Everyone, welcome to the Michael Kors' first quarter fiscal 2018 earnings conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Christina Coronas, Director of Investor Relations. Please go ahead.
Good morning, thank you for joining us for our first quarter 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, 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 acquisition of the company's Greater China license. You may identify these non-GAAP measures by the terms adjusted and non-GAAP. To view the corresponding GAAP measures and related reconciliations, please view the earnings release posted to our website earlier today at investors.michaelkors.com. I will now turn the call over to Michael Kors' Chairman and Chief Executive Officer, Mr. John Idol.
Thank you, Christina. We are in an exciting and transformative time for our company. We recently announced that Michael Kors Holdings Limited is forming a global fashion luxury group with our acquisition of Jimmy Choo, bringing together two iconic companies and creating a platform for future acquisitions. The foundation of our group will be built on fashion authority with craftsmanship and heritage at the core. Jimmy Choo embodies all of these elements and is an excellent fit for our group. The brand has been a leader in designing glamorous, innovative, expertly crafted footwear and accessories that have resonated with luxury trendsetters for more than 20 years. Under the leadership of Chief Executive Officer Pierre Denis and Creative Director Sandra Choi, the company has demonstrated an impressive track record of consistent sales and earnings growth, in addition to strong cash flow generation.
We believe Jimmy Choo can reach $1 billion in revenue over time as we partner with Pierre, Sandra, and the rest of the talented management team to build the brand's online presence, expand its retail footprint globally, and accelerate growth in the accessories and men's categories. Through the formation of a global fashion luxury group, we expect to enhance long-term value for shareholders by growing the Michael Kors and Jimmy Choo's businesses while diversifying our product and geographic mix. Moving to the quarter's performance. This morning, we reported first quarter fiscal 2018 results, which were ahead of our expectations, largely as a result of better than anticipated comparable sales performance in our retail segment in North America and Europe. We have also begun to execute our strategic plan, Runway 2020, to reposition our company for future growth.
These efforts are expected to drive improved financial performance as we generate even greater appeal for our fashion luxury assortments, deepen consumers' connection with our brand, and further elevate the exceptional jet-set experience that we offer online and in our stores. It is still early in the process, we have certainly begun to lay the foundation for future success. While we recognize that it will take time for our initiatives to bear fruit and meaningfully benefit our financial results, it is encouraging that we have already seen early signs that our efforts are resonating with our consumers. I will now provide you with an update on the actions we are taking in our focus areas of product innovation, brand engagement, and customer experience. Beginning with product innovation, we continue to leverage Michael's fashion luxury leadership and iconic runway heritage to further elevate our accessories product offerings.
Importantly, we are also expanding our presence in other key categories, including women's ready-to-wear footwear, men's sportswear, men's leather goods, and Access smartwatches. In our accessories assortments, the layering and increased fashion innovation that we injected into our offerings elicited excitement among our consumers, with the Mercer collection continuing to be a true favorite. New Mercer styles with feminine novelty detailing, including studs, perforation, crystals, and leather inlays, garnered outstanding response. In addition, the hardware branding details we offered on shoulder bags, including the Sloan Editor and Mott collections, were well received among consumers. Finally, the launch of our iconic Jet Set signature pattern in a smaller size was also a notable success. We remain pleased with the performance of products that provide opportunities for customization and personalization.
Consumers continue to take advantage of the opportunity to personalize their leather goods through our monogramming services which we offer in our digital flagships and select retail stores. In addition, we continue to see strong response to our customizable product offerings, including our mix-and-match guitar straps, as well as our Selma swap handbag. Our fall accessories assortments will build on this momentum, beginning with the launch of Bancroft from the Michael Kors collection line. This important new group is a first step in expanding our collection offerings. In addition, we are introducing Sadie into our Michael Kors line. Sadie is a new soft satchel collection with a cool fashion sensibility featuring chain inlay detailing.
Both Bancroft and Sadie will be featured in our upcoming fall fashion campaign as part of our efforts to showcase these new collections through a 360-degree marketing effort, generating excitement and creating desire for these innovative products. We also continue to see positive response to our enhanced assortment of women's ready-to-wear and footwear. The increased innovation and elevated positioning of our assortments was well-received, and our expanded dress offerings continued to garner exceptional response from consumers, contributing to growth in our women's ready-to-wear business during the quarter. Men's sportswear and luxury goods also continued to exhibit positive momentum in the quarter. In sportswear, the consumer responded well to our fashion introductions in woven and knit classifications. Our Greenwich knit polo is now becoming a bestseller at retail. In leather goods, we saw strong response to our expanded offerings, including Bryant and Harrison groups.
