Capri Holdings Ltd (CPRI) 2017 Q2 法說會逐字稿

Good day, and welcome to the Michael Kors Holdings Limited second quarter FY17 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Joe Parsons. Please go ahead, sir.

Good afternoon, and thank you for joining us for our fiscal second-quarter earnings call. Presenting on today's call are John Idol, Chairman and Chief Executive Officer, and myself, 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 would 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 date, 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, Joe. Good afternoon, everyone, and welcome to Michael Kors' second-quarter 2017 earnings call. I'm joining you today from Tokyo, which is a market that we believe has great opportunity for the growth of the Michael Kors brand.

Now, turning to a review of our second-quarter performance. Our results exceeded our expectations in the second quarter. We continued to deliver innovative luxury fashion product, and expanded our brand footprint worldwide.

We were extremely pleased with the successful launch of our Michael Kors Access wearable technology line of watches and fitness trackers, as well as the debut of our Wonderlust fragrance. In addition, we were pleased with the great response to our new fall handbag collections, which exceeded our expectations. Our new iconic Mercer collection emerged as a global best seller, and our Brooklyn collection set the fashion tone for the season, with the introduction of grommet hardware detailing. We also achieved strong sales growth in our mens wear business during the quarter, and we continue to see this category as an area of future growth for the Company.

In North America, our digital flagships continued to deliver double-digit sales increases, and we were pleased with the successful launch of our European digital flagships. In addition, we seamlessly completed the integration of our recently-acquired business in Greater China. This region represents a strong growth opportunity for the Company.

I am very proud of the work our team has done to deliver on these strategies. I believe these accomplishments set the stage for future growth. Let me now turn to a review of our quarterly results.

For the second quarter, total revenue reached $1.1 billion, and earnings per share was $0.95, both of which came in ahead of our expectations. Comparable store sales decreased 5.4%. While our comps in North America decreased in the mid single digit range for the quarter, overall, we were pleased to see sequential improvement, driven by our strong fashion product offerings.

Turning to our international business, we were disappointed in our results in Europe which saw a low double-digit comp decline. In Asia, we saw a mid single-digit comp increase. Please note that our comp in this region currently reflects only Japan, as the remainder of our Asia business is not yet included in the comp base.

Our North American digital flagships continued to perform well during the quarter, with strong double-digit comp growth. We expect the momentum in our digital flagships to continue, as we further invest in growing this channel. In the Americas, retail stores conversion rates increased in the high single digit range, which was offset by a continued decline in traffic.

As I mentioned earlier, we saw a positive response to our new handbag collections, women's small leather goods, Michael Kors Access smart watches and fitness trackers, Wonderlust fragrance, and our men's bags and small leather goods. The growth of these categories was more than offset by a decrease in our handbag sales and a double-digit decline in our watch sales.

In Europe, traffic continued to decline in certain major markets. We believe that the softness in this business was due to continued consumer uncertainty related to Brexit, and the lingering concern following the terrorist attacks in Belgium, France and Germany, as well as other geopolitical issues. That said, we continue to believe that the Michael Kors brand remains strong in Europe.

We are committed to investing in our digital flagship strategy, to ensure we are positioned to capture the growth opportunity in this region. To that end, we launched our digital flagship businesses in the UK and Germany at the end of the quarter, and we have since launched digital flagships in France, Switzerland, Spain and Italy.

While it is still very early days for each of these businesses, we are pleased to have completed the launches, and now have the platforms in place that will enable us to deepen our engagement with our consumers in these countries. We also plan to have e-commerce capabilities in 16 additional European countries in the spring of 2017.

In our Asia region, we saw increases in sales of 96%. This was driven by the addition of the China business, as well as a mid single-digit comparable store sales increase in Japan. We were very pleased to see strong sales growth in China, as our store network expands and our brand awareness increases. Looking ahead, we continue to believe that Asia represents a significant growth opportunity for the Company, and will ultimately reach $1 billion in revenue.

Turning to our wholesale segment, revenues declined 18%. In the Americas, we saw a decline of 22%. We are strategically reducing our sell-in to department stores, in order to protect our brand and margins in this channel, through disciplined inventory control, and reduced promotional activity, which has impacted our sales in this segment. We expect this trend will continue through the remainder of this year, as we reduce both inventory flow and promotions.

