Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Michael Kors first quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. As a reminder, today's conference is being recorded. I would like to turn the conference over to Jennifer Davis, Vice President Treasurer. You may begin.
Good morning, and thank you for joining us for our first quarter earnings call. Presenting on today's call are John Idol, Chairman and Chief Executive Officer, and Joe Parsons, Chief Financial and Chief Operating Officer. Before we begin, let me remind you that certain statements made on this call may constitute forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those that we expect. Those risks and uncertainties are described in today's press release and in the company's SEC filings, which are available on the company's website. Investors should not assume that the statements made during the call will remain operative at a later time, and the company undertakes no obligation to update any information discussed on the call. I will now turn the call over to Michael Kors Chairman and Chief Executive Officer, Mr. John Idol.
Thank you, Jennifer. Good morning and welcome to Michael Kors' first quarter fiscal 2016 earnings call. I'll begin with a quick review of the quarter and then provide an update on some of our growth initiatives. I'm pleased to report that our luxury brand continues to achieve global growth. Total revenue increased 7% or 13% on a constant currency basis for the first quarter of fiscal 2016. In constant currency, we saw revenue growth of approximately 2% in North America, 42% in Europe, and 57% in Japan. Although we are at different stages of development in each of our regions, we continue to drive top-line growth and believe consumers view Michael Kors as a leading luxury fashion brand. Our first quarter financial results exceeded expectations, driven by better than anticipated performance in both our retail and wholesale segments.
The increase in retail net sales was attributable to new stores and accelerated growth in our North American digital flagships, which experienced 102% year-over-year increase. Global comparable store sales declined 9.5% or 5% on a constant currency basis, slightly better than we had expected. We saw continued momentum in our international markets with mid-single-digit comp growth in Europe and strong double-digit increase in Japan in constant currency. In North America, we experienced a high single-digit comp decline, reflecting a channel shift to online purchases and the continuation of reduced mall traffic. In addition, the continued decline in watch sales had a meaningful impact in the quarter, as expected, and we saw a continued shift towards smaller size handbags along with increased demand for crossbodies and small leather goods, which is resulting in an overall lower average unit retail.
If we include our U.S. digital flagship sales in our comp base, our North American comparable store sales would have decreased in the mid-single-digit range. Global wholesale growth was led by continued strength in our accessories and ready-to-wear categories. Notably, when looking at our company-owned stores' sales combined with department store sales on a retail basis, our accessories business grew at a low double-digit rate globally and a high single-digit rate in North America. We believe this represents a higher growth rate than the category as a whole, suggesting that we continue to take market share and demonstrate the strength of the Michael Kors brand. Lastly, the increase in our licensing revenue in the first quarter was related to sales of eyewear, jewelry, and watches.
Earnings per share results were better than expected at $0.87 for the quarter, including the unfavorable impact from foreign currency of $0.06 per share. Turning to some highlights on our key growth initiatives. First, we are driving our direct-to-consumer business worldwide through the development of our digital flagships, as well as our expanding our footprints across North America, Europe, and Asia. We expect our omni-channel initiatives, combined with our retail expansion, to drive double-digit sales growth in this segment this fiscal year as we continue to provide a jet-set shopping experience to our customers. We are increasing our retail store openings from 85-100 locations this year, with the addition of eight locations in North America, five in Europe, and two in Japan.
We are also excited about the expansion of our men's in the retail channel and continue to believe there is the potential for as many as 500 men's locations worldwide. In addition, we look forward to driving growth in our Korean business as we transition these stores in-house by the end of the year. Second, in our wholesale business, we see low single-digit growth this year stemming from both increased penetration across product categories as well as through the conversion of department store doors into shop-in-shops globally. We expect sales increases in our accessories business across regions, including in North America, to be driven by overall category growth, as well as through increased penetration in both Europe and Asia as we gain market share in these regions. We also see growth in our womenswear, footwear, and men's categories as we further develop these businesses and evolve as a lifestyle brand.
Our shop-in-shop conversions are expected to generate incremental sales as consumers continue to respond favorably to the Michael Kors-branded environment and love having a jet-set experience with their favorite department stores. We are on track for the conversion of approximately 600 shop-in-shop locations globally this year, including 90 men's shops. Third, in our licensing business, we anticipate a low double-digit growth rate this fiscal year. We see the biggest opportunity in fragrance and eyewear, as consumer response to these collections has been very favorable, and we are excited about the potential for distribution expansion in addition to increased penetration in these categories. In watches, we expect the introduction of our new styles in calendar 2016 to drive improved performance in our fiscal fourth quarter. In addition, we are focused on adapting the exciting developments in wearable technology into the luxury fashion products that consumers expect from Michael Kors.