Backpacks are now the number 1 selling silhouette in our collections. In addition, our iconic Jet Set signature collection continues to perform well, and we saw a particularly strong response to our camouflage print as part of our Father's Day gift efforts. With respect to the watch business, Access smartwatches remain an important and growing category. Consumers continue to respond well to the increased array of styles, platings, and interchangeable strap options. For the fall season, we are excited to introduce two new Access smartwatch styles, Sofie and Grayson. These styles will help fuel our growth of smartwatches, which we anticipate will reach 25% of our overall watch sales by year-end. We also continued to expand our leadership in fashion wearable technology. During the quarter, we launched My Social, a feature that enables users to link to their Instagram account and set a personal post photo as their watch face.
In addition, consumers were highly engaged with our expanded offering of watch dials, as we have seen more than 4.5 million watch face changes since April. Turning to brand engagement. We continue to leverage Michael's iconic image and fashion leadership as we deepen our bond with consumers and enhance excitement of our brand. Michael's strong presence in the fashion industry was showcased at the Met Gala, where an ensemble of celebrities were dressed in his designs, including Kerry Washington, Mandy Moore, Elizabeth Banks, Natasha Poly, and Yang Mi. The impressive celebrity lineup garnered significant global print and broadcast media coverage, as well as 297 million global impressions across various social media channels. In June, Michael traveled to London to celebrate the launch of Tatler's English Roses. This multimedia exhibition at the Saatchi Gallery showcases the work of the acclaimed photographer David Burton.
The portfolio features the most exciting, interesting, and beautiful women in Britain right now, many of whom were photographed wearing looks from the fall 2017 Michael Kors collection. The event generated great global press and digital exposure across the globe. Finally, turning to customer experience. We continue to focus on elevating the brand experience in our digital flagships and brick-and-mortar stores. As part of these efforts, we continue to expand our global presence with the launch of 12 additional European digital flagships in the quarter. We now serve a total of 23 countries globally. We also launched a number of features to support our efforts to grow ready-to-wear and footwear penetration in the channel. These efforts include the launch of our online dress shop, as well as the rollout of Kors Style, which allows customers to view Michael's head-to-toe styles of the season and buy them in a single transaction.
Turning to the details of the quarter's financial performance. Total revenue was $952 million, a decrease of 3.6%. Retail comparable sales decreased 5.9%. Earnings per share was $0.80, a 3.6% decline year-over-year. In the Americas, total revenue declined 8.2% in the quarter. We continued to take steps to increase excitement and desire for our assortments, deepening the innovation and layering our offerings. In addition, we remained focused on taking action to elevate our brand positioning as we reduce promotional activity in our digital flagships, lifestyle stores, and wholesale channel. In the Americas, retail net sales were flat with comparable sales declining in the mid-single digits. e-commerce continued to perform well with a double-digit comparable sales increase in the quarter.
Consumers responded well to the more elevated and layered assortments in our digital flagships and retail stores, which helped to drive mid-single-digit increases in AUR for handbags and ready-to-wear in the quarter. This was more than offset by the decline in volume as a result of our strategic decision to reduce brand-wide promotional days in our digital flagship and lifestyle stores, which declined 56% as compared to last year. In the Americas, wholesale net sales declined 19.5%, largely driven by our decision to strategically reduce sell-in and limit promotional activity in this channel. In the first quarter, there were 42 fewer brand-wide promotional days as compared to last year. We believe this is absolutely the right long-term decision for our brand despite the near-term sales pressure.
As I mentioned earlier, there was positive consumer response to our more elevated and layered assortments, which helped to drive AUR increases in women's accessories, footwear, and ready-to-wear in the quarter in this channel. Moving to Europe, total revenue declined 10.2%. In the retail channel, net sales grew 2.5%, with a comparable sales decline in the low teens on a reported basis and in the high single digits on a constant currency basis. Please note, including e-commerce sales and on a constant currency basis, European comparable sales results would have been modestly positive for the quarter. The sequential improvement in comparable sales performance was partially driven by better tourism trends in the quarter, led by improving performance from Chinese and Russian visitors, although local trends remained soft.
