Capri Holdings Ltd (CPRI) 2018 Q4 法說會逐字稿

Good day, and welcome to the Michael Kors Fourth Quarter and Fiscal Year 2018 Earnings Conference Call.

Today's conference is being recorded.

At this time, I'd like to turn the conference over to Christina Coronios, Director of Investor Relations.

Please go ahead, ma'am.

Good morning, and thank you for joining us for our fourth quarter and annual fiscal 2018 earnings call.

Presenting on today's call are John Idol, Chairman and Chief Executive Officer; and Tom Edwards, Chief Financial and 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.

In addition, certain financial information discussed today will be presented on a non-GAAP basis.

These non-GAAP measures exclude certain items related to the company's acquisition of Jimmy Choo; restructuring and noncash impairment charges, primarily associated with underperforming retail stores; and the acquisition of the Greater China licensee.

You may identify these non-GAAP measures by the terms adjusted and non-GAAP.

To view the corresponding GAAP measures and related reconciliation, please view the earnings release posted to our website earlier today at investors.michaelkors.com.

I will now turn the call over to Chairman and Chief Executive Officer of Michael Kors Holdings Limited, Mr. John Idol.

Thank you, Christina.

Looking back, fiscal 2018 was an exciting year for Michael Kors Holdings Limited as we established a strong foundation to support the future growth of our company.

With the acquisition of Jimmy Choo, we formed a global fashion luxury group, bringing together 2 industry leaders in style and trend with a focus on runway collections and fashion design.

For the Michael Kors brand, fiscal 2018 marked the first year of our Runway 2020 strategic growth plan.

We were extremely pleased with our performance this year, achieving full year operating results that were better than anticipated.

Foundational to this success was the innovative and elevated product that Michael and our design teams delivered.

Importantly, the enhanced focus on our luxury heritage is increasing excitement and desire for the Michael Kors brand globally.

Similarly, Jimmy Choo's fashion leadership and 20-year track record of growth is the result of the creative direction of Sandra Choi and her design team.

They have a deep knowledge of craftsmanship and the creative vision to set fashion trends.

We remain committed to building on the fashion luxury leadership of Jimmy Choo.

Turning to fourth quarter performance, we exceeded our expectations, delivering better than anticipated revenue, operating margin and earnings per share results.

This performance reflects the progress we continue to make on our Runway 2020 initiatives, which are focused on product innovation, brand engagement and customer experience.

Beginning with product, we significantly increased the level of fashion innovation and luxury offerings across all our categories.

In accessories, approximately 65% of our spring assortment consisted of new styles, up from 20% last year.

We updated our iconic Bancroft group from the Michael Kors Collection line, expanding the offering to include additional novelty, mixed materials and seasonal color blocks.

In the MICHAEL Michael Kors line, we introduced the Blakely collection, which was featured in our spring advertising campaign and quickly became one of our top-selling groups.

Consumers also continued to respond to our Mercer collection, including the introduction of woven leathers as well as seasonal colors and design elements.

We were particularly pleased with the response to our Cori trunk bag, which was featured in the Lunar New Year campaign on our brand ambassador, Chinese actress, Yang Mi.

Additionally, we saw continued growth in backpacks as consumers responded to our expanded offering in this classification.

The increased level of fashion innovation across our accessories assortments was met with strong response, driving higher AURs in our retail channel, which contributed to positive comparable sales in this category.

In footwear, we continued to capitalize on the fashion-active trend, incorporating new styling into our best-selling Allie and Billie sneakers.

This included pearlized and perforated leathers as well as floral details, such as studs, sequins and leather appliqués.

In ready-to-wear, continued focus on growing our dress assortment as well as elevated novelty offerings drove strong results for the quarter.

Consumers responded to our modern feminine styles across all classifications.

We capitalized on the floral trend, offering prints as well as novelty texture through the use of embroidery, appliqués, sequins and eyelets.

We have also seen the growth of our fashion outerwear classification, as it is the perfect complement to our dress offering.

Some bestsellers included a floral embroidered bomber, a soft drapey trench and a pastel motorcycle jacket.

Importantly, the positive response to our elevated offerings drove higher AURs in both footwear and ready-to-wear, contributing to comparable sales growth in both categories.

In our Men's business, sportswear and leather goods continued to resonate with consumers, and we were, once again, pleased with the growth in this category.

In sportswear, the customer reacted to our expanded assortment of technical fabrics in bottoms and knits as well as sport-inspired novelty design in outerwear.

In leather goods, we saw significant growth from our iconic Bryant and Harrison leather goods, which we expanded to include additional shapes and injected innovation through our novelty offerings.

In our Watch and Jewelry business, we, once again, saw increases in the MICHAEL KORS ACCESS smartwatch category, with Sofie remaining a top seller.

We also saw solid performance from our new fashion watch offerings, particularly slim women styles with leather bands.

The combination of strong performance in ACCESS smartwatches and these new fashion watches styles helped to partially offset the overall decline we experienced in the fashion watch category.

Moving to brand engagement.

We remain focused on deepening our connection with consumers and driving excitement and desire for the Michael Kors brands.

In January, we launched our KORSVIP loyalty program.

Membership is tracking well ahead of our initial expectations.

This helped grow our global database by 24% compared to last year.

We also continued to deepen our engagement with consumers across social media channels, ending the year with 41.5 million total followers, an increase of 14% compared to last year.

We use this important channel to amplify glamorous events, such as our Michael Kors Collection Runway Show at New York Fashion Week, which was attended by global celebrities, including Zendaya, Blake Lively and Emily Blunt.