Over time, we believe that we can become a leading brand in connected fashion accessories. Finally, we plan to expand our international presence as we further develop our regional licenses. We are pleased with the strength in China and Southeast Asia, with double-digit comp growth in the first quarter, reflecting the strong consumer response to our luxury fashion products and Michael Kors lifestyle brand. We are continuing to build momentum through strategic marketing events, key store openings, and of course, great product offerings. Brand awareness in these markets is accelerating, and we are more excited than ever about the opportunity in this region. We look forward to continuing to execute on numerous growth initiatives that are currently underway. Near-term, we expect continued pressure from macroeconomic headwinds, including currency fluctuation, lower store traffic due to channel shift, reduced tourism in select markets, and geopolitical issues.
While these factors are expected to have an impact on our business, we continue to believe we have many growth opportunities that lay ahead for Michael Kors. In the second half, we have a new national advertising campaign planned that transports our customers to jet-set travel destinations and captures inspirational moments of the Michael Kors woman. The campaign will engage her in all aspects of life, with ads depicting glamorous backdrops appearing across all communication channels, including print, catalog, billboards, social media, and our own website. In fact, our digital flagship will lead our marketing efforts, offering her the most expansive expression of the Michael Kors brand and providing her with numerous opportunities to engage not only with our fashion brand but with Michael himself through our Destination Kors features, including Michael's edits and travel diaries.
Importantly, it will allow us to continue to expand our social media presence across all platforms and connect more and more customers with our luxury brand. I am also very proud of the philanthropic work that continues to be a cornerstone of Michael Kors culture. You may have already seen that actress Kate Hudson recently teamed up with Michael to support our Watch Hunger Stop campaign. She will help us launch two new limited edition styles of the Bradshaw watch. Every sale of these special styles, named the Bradshaw 100, will enable 100 children in need to receive a nutritious meal. Since launching in 2013, Watch Hunger Stop has helped deliver over 10 million meals to children in need, and we will continue working to build on a world without hunger.
As we look at our product for holiday, we are excited about our compelling gift offering focused on our current fashion trends, such as backpacks, crossbodies, and small leather goods, active footwear, and watches featuring assorted leather bands. We expect this injection of newness and excitement to drive growth during the holiday selling season. For spring 2016, we are introducing our largest assortment of new handbag groups as well as new watch styles that represents the most extensive presentation of innovative and new materials we have introduced to date. It's all about fashion, and we remain focused on offering our customers compelling, on-trend product each season. Overall, our brand remains strong, driven by a powerful business model. We are focused on driving our direct-to-consumer business both through our digital flagships and our retail stores, and building our wholesale presence through shop-in-shops.
Our growth is rooted in our design leadership. We will continue to expand our fashion offerings and deliver exceptional luxury products across all lifestyle categories. We will also continue to leverage our innovative marketing strategy to enhance our brand awareness worldwide. Looking ahead, we continue to believe that there is ample room to further build our business. We remain on track to achieve our long-term growth initiatives. Now, let me turn it over to Joe for a detailed review of our first quarter financial results and our updated outlook.
Thank you, John, and good morning, everyone. Our financial results exceeded our guidance for the first quarter of fiscal 2016. Total revenue grew 7.3% to $986.0 million as compared to $919.2 million last year. As is expected, foreign currency headwinds continued to impact our results this quarter. On a constant currency basis, total revenue grew 13.4%. By region, North American revenue increased 1.9%, Europe revenue increased 42.2%, and Japan revenue increased 57.4%. In our retail segment, net sales increased 9.0% to $523.3 million on a reported basis and increased 16.0% on a constant currency basis. Sales were driven by the opening of 107 net new stores since the first quarter of last year and a 101.6% increase in our North American digital flagship sales.
Comp store sales declined 9.5% on a reported basis and decreased 5.0% on a constant currency basis due to lower comp sales in North America, partially offset by an increase in comp sales in both Europe and Japan. Our U.S. digital sales would have increased our global comp store sales by a low single-digit percentage on a constant currency basis. We opened 24 new stores in the first quarter, 11 in North America, 10 in Europe, and three in Japan. In addition, we expanded or relocated 11 stores. We ended the quarter with 550 company-owned retail stores, including concessions, and 774 stores overall, including our licensed locations. Wholesale net sales grew 4.2% to $424.0 million for the first quarter. On a constant currency basis, wholesale sales increased 9.7%. The increase was driven by our accessories and womenswear categories, partially offset by lower footwear sales.
Wholesale growth was also attributed to the expansion of our European operations. During the first quarter, we converted an additional 128 wholesale doors into shop-in-shops globally. In our licensing segment, revenue grew 20.5% to $38.7 million for the quarter, led by our eyewear, jewelry, and watch categories. We opened 33 new watch and jewelry shop-in-shops during the quarter and ended the quarter with 294 shop-in-shops globally. Gross profit grew 5.6% to $603.6 million. Gross margin declined 100 basis points to 61.2%, which includes a 63 basis point foreign currency impact. The decline in gross margin was due to a 170 basis point decline in retail gross margins due to higher markdowns in our North American retail business, partially offset by higher full price sell-throughs in our European retail business.