European wholesale net sales declined 28.4%, largely as a result of our strategic decision to reduce shipments into the channel as part of our efforts to protect brand health and elevate our positioning. Turning to Asia. This region continues to perform well with total revenue growth of 60.2% in the quarter. Asia retail net sales grew 104.8%, largely as a result of the shift of China sales to our company-owned retail segment. Comparable sales, which currently exclude China, decreased in the low single digits on a reported basis, but increased in the low single digits on a constant currency basis. Including China, comparable sales for Asia increased in the low single digits on a reported basis and in the mid-single digits on a constant currency basis. Asia wholesale net sales decreased 47%, primarily as a result of the shift of China sales to our company-owned retail segment.
We continued to see strong performance in mainland China and Japan, which was partially offset by weaker performance in South Korea, Hong Kong, and Macau, which continued to be impacted by the decline in mainland Chinese tourists. Finally, in our licensing business, revenue decreased 5.6% in the quarter. We saw continued strong performance from Access smartwatches, which was offset by declines in fashion watches. We are pleased with the continued strong momentum of Access smartwatches, and we believe they will reach 25% of our total watch sales by year-end. In fragrance, we added another scent to our Wonderlust collection with the July launch of Wonderlust Essence. The scent is a more intense, richer version of the original. We are also excited to expand the category this fall with the global launch of a major new fragrance, Sexy Ruby.
In eyewear, consumers responded well to the Leah Open Wire Aviators and the Ella, which featured a trendy double brow feature. In conclusion, we are pleased that our first quarter results outperformed our expectations, but continue to believe fiscal 2018 will be a transition year for Michael Kors as we execute on our strategic plan, Runway 2020. We are intently focused on raising the level of fashion luxury innovation, elevating our store experience, and expanding our global presence. As I stated earlier, it will take some time before our actions translate into improved financial performance. However, we are encouraged by early indicators of success, as well as customer feedback and enhanced engagement. Overall, we are confident that we have the right plan in place and are committed to its successful execution. With that, I will turn the call over to Tom.
Thank you, John. I'd like to cover our results for the first quarter of fiscal 2018, provide an update on our forward outlook for the second quarter and full year, and conclude with some additional perspective on the Jimmy Choo acquisition. For the first quarter, we reported net income of $125.5 million, or $0.80 per diluted share, which was ahead of our expectations largely due to higher than anticipated retail comparable sales results. This represents a 3.6% decline compared to last year, including $11.3 million of one-time costs associated with the acquisition of the Greater China license. Excluding these one-time costs, earnings per share decreased 11.1% in the quarter. Moving to top line performance. Total revenue was $952.4 million, a decline of 3.6% compared to last year.
Retail net sales increased 10.1%, largely driven by 67 net new store openings and the impact of the acquisition of the Greater China license. This was partially offset by a comparable sales decline of 5.9% in the quarter, with North America e-commerce contributing 330 basis points of benefit. Wholesale net sales declined 23.0% due to our strategic decision to reduce sell-in in order to protect the long-term health of our brand in North America and Europe, as well as the shift of China sales to our company-owned retail segment. In the licensing segment, revenue decreased 5.6%, primarily due to the absence of licensing revenue associated with the previously licensed business in Greater China, while fashion watch declines were almost entirely offset by increases in Access smartwatch revenue. Gross margin for the quarter was roughly in line with our expectations at 60.3%, compared to 59.9% last year.
This year-over-year improvement was primarily attributable to the growth of retail sales as a percentage of total revenue. Retail gross margin increased 120 basis points, which was largely due to an increase in international sales as a percentage of the total. As we anticipated, wholesale gross margin declined 490 basis points. This performance reflected higher allowances related to margin assistance to our wholesale channel partners, as well as strategic pricing initiatives designed to create higher sell-throughs on core products. We expect this margin trend will continue through the balance of the year. Total adjusted operating expense increased $32.3 million to 44.7% of revenue, compared to 39.8% in the prior year. The increase in expense as a % of revenue was due to both deleverage and the inclusion of our business in Greater China. Consolidated adjusted operating margin was 15.7%, compared to 20.1% in the prior year.
Adjusted retail operating margin was 14.9% versus 13.8% in the first quarter of fiscal 2017. This year-over-year increase was driven by higher gross margin as adjusted retail operating expense grew roughly in line with sales. Wholesale operating margin was 14.3%, compared to 26.6% in the prior year. This anticipated decrease in wholesale operating margin was primarily the result of expense deleverage on lower sales, as well as the decline in wholesale gross margin. Turning to the balance sheet. We ended the quarter with $273.7 million in cash and cash equivalents and a debt balance of $155.8 million. Capital expenditures for the quarter totaled $14.8 million and were related to retail store openings and renovations, as well as continued investments in information systems enhancements. Additionally, we spent $157.8 million repurchasing approximately 4.5 million shares and have $842.2 million remaining under our current $1 billion share repurchase authorization.