The show received overwhelmingly positive reviews, and we streamed the event online to over 14 million viewers and drove more than 300 million impressions from our corresponding social media campaign.

Creating an engaging and luxurious customer experience, both online and in stores, remains a priority.

In the quarter, we continued to see strong comparable sales performance across our digital flagships.

This growth was in large part driven by new features and capabilities we added throughout the year with the goal of elevating our online experience and better communicating our fashion point of view.

For example, our online dress shop and Kors Style features were strong performers in the quarter, which helped to drive increased conversion and transaction size.

With respect to our in-store experience, we continued to roll out Kors Connect, which provides sales associates with the ability to augment the in-store selection with products available online and in other Michael Kors locations.

Kors Connect is now in place throughout our European fleet, and the U.S. roll-out will be completed by the end of the first quarter.

New features are expected to be introduced throughout the year, including enhanced clientele-ing services, allowing associates to build user profiles and personal looks to create a tailored styling experience for customers every time they shop with us.

We also transitioned additional locations into our new luxury store concept, which reflects a refined take on glamour in a modern and engaging environment.

This new elevated concept features a runway leading to rooms that showcase our accessories, footwear, womenswear and menswear collections, while enhancing our sales associates' ability to provide consumers with a unique and elevated styling experience.

Recent results show our renovated locations are outperforming the balance of the chain.

Based on this performance, we plan to accelerate our store renovation program, with the goal of renovating 200 locations in the next 2 years.

Now turning to Jimmy -- to the Jimmy Choo business.

We continued to deliver luxury product and glamorous red-carpet communications.

We were thrilled with the results of our collaboration with Off-White.

The collection was made up of 9 shoe silhouettes that complemented Off-White's ready-to-wear looks, bringing a street-fashion aesthetic to luxury footwear.

We supported this collaboration with a 360-degree marketing campaign, which generated more than 65 million social media impressions across the global media exposure.

We were also pleased with the growth of the footwear category in the quarter.

The Micky pointy toe pump, Norway Knit and Lurex trainer as well as the [Shahar] sandal booty were among our most popular fashion styles.

We also continued to see strong response to our core Choo 24/7 offering, including our iconic Romy pointy toe pump, Miami trainer and Emily sandal.

In our accessories category, performance was softer than anticipated due to a lack of new introductions.

We have already taken action to introduce new silhouettes into this category, with our first new collection [Marianne] debuting this fall.

We will continue to accelerate new introductions over the coming seasons.

However, we expect continued softness in this category in fiscal 2019 as we transition out older accessories boots.

Now moving to our expectations for fiscal 2019.

We expect to grow revenue in the high single digits, with mid-single-digits earnings per share growth.

This performance will be driven by a number of growth initiatives in both our brands as we continue the strong momentum of Runway 2020 for Michael Kors and make further investments in Jimmy Choo.

For the Michael Kors brand, we expect to deliver low single-digit revenue and operating income growth, with an operating margin that is in line with our fiscal 2018 results.

We anticipate that revenue growth will be driven by our retail channel, as we continue to successfully execute our Runway 2020 initiatives.

With respect to our product, we will remain a leader in fashion luxury innovation while also elevating assortments to increase AUR, building on the success we saw in fiscal 2018.

We are particularly pleased with the level of product elevation and layering we anticipate for the fall and holiday collections.

In accessories, we're excited about the introduction of our new Whitney collection.

The new Whitney silhouettes will feature an envelope flat that is designed to reflect the letter M and is offered in an array of novelty detailing, such as our iconic MK signature logo, a velvet patchwork with zigzag stitch and quilted, shiny crinkle calf, which is a new take on patent.

This exciting new collection will be featured in our fall advertising campaign globally.

Additionally, Michael and our brand ambassador, Yang Mi, collaborated to design 2 additional styles of Whitney, which will be marketed during the all-important Xie Xie holiday period in China.

For the fall season, we also will introduce a new layer to our MK signature logo.

This will feature an array of metallic letters incorporated in a patchwork design and will be offered in a number of our existing accessories groups.

We believe that these 2 initiatives for the fall season will generate accelerated revenue growth in this category globally.

In footwear, we will continue to accelerate our active platform capitalizing on street style dressing that is currently an important trend in fashion luxury.

We are particularly excited about our new cosmos sneakers showcasing exotic materials on a new fashion construction, which will also be featured in our fall advertising campaign.

In ready-to-wear, outerwear will be a key focus for us during the fall and holiday season as we capitalize on the success of this classification as an outfit-completer to our successful dress category.

Finally, we will launch a new capsule series, MK Go, spotlighting exclusive designs inspired by street, sport and novelty fashion.

MK Go will stretch across product categories, including accessories and footwear as well as women's and men's ready-to-wear.

Our first collection will arrive in stores in July and will focus on graffiti design that features the Kors name.

Our second capsule will drop in October.

This collection will feature key streetwear pieces, including motor jackets, sweatshirts and hoodies, that incorporate the Kors name in our signature graphic letters.

Turning to our retail business.

We expect growth in this category, driven by our initiatives across fashion luxury, product, brand engagement and customer experience.

We will continue to expand our fleet adding 60 new stores, primarily in Asia.

We will also accelerate our store renovation program, and now intend to renovate 200 stores over the next 2 years.

Additionally, we will continue to leverage CRM to deepen our connection with consumers and believe that we can grow our database by over 20% next year.

As part of this, we will expand our loyalty program, KORSVIP, which is growing faster than our initial projections.