A 120 basis point decline in wholesale gross margin due to additional wholesale allowance and inventory reserves, partially offset by geographic mix. The retail and wholesale gross margin declines were partially offset by higher licensing gross margin dollars. Total operating expense grew 20.4% to $355.0 million. The increase is attributable to our global investments, including our digital flagship initiatives, infrastructure investment for Korea and the men's business, the build-out of our European distribution center, and the continued investment in corporate systems and infrastructure. As a percent of total revenue, total operating expenses increased 390 basis points to 36.0%. This was below the 550 to 600 basis points of deleverage in our guidance as sales exceeded our expectation and depreciation expense was lower than anticipated. Selling general and administrative expenses increased 17.9% to $313.5 million.
The increase in SG&A expense was largely due to higher retail occupancy and salary costs related to new store openings, an increase in corporate employee-related expense, primarily due to an increase in our corporate staff to support our global growth, as well as other corporate operations-related costs. As a percent of total revenue, selling general and administrative expenses were 31.8% compared to 28.9% for the first quarter of last year. Depreciation and amortization expense increased 43.3% to $41.6 million for the first quarter, primarily due to new retail stores New shop-in-shops, an increase in lease rates related to our new European stores, and investments in our corporate facilities and IT infrastructure. As a result of these factors, income from operations was $248.6 million, or 25.2% of total revenue, as compared to 30.1% of total revenue in the same period last year.
Retail operating margin declined 660 basis points, primarily due to a 490 basis point increase in operating expense attributable to higher store-related costs, corporate allocated expenses, and depreciation and amortization. Wholesale operating margin declined 380 basis points, primarily due to 260 basis point increase in operating expenses attributable to higher corporate allocated expenses and depreciation and amortization. Licensing operating margin increased 420 basis points, primarily due to lower advertising costs, partially offset by higher costs related to protection of our intellectual property. Income taxes were $72.7 million in the quarter, and our effective tax rate was 29.4% as compared to 32.0% in the same period last year. The decrease in our effective tax rate was primarily due to the increase of taxable income in certain non-U.S. subsidiaries, which are subject to lower statutory tax rates.
Net income was $174.4 million for the first quarter, and diluted earnings per share were $0.87, based upon 200.1 million weighted average diluted shares outstanding. The unfavorable currency impact to EPS was $0.06 per share. Turning to the balance sheet. At the end of the quarter, cash and cash equivalents were $808.5 million as compared to $1.1 billion last year. There were no outstanding borrowings under our credit facility in either year. During the quarter, we repurchased approximately seven million shares totaling $350 million, bringing our total repurchase to date to approximately 13.8 million shares totaling $841.9 million of our $1.5 billion authorization. These repurchases reflect the strength of our balance sheet and confidence in our ability to generate strong free cash flow. Our first priority will continue to be the strategic investment in our luxury brand to fully maximize our global growth opportunities.
That said, given our strong balance sheet, we are confident that we will have the financial flexibility to continue with our share repurchase program. Inventory increased 15.0% versus last year. Approximately a third of the increase was related to early shipments of fall merchandise versus the prior year, as we wanted to mitigate potential risks related to the West Coast port delays. Excluding these early shipments, inventory would have increased slightly ahead over sales increase. Capital expenditures for the quarter totaled $106.0 million. These expenditures were related to the build-out of our new retail stores and shop-in-shops, as well as investments in our information technology, distribution system enhancements, and other infrastructure improvements.
Before discussing guidance, I would note that subsequent to the first quarter, we obtained controlling interest in our Latin American joint venture, MK Panama Holdings, and will be consolidating MK Panama into our operations beginning with the second quarter. We are currently in the process of finalizing the new ownership structure and accounting, and while we may record fair value adjustments, we do not expect a material impact on our ongoing operating results. The impact of these adjustments have not been included in our guidance. Turning to our outlook. Our second quarter and full-year guidance reflects our expectation that the retail environment will remain challenging and foreign currency will continue to be a headwind. For the second quarter, we expect total revenues to be between $1.06 billion and $1.08 billion.
On a constant currency basis, total revenue is expected to increase in the high single-digit range, assuming a $60 million impact from the change in foreign currency rates. We expect a high single-digit comp store decrease on a reported basis and a low single-digit decrease on a constant currency. Operating expenses as a percent of total revenue is expected to increase 440 to 490 basis points in the second quarter due to our global investments. We expect diluted earnings per share to be in the range of $0.86 to $0.90, assuming a tax rate of approximately 29.5% and 194 million shares outstanding. We expect foreign currency to impact net income by approximately $11 million and EPS by approximately $0.06 to the second quarter. For the full fiscal year, we continue to expect total revenue of between $4.7 billion and $4.8 billion.