In Europe, we saw 3% increase in wholesale sales. This growth is lower than historical trends, as we are being negatively impacted by a mix shift towards cross-bodies and small leather goods, which carry a lower AUR. This is the same fashion trend that started more than a year ago in North America. We anticipate this trend will continue to impact our wholesale sales in this region for the balance of the year.

In Asia the 43% decline in wholesale sales was primarily attributed to the shift of China and South Korean businesses to our Company-owned retail segment. In our men's business, we delivered solid performance in the second quarter, and we ended the quarter with 244 sportswear and leather goods shop-in-shops within our wholesale doors globally. Our North American and European wholesale partners remain excited to have a major new designer menswear line to offer to their customers, and we are confident that our men's business will be an important contributor to our future wholesale growth.

In our licensing segment, revenue he declined during the quarter as we continued to see softness in the fashion watch category. That said, performance in our Michael Kors Access smart wear collection, as well as our fitness trackers, which debuted in September, are exceeding our expectations. Importantly, our Access product line is engaging both our loyal watch customers, as well as attracting new customers in a younger demographic.

Our Bradshaw and Dillon smart watches in signature, rose gold, gold and silver platings are quickly becoming our most popular styles. The launch was supported by a significant marketing campaign across our global print, digital and social platforms. We also simultaneously created interactive experiences, both on our digital flagship and in-store to educate and excite consumers, bringing the category and its benefits to life.

To keep the momentum going through holiday, we will continue to roll out a comprehensive marketing program across print and social media, and we'll be featuring the product as one of our must-have gifts in our holiday gift guide. We also saw strong response to the debut of our Wonderlust fragrance, which came in ahead of plan during the quarter. We believe that this new pillar in our fragrance collection will drive further growth in this category going forward.

In conclusion, our focus remains on executing on our multiple pillars for revenue growth, while maintaining our leadership position in the global luxury market, consistently delivering innovative fashion products to our customers, and enhancing consumer engagement with the brand worldwide. Our key new handbag groups are performing very well. Our consumers respond favorably to the seasonal colors and novelty design elements featured in the collection.

We are also seeing continued growth in our women's active shoe assortment, and are encouraged by the initial results we have seen from the roll-out of our men's offerings, both of which are key areas of growth for the Company. We are also pleased with the strong momentum in our digital flagships, and we look forward to launching in Japan and China, as well as additional countries in Europe within the next year.

While there were some accomplishments that we were pleased with during the quarter, our results continued to be impacted by the ongoing decline in mall traffic, the reduction in tourism in certain major cities, and our strategic decision to reduce sell-in of inventory in the US wholesale channel. We are in the process of rebalancing our business to increase the average transaction value in our retail stores, as well as in our wholesale channel, and reduce the total number of units sold in the marketplace in North America.

While these actions will result in short-term revenue declines, we believe they will enhance our brand equity over the long term. We will use this rebalancing as an opportunity to emphasize and extend other categories in our lifestyle portfolio of products, as well as to expand our business internationally. With that, I'll turn it over to Joe to review our financials.

Thank you, John. We are pleased to report that revenue and earnings per share results came in above our guidance. Total revenue was $1.09 billion, compared to $1.13 billion in the prior-year quarter.

In our retail segment, net sales increased 12.1%, driven primarily by the addition of 198 net new stores since the second quarter of last year, including 137 stores associated with our recent acquisitions of Greater China and South Korea. Comp sales decreased 5.4%, reflecting a mid-single digit comp decrease in North America, and a low double-digit decline in Europe, partially offset by a mid single-digit comp increase in Asia, and strong performance of our digital flagships. Our North American digital flagship sales contributed 270 basis points to our North American comp performance in the quarter.

In our wholesale segment, net sales declined 18.4%, due to lower sales in our accessories, women's wear, and footwear businesses, partially offset by an increase in our men's business. We saw a 22% decline in our wholesale business in the Americas region, as we remained disciplined with the amount of inventory we have shipped into that channel. We also saw a single-digit increase in our European sales.

In addition, we had a decrease in Asia, which primarily reflects the shift of our Greater China and South Korean businesses to the retail segment during the quarter. In our licensing segment, revenue decreased 10.2%. This was primarily due to the continued softness of the fashion watch and jewelry categories, as well as lower revenues from our geographic licensing arrangement in Asia, as a result of our recent acquisitions of our licensee operations.

Gross margin expanded 40 basis points to 59.2% due to a favorable channel mix shift towards the retail segment. Gross margin increased 80 basis points in our wholesale segment, primarily due to a change in the geographic mix. Gross margin declined 250 basis points in the retail segment, attributable to higher markdowns as compared to last year.

