental buybacks in the guide for the year?

And then with gross margins being up, could you maybe parse out how that looks retail versus wholesale and if there's any residual FX headwinds given just transactional piece of the FX?

Thanks.

Erinn, obviously, we had a good quarter from a comp store standpoint, I think, globally, compared to many of our competitors.

I think we were close to best-in-class.

Because again, remember, many of the European competitors are reporting on a reported basis.

But when you look at the constant currency, I think in Europe in particular, we did better than most.

That being said, we're definitely seeing the business stronger in -- as I mentioned in the last quarter, Italy and Spain and certain of the Eastern European markets, our business is, for example, in Russia is outstanding.

That's not in our comp but I'm just telling you it's very, very strong there.

On the other hand, we're seeing, as many luxury companies have reported, our business in the -- in France after the terrorist attacks, has been very difficult and continues to decline, given the tourism decline in that marketplace.

We have had difficulty in the UK that was driven primarily -- initially by currency changes.

That's now changed a little bit, given that we've got some issues that people are thinking about with Brexit, et cetera.

So our business remains a bit challenged there.

I would tell you overall in Europe, and I've seen some other luxury goods companies report this as well, we do see headwinds.

Tourism into Europe is declining.

There's a lot of macro issues in Europe.

There was another terrorism alert that came out yesterday.

So we believe that Europe, while it's still a growth opportunity for us, as Joe indicated, in terms of region, it's going to be a bumpy road in 2017 until there's some issues settled politically.

We're not exactly sure where the FX is going to end up for the year.

And so we're going to stay very close to that.

Again, growth market for us but it's -- I think there's going to be a few bumps as we get through the year.

In terms of the gross margin, you should be thinking of the margins being essentially flat for the different segments and the real improvement is driven, again, similar to what you saw for fourth quarter, is due to both geographic and segment mix, as both international and retail is growing faster than the US domestic business, or I should say the North American business.

In terms of buyback, we really don't guide in terms of what we do.

As you know, we tell you what the authorized shares or what the authorized amount is.

We basically are opportunistically buying and so we have never provided guidance as to when and how much we're going to buy.

But I would add to that, Erinn.

You know how strongly I've stated this in past calls, that the Board of Directors and the management of this Company, we know that this stock is significantly undervalued where we trade versus the peer group.

We also understand that even our operating margins, even at 21.5%, I think are the third best in the luxury category of any luxury retailer in the world.

We have a powerful business model that's generating tremendous amount of cash and we have multiple growth opportunities.

And as long as the stock remains in our opinion, and it's just our opinion, significantly undervalued, we will be aggressively in the marketplace over the next year, taking advantage.

We've taken out 15% of our shares and we're going to keep going.

We have the balance sheet and the cash flow to continue to do that.

So you can be very sure that we're going to be returning value to our shareholders, particularly at this time, and we think that's going to bear a lot of fruit when people understand that Michael Kors is here to stay, powerful business model, one of the most profitable companies in the market and we will continue to deliver great results.

Thank you, Erinn.

Thank you.

And we'll go next to Randy Konik with Jefferies.

Yes, thanks a lot.

Appreciate it.

I guess, John, just to think about the wholesale strategy, I think it's a very good strategy in terms of just getting more full-price kind of arena.

Do you think about in that reduction strategy, is it more just unit based or is there a SKU count reduction philosophy that we should be thinking about there and parsing out those SKUs between wholesale and retail to make them even more differentiated?

I guess the second question is, you mentioned units up pretty strong.

It sounded like AUR down.

Was there any AUR differential by channel?

And if you could give us some comments on your outlook for AUR in whole and by channel, that would be super helpful.

And then I guess lastly, when you think about the long-term nature of the business from a retail/wholesale split, do you think about where it is today, even recognizing the pullback in the US market but the growth in international markets, should we think about the total business having a similar wholesale to retail mix as it is -- as it stands today?

Or how should we be thinking about the changes there?

Thanks.

Sure.

Let me see if I can get all that, Randy.

So let me take the last one first.

When we took this Company public and you've heard me say this many, many times, we said to you that North America would grow.

It would eventually reach maturity and then as that happened, Europe would come on, and then as that happened, Asia would come on.