On a constant currency basis, total revenue is expected to increase in the low double-digit range, assuming a $192 million impact from the change in foreign currency rates. We expect low single-digit decline in comp store sales on a reported basis and flat comps on a constant currency basis. We expect a sequential improvement in our comp store sales in the third and fourth quarters, driven by the inclusion of the U.S. e-commerce sales on the comp base, the rollout of Kors Concierge in our stores, the launch of our new national advertising campaign, the introduction of new innovative product offerings for holiday and spring 2016, diminished FX headwinds, and easier year-over-year comps. Our overall top line will benefit from the outperformance we saw in the first quarter, the increase in our digital flagship sales, the rollout of additional retail locations, and continued shop-in-shop conversions.
As we stated in our last call, we anticipate that the 53rd week to add approximately $40 million of additional sales in this fiscal year. International gross margin will remain pressured in the second half as the favorable hedging contracts we entered into last year begin to expire. Operating expense as a percent of total revenue is expected to increase 140 to 180 basis points for the year. We expect the increase in operating expense as a percent of total revenue to moderate in the second half of the year as the rate of spend slows, and we begin to anniversary the investments we made in 2015. We continue to expect diluted earnings per share to be in the range of $4.40 to $4.50, assuming a tax rate of approximately 29% and 195 million shares outstanding.
We expect foreign currency to impact net income by approximately $41 million and EPS by approximately $0.21 for the year. I will now turn the call back to John for closing remarks.
In summary, the top-line growth we have achieved in the quarter demonstrates the continued strength of our brand and the successful execution of our strategic initiatives. We continue to see multiple growth opportunities ahead of us, and our commitment to unlocking these opportunities remains unchanged. We will continue to drive top and bottom-line performance through the expansion of our global presence in our retail, wholesale, and licensing channels. We will capitalize on growing brand awareness in the international markets to capture the potential in these regions. We will maximize the growth opportunities in our accessories categories and further develop our men's, women's wear, footwear, and licensed businesses, delivering exceptional fashion product and maintaining our leadership position with the global luxury market. I will now open up the call for questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Kimberly Greenberger with Morgan Stanley.
Great. Thank you. Good morning, John. I'm wondering if you can talk about the handbag business. It sounded like if you aggregated in North America, your wholesale and your retail business, you mentioned that the handbag category in general would have grown for Kors. I want to make sure I heard that correctly. I think you indicated that it's declining in your own stores. Maybe you could share with us your observations on what's going on in the wholesale channel versus the retail channel, and if there are any opportunities to perhaps drive some of that business back to your own stores. Thanks.
Sure, Kimberly. First off, good morning. What we said was that if you take our retail sales in our own stores and our department stores, we had growth in North America. That was high single digits in North America. We believe that we are, in fact, growing market share in North America. We grew at a higher rate than we believe that the category did. Then I would also add that internationally, when you add both domestic and international together, we grew a double-digit rate. Again, we believe that the category in North America is growing in low single-digit rate today. We think that we are outpacing that growth by a fairly significant amount, again, showing the health of our brand. Most importantly, really, it's kudos to our design teams.
We also mentioned to you that we are really excited about the fact that we're going to introduce the largest amount of new handbag groups that the company's ever introduced, and we're doing that purposely. We think that there's an excitement level that we can generate with our customers. We've got probably one of the finest store fleets in the world in terms of locations. We have got such a great customer engagement going on today. We grew our social media channels by over 25% in the quarter. She's responding. She's engaging. Newness is without a question what is driving her interest. I just might add on that point, if you look at what's happening, there's some really good things starting to happen in the handbag business. Backpacks are starting to trend, and I think we're a leader in that category.
I think we've caught it pretty early on. There's a very big shift towards smaller handbags and then crossbodies and small leather goods, particularly the millennial customer. It's the way that she's shopping. It's the way that she's wearing the product. You're going to see some very significant presentations from us on those categories. Little negative in the fact that when you're selling a smaller handbag or a crossbody, it drives a little bit of your AUR down. I think that's one of the things that you're seeing show up a little bit in some of the comp. Otherwise than that, the handbag business appears to be robust, although not at the same level it grew at the past few years. We like where we're positioned and the amount of market share that we continue to gain. Thank you very much, Kimberly.
Thanks.
Our next question comes from Omar Saad with Evercore ISI.
Thanks. Good morning. Appreciate all the updates. Hoping you can give us some detail, some color around the comp trends and the visibility based around your guidance going forward. It looks like you're expecting ex-currency comp trends to improve a little bit in the second quarter and continue to improve over the course of the year. I know the e-commerce piece comes into play later in the year, are you seeing something in the business today, quarter to date? Any color around how you're thinking about that unfolding throughout the rest of the year would be really helpful. Thank you.
Sure. Thank you, Omar, and good morning. I would say the following. We certainly see mall traffic continue to remain challenged. Our point of view on that is that there is absolutely a channel shift going on because when you look at our acceleration of our digital business growing at over 100% last quarter, and that's quite frankly with still some issues with inside the distribution center. I might add that we, by the way, have moved our Ohio distribution center into our California distribution center in Whittier as of last week. We've done that to consolidate so that we can really take and have a much better grasp on the demand that's happening there. The further acceleration that we think that's going to continue out of that facility.
What you have is you have a customer who's able to shop no matter where they are, just from a mobile device or from a desktop. We think as that continues, traffic inside the shopping centers are going to remain challenged. That being said, one of the categories that really impacted our comp store sales was watches. That's, we think, a cyclical issue. Although there's some product challenges there that we think we can really go after, that you'll start to see a little bit in our third quarter, but mostly in our fourth quarter. We're encouraged by the concept that this new product is going to be flowing into our stores starting third quarter and then heavily into fourth quarter first. Secondly, we're going to start to go up against the initial declines in the watch business.
That'll become a little easier for us to comp against. If you remember, Q1 and Q2 were huge comps that we're up against from last year. The comps that we're up against in Q3 and Q4 are a little easier. We also, some of the FX headwinds start to burn off a little bit, hopefully. Let's pray that that continues, the dollar and the euro in particular stay stabilized. We'll get some of the benefits of that. Then with omni-channel coming on board for us in our third quarter and Kors Concierge being launched, we think we're going to have a real opportunity in our stores to be able to maximize sales with better inventory management in terms of point of location and distribution.
We just also think that we're going to have a much more comprehensive engagement with our customer on how we're going to be selling to them, having all of our sales associates armed with digital information on the broadest assortment. You look at a 2,500 square foot store for us on average, and they can maybe show 40% or 50% of our assortment. Now the sales associate will have access and a selling tool to show close to 100% of our assortment. We think that's going to add up to some significant improvement in sales inside of our own stores. Thank you, Omar.
Our next question comes from Simeon Siegel with Nomura Securities.
Thanks. Good morning, guys. John, can you talk about your view on the promotional environment ex-FX? You guys only saw was like 45 basis points of gross margin pressure. What's the right way to think about margins for the rest of the year and then maybe longer term sustainable rates? Then just if you can you help quantify the negative comp impact from watches? Maybe any update on the timing of the wearables, then just how large do you think the jewelry opportunity could be? Thanks.
Okay. The gross margin impact. We have said consistently that we really have not changed our promotional cadence almost since we started the company. We did say that last quarter we did get a little more promotional, that is just clearing some merchandise through our stores as we had normalization and our comps slowed down a little quicker than we had anticipated. I think we have got a fairly good grasp on that. We are anticipating the gross margin on a year-over-year basis to be down about 1 point for the company, and I think we still feel that that is really where it is. Part of that is going to be impacted by foreign currency, and part of that is going to be impacted by the addition of some markdowns and some additional allowances in the wholesale channel. I think we feel pretty good about the vision on that.
In terms of the watch, we really do not quantify the breakdowns of that. I want to mention that the watch issues for us are a North American issue, and we have not seen that same deceleration in Europe or in Asia in the category. If you saw in our actual licensing, we said that one of the reasons why our licensing revenues were up was because of watches. We are getting positive growth outside the U.S. Now that is being impacted by constant currency, though, unfortunately, or FX headwinds. In Fossil, we are achieving some very nice gains in Europe. Some of that is just being counteracted by the currency translation. In jewelry continues to be a category that we believe in, that we think can offer great success long term for the company.
We have got some pretty interesting initiatives that we are going to, I think, talk to you about on the next call, where we think we could accelerate that category with a few things that we are working on there. All in all, again, the bigger piece of our comp decline was caused, though, by watches.
Great. Thanks a lot and best of luck for the rest of the year. Thank you.
Our next question comes from Dana Telsey with Telsey Advisory Group.
Good morning, everyone. Can you expand a little bit about on the expense shift that's going on, perhaps from Q1 to Q2, and how bucketing the expense is what we should see through the balance of the year? Just lastly, any commentary, John, on outlet performance versus what you're seeing in full line stores? Thank you.
You're basically seeing a continuation in second quarter, what you're seeing in first quarter. That's both initiatives that we started last fiscal year, the initiatives we're starting in the current fiscal year. As we mentioned in the call, we will have some moderation of that then later in that second half of the year, as these initiatives begin to anniversary. Dana, I would add to that. If you really look at one of the things that is impacting our current operating profit is our SG&A. We made a decision a little over two years ago to build out a very significant and sustainable infrastructure to support our growth in terms of warehouse and distribution. We'll be finished with those projects mid calendar next year.
That really will be up and running, we think we're going to start to see benefits from those initiatives that we've put in place. We're already beginning, after an extensive renovation of our Whittier facility, we're starting to see our ability to drive costs down in that facility as well. Both of these facilities, the one in Europe, Venlo, and then Whittier, what we're excited about is they'll be fully integrated facilities that will handle our retail, wholesale, and our growing e-commerce business. Really, it's going to give us the ability to access inventory very, very quickly, in particular for this e-commerce business, which is just growing at breakneck speed. We think that those investments, while some of them might look a bit painful right now, are actually great investments for this company in the long term.
Secondly, we're building out our corporate offices here. We've had to add a lot of square footage because, while I know there's a lot of commentary about how Michael Kors is struggling, in fact, we grew 30% last year. This year, we're going to do close to $4.7, $4.8 billion. We've had to add a lot of people. We've had to put some office space to add those people, we're proud of that. We're building a world-class facility for those people to work in because as a company, we've made the decision. We want to be able to hire not just from our industry, but from some of the best tech companies in the world and really draw the talent that's going to help drive this company for the future. The last part of our expense initiatives has been talent.
We're really bringing in some world-class people to help build and run this business. A great example of that is the men's, where we've just hired Marcel Ostwald, who headed up design for Hugo Boss, and we hired Mark Brashear. When we say we're going to build a men's business, we're bringing in world-class people to build those businesses, and we're putting the resources behind them to be successful. That's a long-winded way of saying, those investments, we're really not going to have that kind of stepped-up investment in fiscal 2017. We anticipate CapEx to start to come down as a trend also in 2017. We're going to start to get some real leverage on our SG&A as we go forward. Lastly, in terms of outlet versus full price, both channels we're seeing mall traffic decline in. The outlet channel is very, very small.
I think other people have discussed it, and the mall traffic in the U.S., and you can check that from ShopperTrak, it's kind of high single digits. Mid to high single digit decline in terms of the traffic. We see that from the information that they're providing, and we're tracking in that same kind of range.
Thank you.
Our next question comes from Oliver Chen with Cowen and Company.
Hi, thank you. On the innovation front, in terms of the new handbags, what are your thoughts on how you'll pursue SKU breadth versus depth? It does look like we're seeing a lot of new platforms, and I wonder about between that relationship and merchandise margins and promotions, just as you continue to try new innovative things there. The free cash flow profile of your company is very impressive. I was just curious about, on a longer-term basis, thoughts on how we should think about modeling that line item in the cash flow statement. Thanks a lot.
Sure. On the innovative product, we're going to take a very aggressive point of view on newness for the spring season in particular. Our design teams have just come up with some fabulous new product. I might say it's in handbags, it's in our women's ready-to-wear, and in our footwear categories. When you're the size company that we are and you have the position in the marketplace that we do, we believe in America, Michael is the number one leading American designer in the world. As to taking that position, we have to offer exciting new product, and we want to take a little bit further stab at making sure the customer understands that's what we stand for. The great news is that some of the things that we've been doing are really getting some good traction.
Our newness sell-throughs are really performing at probably the best levels that we've had in three years. We're terribly excited about that. In the watch category, I would tell you that we believe that we've probably not had enough newness in that category. As we talked about earlier, the platforms that you're going to see introduced there, in terms of new metal materials, in terms of new acetates, and we're going to continue on this leather band program, which we think is a very important initiative for us. We think is going to drive a lot of interest and a lot of engagement with our customer to continue to look at Michael Kors as their fashion wardrobing resource.
The last thing I'll just add to you is wearables is something, as you know, our company and Fossil are really dedicated to, and we've been cautious, and we've taken our time to make sure that when we introduce our program, which will be coming for fall of 2016, that it is robust and that it is something that's well thought out, and that our customer will understand how it fits into her lifestyle and his lifestyle. We're excited, and I would tell you that we think that that entire category is something that we think will begin to revolutionize the fashion watch business as people look for more technology inside of the watch that they buy. As you know today, we view watches as a fashion accessory, not just a watch.
This will really almost take it back to its original roots that it will do more for you than being just a fashion accessory. I'm going to say one thing and turn it over to Joe on the free cash flow. As we've said on our previous two calls, we, the management of this company and our board of directors, feel very strongly about the value in terms of repurchasing stock, in particular at what we consider to be a price level that is not where our company belongs. Given that, you saw how aggressive we were during the last quarter in buying back shares. We will continue to be aggressive as long as there is a displacement in terms of what we think is the appropriate value for the company and the share price.
I'll turn that over to Joe in terms of what that means to the cash flows.
Thank you, Oliver, for those comments. We indeed are a positive cash flow. We are generating a lot of cash. Management believes that we should have a very strong balance sheet. Our first priority will be to invest in the company. Our second priority, as John just mentioned, will be to repurchase shares. Our third priority will be to have dry powder, should we be able to opportunistically do something in the future. Again, we are going to be very conservative and have a strong balance sheet. We are very pleased with our cash flows today, and those will be our objectives.
I'm going to end. We'll take the next question. I also, when you look at not only our strong cash flows, please continue to look at our operating margins. While they are down from where they were previously, and we've always said since we took the company public that the original 30-plus% operating margins were not sustainable. We think we have best-in-class operating margins in terms of our competitive set. That's not only the companies here in the U.S., but it's also our European luxury goods competitors. I think when you look at the strength of Michael Kors, the brand, the balance sheet, and our operating margins, it really bodes well for our future and our ability to invest and to maintain growth both top and bottom line. Thank you, Oliver.
Thank you. Best regards.
I mean Oliver, sorry. Oliver.
Our next question comes from Randal Konik with Jefferies.
Yeah, great. Thanks a lot. I just want to follow up on the cash flow again. I guess I asked this last quarter. When I look at two quarters ago, you bought back $400 million of stock. This quarter, you bought back $350 million, which is great. When you look at the cash flow prospects and the leverage ratios in the business, only a few quarters ago, you're buying the stock at $80, you're buying it now at $40 on average. Why not pursue an alternative capital structure if the company is under-levered. I guess two other questions related to that is from a cash use perspective, what about thinking about a dividend? How should we be thinking about, it sounds like you said something about you bought in Panama. How should we be thinking about the Far East Holdings Limited business?
How should we be thinking about that part? Thanks.
Randy, I think the first thing is, we think our capital structure is excellent inside the company, so I don't think we said that we were under-levered. We believe that having a company that operates with a strong balance sheet is the right way to build a luxury company. Other companies don't run their businesses that way, but we think a luxury company should be run with a strong balance sheet, of which we've done from the date that we really went public. In terms of our priorities, as Joe said, number one, we're going to continue to invest in the company. The good news is we've made these big investments, the build-out of Venlo, the build-out of our corporate offices. We've built a lot of retail stores and shop-in-shops over the last five years.
Many of those initiatives are going to start to burn down over the next 24 months, which will give us even more free cash flow as we move forward. Our second priority then is going to be to continue to buy back stock, and at these levels, we find it incredibly attractive. We'll continue to be aggressive about doing that. Thirdly, we've said before that when certain licenses become available to us and we're doing two right now. We're doing Korea, and we are doing a majority ownership of our Panama/South America. As they're either strategically correct for us to look at or they're going to create positive earnings for us, we will look at buying those. As Joe said before, we want dry powder to be able to do that.
There might be other things that we would look at as an organization as well. We'll take a look at that as we get further down the road. We have great infrastructure. We could leverage other things off of this infrastructure. We think we've got a very clear vision, but we don't think adding a lot of debt to the company would be something that would be of interest to running a luxury goods company at this point in time. Before we would entertain a dividend, we'd want to make sure we had looked at all the other initiatives, which would generate profitability and be accretive for the company. Joe, do you have anything to add to that?
No, that's well said.
Okay. Thank you.
Our next question comes from Joan Payson with Barclays.
Morning. Thank you for taking my question. I was wondering if you could talk a little bit about the wholesale business and the North American wholesale business in particular. It looks like that channel slowed a little bit versus what we saw last year in particular. Maybe you could talk about if there's any change to how you think about the size of that business or change in strategy at all.
Sure. Joan, first thing, just so you know, we mentioned it in our fourth quarter call. There's about $100 million on an annual basis that will move out of North American wholesale into our International Asia Category, because we are shipping and servicing certain of our retail accounts out of that facility now. We have a warehouse, we have an operation in Hong Kong led by Stephane Lafay, who was formerly the Senior Vice President of Tiffany Asia. That's DFS and some of our licensed businesses and all are serviced out of there. You just know that for the future. Secondly, if you look at our wholesale business in North America, as I said before, our accessories business was up a high single-digit. Our footwear business was actually up very strong double-digit. As Joe mentioned before, the footwear shipments were flat to slightly down.
The reason for that is, remember, we're going up against, in footwear as an example, installing a lot of shops last year. A lot of that gets into pipeline filling. Secondly, as we see the department store channel in North America slowing down, because you know that. The department stores here are not posting robust results. We've decided to reduce the amount of inventory that we're starting to put into that channel because we don't want to have a lot of markdowns showing up inside the channel. I would say we still believe, obviously, in growth in the North American wholesale channel. It will be in the kind of single-digit type range for us, because, A, the channel is not quite robust right now, and B, we have dominant market share in many of those channels.
It's no secret in handbags we're the number 1 in that channel, in watches we're the number 1 in that channel. In footwear today, in most accounts, we're the number 1 in that channel. As that channel goes a little bit is how we're going to go. I might add, though, on the flip side, the e-commerce portion of the department store business in North America is really robust. You're talking very strong double-digit growth at all of our department store partners. So while you'll see us begin to end the shop-in-shop installation in the U.S. over the next 12-18 months, that's, again, just as planned as when we went public, we had talked about with the exclusion of men's, which will still be robust rollout.