Finally, we will continue to add new features and capabilities to Kors Connect, which will further enhance our sales associates' ability to engage in one-on-one styling with customers.

Turning to wholesale.

We will continue with our strategy to elevate our brand position in this channel as we focus on increasing full-price sell-throughs, particularly in our accessories business.

As a result, revenue is expected to decline in both Americas and Europe, as we further reduce shipments to drive higher full-price sell-throughs.

Importantly, we expect our wholesale business will return to growth in fiscal 2020.

Moving to licensing.

Fiscal 2019 represents a restaging year for our Watch and Jewelry business.

In watches, we will continue to grow ACCESS smartwatches through the introduction of additional styles in the fall season that feature new technology, including GPS, heart rate and mobile-payment capabilities.

In addition, enhanced layering will further elevate the assortment as we introduce lux materials, such as pavé and ceramic.

As I mentioned earlier, we were very pleased with the response we saw to our fashion watch introductions in the fourth quarter.

With respect to jewelry, in the fall season, we will relaunch our offering, debuting our new fine jewelry line, featuring sterling silver and 14-karat gold plating as well as semiprecious stones.

We believe repositioning our jewelry line represents a significant growth opportunity for the company over the next several years.

Turning to the Jimmy Choo brand.

We are excited to further grow this business, as we expect revenue to increase approximately 10% on a pro forma basis in fiscal 2019.

In footwear, we expect to drive continued growth as we believe seasonal collections rooted in glamorous red carpet fashion will also further innovate within our core 24/7 collection.

In addition, we will expand our fashion-active offering, capitalizing on this strong trend.

In accessories, we see this category as a pillar of our growth strategy.

Accordingly, we have expanded our design team and are working diligently to introduce multiple new collections over the coming seasons.

For fall, we will debut our new Marianne collection, which will feature Jimmy Choo's iconic flip lock with a refined beveled-faceted edge to add light and reflection to its look.

Marianne will be offered in a chic, top-handled silhouette as well as crossbody styles, featuring a refined leather strap with chain detail.

For fall, this group will be featured in Dégradé Painted Python as well as a soft pebbled leather, and we plan to introduce new shapes, materials and embellishments to the Marianne collection over the coming seasons.

Turning to stores, we plan to increase the pace of store openings, adding approximately 30 new -- net new locations in fiscal 2019.

Given Jimmy Choo's significant global recognition, we believe there is meaningful opportunity to expand our global presence, with a particular focus on Asia.

In marketing, we are very excited about our glamorous fall campaign featuring supermodels Joan Smalls, Lily Aldridge and Rosie Huntington-Whiteley.

With a combined Instagram following of over 14 million, the trio of models embody the essence of the Jimmy Choo woman.

The campaign will showcase key fashion silhouettes in a gold theme while reinforcing the confidence, glamour and playful personality of Jimmy Choo's DNA.

Importantly, we are highlighting the most fashion-forward pieces of the collection, and we'll use this opportunity to support the introduction of our new Marianne handbag group alongside key seasonal silhouettes, the [Sandria] pump and the [Hurley] boot.

In conclusion, fiscal 2018 was a pivotal year for Michael Kors Holding, and we are proud of the results we delivered.

We ended the year significantly ahead of plan for our Runway 2020 initiatives, successfully completed the integration of Jimmy Choo and began to make strategic investments to drive accelerated growth in the brand.

We look forward to building on our momentum in fiscal 2019 and are on track to meet the long-term targets for both brands as we continue to lead in fashion innovation, deliver glamorous product, engaging brand communication and provide an exceptional customer experience for both Michael Kors and Jimmy Choo.

Additionally, we will continue to explore acquisitions to complement our existing luxury portfolio.

Overall, we believe that we are well positioned to deliver long-term growth and enhance shareholder value.

With that, I will turn the call over to Tom.

Thank you, John, and good morning, everyone.

We are pleased to have ended the year with fourth quarter performance above expectations, delivering adjusted net income of $97 million and adjusted diluted earnings per share of $0.63.

We also achieved better-than-expected operating margin for the fourth consecutive quarter, driven by revenue growth and gross margin expansion.

Turning to the details of our fourth quarter performance.

Total revenue of $1.2 billion increased 10.8% compared to last year and grew 7.2% on a constant currency basis.

This reflects $108 million of incremental revenue from Jimmy Choo and a 0.6% increase in Michael Kors revenue compared to last year.

Michael Kors retail revenue exceeded expectations, increasing 4.4% and was flat on a constant currency basis.

Since the fourth quarter of last year, we opened 2 net new stores reflecting 50 openings, primarily in Asia, and 48 closures.

Comparable sales grew 2.3% and decreased 1.7% on a constant currency basis, with global e-commerce benefiting comparable sales by 160 basis points.

With respect to regional comparable sales performance, results in the Americas and Asia were better than anticipated and performance in Europe was in line with our expectations.

In the Americas, comparable sales improved sequentially by almost 500 basis points to nearly flat, as we continued to deliver product that resonated with consumers and anniversaried our strategic initiative to reduce promotional activity.

In Europe, we continued to take steps to decrease inventory and drive higher full-price sell-through, which as expected, impacted comparable sales performance.

Our growth in Asia remained on track, and we continued to drive positive comparable sales in the region.

For the Michael Kors wholesale business, revenue decreased 3.2% or 6.1% on a constant currency basis, which was in line with our strategy to reduce inventory in the channel to drive higher full-price sell-through and elevate brand positioning.

In the Americas, the wholesale revenue decrease was smaller than expected and improved sequentially, largely as a result of better full-price sell-through across multiple categories.

