Earnings Call: Q1 2016

Aug 6, 2015

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Michael Kors First Quarter 2016 Earnings Conference Call. As a reminder, today's conference is being recorded. And now, I would like to turn the conference over to Christina Lack, Vice President, Treasurer. You may begin. Good morning and thank you for joining us for our Q1 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, Christina. Good morning, and welcome to Michael Kors' Q1 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 Q1 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 Q1 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 cross bodies 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 Q1 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 to 100 locations this year. With the addition of 8 locations in North America, 5 in Europe and 2 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. 2nd, 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. 3rd, in our licensing business, we anticipate a low double digit growth rate this fiscal year. We see this 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 drive improved performance in our fiscal Q4. 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 Q1, 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 destination 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 course 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'm 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 of the Bradshaw watch. And 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 10,000,000 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, cross bodies 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 flagship and our retail stores and building our wholesale presence through shop in shops. Our growth is rooted in our design leadership and 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 and 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 Q1 financial results and our updated outlook. Thank you, John, and good morning, everyone. Our financial results exceeded our guidance for the Q1 of fiscal 2016. Total revenue grew 7.3% to $986,000,000 as compared to $919,200,000 last year. As is expected, foreign currency headwinds continue 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 percent to $523,300,000 on a reported basis and increased 16.0 percent on a constant currency basis. Sales were driven by the opening of 107 net new stores since the Q1 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 Q1, 11 in North America, 10 in Europe and 3 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 license locations. Wholesale net sales grew 4.2% to $424,000,000 for the Q1. 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 Q1, we converted an additional 128 wholesale doors into shop in shops globally. In our licensing segment, revenue grew 20.5% to $38,700,000 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 percent to $603,600,000 Gross margin declined 100 basis points to 61.2 percent, 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 $355,000,000 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 percent. This was below the 550 basis points 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 percent to $313,500,000 The increase in SG and 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 Q1 of last year. Depreciation and amortization expense increased 43.3 percent to $41,600,000 for the Q1, 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 $248,600,000 or 25.2 percent 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 2 60 basis point increase in operating expenses attributable to higher corporate allocated expenses in depreciation and amortization. Licensing operating margin increased 4 20 basis points, primarily due to lower advertising costs, partially offset by higher costs related to protection of our intellectual property. Income taxes were $72,700,000 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 $174,400,000 for the Q1 and diluted earnings per share were $0.87 based upon 200,100,000 weight 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 $808,500,000 as compared to $1,100,000,000 last year. There were no outstanding borrowings under our credit facility in either year. During the quarter, we repurchased approximately 7,000,000 shares totaling $350,000,000 bringing our total repurchase to date to approximately 13,800,000 shares totaling $841,900,000 of our $1,500,000,000 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 of our sales increase. Capital expenditures for the quarter totaled $106,000,000 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 Q1, 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 Q2. 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 2nd 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 Q2, we expect total revenues to be between $1,060,000,000 $1,080,000,000 On a constant currency basis, total revenue is expected to increase in the high single digit range assuming a $60,000,000 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 basis points to 490 basis points in the Q2 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 percent 194,000,000 shares outstanding. We expect foreign currency to impact net income by approximately $11,000,000 and EPS by approximately $0.06 to the 2nd quarter. For the full fiscal year, we continue to expect total revenue of between $4,700,000,000 $4,800,000,000 On a constant currency basis, total revenue is expected to increase in the low double digit range assuming a $192,000,000 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 3rd and 4th quarters driven by the inclusion of the U. S. E commerce sales in the comp base, the rollout of Coors Concierge in our stores, the launch of our new national advertising campaign, the introduction of new innovative product offerings for holiday in spring 2016, diminished FX headwinds and easier year over year comps. Our overall top line will benefit from the outperformance we saw in the Q1, 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 $40,000,000 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 basis points 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 195,000,000 shares outstanding. We expect foreign currency to impact net income by approximately $41,000,000 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. And we will maximize the growth opportunities in our accessories categories and further develop our men's, women's wear, footwear and license businesses, delivering exceptional fashion product and maintaining our leadership position with the global luxury market. I will now open up the call for questions. And 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 handbags, the handbag category in general would have grown for Kors. I want to make sure I heard that correctly. And but 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. So and that was high single digits in North America. So we believe that we are in fact growing market share in North America. We grew at a higher rate than we believe the category did. And then I would also add that internationally, we when you add both domestic and international together, we grew a double digit rate. So again, we believe that the category in North America is growing in low single digit rate today. And we think that we are outpacing that growth by a fairly significant amount, again showing the health of our brand. And most importantly, really 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 has 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. So she's responding, she's engaging. Newness is without a question what is driving her interest. And 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 cross bodies and small other 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 cross body, it drives a little bit of your AUR down. And I think that's one of the things that you're seeing show up a little bit in some of the comp. But otherwise in that, the handbag business appears to be robust, although not at the same levels it grew at the past few years. And we like where we're positioned and the amount of market share that we continue to gain. So 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 improve a little bit in the Q2 and continue to improve over the course of the year. Are you seeing I know the e commerce piece comes into play later in the year, but are you seeing something in the business today quarter to date? What's any color around how you're thinking about that unfolding for 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. And 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. So we've done that to consolidate so that we can really take and have much better grasp on the demand that's happening there and the further acceleration we think that's going to continue out of that facility. And what you have is you have a customer who is able to shop no matter where they are just from a mobile device or from a desktop. And 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 and that's we think a cyclical issue, although there's some product challenges there that we think we can really go after. You'll start to see a little bit in our Q3, but mostly in our Q4. So we're encouraged by the concept that this new product is going to be flowing into our stores starting Q3 and then heavily into Q4 first. Secondly, we're going to start to go up against the initial declines in the watch business, so that will become a little easier for us to comp against. If you remember, Q1 and Q2 were huge comps that were up against from last year. The comps that were up against in Q3 and Q4 are a little easier. And we also start to some of the FX tailwinds or headwinds start to burn off a little bit, hopefully. Let's pray that, that continues to the dollar and the euro, in particular, as they stabilize. So we'll get some of the benefits of that. And then with omni channel coming on board for us in our Q3 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. And 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 there's they can maybe show 40% or 50% of our assortment. And now the sales associate will have access and a selling tool to show close to 100 percent 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. And 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 it was like 45 basis points of gross margin pressure. So what's the right way to think about margins for the rest of the year and then maybe longer term sustainable rates? And then just if you can, can you help quantify the negative comp impact from watches? Maybe any update on the timing of the wearables? And 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 haven't changed our promotional cadence almost since we started the company. We did say that last quarter, we did get a little more promotional and really that's just clearing some merchandise through our stores as we had normalization and our comp slowed down a little quicker than we had anticipated. I think we've got a fairly good grasp on that. We're anticipating the gross margin on a year on year basis to be down about a point for the company. And I think we still feel that that's really where it is. Part of that's going to be impacted by foreign currency and part of that's going to be impacted by the addition of some markdowns and some additional allowances in the wholesale channel. So I think we feel pretty good about the vision on that. In terms of the watch, we really don't quantify the breakdowns of that. I want to mention that the watch issues for us are North American issue and we have not seen that same deceleration in Europe or in Asia in the category. So if you saw in our actual licensing, we said that one of the reasons why our licensing revenues were up was because of watches. So we're getting positive growth outside the United States. Now that is being impacted by constant currency though unfortunately or FX headwinds. So we're in Fossil, we're achieving some very nice gains in Europe. Some of that's just being counteracted by the currency translation. And in jewelry, jewelry continues to be a category that we believe in that we think can offer great success long term for the company. We've got some pretty interesting initiatives that we're 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're working on there. So 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. And 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 expenses what we should see through the balance of the year? And then just lastly, any commentary John on outlet performance versus what you're seeing in full line stores? Thank you. So you're basically seeing a continuation in the Q2, what you're seeing in Q1. So that's both initiatives that we started last fiscal year and then the initiatives we're starting in the current fiscal year. So and as we mentioned in the call, we will have some moderation of that then later in the second half of the year as these initiatives begin to anniversary. And Dana, I would add to that that we the expense if you really look at one of the things that is impacting our current operating profit is the is our SG and A. And we made a decision a little over 2 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. So that really will be up and running and we think we're going to start to see benefits from those initiatives that we put in place. We're already beginning after an extensive renovation of our Whittier facility. We're starting to see our ability to drive cost down in that facility as well. And then both of these facilities, the one in Europe, Benelow and then Whittier, what we're excited about is there'll be fully integrated facilities that will handle our retail wholesale and our growing e commerce business. And 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. So 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 $4,700,000,000 $4,800,000,000 We've had to add a lot of people, we've had to put some office space to add those people and 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. And the last part of our expense initiatives has been talent and 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 Otzweld who headed up design for Hugo Boss and we hired Marc Brashear. So when we say we're going to build a men's business, we're building in bringing in world class people to build those businesses and we're putting the resources behind them to be successful. So 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. So we're going to start to get some real leverage on our SG and 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. But the and I think it's other people have discussed it. And the mall traffic in the United States, you can check that from ShopperTrak is about 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 like SKU breadth versus depth? I mean, it does look like we're seeing a lot of new platforms. And I wonder about that relationship between that relationship and merchandise margins and promotions just as you continue to try new innovative things there. And then 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. And I might say it's in handbags, it's in our women's ready to wear and in our footwear categories. And 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. And as 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. And 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 3 years. So we're terribly excited about that. And in the watch category, I would tell you that we believe that we've probably not had enough newness in that category. And so 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 it's 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. And 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. And as you know today, we view watches as a fashion accessory, not just a watch. So this will really kind of almost take it back to its original roots that it will do more for you than being just a fashion accessory. And then 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. And 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 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. So thank you, Oliver, for those comments. We indeed are positive cash flow. We are generating a lot of cash. We do management believes that we should have a very strong balance sheet. So our first priority will be to invest in the company. Our second priority, as John just mentioned, will be to repurchase shares. And our third priority will be to have dry powder should we be able to opportunistically do something in the future. So again, we are going to be very conservative and have a strong balance sheet and we are very pleased with our cash flows today and those will be our objectives. And I'm going to end, we'll take the next question. But 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 percent operating margins were not sustainable. We think we have best in class operating margins in terms of our competitive set. And that's not only the companies here in the U. S, but it's also our European luxury goods competitors. So 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, Omar. Thank you. Best regards. I mean Oliver, sorry, Oliver. Our next question comes from Randy Konik with Jefferies. Yes, great. Thanks a lot. So I just want to follow-up on the cash flow again. I guess I asked this last quarter. When I look at 2 quarters ago, you bought back $400,000,000 of stock. This quarter, you bought back $350,000,000 which is great. But 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 $80,000,000 You're buying it now at $40,000,000 on average. Why not pursue an alternative capital structure if the company is under levered? And I guess 2 other questions related to that is from a cash use perspective, what about thinking about a dividend? And how should we be thinking about it? 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 we 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. And in terms of our priorities, as Joe said, number 1, we're going to continue to invest in the company. The good news is, 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 5 years. And 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. So our second priority then is going to be to continue to buy back stock and at these levels we find it incredibly attractive and we'll continue to be aggressive about doing that. And thirdly, we've said before that when certain licenses become available to us and we're doing 2 right now, we're doing Korea and we are doing majority ownership of our Panama, South America. And 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. So as Joe said before, we want dry powder to be able to do that. And there might be other that we would look at as an organization as well. But 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. So 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. And 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. So Joe, do you have anything to add to that? No, that's well said. Okay. Our next question comes from Joan Pason with Barclays. Good 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. And 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 Q4 call, there's about $100,000,000 on an annual basis that will move out of North American wholesale into our what is 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 Le Fay, who was formerly the Senior Vice President of Tiffany Asia. And so that's DFS and some of our license businesses and all are serviced out of there. So 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 high single digit. Our footwear business was actually up very strong double digit. But as Joe mentioned before, the footwear shipments were flat to slightly down. And the reason for that is remember, we're going up against in footwear as an example, installing a lot of shops last year. So a lot of that gets into the pipeline filling. And then 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. So I would say we still believe obviously in growth in the North American wholesale channel and it will be in the kind of single digity 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. And 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 one in that channel. So as that channel goes a little bit is how we're going to go. I might add though at the end on the flip side, the e commerce portion of the department store business in North America is really robust. You're talking very, 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 United States over the next 12 to 18 months and that's again just as planned as when we went public and 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. And then obviously some comp store growth inside there, inside of our shop in shops that we've put in as well. So hopefully that gives you an answer to the North American wholesale business. And our next question comes from Matthew Boss from JPMorgan. Hey, good morning guys. So on the margin side, EBIT margin this year on our math has 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 multiyear floor? And 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? Sorry? Yes, yes, yes, Europe comp. Okay. On the operating margin, I'll let Joe speak to that. The comps in Europe, I think are going to be in that 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 in the minute that that kind of got past whatever was in the consumer's mind, our business in this quarter has really accelerated. So 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 UK and the strength of the pound to the euro is hurting a little bit of some of the business in that marketplace. So 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. And again, we grew on a reported 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. So we feel pretty good about Europe. And 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. The same thing we sat 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 and for the long term. So I think these things are going to continue to pay off. So I will turn it over to Joe on the operating part. So 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 $200,000,000 of top line purely due to FX. It is a tough market today. And as you know, as we've already talked, we over the last this year and the prior year have done a lot of innovations that have impacted SG and A and D and A. So 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. And our last question comes from Anne Charlotte Windle 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 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, Ann. Yes, Ann, we've talked about this on the calls. We've said that in North America, we're going to open 400 stores and we're going to have 200 stores in Europe and 100 stores in Japan, etcetera. And we when we set those targets, we're way below what other competitors are in terms of their distribution. And 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. And we've had that with a very clear target about how many department stores we've had. So all of that has been really deeply thought out by city, by location, etcetera. And then of course, over the last 2 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. But we don't open stores unless they're profitable. So even if the e commerce becomes 20% of our overall revenues, 80% still I'm sorry, retail revenues, apologies, retail revenues, 80% still going to come from freestanding stores. So 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. And 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. So we're still feeling good about our rollout. And again, that rollout is going to come to an end here pretty shortly, in particular in North America. It will be over within the next 24 months and 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.