We're going to still get growth in the department stores, and most of that's going to come from the e-commerce portion. Obviously some comp store growth inside of our shop-in-shops that we've put in as well. Hopefully that gives you an answer to the North American wholesale business.
Our next question comes from Matthew Boss from JPMorgan.
Hey, good morning, guys. On the margin side, EBIT margin this year on our math is guided just below 26% at the midpoint. It's about 200 basis points below the prior guide. I guess, as we look ahead, John, what's your confidence in this level as the multi-year floor? Then on a regional basis, is it fair to think about Europe at mid-single, similar to what we saw this quarter? Is that the best way to think about a normalized growth rate on a go-forward basis?
Matt, the last part of the question, you were talking about comp for Europe? I'm sorry.
Yeah. Europe comp.
Okay. On the operating margin, I'll let Joe speak to that. The comps in Europe, I think are going to be on a constant currency basis, somewhere to the high single to mid-single digits. It's just going to depend on what different things happen over there. It's so funny because while Greece doesn't mean anything, while that was going on, all of a sudden, business softened up. The minute that kind of got past whatever was in the consumer's mind, our business in this quarter has really accelerated. There's some funny stuff going on over there. We also are being a little bit hurt by, we have a very big business in the U.K., and the strength of the pound to the euro is hurting a little bit of some of the business in that marketplace.
As that normalizes as well, we're feeling good about Europe for Q2, and for the back half of the year. Still see good strength there. We still see an opportunity to expand the marketplace. Again, we grew on a constant currency basis of 47% in that marketplace. That is a lot of growth and we still have a long way to go in terms of increasing the brand awareness. We feel pretty good about Europe. Just on the international note, Asia is really strong for the company. What we're seeing happening for us in China and in Southeast Asia and in Japan is really breathtaking. Same thing we said on this call many years ago and told you that we were going to invest in Japan and lost money there for years. We're now making money. The comps look great. The business growth is great.
We did the same thing in Europe. It took us years to invest and build there. South America is going to be a similar thing. We're going to invest for the long term. I think these things are going to continue to pay off. I will turn it over to Joe on the operating part.
We don't provide guidance other than the year that we're in. In terms of how you should think about this, clearly, this current fiscal year was difficult for a number of reasons. We've lost, as you know, almost $200 million of top line purely due to FX. It is a tough market today, and as you know, as we've already talked, we, this year and the prior year, have done a lot of innovations that have impacted SG&A and D&A. Again, we don't guide, but we are feeling good that this is a year that is difficult and we should be seeing improvements in the second half of this fiscal year, and are comfortable that that will continue into the future.
Our last question comes from Anne-Charlotte Windal with Bernstein.
Yes, good morning. Thank you for taking my question. A question on your target number of stores. You talk a lot about decreasing foot traffic, the power of your digital flagship. Does it lead you to reconsider in any way the target number of stores that you are looking at, in particular in North America?
Good morning, Anne. Yeah, Anne, we've talked about this on the calls. We've said that North America, we're going to open 400 stores, we're going to have 200 stores in Europe and 100 stores in Japan, et cetera. When we set those targets, we're way below what other competitors are in terms of their distribution. I also might add that we also set those targets with a very clear eye to how many full price and how many outlet stores we've had. We've had that with a very clear target about how many department stores we've had. All of that has been really deeply thought out by city, by location, et cetera.
Of course, over the last two years, we've seen e-commerce take on a much bigger role in, I think, everyone's projection in terms of what that will be of their total retail business, and we believe that that's going to be approximately 20% of our sales over the next few years. That all being said, we make a lot of money in our retail stores. We have a handful of stores that we don't make money on. Some of those are flagships that we want from an impression standpoint in the city. Some of those are just stores that maybe aren't producing at the level that we want to. We don't open stores unless they're profitable. Even if e-commerce becomes 20% of our overall revenues, I'm sorry, retail revenues. 80% is still going to come from freestanding stores.
We still believe that if you live in Arkansas or you live in Omaha or you live in New York, you should have the ability to be able to go into a store and shop that store with Michael Kors product. I think we're very careful about where we distribute our product, and I think we're very proud of the shopping centers that we're in, the street locations, and where we've positioned the brand up against our luxury or with our luxury competitors, and/or with some of our U.S. neighbors as well. We're still feeling good about our rollout. Again, that rollout's going to come to an end here pretty shortly, in particular in North America. It will be over with in the next 24 months. Then we'll really be looking at all of our growth coming out of comp from a retail standpoint.
I'd like to say thank you to everyone for joining us today and look forward to keeping you updated on the growth and the progress that we're making on our growth initiatives in our next call. Have a great day.
That concludes today's conference. Thank you for your participation.