Total operating expense grew 12.7%, and increased 590 basis points to 40.5% of total revenue. The increase was primarily due to the inclusion of our businesses in Greater China and South Korea, our investment in new stores, e-commerce, and omnichannel capabilities, new shop-in-shops, and infrastructure improvements. Income from operations was $203.7 million, or 18.7% of total revenue, as compared to 24.2% of total revenue in the same period last year.

Retail operating margin was 11.7%, compared to 18.8% in the prior-year period. Operating margin was negatively impacted by 170 basis points from the inclusion of our newly-acquired Greater China and Korea businesses, and by 90 basis points due to a non-cash asset impairment charge. Operating margin was also negatively impacted by the 250 basis point decrease in gross margin that I described earlier.

Operating expense as a percentage of sales was higher, due to continued investments in our business, including retail store-related costs, and depreciation expense associated with new store openings, as well as continued costs relating to building our digital flagship platforms. We expect the inclusion of these international businesses, which currently carry a lower operating margin, to negatively impact our operating margin for the balance of the year.

Somewhat offsetting the compression from Greater China and Korea is a sequential improvement in gross margin from the first half of the year to the second half, and leveraging of our fixed operating expenses, as we grow the retail revenues in the second half. For the second half of the year, we anticipate that the retail segment operating margin to be approximately 20%.

Wholesale operating margin was 27.0%, compared to 28.3% in the prior-year period. This was largely the result of a 210 basis point increase in operating expenses as a percent of revenue, due to deleverage. This was partially offset by the aforementioned 80 basis point increase in our wholesale gross margins.

Licensing operating margin was 31.2%, compared to 37.7% in the prior-year period. This was primarily due to increased costs associated with advertising, as well as increased depreciation expense.

Income taxes were $41.9 million in the quarter, and our effective tax rate was 20.7%, as compared to 28.9% in the same period last year. The decrease in our effective tax rate was primarily due to -- (technical difficulty). $160.9 million for the second quarter and diluted earnings per share was $0.95. This compares to net income of $193.1 million, or $1.01 per share, per diluted share in the second quarter of FY16.

Turning to our balance sheet, at the end of the quarter, cash and cash equivalents were $186.4 million. Inventory decreased 2.5% compared to the prior year, due to careful inventory management, and the anticipated decline in the US wholesale business. We ended the quarter with $384.4 million of debt, which was recorded within short-term debt on our consolidated balance sheet.

The debt consisted of borrowings under the Company's revolving credit facilities. The amount available for future borrowings is approximately $615.9 million.

During the quarter, we repurchased approximately 5 million shares, totaling $250 million under our share repurchase program, and have another $350 million of availability remaining on our most recent $1 billion authorization. This most recent share repurchase further demonstrates the Company's commitment to returning value to shareholders, and our confidence in our long-term growth potential.

Capital expenditures for the quarter totaled $52.3 million, and were related to the build-out of new retail shops and shop-in-shops, as well as investments in our distribution facilities, our corporate offices, digital flagships, and other infrastructure improvements. We added 16 net new stores and converted 54 wholesale doors into shop-in-shops globally in the second quarter.

Overall, Michael Kors remains a leader in the fashion luxury marketplace. That said, our business has become increasingly challenged by macro factors that exist globally, including weakness in consumer spending. While we are excited about the strong response to new product across categories, we see a continuation of soft traffic trends, and aggressive promotional activity in the US market.

Globally, our brand acceptance remains strong, but we are seeing weakness in tourism trends, geopolitical issues, and foreign currency fluctuations that contribute to top line pressure. Given these macro factors, we are reducing our FY17 revenue expectation to approximately $4.55 billion and expect a mid single-digit decrease in comp sales. Gross margin is now expected to be approximately 60%, modestly below our initial expectation, as we anticipate that our reduced European sales outlook will result in a less favorable benefit from geographic mix than we initially anticipated.

In addition, we expect operating expense as a percent of total revenue to be approximately 39.5% (sic "39.3%"). These assumptions result in an operating margin of approximately 20.7%, excluding the $11.3 million in one-time transaction costs related to the acquisition of our Greater China licensee. On a GAAP basis, we expect diluted earnings per share to be in the range of $4.32 to $4.38, inclusive of the $11.3 million of one-time transaction costs.