Michael Kors generates significant free cash flow, maintains a strong balance sheet, and will remain committed to maintaining an investment-grade credit profile. Following the completion of the Jimmy Choo acquisition, we plan to prioritize debt repayment as our primary use of free cash flow to rapidly delever to achieve our target lease adjusted leverage ratio of 2.0 to 2.25 times. To support this, we intend to discontinue our share repurchase activity through the balance of this fiscal year. Turning to our guidance. We are raising the full year outlook to reflect the better than anticipated first quarter results, partially offset by our decision to stop our share repurchase activity for the remainder of fiscal 2018. For the full year, we now expect total revenue to be approximately $4.275 billion, with a mid-single-digit decrease in comparable sales.
Gross margin is still expected to be approximately 60.0%, and operating expense is expected to be approximately 44.0% of total revenue, resulting in an operating margin of approximately 16.0%. Diluted earnings per share are now expected to be in the range of $3.62 to $3.72, assuming a tax rate of 17% with 156 million weighted average shares outstanding. For the second quarter, we expect total revenue to be between $1.035 billion and $1.055 billion, with a mid-single-digit decrease in comparable sales. Gross margin is expected to be approximately 59.3%, and operating expense is expected to be approximately 45.0% of total revenue, resulting in an operating margin of approximately 14.3%. Diluted earnings per share are expected to be in the range of $0.80-$0.84. This assumes a tax rate of approximately 15% and weighted average shares outstanding of 154 million.
We continue to plan capital expenditures at approximately $200 million, which will be focused on select new store openings, renovations to our retail store fleet, and investments in information system enhancements. As we mentioned on our last earnings call, we expect to incur $100 million-$125 million in one-time expenses over the next two years as we close between 100 and 125 stores. The guidance I just provided includes assumptions about the ongoing impact to revenue, as well as to operating and depreciation and amortization costs, but excludes any one-time costs associated with these plans. For fiscal 2018, we expect to close between 20 and 40 stores with one-time costs between $40 million-$60 million, predominantly in the fourth quarter.
Turning to the Jimmy Choo acquisition, I'd like to provide some additional thoughts on our expectations for Jimmy Choo as it relates to our financial outlook, transaction and transition costs, and foreign exchange risk. Please note that these expectations have not been incorporated into the guidance I just provided, as the transaction has not yet been completed. Based on our internal forecast for Jimmy Choo, and assuming a close early in our third fiscal quarter, we expect incremental revenue of approximately $275 million for the second half of fiscal 2018. For fiscal 2019, we expect incremental revenue of approximately $570 million-$580 million. Based on these assumptions and our anticipated free cash flow generation of Jimmy Choo, we expect this acquisition to be immediately accretive on a cash basis.
We expect the acquisition to be dilutive to EPS in the low single-digit percentage range in both fiscal 2018 and 2019, and accretive in the low single digits in fiscal 2020, the second full year after acquisition. These expectations exclude one-time transaction and transition costs. With respect to these one-time costs, we forecast transaction costs related to the acquisition to be between $40 million-$50 million, and transition costs to be between $20 million-$30 million over the next two years as we integrate Jimmy Choo into the broader group. In addition, to mitigate foreign exchange risk related to the British pound purchase price, we have entered into a foreign exchange hedge. This type of position does not receive hedge accounting treatment, and we will record mark-to-market gains and losses through our income statement until the completion of the transaction.
With respect to financing, we ultimately plan to finance the acquisition through a combination of term loan and longer-term bonds, and we anticipated a weighted average cost of 4.25%-4.75%. We look forward to updating you on the forecast for the combined group following the close of the transaction. With that, I will turn it back over to John for closing remarks.
Thank you, Tom. In conclusion, this is an exciting time for the company as we create a global fashion luxury group. The acquisition of Jimmy Choo is expected to unlock opportunities for additional growth while also diversifying our product and geographic portfolio. In addition, we are pleased with the initial progress we are making on Runway 2020 strategic plan. The initial success we have seen so far has increased our confidence level in how we are executing against the plan. With that, I would like to open up the call to questions.
Thank you, sir. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute option is turned off to allow your signal to reach our equipment. Once again, everyone, press star 1 to ask a question. Also, please limit yourself to one question and, if necessary, one follow-up question. We'll pause for just a moment to allow everyone an opportunity to signal. Our first question comes from Kimberly Greenberger with Morgan Stanley.
Okay. Great, good morning. Thank you so much. John, it sounded like there are some early positive signs in select category performance. I wondered if you could just go category by category and talk about the things that are working and then over the next one to three quarters, the next steps to sort of firming up those categories. I think clothing, apparel might have been positive in the quarter. Is that a trend that you think can continue? If you could just give us your thoughts on categories. Then one follow-up on the wholesale revenue.
If you could talk about sort of look out over the next two years and give us your best guess at where you think once the wholesale channel is cleaned up and the promotional days are down to where you want them to be, what does that wholesale revenue look like in total? Thanks so much.
Thank you, Kimberly, and good morning. I'll start with your first question and just give some brief updates on the categories. The most exciting thing that happened to us in the quarter was the increase in AUR, which I mentioned in our prepared remarks. As you recall, a few quarters back, we said that we had made the decision to create a promotional policy for the company that would really increase AURs over time, because we felt that there was too much activity of the brand being put on sale really just at multiple different time periods. That has absolutely had a positive impact across our own retail distribution and in the wholesale channel as well. AURs are definitively up.
The second part that has helped the AURs in, again, our retail channel and the wholesale channel, is the fact that we took five groups and we focused those five groups on price points that we thought would improve full price sell-throughs. We went back and looked at where was the product going, quote, "out the door at," and really analyzed where the customer's response was the highest for us. That obviously has impacted our wholesale gross margins, but we've seen the improved sell-throughs as it relates to that strategy. I might add that what you're going to see happen really come spring season and through the balance of calendar 2018, is we will now begin to layer up price points in our own stores and the wholesale channel. In particular, in our own stores, we will start that with the Michael Kors collection handbags.
I talked to you about Bancroft, which landed in the stores a few weeks ago, and we've had tremendous sell-throughs on this product, which we're very excited about. It's an expensive product, averaging approximately $1,000 on a bag. That's really showed us the power of the brand and the customer's desire when the product is right. That product, by the way, is made 100% in Italy. We're really going after product that has craftsmanship, as we've talked about in our whole brand positioning. I would tell you that while the accessories category was down in total, the AURs are up and the full price sell-throughs are up, and that's exactly where we wanted to be at this point in time.
What I'm also excited about is, and we've talked about this previously, we're going to put hundreds of millions of dollars less product into the marketplace for Michael Kors handbags. That is going to create a bit more scarcity and we believe a bit more desire. We feel like we are on the right path there. Then just concluding, obviously the product that we are going to deliver for spring season, we're right on track with where we wanted to be with innovation. As we spoke about that before, there'll be between 65% and 70% newness come spring season on the floors in our stores and in our wholesale accounts. That's going to be terrific. In terms of women's ready-to-wear, the business is performing very strong.
We're comping up over last year in very strong numbers in our own stores, and we're starting to see the same trend in our wholesale distribution, both domestically and internationally. We've made some great changes to that product and brought a lot of innovation, Michael and design teams have just, in our opinion, done a spectacular job there as they are starting to do the same in accessories. Customers responding to that, we feel really good about that. Footwear also is seeing great response. Again, we're one of the leaders, in particular in the fashion active market. Great response there. We're going to take on some additional categories, in particular, more dress footwear, which is going to go with that ramp up in our women's ready-to-wear.
As we talked about on our e-commerce site, we have the ability with Kors Style that she can click through and buy the whole look. That's an important way that we're going to continue to show our fashion leadership. In terms of watches, I think we are not going to call a bottom yet, but we're definitely seeing improvement. Smartwatches are retailing. She is responding. We have two great new styles coming for the fall and holiday season. We're very hopeful that acceleration continues for us. We hope that the category will be reinvigorated, in particular because of the smartwatch initiatives we're taking. I might add, we have an incredible partnership with Google that we'll be talking to you more about in our upcoming call.
We are partnering with them on some very significant programs for the fall season, that I think will create a lot of consumer engagement, desire, and ultimately sales for us. Lastly, while it's small, we're getting some really good response to our men's business. We saw very strong comp store increases in the men's business, both at wholesale and at retail. Again, it's not big enough yet to impact our company. The early indications are over the next few years, this is going to be a powerful business for the company.
Again, as we've said, our goal is to right-size our accessories business and then have it have some low single-digit growth starting next year, and then really have these other categories augment our lifestyle stores, and our wholesale distribution and provide a bit more accelerated growth, as they're under-penetrated to our total company and in the marketplace in terms of competition. Lastly, to answer your question on wholesale, it's early days. We are feeling and we are planning with our partners that next Calendar year, we will start to see some small increases in the business. We're hopeful that is what's going to happen.
We have to get through the holiday season, but the response to what the wholesale customers have seen in our showrooms is quite strong, and I think they're feeling good about where we are executing against our plan with them to reduce promotional activity, bring a greater scarcity level of product, particularly in North American markets, and get AURs up in full price selling. Sorry for the long-winded answer, but thank you, Kimberly.
Our next question comes from Randal Konik with Jefferies.
Yeah, thanks a lot. I guess a couple quick things. John, can you expand upon you had a nice impressive result that you talked about on the AUR inflection. I think it's the first time in a number of years now. You gave some commentary around the full price sell-through improvement. In the years past, we've also been hurt on AUR because of, I guess, silhouette. Can you just give us some perspective on what you think silhouette changes come through in the next 12 months to impact AUR, either up or down from here? Then, the other thing that stood out in the numbers was the inflection in the retail segment margins. I think it was mentioned that the gross margin improved there.
Just get some sense of are we seeing the floor in the retail segment margins, and what can we think about now that we're starting to see some stabilization in your business model or business, where the retail operating margins can reshake back out on a normalized basis going forward over the next couple of years. It seems like it's starting to move higher, and just want to get some perspective on the drivers of that change going forward. Thanks.
Sure. Thank you, Randy. Couple of things. On the AUR side, the thing that will continue to drive AUR for the next, I'd call it almost 12 months, is going to be the reduction in promotional activity. That'll be the single largest driver. The second driver of that will actually be our introduction of higher price points into the business. That's not just raising prices, but it's actually delivering fashion that's very evident to the consumer. We're really working again with Michael and the design teams on innovative materials and workmanship to that product because clearly the customer wants that. They want something that's going to look different for them and look different with their wardrobe. Then customization will also help to drive AUR. Again, we're seeing a lot of response to monogramming and all the different areas, whether it's the guitar straps we talked about, whatnot.
That's going to become a significant part of the business as we move forward for anyone in this category. That's the tailwinds. The headwind is unfortunately, some of the small leather goods business is being impacted, as you see with payment plans coming on through all different vendors. There's less need for cash and in some cases, credit cards. There is some impact in that business that we're experiencing which does hurt a little bit as smaller wallet sales are becoming more popular as opposed to larger wallet sales. Again, we'll just have to see how that shakes out. As I mentioned in the prepared remarks, one of the real key drivers in the men's leather goods business is backpacks, and we're seeing the same thing emerge in the women's business. It's really shaking out.
It's taking a lot of the tote business, and there's a lot shifting into that category. I would call that neutral, but it's definitely a trend that's happening out at retail, and I think we're right there to take advantage of. It's very much a fashion trend. In terms of the retail margins, what you're seeing is first and foremost mix shift on a global basis, which we had talked about over the last couple of quarters. That as the Asian business is brought on, which has higher gross margins, and as retail in total is becoming a bigger mix of the company, you're seeing the gross margins favorably impacted. We think that's going to continue to go forward. Again, we've given guidance, and we think that that guidance is pretty steady.
On the operating margin side, where you're seeing improvements, again, that's a mix of what you're seeing happen in terms of the Asian businesses, which are more profitable. You're also seeing us being able to as the comps begin to normalize in our business in North America and in Europe, we're going to stop that deleverage that you're seeing. Hopefully as we get to flat or slightly increased comps, we're going to create leverage. Then I also want to remind you that we've talked about it many times. Unfortunately, as the e-commerce business grows, we have lower operating margins in that business. That's been a headwind for us. We're making progress in that business. We're making progress in improving our operating margins, again, created by velocity and other activities that we're doing internally to help improve that.
I would tell you that we think that the retail business will ultimately grow in the operating margin in the out years, that will be driven by stabilization of comps, improvement in how we're operating our e-commerce business, and ultimately, positive comps, which will create leverage for us. Thank you, Randy.
Our next question comes from Lindsay Drucker Mann with Goldman Sachs.
Thanks. Good morning, everyone. John, I was wondering if you could give any details on what you're seeing in terms of North America retail by type of store or by region. Any difference in sort of outlet versus full price or age or region across the country. Also, with having had a bit more time to spend with Jimmy Choo, just curious if you could give us an update on any synergy or other opportunity as we think about integrating the business. Thanks very much.
Thank you, Lindsay, good morning. We're definitely seeing business improve in North America. That's I think a combination of a few things. Our product that we're delivering is getting better, the customer is responding to that. I would say the traffic trends really haven't changed at all. That's not something that we're seeing as of yet. We think that our conversion rates continue to accelerate inside of our stores. There's definitely a slightly better feeling that we're seeing with the consumers coming into the store, being a bit more optimistic, I would say also being more excited about fashion and innovation. I've said before that I think our company needed to be more aggressive in its fashion and innovation, Michael and the design teams have done just a spectacular job with that.
I'd say it again, we're seeing business definitely improve, and I don't think it's one channel versus the other. It's just a little bit of a uptick that we're feeling. It gives us some optimism going into the fall season the way that she is responding to newness. I want to leave you with one other thing, too. The reduction in promotional activity, what we've seen is she's not fighting us on that. As long as we are giving her the right product, she's responding extremely well. Our two best-selling products being Mercer and our smartwatches, have basically no sale. There's some limited colors that are on sale on Mercer, but we really have shown that if it's the right product, you do not have to have these aggressive markdowns happening at retail.
I think that's proving to be a real plus for us. Now, moving on to Jimmy Choo. Super excited. I have to tell you that we've now had a number of meetings with the management team. We're heading off there again this afternoon. Pierre and Sandra and the management team there are just I can't tell you how excited we are to have them as part of our organization and family and group. We really believe in the plan that they've developed and are executing on. I think it's too early to make any comments about synergies. I have said before, whatever synergies there will be, won't be anything significant. We think that the biggest opportunity in acquiring Jimmy Choo and bringing it into our fashion luxury group is the fact that this company, we very strongly believe will grow to $1 billion.
If we and the Jimmy Choo management team are able to achieve that, we think that as Tom had stated earlier, that will add to some very nice accretion for the company in the long term. If we're able to execute on Runway 2020 and the Jimmy Choo plan rolls out as we anticipate, I think we will have a company that's delivering a very significant revenue in totality with some very nice growth and operating earnings and net income earnings that will be growing in the future. Thank you, Lindsay.
Our next question comes from Omar Saad with Evercore ISI.
Thank you for taking my question. I wanted to ask, John, if you could give a little bit more color about the new product that's coming down the pike for spring 2018, 65%, it sounds like a big number in terms of the newness that's out there. Obviously, you guys have been developing new product over the years. What's different about seeing, to the extent that you can provide detail and some color, what's really different about the spring 2018 product and what's giving you that confidence? Are you testing it out there? Are you getting feedback from retailers, et cetera? Any color would be greatly appreciated. Thanks.
Thanks, Omar. Omar, I answer that in two ways. I think first, we know from the industry trend that product. We're in a cycle where more innovation is what the consumer is responding to. We're not the only company seeing that. You certainly look at many of our luxury or European luxury competitors, and they're seeing the same type of response from the end consumer. Given that we are a global luxury brand, we don't just compete in North America, but we compete around the world, and we're sitting on the best streets in the world across from the best or next to the best competitors in the world. We have to really excite the customer because she has choices.
We know that clearly in the women's ready-to-wear business, where we got off to a little quicker start in being able to get that innovation in front of the consumer, the results have been outstanding. Now we have actually customers coming in here saying, "Let's make it a little bigger next year." We're going to go slow, and we're going to be patient about that. We have our own retail teams who are going, "Wow, let's get more of this in our stores," and we're seeing the consumer respond. We saw that same kind of reaction this market when we opened up with our accessories collections, where our teams and our retail partners walked in and said, "Wow, this is different.
Our customer's going to respond to this." Some of this innovation is based on taking a group like Mercer, which is very strong and powerful for us, and creating layer-ups in that. Some of this is based upon areas that are very strong in terms of fashion trends, like backpacks we talked about. Some of this is in new groups that we're introducing. A little bit of that will happen, as we said already, in the holiday season. We have new introductions that are going to be coming in particular in calendar Q4, which will be right before the holiday season. We'll get some reactions from that and be able to chase those products where the consumer does react strongly to. I think that the strategy is across all product categories inside the company.
That really gives us the feeling that we're on the right track. Early results of what we're seeing in some of the newness and innovation, which I talked about in the previous call, in some of the layer-up products and one or two of the new styles that we introduced have been quite good. I think the response from our own teams, response from the wholesale accounts, and early indications from the end consumer have given us reason to feel that we're on the right track with Runway 2020. It's still going to take time. That being said, we think we've got the right plan in place. Thank you, Omar.
We'll take our next question from Simeon Siegel with Nomura Instinet.
Thanks. Good morning, guys. Great job on the retail margin expansion. To your comments, that should continue. Can you help us think through the math behind the wholesale margin contraction on that deleverage and how you'd expect those margins to look over the year? Congrats on the Asia growth. Just given the timing of the in-housing, can you help on what the apples-to-apples retail growth looked like and how that would look like over the year? Thanks.
Simeon, I'm going to turn the two questions over to Tom.
Hi, Simeon. First, on the wholesale margin contraction. We've been working closely with our partners as we navigate the promotional strategy, where we're reducing our promotional days this year. Really in that business, we've enhanced our margin with our partners. We think it's important to have their partnership as we work through this. We've also put in the strategic price points to make sure we're going after more sell-through on our core products. We believe that this margin will really continue through this year. As we noted in Runway 2020, in our investor day, that we'll be stabilizing our margin performance in 2019.
On Asia, I'm going to make one quick statement about Asia, and then I'll turn it over to Tom. As I said earlier, there is an impact that Asia has on the overall margins. We don't break that out specifically, Simeon. What I will tell you is that the North American margins are absolutely starting to stabilize. We believe that as we move closer to Q3 and Q4, North American margins potentially have the opportunity to expand. I'll let Tom give you a little color on the impact of that.
Sure. When we take a look at retail, and then I'll give you a little color on wholesale as well. We said retail sales were up by 10%. Excluding the change in the China business, it would've been up 3%. That was a portion of the driver. The other was the net new store openings, partially offset by the lower comp sales. On wholesale, we declined 23%, but that would've been down, as our guidance noted, in the low teens, excluding the change in the China business, which moved to the retail side.
Thank you, Simeon.
Our next question comes from Oliver Chen with Cowen and Company.
Hi, this is Sheila Regines on for Oliver today. Could you just elaborate more on what you're seeing in the broader retail environment and the overall handbag category? I think the growth of the overall category has been flattish to up low single digit. Are you seeing customers react positively to the product innovation that's driving renewed excitement for the category as a whole?
I'm sorry, I didn't hear the first part of the question.
Sorry. I just wondered if you could comment more specifically on the broader retail environment and the overall handbag category, what the category growth has been like during the quarter relative to prior quarters.
As I said earlier, we're seeing a little positive movement, I would say, at least for our product in the category. I can't comment on the overall category. Clearly the customer is responding to initiatives that we're taking, and we're seeing, as I said, Transactions accelerate. We're not seeing traffic accelerate, but we're seeing our conversion rates accelerate. Obviously, she's responding to what we're doing. I would say that the overall accessories category remains roughly flattish in North America, as we've said before, probably up low single digits in Europe. As you now, I'm sure, have ascertained, seeing the luxury goods reporting, it's very strong in Asia and in China in particular. There is a very strong inflection and acceleration happening for the accessories business in China. The consumer is definitely back.
As we said in our prepared remarks, we're seeing more of that in mainland China. She is definitely shopping in mainland China. There still is some softness in other parts of the region from a travel basis. As typical this time of the year, very strong response from the Asian consumer in Europe as they're traveling during the holiday season. Thank you very much.
Our next question comes from Erinn Murphy with Piper Jaffray.
Great. Thanks. Good morning. I guess, John, for you, could you talk a little bit more about what you're seeing in the North American retail environment as it relates to the international tourist into this market?
Sure. Thanks. Erinn, we unfortunately have not seen any rebound in the market. As you know, I'll call it two to three years ago, we had a very strong business with South Americans, and that's really not come back. We also had a very strong business with Europeans coming here, in particular, when the euro was about $1.35 to the dollar. We do not anticipate that changing for the moment. Although the dollar is weakening, and so that gives us some hope that consumer will start to come back in a stronger way to North America. I would say that if we see this weakening of the dollar continue, that could create some activity in North America that we have not seen rebound in the last couple of years. Thank you, Erinn.
That concludes the question and answer portion of today's call. I would like to turn it over to John Idol for closing remarks.
Thank you for joining us this morning. We look forward to sharing updates with you on the development of our fashion luxury group, our Runway 2020 initiatives, and our pending acquisition of Jimmy Choo in the coming quarters.
That concludes today's presentation. Thank you for your participation, and you may now disconnect.