And I think all of those things has played out as we had laid them out with the exception of what's really happened in mall traffic in North America.

I don't think any of us had the crystal ball to see that coming and obviously, part of that's driven by the digital shift in the consumer behavior and the other part of that's driven by, in our case, and I know in some of our very, very valued department store partners' cases.

And by the way, when I use that word department store, it's not just North America.

Because I -- normally this call is focused on North America wholesale, but we have a lot of business around the world.

The department stores in Europe are facing many challenges with traffic from tourism as well.

So -- and the second thing we said when we went public was that this Company ultimately would be 70%, 75% retail versus wholesale.

Wholesale just grew faster than we had ever anticipated and we enjoyed that.

And we think that's terrific and we're going to continue to enjoy that.

But that's -- we ultimately, first and foremost, are retailers.

Ultimately, we believe that our store network, which will get to some 1,000 stores worldwide, will the cornerstone of our development and growth.

And it will be somewhere between 65% and 75% retail and the balance will be wholesale.

And as you look at China, China is -- I mean, sorry, Asia.

Asia's basically all retail, small wholesale business there with some duty-free operators and a small license business there.

In Europe, Europe is going to -- has always been a business that will grow more quickly in retail because there's just more opportunity for us to do that.

So again, I don't think that should be any surprise.

That's kind of what we had laid out initially.

We just were able to develop the wholesale piece of it of faster than the retail piece.

In terms of SKUs, I'll go back to your first question, no, there's not going to be really any change in SKU.

And if anything, I think when many of you came through our showrooms, you saw the amount of product innovation that our design teams are delivering is really quite exciting.

And I think it's what the market needs.

I've been very vocal on the fact that I think the market has had a malaise in terms of design.

I think that the consumer needs to see something that's got more interest in terms of product and quality and I think many of our competition is doing a great job, in particular, some of our European competitors are doing just an outstanding job with new product innovation.

You'll see some of -- some additional things coming to bear very shortly on our website that will be exclusively on our website, with products that we will be, quite frankly, building custom for consumers.

We think that, that's going to become even more of an issue, as people look at what's in their wardrobe and how we curate that for them.

So there's going to be actually more customization that we're going to look at on a go-forward basis.

You'll see some of that be launched.

We'll talk about that in the next call.

In terms of AUR, AUR declined in both channels and in our retail channel, it was a bit more driven by size of bag than promotion.

But clearly, promotion added to the decline in AUR.

And in the wholesale channel, it was higher than our own channel.

And that's just because there's more activity in that channel by more people and of course, there's a tremendous amount of price matching that goes on.

So that's really added to a bit of the chaos of the situation that's happening in that particular channel.

So thank you very much, Randy.

Just if I could, if I may, could you clarify how you think about AUR going forward by channel?

That's all.

Thank you.

Yes.

Sorry.

I think AUR is actually going to increase and we told you -- again, I apologize, I don't remember if you were in the showroom walk-through or not.

But we said that, that AUR, we are actually focused on that and we're doing that through kind of three things.

First, we believe that by reducing the amount of inventory at retail that's available for sale, it's going to raise the AUR.

Secondly, we are taking the smaller bags and we're offering more fashion design into those products and actually offering higher price points.

It was a strategy that Michael personally, really, came up with and we think it's a brilliant strategy because it's not just the price that she's interested in the smaller bags, it's the size.

So we believe that we've probably actually been slightly undercharging and slightly underdesigning in terms of where -- she'll definitely pay somewhere between $200 and $300 for a cross-body.

Why can't we have more of them at the higher price point.

So that you'll be seeing that coming to bear in the stores.

And then also, we believe that one of the reasons why the predominant amount of handbags that many of us are selling are in that $300 to $350 range is because we really haven't been providing enough design to get the customer excited for higher price point product.

And so that's coming and so that will actually raise the AUR for Fall season on the floor inside the stores.

So we feel very good about that strategy: reduce units, get AURs up, still being very competitive price points.

Because I don't want you to think we're having a complete shift in pricing.

But we think that's the right thing to do and we think the customers are going to respond to that because she's going to see the value in the design of the product.

That's very helpful.

Thank you.

We'll go next to Matthew Boss with JPMorgan.

Thanks.

So on bottom line profitability, EBIT margins moved from high 20%s two years back to low 20%s this year.

Is it best to think of this as the trough and then just the best way to think about SG&A dollar growth versus sales growth as we move beyond this year?

Yes, thank you, Matt.

That's a very good question.

Matt, as you know, we publicly said we thought we'd be kind of between 23% and 24%.

We're lower than that, where we are now at 21%, and I want to acknowledge that.

We believe that this is, from what our three-year planning cycle looks like, that looks about where we're going to land.

And really, the key to that is going to be SG&A will start to level out in next fiscal year.

It actually would have looked that way.

We would have made the kind of projection that we talked about, the 23%, 24%, had we not made this decision to reduce the wholesale inventories.

We would have been kind of right there.

So we made the decision that we're in this for the long term, as we've told everyone since we started this journey.

We're building, as Joe mentioned before, our new distribution center in Venlo.

We're developing a CRM team and systems here that are going to be world-class, in our opinion.

We're building out a web -- our e-commerce capabilities on platforms that we own, quite frankly.

These are not platforms that we're paying fees on, et cetera.

So we've decided to go the long-term route on all of our investments into this Company, because we think it's, obviously, one of the greatest fashion luxury companies in the world.

And we'd rather do it the right way than to do it short term to create an extra basis point, or 100 basis points in operating margin.

That being said, we do believe that next year, we kind of level out and we believe that for your modeling, you should be assuming that, that's about where we're going to land on a go-forward basis.

Okay.

Great.

Can you just talk about drivers of the negative same-store sales this year; any update on larger picture industry growth?

Just is there anything structurally preventing you guys from returning to positive comps in the back half of the year?

Sure.

Very good questions.

Let me start with the industry.

We believe that the North American handbag business is flat to down high -- I'm sorry, low single digits in total.

I know that, that's different from what some other people have reported but that's just our belief.

So we believe that the North American business, handbag business, is about flat to down low single digits and that's, I think, primarily because of the promoting that's going on.

Obviously, units are up double-digits and I think it's for most of us.

And by the way, that includes luxury players, too.

Because I know many times, we have these conversations, there's only two other competitors that are referred to but we see the same thing happening with multiple luxury companies, obviously, with the exclusion of Vuitton who doesn't operate in a sale environment.

But many other companies are -- their amount that they're selling on sale is higher than the amount that they're selling at regular price this year versus last year.

The -- we believe the macro handbag, luxury handbag market is relatively flat on a global basis, possibly up 1 point or 2 points.

So -- and we believe that's going to be sort of the trend on a macro basis for the next year at least.

And of course, you've seen that in the recent Altagamma Bain Luxury Report which echoed the same exact issues, with the exception of our point of view on the North American handbag market.

We believe that there's softening that's continuing in mall traffic.

We've actually seen an acceleration of softening in mall traffic and this is not just our stores.

This is what we see from ShopperTrak, which is a Company that we use that looks at our -- that looks at not only ours, but other retailers' numbers, so we compare ourselves to that on a pretty regular basis.

So mall traffic continues to soften in North America.

We do not see the tourism rebounding.

So we're taking a slightly more pessimistic view of Q1 and Q2 for us.

Q3 and Q4, we feel pretty optimistic about.

And if you remember last year, when we were sitting here at this time having this conversation, I know many people didn't believe we were going to be able to do what we did.

I understand why.

That's not a negative.

But we did.

We delivered on everything that we said we were going to do through the year, including the comps.

In the back half of the year, we've got some amazing things that are going to be happening for us.

First and foremost, we're really seeing the e-commerce part of our business accelerate.

You heard, we more than -- we increased by over 50%, our e-commerce sales this past year.

And traffic remains strong, double-digit increases.

And so what we need to have in place is this great CRM capability, which today we don't really have.

We have a fair CRM capability but what we're building out is going to be, like I said earlier in the call, world class.

And that, we think, is going to give us the ability to do a lot of things in the back half of the year which we're going to talk about in our next conference call, everything from the spoke offerings to curation specialty that we're going to be doing and just the way we're able to engage with our customers.

Second is our new product initiatives, our introductions are very strong.