We expect diluted earnings per share to be in a range of $4.37 to $4.43 for the year, excluding the one-time costs noted earlier. This assumes a tax rate of approximately 21% and 169.5 million shares outstanding. For the third quarter, we expect total revenue to be between $1.365 billion and $1.38 billion, and a mid single-digit decrease in comp sales.

We expect gross margin of approximately 60.5%, driven by favorable geographic and channel mix shift. We plan to continue to invest in our international expansion, digital flagships, and global infrastructure and therefore, expect operating expense as a percent of total revenue to be approximately 35.5%, resulting in an operating margin of approximately 25%.

We expect diluted earnings per share to be in the range of $1.61 to $1.65. This assumes a tax rate of approximately 21% and 166.5 million weighted average shares outstanding. Capital expenditures are expected to total approximately $250 million through FY17, and we will focus on ongoing investments in global digital strategies and omnichannel capabilities; global retail expansion, including approximately 15 new stores in the Americas, 25 in Europe and 30 in Asia; the conversion of approximately 215 wholesale shops and shops globally; and the Companies' global distribution infrastructure, information systems and corporate facilities.

In conclusion, we remain focused on the initiatives that we have in place to drive sequential improvement in our business in the second half of FY17, and sales and earnings growth over the long term. I will now turn the call back to John for closing remarks.

Thank you, Joe. We continue to see meaningful long-term growth opportunity, as we further expand our luxury brand internationally, grow our digital flagships and develop our men's business. We are also excited about our holiday season, as we expect to continue to benefit from the recent new handbag collection launches, the Michael Kors Access wearable technology line, and our new Wonderlust fragrance.

In addition, we have strong holiday gifting programs including the Michael Kors Fuji in-stock collaboration, and our launch of the Custom Kors Experience on our digital flagship, where customers can create their own personalized handbags and small leather goods, with monograms, stickers, charms, key chains, and interchangeable flaps. We plan to drive brand engagement with exciting new marketing programs positioning Michael Kors as the gifting destination this holiday season.

Our #givekors campaign, featuring model Taylor Hill will be comprised of a robust gifting experience across our digital flagships and catalogs, as well as social, e-mail and print marketing campaigns. We will also be focused on helping our customers find the perfect gift for everyone in their lives, through a number of Jet Set in-store personal shopping events.

Our Michael Kors stores will certainly be the place to be this holiday season. Despite the expected impact on our near-term results from the previously-mentioned macro challenges, we remain confident in our ability to drive long-term growth and increase shareholder value. With that, I will now open the call to questions.

(Operator Instructions)

And we'll take our first question from Kimberly Greenberger with Morgan Stanley.

John, I wanted to ask, obviously there are a lot of external pressures that are certainly hurting your business, or are causing a headwind in your ability to grow. Maybe if you could turn for a second at some of the internal strategies. What are the things that Kors is putting into place to try to combat some of these external pressures and drive growth?

And then Joe, I just wanted to follow up on the margin commentary. I'm wondering if you can talk to us about how we should think about retail segment margins over the medium term? Where do you expect them to land? And wholesale margins over the medium term, where do you think they end up normalizing? Thank you so much.

Thank you, Kimberly. There's two separate things that are going on for us, we believe, in the total retail environment. First, there's no question in North America, we probably suffered worse than many of our competitors, because we had a very large international business, that we had some very nice growth with, in particular, European tourists coming to the United States and South American tourists coming to the United States. To a degree, people from Mexico as well.

So most of that business has declined dramatically, and we have not seen any return, and it's getting probably closer to the bottom, but there's still more headwinds in there, obviously not as volatile as it was 12 months ago. So we're really looking at that as one issue that we have to deal with.

And the second issue is in North America, there has been a very, very strong amount of promotional activities generated from competitors, and from certain other channels of distribution. I'm going to address the second one first. We, as you know, announced that starting on February 1, we're really focused on reducing the amount of promotional activity that we're going to be involved with as a brand. We think that's the right thing to do for the health of the business.

Once again, this past quarter, we saw mid single-digit increases in our overall accessories business in units, so once again, customers buying Michael Kors, that's not the issue. The issue is that the price of our sale has been denigrated, and it's been denigrated because of promotional activity. We believe that if we focus on average transaction value, and get that up and less on the unit, amount of unit transactions, we're going to have a healthier business.