In Europe, constant currency sales declines were in line with expectation as we are early in the process of resetting the wholesale base in this region.

Michael Kors licensing revenue decreased 11.1% versus the prior year, but we were pleased with the continued growth in Michael Kors ACCESS smartwatches.

This was more than offset by the ongoing pressure in fashion watches.

Additionally, we began to discontinue our fashion jewelry offering in preparation for the launch of a new elevated fine jewelry collection in the fall season, resulting in lower sales.

Turning to Jimmy Choo.

Revenue was $108 million.

During the quarter, we continued to expand our presence by opening 5 new stores, bringing our total global fleet to 182 locations.

We were pleased with the strong momentum in the footwear business, which met -- was met with favorable response as we continued to deliver exceptional product innovation.

As John mentioned, accessories' performance was lower than anticipated as we began to transition to new collections.

We plan to deliver innovation and enhanced support for this category in fiscal 2019, which will enable us to capitalize on our growth expectations.

Turning to total company margin performance.

Adjusted gross margin was 60.4%, an increase of 220 basis points.

This was primarily attributable to a higher retail mix for the Michael Kors brand, improved Michael Kors wholesale gross margin and the inclusion of Jimmy Choo, which drove an 80 basis points benefit.

Michael Kors retail gross margin increased 110 basis points, driven by international growth and lower cost of goods.

Michael Kors wholesale gross margin expanded 150 basis points, primarily due to better sell-throughs at retail.

These year-over-year comparisons reflect conforming our intercompany cross methodology for our China acquisition in the prior year period, which did not impact consolidated gross margin.

Total adjusted operating expense increased $90 million to $558 million, reflecting $89 million of expenses from the inclusion of the Jimmy Choo business.

As a percent of revenue, adjusted operating expense was 47.3%, an increase of 330 basis points, driven by a 360-basis-point impact from the inclusion of Jimmy Choo.

Operating expense as a percent of revenue for the Michael Kors brand was 43.7%, down 30 basis points versus prior year.

Total adjusted operating margin was 13.1% compared to 14.2% last year.

The Michael Kors adjusted operating margin was 15.8%, an increase of 160 basis points compared to the prior year, including the methodology update to last year's fourth quarter, Michael Kors adjusted retail operating margin grew 280 basis points to 8.5%, driven by leverage on higher sales and gross margin expansion.

We were pleased with the continued improvement in retail operating margin and expect to see this positive trend continue into fiscal 2019.

Michael Kors' adjusted wholesale operating margin increased 170 basis points to 25.5% due to higher gross margin and lower operating expense.

Adjusted licensing operating margin for Michael Kors was 24.6%, an 860-basis-point decline, driven by deleverage.

For Jimmy Choo, we made a number of accelerated investments during the fourth quarter in marketing, e-commerce and store openings.

As a result, Jimmy Choo adjusted operating margin was negative and dilutive to the consolidated operating margin by 270 basis points.

This is directionally in line with Jimmy Choo's normal seasonality, which I will discuss in more detail when I turn to guidance.

Our tax rate for the quarter was 31.5%.

This reflects updates to our estimates for the impact of the new U.S. tax reform legislation as well as other updates to our tax provision estimates.

For the full year, our tax rate was 19.9%, 100 basis points lower than the prior year.

Turning to the balance sheet.

We ended the quarter with $163 million in cash and cash equivalents and $874 million of debt, reflecting $320 million of debt repayment during the quarter.

In the fourth quarter, we repurchased approximately 3.2 million shares for $200 million.

We have an additional $642 million of availability remaining on our share repurchase authorization.

Inventory was $661 million, including $129 million associated with the acquisition of Jimmy Choo, compared to inventory of $549 million in the same quarter last year.

Inventory for the Michael Kors brand of $532 million was down 3.1% compared to the prior year.

Capital expenditures for the quarter were approximately $37 million and related to new store development, renovation and information technology, e-commerce enhancements.

Now we would like to turn to guidance and provide our outlook for the full year and first quarter of fiscal 2019.

Starting with the Michael Kors brand.

In fiscal 2019, we expect to deliver low single-digit revenue growth and an operating margin in line with the prior year.

In the retail segment, we expect revenue growth in all quarters, with an increase in the mid-single digits for the year.

In our wholesale business, we expect continued inventory reductions as we drive higher full-price sell-through.

We expect this will result in a revenue decline in the mid-single digits.

Wholesale trends will differ for the Americas and Europe.

In the Americas, we expect the largest reduction in the third quarter, as we focus on improving full-price sell-through in the high-volume holiday period.

In Europe, we expect relatively consistent declines throughout the year, as our efforts were started later in this region.

For our licensing business, the transition to a more elevated jewelry line and fashion watch trends are expected to result in high single-digit revenue decrease for the year.

For Jimmy Choo, we remain on track to meet our initial revenue expectations for fiscal 2019 and continue to plan to make investments in our retail expansion, accessories business, e-commerce capabilities and marketing programs.

As a result, we expect Jimmy Choo's operating income in fiscal 2019 to be below its historical level due to these investments and normal purchase accounting amortization.

We are confident the strategic investments we are making in Jimmy Choo will position us to achieve our long-term revenue target of $1 billion and an operating margin rate in the low teens, as we build greater global scale and further expand the accessories business.