I think it's the best product that we've shown since -- at least I've been here with this Company.

Again, Michael and the design teams have really done a tremendous job featuring what I consider to be the highest levels of innovation in our Company in terms of the materials and the silhouettes, et cetera.

So I think it's going to be powerful and I think our customer's going to be extremely excited by the newness.

Next is Kors Access.

Kors Access is going to be a very big help for us.

As you recall, we talk about two things constantly on these calls, North America and handbags.

And we don't always remember we're a retail Company, which I'd like to remind everybody on this call we're a retail Company.

And secondly, we don't talk about the fact that watches have really had tremendous impact on our comp store sales.

I mean, this is the number one area that has hurt us in comp store sales over the last two years.

And again, this is our partner at Fossil, terrific people, doing a great job for us and it's really been because people have moved to the iPhone and to some degree, iWatch, but I think it's really more the switch to that.

So Kors Access is going to be a really powerful, new, innovative opportunity for our sales associates to communicate and engage with our customer and then the trackers are going to be great.

You know we've got some competitors out there.

I'll say that Fitbit is a competitor of ours.

We think that we're going to have the most innovation in terms of fashion in a tracker of any Company in the world.

And I'm being that strong about the statement.

And we priced it from $95 to $150.

We're going after this aggressively and we think that's going to be an amazing opportunity for us in, particularly, in the third quarter.

And then lastly, we told you -- before I get to that.

The launch of Wanderlust is always a big plus for us when we see that happen.

Lots of television, marketing campaigns.

Lauder's done an amazing job with this new fragrance with us.

Lauder's been just a terrific partner with us.

Lastly, it's going to be gifting.

We did a great job last year with gifting.

It really helped us in Q3.

We told you about that.

We've taken that to a whole new level for this year.

So we -- this isn't full hockey stick.

I don't want you to think of it that way.

But we're going to have a very good third and fourth quarter in this Company.

Q2 will be okay, but Q3 and Q4 will be great.

So thank you very much, Matt.

Best of luck.

Thank you.

We'll go next to Oliver Chen with Cowen and Company.

Hi, thank you.

Solid results in an environment that's not easy.

John, what is your thoughts from an industry and a Company-specific strategy-wise regarding the reality of price matching and also, how mobile is really changing how the consumer shops and how the path to purchase works in terms of multiple channels and thinking about mobile?

And then also, John, I know we've been following a lot of the luxury companies and there's been a pretty sharp divergence between Hong Kong, Macau, versus mainland.

Is that something you're seeing and how are your thoughts on the real estate in terms of what you're thinking about as a lot of people are focused on real productivity per point of store in Asia versus distribution growth?

Thank you.

Well, okay, I'm going to start with the price matching.

My opinion of price matching is that it's a race to the bottom.

So I believe that those people who want to participate in that, as a general rule, will ultimately see their business decline and I also know that many people think that, that's a way to protect their relationship with their customer.

I think it's a way to devalue the relationship.

It just basically means that they don't believe in when they do have a sale or an offering for their customer that it's legitimate.

They just offer anything at any time.

My personal opinion is it's a race to the bottom.

I think mobile has definitely changed consumer shopping behavior.

Everything from the way that people shop, which is obviously hurting mall traffic because people -- we know they're beginning their journey online and ultimately, we're still doing 90%-plus of our business in North America in stores, so stores are still real.

And while one day, I publicly said, we'll get to 25%, 30% of our business in e-commerce.

We're nowhere near that today.

But that being said, we have to be very cognizant that consumer is starting and definitely creating her path to purchase on mobile and we better be a part of that and be good at it and be influencing her through that journey.

I want to note that we don't do the price matching thing and our comps are quite frankly better than a lot of other people's comps who are doing all these types of things.

So you can't continue to build your business, especially with the mobile view that says to your customer, it's all about price, because that will ultimately just drive the AUR down, which will ultimately -- you can't sell enough units to make up for the dollars, it just doesn't work.

But we do think that our new CRM groups that we're putting together here and the investments we're going to be making will give us the ability to really change the shopping experience and Oliver, as you know, if you go down to our Flatiron store, you'll see Kors Concierge is up and live.

It's a whole digital shopping experience with the customers that our sales associates are fully enabled with.

We'll have 35 stores rolled out the next few months and we're going to arm our customers with the ability to be the ultimate fashion stylist for their clients, and be able to curate for them and that's what people want.

If you want to get away from price, it has to be product.

It has to be innovation, and we believe strongly in it has to be curation.

So that's our point of view on that.

In terms of Hong Kong and Macau, as I said earlier, we got lucky.

We have nice distribution in Macau.

We're in some -- excuse me, terrific locations.

So there will be no real estate changes in Macau.

Obviously, our business is very difficult there, and really not seeing any signs of any kind of recovery in that marketplace.

Hong Kong, we do not have a large distribution there, a few points of distribution.

Believe it or not, our Hong Kong business, I don't -- I can't 100% explain to you why but over the last 60 days, is actually showing signs of improvement.

So I don't want to tell you that's a trend, by any stretch of the imagination, but what was terrible before is now just kind of bad.

So we feel good about where we are.

And I would tell you that we are looking at real estate in Hong Kong as an opportunity for the Company, especially since rents have come down significantly since their peak.

So we'll be cautious.

We'll continue to view things as where is the consumer shopping.

Ultimately, Hong Kong is going to come back.

Is it a year from now?

Is it two years from now?

Is it five years from now?

Nobody knows.

But Hong Kong will become a place that is important.

The only thing that I would add to that is what I think many luxury companies are seeing is there's a movement of the people who are coming to Hong Kong and Macau now are a bit more coming from Tier 2, 3 and 4 cities.

The Tier 1 customer, who is still the, probably the biggest average per spend customer, is moving into clearly Europe, clearly Japan, clearly Korea, so the average transaction that many people are seeing in those markets is slightly down because just of the customer mix.

John, you've said this to us in meetings that your Company could be also viewed as a media company in terms of how you've embraced a lot of the formats.

What are your thoughts on Generation Z and the millennials in terms of how you're transforming how you interact with the customer and how the customer has really changed permanently?

Oliver, I think that we all have to acknowledge that digital has changed the way that everyone is living their lives today.

And what we believe is just that we've got to stimulate our customer and I was just looking at some stats.

Our Instagram following is up 95% in the quarter, 95%.

It's incredible.

And I know that people think that the Michael Kors brand is whatever, and it's -- when we look at the engagement and the following, it's driven by Michael's voice, first and foremost.

I think people are so engaged with the -- whether it's Michael and Nina Agdal and the Glamour Games that we put up or whether it's the whole new campaign that we just shot in Mexico for summer and all the different videos, or if it's the Mother's Day Campaign, which was a huge success for us with Alessandra Ambrosio, or whether it's Lily Aldridge doing a whole sneaker campaign for us.

So I think we're really good as a Company and our teams are excellent at developing content that is engaging and that's exciting the customer and keeping them engaged with the brand.

They may not actually shop from us but I think they love being a part of the Michael Kors family and so I think in today's world, you have to be there.

Look at our major competitors in Europe and everyone's upping the game, whether it's fashion shows in Rio or Blenheim Castle or whatever the palace, excuse me, whatever the things are, you have to understand that we're in the business of exciting people.

And that's fun, quite frankly.

That's the fun part of what we get up and do here every day, products, first; but quite frankly, marketing and brand and exciting and engaging the customer, second.

So thank you, Oliver.

Thank you.

Best regards.

We'll go next to Lorraine Hutchinson with Bank of America.

Thank you.

Good morning.

I was hoping that you could discuss any divergence that you saw in trends between your retail stores and your outlets.

And then also just wanted to follow up on the decline in the tax rate for 2017 and reasons for that?

Sure.

Thank you, Lorraine.

I'll take the first one.

Traffic in outlets, while it is down, is down very small amount as opposed to the -- our full price stores.

And again, we believe that, that is just an issue that we don't obviously offer our outlet products online.

Unlike many of our competitors, who still offer flash website sales, even though they are reduced, they're still doing something that, in our opinion, is basically an outlet store online.

We do not do that.

So we think that we've been able to maintain a direction of saying to our customer come to an outlet store, that's really product that's end of season or maybe a couple years old that we've reproduced for the outlets and if you want to come there and shop, we love you.

We think that -- we love those customers as much as we love the customers who go in our full-price stores.

But we believe that, that channel is seeing traffic issues and I think that's been acknowledged by some other people as well.

In terms of tax rates, it's very consistent with -- you should think of it very consistent with what we've seen in history.

As we grow outside of North America, the tax rates are going to be lower; therefore, the effect -- that's going to drive down the effective tax rate.

Thank you, Lorraine.

And we'll go next to Omar Saad with Evercore ISI.

Thanks.

Thanks for all the information, guys.

Wanted to ask about, following up around on the channel exposure, department stores, malls, outlets, tourist city locations, sounds like your conversion is good.

You've got a lot of new, innovative products, more coming, but traffic is the issue which is, obviously, not a Company-specific issue.

But one that you're dealing with nonetheless.

Talk through how you, really, looking ahead, how you plan to drive traffic, how you keep traffic coming to the stores or your website.

Are you going to ramp up marketing spend?

Help us understand how you think about that, because that sounds like it's the one kind of missing piece here.

First off, Omar, thank you for your questions and thank you for your one comment that it is true, our -- the traffic issue is not a Michael Kors issue.

This an issue -- as -- I don't know one retailer that I speak to who isn't seeing this happening.

And Omar, I would first start by calling the traffic thing a behavioral change.

And again, I think many times that we're the first Company or the most honest Company to come out and say these traffic trends you're starting to see in other places in the world.

So mall traffic is declining in Europe now.

It's declining in the UK, in particular.

And I would tell you that in the most sophisticated digital markets is where you see the most mall traffic slowing.

So we start out -- and this is just our theory and just our hypothesis, that consumers who have high levels of digital product availability are shopping less in shopping malls.

The UK is a perfect example.

As Harrod's and Selfridges and House of Fraser and John Lewis all got better with e-commerce, there's just more business going there and we know that because we do business with them.

We see how much percentage-wise.

The UK for us has some of the highest levels of penetration with our department store partners than anywhere else in the world, so somewhere between 25% and 35% of our business with those retailers comes from online.

And they're the most sophisticated click and collect.

They're the most sophisticated at same-day delivery service.

They do it better than any department store in the world, in the UK.

But that's affecting mall traffic.

So we think that's only going to continue on because people are just going to get better.

We'll be announcing shortly some cities in the United States where we'll be providing same-day service and so on and so forth.

And actually, we believe that one of the most important ways that we're going to compete globally is with delivery.

And delivery, one of the things that we have, which many people were concerned about, about -- are the amount of locations that we have both in North America and internationally, is actually going to be a strength for us.

Because we will be able to offer same-day delivery and unfortunately, probably for free.

But that's going to be the new norm and so we have to deal with that behaviorally.

So what are we going to do to drive traffic into the stores?

Well, first and foremost, we believe that creative marketing leads the way.

So we have to inspire the customer with new product, delivered in creative marketing.

Again, I think our teams -- I think we're world class in -- if we're launching a new bag, building campaigns around that, that involve everything from Michael himself personally to certain celebrities that we make sure that the product appears on, to digital marketing campaigns and print campaigns.

We're furthering that by being able to arm our sales associates with of course, Concierge, which gives them the ability, and I've just actually saw it demonstrated yesterday.

It's phenomenal, where they can talk directly one on one.

So it's not just a corporate communication, but now you've got the sales associate in the store talking to their client directly through this new curation device platform that we've built, that says, not only does this come in, but here's the shoe and the dress and the jewelry that -- and the watch that's going to go with this.

Why don't you come on in and let's have a conversation?

So we believe that this is going to be one-on-one dialogue with the customer and we're really looking at it from the top of the funnel to the bottom of the funnel.

We are not pulling back on our marketing and in fact, we're increasing marketing.

It would have been easy for us to go in and cut expenses all over the Company and make up a lot of the gross profit dollars that we lost.

But we made the decision that, that wasn't smart for us, that we're building a long-term Company.

We're building a long-term relationship.

And we need to drive customers into the store and you have to spend money to do that with marketing.

But we made the decision that, that wasn't smart for us.

That we're building a long-term Company, we're building a long-term relationship and we need to drive customers into the store and you have to spend money to do that with marketing.

And I think you're going to see the fruits of that between our communication efforts, our CRM, and then ultimately, Kors Concierge, if it works the way we think it's going to work.

We'll be able to drive traffic into the stores.

Is it going to be positive traffic?

I'm not sure, to be frank with you.

I think that's probably wishful thinking.

But I think we will be able to stay at a level that will help us have comp store increases and again, we're getting excellent conversion rates inside the stores and we just think that's going to continue forward.

That's very helpful.

One quick question for Joe on the gross margin.

1Q down, full year up, nicely, actually.

Just help us understand the level of visibility you have into kind of seeing that trend reverse enough to really post what looks like you're guiding to a very healthy gross margin at the end of the year.

As John indicated, we've got a lot of positives for the second half of the year and we think that will actually be positive for gross margin.

As you know, the environment is difficult right now.

So we do have some concerns about Q1.

The other thing that you should be thinking about is that China will only have one month in for Q1 but will be in there for a full year.

It's not a huge number relative to our total revenues but China has very, very healthy gross margins that will have a positive impact on our gross margin.

We're going to take one more phone call and then end the call for the day.

We'll go next to Lindsay Drucker Mann with Goldman Sachs.

Thanks for squeezing me in, guys.

Good morning.

I wanted to ask about North American square footage.

You had talked about the opportunity to expand a number of your stores in North America because they were still pretty small and some legacy stores.

I was wondering how you were thinking about the opportunity even as you sort of limit the number of openings to continue store expansion in this market?

And then could you also give some more specifics on your store plans for outlet versus full price in North America?

Thanks.

Sure.

Lindsay, great question, by the way, and thank you.

Lindsay, we -- I'll tell you about all the things we really did well and I'm going to tell you about something that didn't work as well for us.

Expanding the stores, we did a handful of them.

It really hasn't been a great return for us.

So I would tell you that we're not going to do that.

That's kind of over with.

There will be a handful of select locations where we'll do that but you'll be able to count those on your two hands and they'll be more flagship-y type things.

We just did it in London, and which happens to be working, thank God.

But where we did them in more regional locations, it really didn't provide the uplift from our profitability standpoint that we were anticipating.

So unless we see something changing on that, that will not be part of our strategy going forward.

And in terms of outlets in North America, we're basically done at this point.

I think there's one or two more that we're going to open and it's over with.

And that's pretty much worldwide also.

There will be a handful that will open in a couple locations but we're pretty much finished out on that.

And then over the next two years, maybe three years, we'll be finished with our global store expansion.

I want to mention one other thing, too, that, that, again, we remain a very highly productive, on a sales per square foot basis, again, top, in usually most centers, usually in the top five, but let's call it Top 10 in the world.

So stores are extremely profitable for us and we'll continue to open them where they make sense.

Just to follow-on then your ship from store comment from before.

Do you have a timeline for when you plan to roll that out?

Our goal is for around the holiday season.

We can ship from store today but we're talking same day service and obviously, we'll start it in New York; there's nothing highly secretive about that and we'll -- we're just putting together the final touches on that.

I can't give you the exact date that's going to start but we'll see how that works.

We'll see what that does.

And we'll see if it really provides a lift to the business that will generate profitability.

Because we can do a lot of things to generate lift.

But we have to generate profitability and as you know, we've always been focused on that as an organization.

Great.

Thanks so much.

Thanks.

I want to thank everybody for being on this extended call.

Look forward to speaking to you in the next call.

I want to remind you all one thing we did not talk about is that Michael Kors has an extremely strong balance sheet and cash flow.

We did say in our last call that we are going to look in the future at acquisitions and the Company had said that we would focus on acquisitions of certain licenses that we thought were most imperative in front of us.

Once -- now that, that is complete, we will selectively be looking at other companies as we move forward.

There is no timeline to when and if we will do anything but Michael Kors does have the ability to use its balance sheet to not only reduce shares outstanding but also to look at acquisitions in the future.

So we look forward to talking to you at the next call.

Thank you very much.

This does conclude today's conference.

We thank you for your participation.

You may now disconnect.