So to that end, our best selling handbag group this fall season is Mercer, which we commented about in our remarks earlier. And that product, by the way, is not on promotion anywhere. So we set it out as a non-promotional item, and it's working. It's working really well in every channel of distribution for us.

So it shows that the customer is absolutely willing to pay when they understand that things can't be put on promotion on a regular basis. We will have for the spring season five groups that will not only fit into that same category, so they will be excluded, even from the authorized sale periods that we will have in Michael Kors. So we're going to be focused on average transaction value, and how we get that up.

But at the same point in time, those groups will be approximately on a medium size handbag $295, which we think is a really key price point. We know it's a key price point. We know she's responding, and responding in very large quantities. So we think we can create an amazing luxury product with fashion sensibility, and deliver it to her at a price point that is something that she's going to find compelling. So we believe that will be a number one driver for us.

Number two, again the active footwear category has been something that's been explosive for us. We're getting great traction in that category.

And third, we're very pleased with what's happening with our smart watch business. We are probably the number-two player out in the marketplace today, clearly, with Apple being number one. And the response has been extraordinary. We're selling out of product. We're actually in a position that we're not able to fill all the demand that is happening around the globe.

So we think those combination of factors will begin to really start to impact the business, as we head through the calendar fourth quarter, our fiscal third quarter, and then into first quarter. That all being said, you know that we've reduced our wholesale shipments in preparation of this. So that's one of the reasons why we've revised our guidance is, I think we have a better handle on where that's all going to land now. And I think the brand will be in a much better position to grow from there.

And then lastly is our men's business, which as we commented earlier, we're very pleased with the initial results, both on the sportswear, and I think we're being a little surprised on how successful the leather piece of the business is. It's really taking off very quickly, and we're trying to capitalize on moving that into more locations, even doors in our own chain, where we might not already -- we might not be putting the full assortment of men's in.

So we still see opportunity for growth, and that will absolutely be in our projections for next year. So we're feeling good about that. I'll turn it over to Joe now.

Kimberly, thank you for the question. I think we were pretty explicit in the script regarding the retail operating margin. So in the second half, we were anticipating the retail margin to be approximately 20%. Obviously for the full year, it will not be at that level.

And then the reason I wasn't explicit about the wholesale margins was because we're going to be pretty consistent with where we're trending now. And so I think when you put those pieces together, you'll see that the operating margin that we gave guidance on, of 20.7%, makes sense.

And Joe, does that hold for the out years as well?

So we have really not updated the discussion about out years. As you know, John and I believe that the Company should be operating in the low 20s, but -- and we continue to think, despite the headwinds that we're facing now, that's where we should be, although, Kimberly, we have not officially updated that number.

Thank you so much.

We will now move on to Omar Saad with Evercore ISI.

Quick question on the smart watches. Sounds great, like they're doing really well. Are the gains you're getting in the smart watch side of the business enough to offset, are they big enough yet to offset the declines in the fashion watch business?

Good afternoon, Omar. So they are not yet big enough to offset the declines that we're having in the fashion watch business, but they are making a significant dent in the decline. And we're just -- I think we are in a situation where we can't fill all the demand right now, so we don't really know how high is high.

We also have to wait until we get through, again, calendar fourth quarter, which will be a very big gifting opportunity for us, to see how this really impacts the sales. We also have other products that are going to be launched right behind the smart watch, and so we think that there's going to be more technology and innovation coming into this category.

And I think you've heard me say before that we think long term, the fashion watch category will be revolutionized and may even ultimately eat into the whole tracker market, as you know it today, where watches will have the same capabilities as trackers, so you can have a smart watch, and then you can watches that will have less functionality, and not be quite as expensive. So we're very excited.

I want to thank our partners, both Fossil and Google, for everything that they've done to make this such a successful launch for the Company, and not just domestically, but worldwide. These watches are selling all over the world. And so I think we're just at the very beginning of something that's exciting.

And the last thing I would say is we're bringing -- people are coming into the store who we've never seen before, who have been reading about this either from bloggers, or seeing it through our social campaigns, and it is absolutely drawing a new and different customer into our store. So we're terribly excited about that, and it even leads into this fun little collaboration that we're doing with Fuji on the in stack cameras. They just hit the stores, and they're really doing extremely well, as well.

So again, we always have been -- Michael's always been focused on being a Company that leads from a modernity standpoint, and we think this just further adds credence to what we're doing with the customer with these products. Thanks, Omar.