With that backdrop for fiscal 2019, we expect the following, all on an adjusted basis: total revenue to be approximately $5.1 billion, reflecting between $570 million and $580 million of incremental revenue from Jimmy Choo, an increase of approximately 10% on a pro forma basis; retail revenue for Michael Kors to grow in the mid-single digits with flat comparable sales; wholesale revenue to decline in the mid-single digits; and licensing revenue to decrease in the high single digits; and operating margin of approximately 17.7%.

This assumes the Michael Kors operating margin in line with the prior year, reflecting modest gross margin expansion and slightly higher operating expense as a percentage of sales as we grow the retail business as well as approximately 180 basis points of dilution from Jimmy Choo; a tax rate of approximately 16.5%; weighted average shares outstanding of 154 million; and diluted earnings per share in the range of $4.65 to $4.75, including dilution from Jimmy Choo of approximately $0.05 to $0.10.

Capital expenditures are expected to be approximately $250 million, including Jimmy Choo.

This reflects the opening of approximately 60 Michael Kors stores and approximately 30 Jimmy Choo locations, with a focus on Asia.

In addition, we will continue to invest in renovations to our retail fleet as well as enhancements to our information systems across both brands.

As part of our fleet optimization for Michael Kors, we plan to close approximately 25 stores in fiscal 2019 and incur restructuring charges of approximately $30 million.

In addition, we expect cost related to the Jimmy Choo transition to be approximately $30 million in fiscal 2019.

Looking at the quarterly pacing for the year.

Our expectations reflect greater seasonality, seasonal variation for the Jimmy Choo business.

We expect Jimmy Choo operating income to be above the full year average in the first and third fiscal quarters, but we do not expect the business to generate significant operating income in the second and fourth fiscal quarters.

Accordingly, while we expect EPS growth in the mid-single digits for fiscal 2019 and low to mid-teens for the first quarter, we anticipate second quarter EPS will be lower year-over-year, largely due to Jimmy Choo's seasonal pacing.

Turning to our outlook for the first quarter.

We expect the following, all on an adjusted basis: total revenue to be approximately $1.135 billion, reflecting between $140 million and $145 million of incremental revenue from Jimmy Choo; retail revenue for the Michael Kors brand to grow in the low single digits with flat comparable sales; wholesale revenue to increase in the high single digit, as we lap the largest quarterly decline from fiscal 2017; and licensing revenue to decline in the high single digits; an operating margin of approximately 15.2%, reflecting a Michael Kors operating margin in line with the prior year and 80 basis points of dilution from Jimmy Choo; a tax rate of approximately 14%; weighted average shares outstanding of 153 million; and diluted earnings per share in the range of $0.90 to $0.95, including anticipated benefit from Jimmy Choo of approximately $0.01 to $0.03.

In conclusion, we are pleased with our fourth quarter performance, which cast a pivotal year for our company.

We're excited about the initiatives we have underway in fiscal 2019 to deliver revenue and earnings growth for Michael Kors Holdings.

Importantly, the momentum we are building positions us to deliver continued growth for the future.

Now I will open the call to questions.

(Operator Instructions) We can take our first question, and it comes from Oliver Chen of Cowen and Company.

Regarding the wholesale side of the business, how should we think about the gross margins trending?

Do you expect the better sell-throughs at retail to continue to have benefit there?

And just more broadly speaking about margins, I was curious about your thoughts on the online e-commerce margins and opportunities to expand those over time, what you think will happen as that penetration rate increases.

I think our belief in wholesale is kind of rooted around the following.

Number one, we were really pleased with what we saw happen in the fourth quarter.

As we said in our prepared remarks that we actually saw comparable sales growth at our retail partners in Q4 -- our fiscal Q4, which was very encouraging.

And that's with less inventory in their stores, and that just reflects better response from the consumer on the elevated product that we've been delivering into the stores.

So I have to say we're kind of very excited about what we saw happen there.

And as a result of that, we sat down with our partners, and we said, "Looking out to the balance of the year, why can't we continue to replicate this?

Put less inventory in the channel, continue to believe that the consumers are going to respond better.

In particular, we've got the 3 initiatives happening.

We've got Whitney coming for the fall season.

We've got our expanded offering around our Michael Kors signature products.

And then now, we've got the MK Go also coming." And so we feel so good about all the things that are happening, along with our partners, that we feel we need less inventory to do that.

That just means less markdowns.

That means a much healthier perspective from -- with -- to the consumer of how our brand is positioned.

And based on that, we're going to have less wholesale shipments to the channel, and we think that's the right thing for us to do.

We think gross margins will roughly remain the same.

Because as you know, we mentioned last year, we were increasing the assistance that we gave to our partners as we got through this situation.

So if the sell-throughs happen at the kind of levels that we saw, we're going to maybe even see some upside to that.

But I think for right now, our focus would be about flattish for the category.

And then secondly on the online margin, what we're extremely excited about, in particular, is Kors Style.

We are seeing the average transaction go up by double-digits with Kors Style, and that's really driven because we're selling multiple products to the consumer, whether we were selling our dress and a hand bag or a shoe and a dress or within multiple classifications are.

So that's really driving improved results on the online piece of the business.

And margin can -- has been sequentially improving each year for us there.

So our goal absolutely is to see margin improve there, and that's both from a gross margin standpoint and an operating margin standpoint.

So we like what's happening on our online business and in particular, the initiatives that we're putting in place in the online business to drive increased sales but also really to connect and further engage with our consumer.

And all of those initiatives are working very, very nicely for us.

So thank you, Oliver.

We can now move along to our next question.

It comes from Simeon Siegel of Nomura.

John, just to that point, your comments on -- around the progress around wholesale.

Is there any -- are the shipment reductions, are they concentrated in any product categories or just the channels within wholesale?

And maybe any context around your full-price or off-price?

And then Tom, just recognizing the return to repurchases, any color on the expected use of capital this year?

Sorry, if I missed it.

Did you gave your CapEx expectation?

Okay, yes.

The most dramatic reduction in wholesale shipments has been in the accessories category.

And again, that's by design, and that is to have less markdown product available, both in the U.S. and in Europe.

And as I said, we're seeing that strategy paying off.

And really, it's paying off because of what Michael and the design teams have been able to create in terms of exciting new innovative product.

And I'm sure you've been at the stores and seeing that, the amount of new product that we have there.

And then the great job that our teams are doing in communications are really telling that story.

And I think one of the other incredible bellwethers for this company is -- and I know the question was specifically focused on wholesale, but one of the other litmus tests that we used is the growth of our social media and also, I've mentioned that we grew the database by over 24% in -- or approximately 24% in our retail channel, and that's just telling you the customers are continuing to engage with the brand.

We're making a little different experience for them because it's about newness, it's about fashion and the amount of promotional activity that we engaged with in the previous years is significantly reduced.

And I also might say that our partners in the wholesale channel have been right there with us all along the way.

And I think that's just doing things that are great for the brand, and we've been very disciplined about it, and we will remain disciplined about it.

And I think that's going to give us competitive advantage as we go forward as certain other competitors have not refrained from that activity.

And we think long term, that's not the right place for a luxury brand likes ours to be.

And so the other categories, footwear and ready-to-wear, we've been talking about for some time, are continuing to see very nice increases.

The sell-throughs on that product, really, have never suffered as we went through this particular initiative, and both of those are accelerating.

And also in the wholesale channel, we're starting to get some very nice traction on our men's business.

We don't talk a lot about it, but we're slowly making some very good progress there.

And hopefully, you get out and see what some of our presentations look like both in men's ready-to-wear and accessories.

But we're -- we told you that was a long-term investment for the company, and we're starting to see that happen, not only in the U.S. but in Europe.

And now we're starting to get some traction in some of the key locations in Asia as well.

And those are typically operated by us, so they don't come under wholesale.

But they're in department-store environments, and we're starting to see some very good results there as well.

So we're pleased with that development.

I'll let Tom answer the capital question.

Thanks, Simeon.

Well, looking at capital usage, our business generates robust free cash flow, and we've been able to pay down our debt at a much rapid -- more rapid pace even than we had anticipated.

So we have the flexibility as a company to do many different things.

And in the quarter, repurchased 200 million of shares, which we believe are a great value.

But going forward, our priorities are consistent.

Our first priority is to invest in the business, and we'll be investing $250 million in CapEx in 2019, though partly to develop and build out 90 new stores, 60 for Michael Kors and 30 for Jimmy Choo.

We'll then look to continue to pay down debt, of which there is a little bit less to do.

We will then look at luxury acquisitions, and to the extent those aren't available, we'll revisit returning cash to shareholders, either share repurchase or other means.

We can now move along to our next question.

It comes from Kimberly Greenberger of Morgan Stanley.

I wanted to follow up on the guidance here for the upcoming year.

I'm wondering the flat comp guidance, is that in constant currency or in dollars?

And John, I think it's a touch below where you had suggested you might expect it to be back on your November call.

So I'm wondering if you can just explore a little bit the slight change in outlook.

Yes.

That is in reported currency.

There won't be any huge swing.

Let me clarify that.

As long as the euro and the dollar don't do something very interesting, which is, obviously, starting to happen, we don't believe that there will be any significant difference between reported and constant currency.

So -- but that is in reported.

The second thing I'd like to address is I don't believe we feel that our flat comp is anything inconsistent with what we had given, in particular, in our Investor Day presentation.

So we are trying to focus, first and foremost, on exciting product that we're delivering to our stores, and that is working.

And we can see that in everything from sell-through to AUR to the amount of new people that we're bringing to the brand, both through social media and through our database.

So we know all the indicators are positive.

What we don't want to do is to start to put too much inventory into our stores, which would then create markdowns, which we think would be the wrong tactic to take a business, very critical moment in the positioning of the brand.

Certainly, that's our guidance, and we gave guidance last quarter, and we certainly did better than our guidance.

So we believe we have the inventory to do better if the customer responds, but we think it's appropriate for us to give guidance.

And our own internal measurement, that is something that is focused on achievements that are about brand health and not necessarily about just driving a revenue.

So we feel very good when you look at all the metrics of the business.

Top line growth, we've got it for next year; bottom line growth, we've got it for next year.

And I'd also like to point out that we ended the year with over 19% operating margins for the company, and I believe that's pretty significant in the luxury industry in terms of our performance.

We want to maintain those metrics so that when you look at Michael Kors as a company, Michael Kors Holdings Limited, that you know this is a company that has very sustainable growth.

And now that we have Jimmy Choo as a part of our family, we love the opportunity that we see there.

We've got a very strong, healthy footwear business as we reported in our prepared remarks.

We have a great opportunity for development of accessories there, and that's going to be hundreds of millions of dollars, by the way, our accessories opportunity.

And that's going to be at very nice margins for the company.

It's also a luxury business in its premium positioning in the marketplace.

And we've hired some incredible designers who come from other European luxury goods company to support Sandra in the development of that business.

So we've got all the right things in place to take that company and develop growth as well.

So we look at our opportunities for the future and feel that it's there for us.

We just want to do it in a prudent and a stepped way, which is exactly what we said in our -- the Investor Day presentation.