If I could switch gears for a second, back to the conversation around kind of reducing the promotional cadence, as you continue to amp up the fashion and innovation, fashion innovation quotient in your products, are there things you can do in the supply chain side, or the design side, to improve that speed to market so you can capture more of the sales of the handbags that are really hot, like you said the Mercer, and maybe reduce some of the inventory risk with certain lines or whatever that aren't doing as well?

Omar, I think our speed to market has not been an issue for us as a Company, and we have two products right now that we are a little light on, and that's both Mercer and our smart watches. Both cases, we'll be back into those in the next 30 to 45 days, in quantities that will be, I think, substantial enough for us to drive sales. I think what is important for us in terms of -- again, I think you've seen the way we've managed the inventory from the days that we were growing at double-digit to now where we've got slower growth, I think we've been very good as a Company in terms of managing inventory.

I think the biggest issue for us is, we want to continue to introduce newness. That's what's going to keep the customer engaged, and excited with our brand, and we've always done that. The issue for us is really more about getting the transaction value back up, because when the customer sees our product, and not just our product, but even with our competitors, that things are constantly being put on sale, you lose a credibility with that customer, that they should see something new, and want to buy it, and not just wait until an event happens.

So I think that's going to be our major focus next year. It won't be an easy task. I don't want to mislead you. It's not something that happens overnight. But if you really care about your brand long term, and you believe that having less units in the marketplace and a higher transaction value is a long-term strategy, then we believe we'll be successful.

Along those lines, John, how long are we thinking about these kind of declines in the wholesale business, to get it to that right size, where you feel comfortable the brand is more.

Sure. This will be the last question, Omar. I think that we'll see some further declines, probably next year in wholesale, not to the degree that you see right now. We worked with all of our partners around North America.

And by the way, they have all -- couldn't have been more positive and embraced the strategy as one that they believe will actually help their business, also. I think we'll see some modest declines next year, and then we'll start to see growth from that point forward. Thanks, Omar.

We'll now go to Randy Konik with Jefferies.

I guess, John, you think you about, give us some perspective on that cycle of AUR destruction from promotion versus mix of a cross-body bag versus like a tote, where are we in that promotional cycle, and any perspective you could give us on percent of the units that were sold on sale currently, and how much of those units you expect to be on sale, let's say, four quarters from now, along with this strategy to drive more fuller price sales?

Okay, Randy. First off, good afternoon. Going to be a little hard to answer that question, because there was, I think, three or four in there. Let me take a stab at it, though.

We are looking to have AUR increase somewhere in the 10% to 15% range, so I think that's the first place to start. And that's been about the degradation that has taken place over the past, let's call it 12 months. And I think I commented to you all before too, not only are unit sales up in our own stores, and in our department store partners, but our actual consumers, new consumers coming to the brand, is up as well.

So again, between that, between our brand awareness studies, et cetera, we don't see an issue that there's a health of the brand issue. More people are buying it. More people are engaged. More people are actually coming to our Company through our own websites and our partners' websites. So that's not the issue.

The issue is when you look at all that, and then you've got, let's say on the high side 15% AUR decline, that really -- you can't make up that difference. So that would be our goal. So that would put the units down to that number, somewhere between the 10% and 15%, and then we hope we'd make that up with AUR.

And we're going to do that as in my earlier answer to Kimberly, not just through the fact that we're going to limit -- exit the friends and family sales and all those types of things, but also really creating a different sense of excitement around the value of the product. Again, we know she is buying cross-bodies and totes, et cetera from us, and she believes that's a handbag when she buys it. She didn't say well, I only bought a small bag because I had less money. That's what fashion is today.

We believe that we can create some excitement with her, especially in medium size bags at a higher AUR than what we're currently selling. But still with great value for her, and very, very consistent with where we've been as a brand, overall. That $300 handbag price point for us has been a very strong price point, and we'd like to see a greater amount of our mix shift go into that area. And so that's why I said we'll have these five groups in the spring season, that we're terribly excited about, and should really generate some significant volume for us, if the Mercer collection particularly is any indication of what we've seen happen.

Can I just ask a quick follow-up? The market, this company generates a lot of cash flow and free cash flow, you've done a good job of buying back your stock. It seems as if there's been a lot of heavy lifting on both the SG&A dollars side as well as the capital expenditure side, to get infrastructure where it needs to be long term.