I will add, would we like to have higher-than-flat comps?

Absolutely.

And if the consumer responds to the product, that may, in fact, happen.

But we think it's just prudent to give a directional indication that would be one that is something that we feel very confident that we could achieve.

And Kimberly, I'd just like to add one other perspective on the Michael Kors comps as we look at 2019.

We see ready-to-wear and footwear growing, accessory stabilizing, and it's mitigating some continued watches declines in the year.

Yes.

And to that note, we will give you one piece of more granular detail, and that is that the watch and jewelry category contributed to approximately half of our comp-store decline on a constant basis last year.

So as you can see, it really is saying if you take that category out, which I know you can't, but if you take that category out, most of our other classifications are very healthy.

And as I -- we talked about, this is really a re-platforming year for us.

We're eliminating our fashion jewelry business to bring in a fine jewelry business that's going to significantly increase the AUR.

It's also going to significantly increase the positioning of that business.

And I will also tell you that we were not happy with what we were putting forward to the customer in terms of fashion watches.

And I think we're in a much better place than we've been.

And I'm certainly not going to call a bottom to the fashion watch business, but we're starting to see some indications of some things changing.

And that will really be a key to us getting a higher comp-store growth in this year is if some of those initiatives are better than anticipated.

We can now move along to our next question.

It comes from Omar Saad of Evercore ISI.

I wanted to ask if you could go a little bit more detail and an update on what's going on in Asia, especially China.

It sounds like a lot of core growth is happening out there.

E-commerce-wise, what's developing there?

I think you're not -- you decided not to partner with Tmall, maybe a little bit more color around what's happening on the digital side.

Yes.

Our Asia business, again, we're pleased with it in general.

Our Mainland China business continues to grow strong.

Our business in Japan continues to grow very nicely.

And as we've indicated in previous calls, our business in Korea, Hong Kong, Macau and Taiwan are softer than we would like, and some of that, some tourist-flow issues and -- so we're definitely working on that to improve our performance in those markets.

And our business in Southeast Asia, which shows up in our wholesale income, has been also developing nicely.

And I would add one further thing, too, on a global basis, we're seeing a very nice pickup in our Duty Free business worldwide, and that's both airports and in partners like DFS, et cetera.

So it's interesting.

Sometimes, where is that customer buying the product from us.

Sometimes, it's in our own stores.

Sometimes, it's in travel retail.

So it moves around, as I'm sure you know with other luxury companies on a -- literally on a quarterly basis.

But we like what's happening for the business and the momentum and how the brand is being perceived by the consumer in Asia.

In terms of e-commerce, as you know, we're platformed in Korea, in Japan and throughout China.

We are not platformed in Southeast Asia, although we're beginning to study that.

And the numbers still are small but growing on a percentage basis quickly.

And we've made the decision that we will remain for the currently on our own platforms as the way to market our products in those regions, and we'll continue to monitor what the various other regional companies are doing.

And that's primarily more of a traffic issue.

And whatever we would ever do would be platformed on a Michael Kors platform.

But for the moment, we believe that we're in a very good place to service the customer on our existing platforms.

We can now move along to our next question.

It comes from Paul Trussell of Deutsche Bank.

Big picture, John, just wanted to inquire how you're thinking about the handbag business from an AUR and unit standpoint in fiscal '19.

Also on Runway 2020, you spoke about the progress made, in fact, kind of running ahead of schedule.

Any adjustments?

Or have you made any adjustments to your thought process of what's attainable by the end of fiscal 2020 to the Kors -- for the Kors brand?

And then lastly from me, it's just on Jimmy Choo.

The investments you guys have made in this last quarter are very understandable, just maybe a broader thought process on how we should think about the impact to Jimmy Choo over the medium term.

Okay.

I'll take the first 2 ones, and I'll turn the third one over -- on Jimmy Choo to Tom.

The handbag AUR continues to accelerate in the company, and that's both of new innovative and engaging product that we're delivering at retail, and that's also a function of lower markdown activity.

And obviously, we are behind comping in North America, the change in strategy of how we dealt with promotional activity.

So that's more going to be on a like-for-like basis.

So AUR increase primarily will be driven by the performance of sell-through of the new product that we deliver.

And I have to complement, again, Michael and our design teams because I think that some of the products that's coming, in particular, for the fall and holiday season is some of the best product this company has ever delivered.

And that's in almost every category, that's in accessories, footwear and women's ready-to-wear and now, our menswear business.

I'm really pleased with what we have got coming.

And so our feeling is that in the accessories business, the unit shipments will be slightly down, which is, again, by design and particularly driven by the reduced amount of shipments we're going to put into wholesale.

But in general, we're looking for a little bit of reduction there and some growth in the AUR.

So that, as Tom said before, we look at our overall retail business for accessories, both in the -- our own channel and in the channel of wholesale to be roughly stable in terms of retail sales, which is exactly where we wanted to be at this moment, in our positioning of the brand.

In terms of Runway 2020, the only thing I can say to you is that we believe we're ahead of expectations from what we had -- where we had wanted to be.

And you're seeing that show up in everything from comp store results, both at our own retail channel and at our wholesale partners.

And you'll see -- we're seeing that -- some of the new renovated store performance is performing at a better rate than chain.

And I hope you've gotten a chance to see some of our stores, but they're really glamorous.

I think they are super exciting.

And so we feel that from a Runway 2020 standpoint, we can go a little faster than what we had intended.

And that will be indicated through the store renovations that we're doing.

And again, if those 200 that we renovate over the next year to 2 years are working even better than we thought, then we'll go even faster.

We certainly have the capital to accelerate pace if we so choose.

And then you've heard about a lot of the issues that we're developing around e-commerce, omni and in particular, Kors styling, which we're very excited about how the consumers are reacting and how our sales associates are reacting of having that capability inside the store.

So all of that's really good stuff.

And I want to add one further thing on Jimmy Choo is that, again, Tom indicated that we're opening the 30 new stores this year.

We indicated that we're delivering the new [Marianne] collection, supported by 3 of the greatest fashion icons in the world in our marketing campaign.

And really, that's going to be a huge initiative for the company.

And I think it's an exciting opportunity for us to further what is probably more or less perceived as more of a shoe brand today to become viewed as a luxury accessories brand.

Again, Jimmy Choo has a handbag business.

It's a smaller percentage of the total sales, but again, over time, we think the handbags will -- and accessories will become as iconic to that brand as footwear.

Then there are some other examples of that in the luxury business, where players have been very successful at doing that.

So we think we've got the right ingredients.

We think we've got the right team, led by Pierre Denis and Sandra Choi.

And so we're quite excited about our opportunity there.

And I will then segue to Tom to talk about Jimmy Choo investment opportunities.

So Paul, you had mentioned Jimmy Choo investment and medium-term impact.

Just as a refresher, the investments we were making are in marketing, it's building the accessories business, building out and continuing to expand e-commerce as well as new-store development.

And in the medium term, what we expect to see is robust top line growth.

We're expecting 10% growth on a pro forma basis in '19 and -- as well as slightly lower margins as we invest.

This accelerated top line is extremely important.

It sets the stage in '19 for further accessories growth in the future, which as John noted, is a key pillar for our total business expansion.

And our overall value case was built on driving this business to $1 billion.

This really sets the stage for it.

From a margins perspective, we'll be lower this year, but we expect it to improve to the low teens as we build scale and build out the higher-margin accessories business.

We can now move along to our next question.

It comes from Michael Binetti of Crédit Suisse.

Would you mind helping us with a little more detail on how the trends in your -- into your Europe business comps went in the quarter?

What kinds of trends you're seeing in that business?

I was thinking a little bit of scrutiny, obviously, the currency but also the underlying business lately.

And maybe how you think about comps in that market this year.

I think previously you've said some of the quality of sales initiatives that you're working on are a little further behind the pace of the U.S. in that market.

Thanks, Michael.

Yes, Europe is probably, at this point, the most challenged market for us in the world.

And again, as Tom indicated in his remarks, we started the process of looking at how we were managing the business there later than we started in the U.S. So there, we are going through the exact same issues where we are taking a much different view.

And there, it's less about the amount of days on sales, it's just the amount of inventory that we're typically left with at the end of the season and how much of that inventory we're selling on sale versus during the in-season periods.

Now sequentially, the business is getting better, which is a good thing.

So again, the results seem to be right in line with what we had anticipated at this point.

But we do expect that Europe will be down on a constant currency basis for the balance of the year.

So -- and that's again by design.

We're going to tighten the inventory levels there and really look to see the acceleration of that business more into fiscal 2020, which is, again, the right way to reset these businesses and to really give the perception to the consumer that were a luxury customer.

And at the end of the season, there's a lot less inventory there, so you better buy it in-season when it's new, and it's fresh and it's in the retail stores.

The other thing that I might add, Europe gets a little bit of some issues related to when the currency moves, and that really affects our tourist business in that market.

So that's seeing some issues over the last year, in particular, with some of the Brexit issues, et cetera, and how the currencies match up against other currencies around the world.

So we're a little bit -- obviously, we're not in control of that, but we think all the other fundamentals are there for us to continue to resume growth in that business, both in our -- the retail channel and the wholesale channel of that marketplace.

And if I could just follow that and try to connect your comments today to something you said on your last conference call.

I think last time we spoke, you pointed to what sounded like you're feeling a fairly sustainable return to positive comp growth by your fiscal second quarter.

Today, you did mention a relatively specific inventory plan for holiday to make sure there's scarcity value.

Could you just help us connect, do you still think 2Q or the fall season is where you see like this is where we, I guess, on a more substantial basis transition to a more positive comp growth story?

Or has there been a change to your calendar, do you think?

Yes.

And I think Kimberly made reference to that earlier.

I think what we said on the last call was that we certainly view the back half of the year to be a more accelerated growth period for the company.

And I would say to you, the only difference between our perspective at that time versus now is we've made a decision to, again, have a little less inventory, both in wholesale and in our own retail channel as well.

We think that's prudent.

So that does not mean that we can't have upside to our current forecast.

But it means that we just -- we've decided that we're going to be just a little more prudent, have a little bit more scarcity and if the customer responds, I think we'll have the inventory to be able to do that.

But you probably will see inventory down as you just saw in this quarter in some of the other quarters as well as we kind of tighten things up a little bit.

And again, we think that's the right strategy for the business on a long-term basis.

And conversely, in Jimmy Choo, you'll see the inventories expand more rapidly because we're opening stores, we're adding accessories and we want to put our foot a little harder on the accelerator in that business.

And we know that we have the momentum to be able to do that.

Thank you, Michael, for your questions.

With that, I'd like to say that we're pleased with the progress that we made in the business during fiscal 2018, and we'll continue building on this momentum in 2019.

Importantly, we remain on track to meet our long-term targets for both brands and look forward to updating you on our progress in the future.

Thank you.

This concludes today's call.

Thank you for your participation.

You may now disconnect.