Where do you think -- how should we be thinking about normalized expense rate in the business, as a percent of sales? It's gone from 30% of sales to 40% of sales, and then how do we think about long-term CapEx or medium-term normalized CapEx levels, since there seems to be a very big opportunity here to drive explosive free cash flow in the business, in the not so distant future. Just want to get your thoughts on where we sit with those things. Thanks.

Randy, I'll take a piece of it, then I'll turn it over Joe. Obviously, the Company generates a tremendous amount of free cash flow, and our number-one focus on that today is to use that free cash flow for share repurchase. We think that's going to really show up significantly in next year, where we do believe we will resume top line growth.

And I think also we believe that our SG&A growth will level off next year. We will have all the websites up around the globe, and I'm going to let Joe talk about infrastructure, et cetera. A lot of the heavy lifting that was done in the last two years is really going to be behind us, starting in Q1 of next year.

And so the focus will be more on, as Kimberly asked earlier, resuming that top line growth. We think we've got some pretty good opportunities, both internationally with Asia, with our men's business. And we do think that in North America, we're starting to see some signs of -- I won't call it the bottom, but some signs of the precipitous declines starting to level off slightly.

That's obviously being tempered by what we're seeing in Europe, which has been very difficult over the last two quarters. So we've got to get that straightened out. But I think you've asked a very good question, and I think that you can see us looking at our operating expenses being on a more leveled basis. But I'll let Joe talk about some of the bigger projects.

Sure. Randy, as you know, our big projects have been our warehouse that we own in Venlo, our corporate headquarters, building the e-commerce sites, updating the e-commerce sites. So we've been through obviously a lot of that. Our CapEx for the current year will be $250 million, which we feel very comfortable is an appropriate amount to be spending to continue to invest in the things that we need, but certainly lower than our run rate over the last several years. So we think -- we have not obviously put out official long-term projections, but when you think about our CapEx, you should be thinking in the zone of our run rate for FY17.

We will now move on to Oliver Chen with Cowen and Company.

This is [Seela Richards] on behalf of Oliver Chen. You talked about the opportunity to improve the average transaction size given the pressures on AUR. And so on this topic, could you perhaps talk more about the Kors Concierge App. We had a chance to preview it, the new technology at your stores this week, and were very impressed. So could you just give us an update, perhaps on the rollout of that technology?

Sure. Kors Concierge is in a limited amount of stores right now, and literally it's only been up for about, I think, three or four weeks. You may have seen it in there about 60 days ago or so, but the full capabilities of it were really not available for the sales associates until just a few weeks ago.

So it's too early to tell what and how that's going to impact the transactions inside the stores, but very clearly, it will give the selling associate the ability to see the full breadth of the product that's available, through not only our e-commerce capabilities, but it will also give them a view of all the product that's inside the chain in stores. And most importantly, it gives them the capability, as you probably have seen, of really being a styling consultant, and wardrobing the customer in multiple different ways, that are all selected from Michael himself personally, and our design teams, and how they see people being put together. So we think it's an incredible tool that sales associates are going to be able to really engage with their customers with.

And you combine that with some of the geotargeting technology that's available from some of our partners, and we're able to have much more targeted communication with the local customer. When I'm talking local, it might be within five blocks of a store if you're in New York City, or it might be within two or three, four miles of a store, if you're out in Manhasset, Long Island. We think given the technology capabilities, the clienteling capabilities and now the styling capabilities, it's going to give our sales associates a lot more to work with, with the customer. And today, that's really what it's all about. You heard us talk earlier, our conversion rates in the stores continue to rise.

So again, customers when they come through the door are engaging with us. That's not the problem. The problem is, how do we get them in and, again, we're hoping this technology, as well as some things that we're coupling with that, are going to be helpful for us. We're also piloting click and collect, which is in a limited amount of stores, that just went live a few days ago.

So that capability will be in place also, which is another reason to have our customers come into our stores, and engage with our sales associates. So all this heavy lifting that we've been doing from a technology standpoint, the great news is we're really going to be in place to start to reap the benefits of those investments. Thank you.

We will now move on to Lindsay Drucker Mann with Goldman Sachs.

I wanted to ask about the wholesale business, understanding that your revenue to that channel is impacted by the decision to destock the channel and clean out inventories. But could you give us some perspective on what sell-through has been like, especially in North America?

Sure, Lindsay. The destock that's happening is really starting to happen now, because the retailers need to reduce their inventories in light of what our new policy is going to be. They obviously are lowering their sales plans because their current model is to do more business with promotional activity. So that's in conflict or contrast to what we think is the right thing to do going forward.

And again, there's been nothing but complete cooperation from every one of our retail partners in the United States. But we're a significant part of many of their businesses. So they need to right-size their inventories accordingly, and we're in complete support of that.

So sell-throughs are pretty similar to where they've been historically, but remember, all the promotional activity is going on, as we speak. So none of that's changed. And none of that will change until the end of January. So we're expecting a fairly promotional holiday season, but once we get beyond that we're feeling that we've got a different way of looking at how the business can be built, and we're hoping that's going to be looked upon in a very positive way by our end consumer.

Great. And in US retail, could you give us some color on trends in outlets versus your full price stores?

Sure. What I'll just talk about is traffic. The traffic in outlets is relatively stable, down a few points. It's not hugely down. But the full price traffic continues to be significantly down, and again, part of that is driven back through our e-commerce business.

Joe indicated that we've got a 270 basis point increase, driven by the e-commerce. So our e-commerce traffic is up strong double digits. We're seeing the same thing happen in Europe.

The minute you turn on e-commerce, and as I said to you before, we're very pleased with what's happening so far, it impacts the full price business. So we think that part of this is a shift to our own e-commerce sites, and part of it is obviously people in general shopping less in the mall channel, just because of all the activity that goes on e-commerce sites around North America. And now you're starting to see the same thing happen in many large European countries, as well.

We'll now move on to Matthew Boss with JPMorgan.

So John, as we think about your retail comps versus industry growth, multi-year how would you like us to think about Michael Kors same-store sales in handbags and also for watches, versus where do you see the underlying industry growth in each of those two categories over the next couple years?

Well, I'll just comment to what we think about industry growth in the two categories and then secondly I'll comment about us. So we believe that the North American handbag business is roughly flat, maybe up a couple points, in total. And we don't see that trend changing much. So I think that as it relates to us, we obviously have a fairly large market share in that category, and our growth rate in handbags in North America will be low-single digit, if we do our job right. That will be more in dollars than in units, so that's how we view that.

And then the watch category, we do believe that the decline is going to lessen. As I said earlier, we've already seen that, when you add the combined smart watch and fashion watch categories together, and we don't know how much that will stop declining, but there are some very good indications there.

We clearly need to have other categories working inside of our store. If you take those two categories, and say, one may still be in the -- let's pretend it's high single-digit decline and one is flattish to up a few points, we need other categories to work. and you're going to be seeing that happen.

We're certainly taking the shoe areas inside of our stores and making them significantly larger. Also, by the way, the shoe business has been positively impacted by our e-commerce, because we're able to have wider assortments online, and sales associates are able to do sends to customers' homes, by virtue of the breadth that we have online. And some of that category could be a very nice increase for us.

We'll be making some announcements about some jewelry in the next call, some strategies that we have around jewelry for our own free-standing stores, and that we think is also going to be a very nice additional category of business for us. So we're going to be looking at other things, and then of course, men's has great opportunity for us.

So we're taking certain stores, and that will be the next round of tests for us, that currently have, we believe, space to add the menswear to, and it's full capacity, so that would be a Tysons Corner, a Aventura, a Toronto. There's going to be a handful of stores that we believe we can add menswear to in their existing footprint, and that could be additional volume for us.

So our goal would be for next year to see our North American comps flatten out, and then have comp store increases in our international business. And so we do see growth, and that will be driven by in certain cases, in our international markets more in the handbag, where we can grow market share, and our North American markets where it will come from some other categories. So I hope that's helpful.

We'll now go to Ike Boruchow with Wells Fargo.

I believe this should be our last question. It's close to 5:34.

Joe, just a quick clarification on the retail margin outlook you gave for the back half of the year, I think you said 20%. Just given what you're lapping from last year, and the margin compares you have, could you just help us how to think about Q3 and Q4, because it seems like that embeds a lot of expansion in Q4. Just trying to if you could piece out how we get there, that would be helpful. Thank you.

Obviously, Q3 is our biggest retail quarter, so as you can tell from history, that will be our biggest increase. However, year-over-year, we are anticipating that Q4 will be up several hundred basis points from our performance in FY16.

This does conclude today's question-and-answer session. I will now turn the call back over to Mr. John Idol for any additional or closing remarks.

I'd like to thank you all for joining us this afternoon on our conference call, and we look forward to updating you on our progress on our next call. Thank you. Have a great day.

Thanks, everybody.

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation.