Please stand by. Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Michael Kors Holdings Limited Second Quarter 2015 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. Now I would like to turn the conference over to Krista Kulyk, Vice President Treasurer. You may begin.
Thank you. Good morning. Thank you for joining us for our second quarter earnings call. Presenting on today's call are John Idol, Chairman and Chief Executive Officer. 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 than we expect. Those risks and uncertainties are described in today's press release and in the company's SEC filings, which are available on the company's website. Investors should not assume that the statements made during the call will remain operative at a later time. The company undertakes no obligation to update any information discussed on the call. I will now turn the call over to Michael Kors Chairman and Chief Executive Officer, Mr. John Idol.
Thank you, Krista. Good morning. Welcome to Michael Kors' second quarter fiscal year 2015 earnings call. With me today is Joe Parsons, Chief Financial Officer and Chief Operating Officer. Before I begin, I wanted to take this opportunity to announce that Krista has taken on the direct responsibility for investor relations at the company, in addition to her responsibilities as treasurer. She has a thorough knowledge of our business. Will be a key resource to the investment community. Congratulations, Krista. My commentary will begin with a brief overview of our second quarter performance. A discussion of our long-term growth opportunities. I will then turn it over to Joe for a detailed review of our financial results. Our outlook for the third quarter and full year. Our strong second quarter financial performance demonstrates the momentum behind the Michael Kors brand.
We delivered both revenue and earnings per share growth in excess of 40%, with strong results across our operating segments and geographies as we continue to expand our presence globally. We attribute this success to our fashion leadership, our Jet Set luxury experience at retail. Great execution by the entire Michael Kors employee team. Second quarter revenue exceeded $1 billion, an increase of 43% over the prior year. In addition, gross margin expanded 20 basis points, while income from operations grew 38% and operating margin was 29%. We attribute our solid results to the continued execution of our growth strategies, which include, first, expanding our global retail presence through new store openings. Expansion in key locations. Second, driving increased comparable store sales at our retail stores. Wholesale shop-in-shops with great fashion product. A luxury shopping experience.
Third, continuing the conversion of department stores globally into branded shop-in-shops that embody the Jet Set Michael Kors experience. Fourth, building an e-commerce platform that will be rolled out globally following our U.S. e-commerce site launch in early September. Fifth, growing our international business through regional partnerships. Sixth, expanding market share across categories, including women's ready-to-wear, women's footwear, jewelry, and menswear. Now turning to our segment performance for the quarter. Retail net sales increased 39%, driven by 121 net new store openings since the second quarter of last year and global comparable store sales growth of 16.4%. We ended the quarter with 473 company-owned retail stores and continue to see the potential for 700 company-owned retail stores worldwide, not including men's locations. In addition, we are strategically expanding or relocating select stores to enable us to more prominently present our women's footwear, ready-to-wear, watches, and jewelry.
Lastly, we now have 176 additional locations operated through our licensing partners, which further expands our presence globally and brings our total store count to 649 locations worldwide. Our wholesale segment experienced strong performance during the second quarter, with net sales increasing 46%, driven primarily by strength in our accessories and footwear businesses, as well as our women's ready-to-wear. The growth was also driven by the expansion of our European business and the conversion of 299 wholesale doors globally into branded shop-in-shops in accessories, footwear, womenswear, and menswear. We ended the second quarter with 1,969 shop-in-shops worldwide. For fiscal year 2015, we continue to expect to convert approximately 750 department store doors into shop-in-shops across all categories globally. Turning to our licensing segment, revenues grew 43%, primarily driven by our watch business as well as our jewelry offering.
We opened an additional 35 watch and jewelry shop-in-shops in department stores worldwide during the quarter, and now have 190 watch and jewelry shops globally. We are focused on expanding this offering in both our retail stores and with our wholesale partners, and believe that there is an opportunity for approximately 500 watch and jewelry shops globally over the long term. We also continued to see strength in our fragrance business during the second quarter. In August, we anniversaried the launch of our Sporty Sexy Glam women's fragrance, and I'm pleased to say customers continued to respond positively to this collection as we saw an increase in sales during the quarter. Turning to our operations by region. Revenue in North America grew 30% to $802 million, driven by the opening of 19 new stores and a comparable store sales increase of 10.8%.
North American traffic was slower than we had anticipated, and we believe this is similar to the general trend that other retailers are experiencing across North American shopping malls. We are now on track to open approximately 50 stores in the region this year. At the end of the quarter, we operated 320 stores in North America, and we continue to believe that this market can support 400 retail locations, excluding potential men's locations. We remain excited about the opportunities in the e-commerce channel. The transition of our U.S. e-commerce site in early September went smoothly, and since the launch, we have seen strong growth with a net sales increase of approximately 70% over last year. Importantly, the new website allows us to engage existing and new customers with the Michael Kors lifestyle and create innovative ways to keep the brand at the forefront of consumers' minds.
It is clear that customers are becoming more engaged with the brand, as evidenced by an increase in global Google searches of approximately 20% year-over-year, as well as the growth of the Michael Kors fan base across social media platforms. In fact, our Facebook fans have grown 80% to 16 million in the quarter. Our Instagram followers have grown more than 150% to over 3 million. Our Twitter fans have grown 55% to over 2 million, and our emerging base of Weibo followers has grown over 150% in the quarter to almost a half a million. We look forward to launching our e-commerce site for Canada in calendar 2015, followed by Europe and Japan in calendar 2016. As we develop an omni-channel environment, we will provide customers with a consistent Jet Set shopping experience that extends from our retail stores and our branded shop-in-shops to our website.
In doing so, we anticipate creating an elevated shopping experience with enhanced service for our customers. Our website will also offer our company's largest assortment of products for the consumer to shop. As a result, we believe that some sales will migrate from our retail stores to our Jet Set website, which may impact the comp performance of our retail stores until our e-commerce sales are included in our comparable store sales. In addition, consumers will be able to return product purchased on our e-commerce site to our stores, which may also impact our comparable store sales in the first year. That said, we believe that e-commerce and retail store sales combined will result in greater total revenues for our retail segment.
Our North American wholesale business continued its strong momentum in the second quarter with revenue growth of 38% and comparable store sales growth that was similar to or greater than the increase in our retail stores. While accessories and footwear led the performance, ready-to-wear also contributed to the overall strength in this channel. We also continued to see solid performance in department store locations that were converted into branded shop-in-shops. Our international markets also saw exceptional growth during the quarter. In Europe, revenue increased 109% to $238 million, and comparable store sales grew 41.1%. We opened 10 stores in the region and ended the second quarter with 111 retail locations across Europe. We are now on track to open approximately 50 stores across Europe during fiscal 2015 and continue to believe that the region can support 200 Michael Kors retail locations.
In the wholesale business, we continue to see strong performance in both department and specialty stores, with particular strength in accessories. In addition, European wholesale comparable store sales were similar to or greater than our retail comp. We view Europe as a very exciting piece of our long-term growth strategy. We are focused on both our retail and wholesale presence and further building brand acceptance and consumer connection through our exceptional product offering and unique Jet Set experience. We believe that we can generate revenue of approximately $1.5 billion in Europe over the long term. Turning to Japan, we saw significant growth in the business during the second quarter, with revenue increasing 106% to $16 million and comparable store sales increasing 52.9%. We opened one net new store, giving us 42 locations in this market to date.
I am pleased to announce that we will be opening our second flagship store in Kobe in Japan in the first half of calendar 2015. This store will span 5,000 sq ft and will offer our customers a premier luxury shopping experience. We are making good progress in creating a framework to support long-term growth and capitalize on the market opportunity in Japan. We continue to expect that this market can support over 100 stores and believe Japan can now reach $300 million in revenue over the long term. The rest of the Far East region saw strong growth as well during the second quarter. Comparable store sales increased at a double-digit rate in retail stores operated by our licensed partners, who opened four net new stores during the quarter.
We now have 116 Michael Kors retail locations in Greater China, Korea, Southeast Asia, and Australia and believe we can ultimately have 200 locations in this region. We see Asia as an important region for development as we grow our luxury brand worldwide, and we are focused on building the business for the long term. To that end, we have decided to bring our South Korea business in-house by early calendar 2016. We believe that the business has reached a threshold at which it makes strategic sense to control the growth in this region directly. Our current distribution includes 37 total locations. We are in the process of searching for the new president of Korea to lead our growth effort in this region. The newly created position will report to Stephane Lefebvre, the President of Asia, who joined our company this past July.
We will build the infrastructure and develop our expansion strategy for this region and therefore do not expect this business to be immediately accretive to earnings. However, we are excited about this growth opportunity and believe that South Korea represents a $100 million business opportunity over the long term. Finally, we continue to see strong results from our travel retail business as our luxury products are sold at the finest travel destinations in the world. We ended the quarter with 73 locations and believe that there is a potential for approximately 100 travel retail shops globally. In summary, we continue to advance on our growth strategies throughout the second quarter. Overall, our business remains strong, and we are very confident in the long-term prospects of our luxury brand. I will now turn the call over to Joe Parsons for additional analysis of our financial results.
Thank you, John. Good morning. I will begin with a review of our fiscal year 2015 second quarter financial results, followed by our outlook for the third quarter and full year. We delivered strong financial performance in the second quarter as we continued to execute on our strategic growth plan. Total revenue for the second quarter grew 42.7% to $1.1 billion as compared to $740.3 million for the second quarter of last year, with strong growth in each of our retail, wholesale, and licensing segments. Retail net sales increased 39.4% to $495.6 million as compared to $355.6 million in the second quarter of last year, resulting from the opening of 121 net new stores since the second quarter of last year and a comp store increase of 16.4%. We also saw strong performance across categories with the largest increase in accessories, primarily handbags and small leather goods.
Wholesale net sales grew 46.1% to $514.1 million in the second quarter, compared to $351.9 million in the same period last year. The increase was led by the accessories and footwear categories, as well as our continued conversion of wholesale doors to shop-in-shops. The expansion of our European operations. In our licensing segment, revenue grew 42.8% to $46.9 million for the quarter as compared to $32.9 million last year. Primarily driven by watches as well as jewelry. As a reminder, we are in the process of transitioning eyewear to our new partner, Luxottica, in January 2015. We expect this transition to impact our royalties for at least two quarters. As a result, we expect licensing revenue to grow in the low double-digit range in our third and fourth quarters.
Additionally, because advertising expense is charged to licensing, we anticipate lower operating margins for the year as the expense will be higher relative to the revenue increase in the licensing segment. Gross profit increased 43.4% to $645.0 million as compared to $449.9 million in last year's second quarter. Gross margin expanded 20 basis points to 61.0%, reflecting a year-over-year increase of 164 basis points in our wholesale segment, primarily driven by a geographical mix shift and certain lower product costs, offset in part by slightly higher allowances during the quarter. The overall increase in wholesale gross margin was partially offset by a decrease of 51 basis points in our retail segment, primarily resulting from increased markdowns as expected. Total operating expense grew 48.6% to $339.5 million in the second quarter of fiscal year 2015, as compared to $228.4 million last year.
As a percent of total revenue, total operating expense increased to 32.1% from 30.9% in last year's second quarter, primarily due to the 80 basis point year-over-year increase in Depreciation and Amortization expense. Selling, General and Administrative expenses increased 45.2% to $305.4 million as compared to $210.4 million for the second quarter of last year. The increase in Selling, General and Administrative expense is primarily due to higher retail occupancy and salary costs related to new store openings, increases in corporate employee-related costs, higher distribution costs, and an increase in advertising and marketing expense. As a percent of total revenue, Selling, General and Administrative expenses was 28.9% compared to 28.4% for the second quarter of last year. The increase in the SG&A rate was primarily due to the increase in advertising costs as well as higher distribution costs.
Depreciation and Amortization expense was $34.1 million for the second quarter, as compared to $18.1 million for the second quarter of last year. Primarily due to the build-out of new retail locations and the expansion of existing locations, new shop-in-shops, increase in lease rights purchased for our new European stores, investment in our infrastructure to support our growth, and accelerated depreciation related to the expansion and relocation of retail stores and the renovation of our corporate offices. Depreciation and Amortization increased to 3.2% of total revenue during the second quarter as compared to 2.4% for the same quarter last year. As we continue to strategically invest in our business, you will see larger year-over-year increases in depreciation as a percentage of total revenue going forward.
As a result of these factors, income from operations was $305.6 million or 28.9% of total revenue as compared to $221.5 million or 29.9% of total revenue in the same period last year. In the retail segment, operating margin declined 330 basis points. 280 basis points of the decline was due to an increase in retail operating costs, primarily due to higher Depreciation and Amortization expense related to new stores and lease rights. Accelerated depreciation related to retail store expansions and relocations, as well as various overhead costs, including pre-opening rent expense. The remainder was due to the 50 basis point decline in gross margin. Wholesale operating margin expanded 250 basis points, primarily as a result of the gross margin improvement discussed earlier, as well as operating expense leverage.
Finally, the licensing segment operating margin was 45.9% compared to 60.2% in the second quarter of last year. The decline in operating margin is due to an increase in operating expense, primarily due to higher advertising costs and to a lesser extent, higher administrative costs. Income taxes were $97.1 million in the second quarter as compared to $75.5 million in the second quarter of last year. Our effective tax rate was 31.9% as compared to 34.1% in the same period last year. The decrease in our effective tax rate was primarily due to an increase in taxable income in certain non-U.S. subsidiaries, which are subject to lower statutory tax rates. Net income increased 42.0% to $207.0 million for the second quarter, and diluted earnings per share were $1, based upon 207.4 million weighted average diluted shares outstanding.
Net income for the second quarter of last year was $145.8 million, or $0.71 per diluted share, based upon 205.2 million weighted average diluted shares outstanding. Turning to the balance sheet. At the end of the quarter, cash and cash equivalents were $1.0 billion, as compared to $618.8 million at the end of the second quarter last year. There were no outstanding borrowings under our credit facilities in either year. As noted in our press release, our Board of Directors has authorized a $1 billion share repurchase program over a two-year period. We believe this action reflects the board and management's confidence in our long-term growth outlook, as well as our commitment to returning value to our shareholders. For the quarter, inventory increased to $215.1 million, or 53.2% versus last year, which compares to a 42.7% increase in our sales for the same time period.
As we discussed last quarter, we expect our inventory increases will continue to outpace sales growth as we open and expand our retail stores, expand replenishment stock, convert shop-in-shops, and roll out our e-commerce business. Capital Expenditures for the quarter totaled $84.2 million. These expenditures were related to global retail store expansion and renovation, construction and renovation of shop-in-shops, investment in our distribution facilities, and enhancement of our information systems infrastructure. We opened 30 net new stores in the quarter, 19 in North America, 10 in Europe, and one in Japan, and ended the quarter with 473 retail stores, including concessions. In addition, we converted 299 department store doors into shop-in-shops. Before I discuss guidance, I wanted to share with you that our decision to relocate our principal offices from our current location in Hong Kong to London, England.
We believe that Europe is the center of luxury brands. This move will better align us with our peers as we continue to expand our brand and presence globally. This change will have no impact on our incorporation status, as we will remain a BVI company. Going forward, we will be holding our future board meetings and our annual shareholders meeting in London. Turning to our outlook. For the third quarter of fiscal 2015, we expect total revenue to be between $1.27 billion and $1.3 billion, assuming a low double-digit comp store increase. We expect diluted earnings per share to be in the range of $1.31-$1.34, assuming a tax rate of 32.5% and 208.3 million shares outstanding. We expect gross profit margin of approximately 60.5% and operating margin of approximately 31.5%.
Operating expenses during the third quarter are expected to be higher as compared to the same period last year due to increased retail operating costs associated with new and expanded stores, higher e-commerce costs, increased overhead costs related to enhancements of our distribution center, technology upgrades, and higher depreciation and amortization expense, including the impact of accelerated depreciation related to store and corporate office expansions. For the fiscal year 2015, we now expect total revenue to be between $4.3 billion and $4.4 billion, assuming a comp store increase in the mid-teens. We now expect diluted earnings per share to be in the range of $4.13-$4.18. The expected diluted earnings per share range assumes a tax rate of approximately 32.2% and 208.0 million shares outstanding. For the full year, we expect gross margin of approximately 61% and operating margin of approximately 29%.
The operating expense increase for the year will be associated with the investments I described earlier. For fiscal year 2015, gross margins for the retail segment are expected to decline approximately 50 basis points and now we expect operating margins to be approximately 27.5% due to the continued investments I mentioned earlier. Capital expenditures are expected to total approximately $400 million for fiscal year 2015. The majority of these expected expenditures are related to new retail store openings planned for the year, with the remainder being used for investments in connection with developing our new shop-in-shops, build-out of our corporate offices and distribution centers, and enhancing our information system infrastructure.
We are on track to open 110 retail locations, including approximately 50 in North America, 50 in Europe, and 10 in Japan, expand and/or relocate approximately 40 retail stores globally in select locations in key cities and convert approximately 750 shop-in-shops. In summary, we are very pleased with both our top and bottom-line performance in the second quarter and feel confident that we will deliver on our full-year outlook. We will continue to invest strategically in our business to ensure that we maintain our leadership position within the global luxury market and drive shareholder value for the long term. I will now turn the call back to John Idol.
Thank you, Joe. In closing, as we look ahead, we see significant growth opportunities across our operating segments, our geographies, and our categories. We remain focused on strategically investing in the business to support our long-term growth objectives. We will continue to offer a luxury product assortment under the design leadership of Michael Kors, the driving force behind our brand. In addition, we will remain focused on providing a Jet Set luxury in-store experience and creating a state of mind for customers that embodies glamour and style. It is these attributes that will enable us to remain a leader in the global luxury fashion market. We will now open up the call for questions.
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one to ask a question. We'll take our first question today from Kimberly Greenberger with Morgan Stanley.
Great. Thank you, and congratulations on a really terrific quarter. John, I'm wondering if you can talk about the differential in North American comps here in the second quarter relative to the first quarter. What were the metrics that drove the comp this quarter, and how did they change relative to last quarter? Secondarily, e-commerce was operating, I think, for about 25 days this quarter. Do you have any additional color beyond what you shared with us in the prepared remarks? As you think about the next one or two years in e-commerce, how sizable do you think that business could be, either in North America or globally? Thanks.
First off, good morning, Kimberly. Let me start with the comps first. There's a few things that happened in Q2 that we think impacted the North America comps. First, there was definitively a reduction in mall traffic. We've kind of been seeing that for the last couple of quarters, but it was more significant in this quarter than we had anticipated. We obviously speak to other people in the industry who are reporting similar trends, that obviously impacted our business. We did have increase in comp store traffic, we had increase in conversion both. It just wasn't up to as high as we had initially anticipated. Obviously, outside the U.S., we saw excellent results on our comp store sales.
In terms of e-commerce, what we said to you in the call is that as we look at the third and fourth quarters, we do think there will be some channel shift between our lifestyle stores and e-commerce. We do see consumers aggressively coming onto our website. As we reported to you, our business was up 70% versus the same period last year when it was operated by Neiman Marcus. By the way, that's to date. That's sales through basically end of last week. It was quite interesting because that increase came before we even really turned on all of our marketing to help support and drive the e-commerce site. We were a little afraid to turn it on too early just because we wanted to make sure that we could handle the traffic coming into the site.
That was really exciting, and we think that that's going to add tremendous top line to the company. As we've said to you before, our goal is approximately 10% as our first goal to reach as a percent to our retail revenues. We assume that's going to take us a couple of years to get there. That'll give you kind of a range in size of the business in terms of goal for us. Just the last thing, so you should be aware, we had no returns to our stores from e-commerce previously because with our relationship with Neiman Marcus, all the returns went directly to Neiman Marcus. Again, typically, e-commerce returns can run up as high as 30%, and those returns, quite a few of them will be coming back into our stores given the omni-channel environment that Joe Parsons mentioned that we're creating.
That will have a negative impact on comp store sales. All of that will kind of even itself out by the time we hit next September, where e-commerce will be reported as a comp store, and those returns will kind of all show up across the omni-channel as well. We were just giving everyone a heads-up on how that might impact us. One last thing that should be noted, it's not in our prepared remarks, but our domestic comp store sales were impacted 1%, and that was from the transition where we are relocating/upsizing select stores.
I'll just mention to you that we, in this quarter, did our Yorkdale store, Tysons Corner, Dallas Galleria, Roseville, North Star, a number of other stores that were enlarged as part of our enhancement program where we can really show our footwear, our women's ready-to-wear, and our watches and jewelry in a more prominent environment. When you do that, you have to remove those stores from the comp. That impacted us in the quarter, and you're going to see that impact going forward somewhere in the 1%-2% range from comp stores from that standpoint. You just might want to look at that when you take a look at them.
Okay.
Thank you.
The Tysons store looks amazing.
Thanks.
Thanks, John.
Thank you. Take your friends and family there to shop during the holidays.
We'll move along to our next question from Matthew Boss with JPMorgan.
Hey, good morning. With the constrained traffic that you guys have talked about in North America, did you guys find the need to deviate from your promotional or your markdown plan at either retail or wholesale? John, I'd be interested in your lay of the land view heading into holidays here.
Yes. We have not deviated from our promotional strategy. Again, I've read a number of reports that talk about counts of certain styles being increased and whatnot, and that's actually factually not true. We run the exact same cadence in terms of our promotional activity in our stores that we have for whatever it is, seven or eight years. We're involved in the same promotions at department stores. Again, I can't speak to every single thing that they do. I'd say it's generally similar on a like-for-like basis. We really have not gone down that path, and our strategy is to not go down that path. Our lay of the land for the holiday season is somewhat more conservative, I think, than we have thought about it in years past, for two reasons. Number one, we are concerned about mall traffic.
This is just a North America conversation. We don't have the same view of international marketplaces. We do see the consumer being slightly more conservative. I don't think, again, that's only in our case. I think we're seeing that from many other companies. Secondly, I think we're conservative because we're not taking a promotional posture. When you don't take a promotional posture, obviously some of the business goes in different directions. We think that's the right thing for us to do as a luxury brand and to maintain our integrity with our consumer and continue to build the great brand that we have.
Lastly, I might add that 16.5% comp store growth and almost 11% comp store growth, which is close to 12% when you take the factors of the stores being closed out is still a very, very strong performance by our company, and I believe one of the best in the entire luxury industry. We're quite proud of that, and we think we continue to gain market share, gain mind share, and build a great business that's going to have tremendous legs for the future, adding multi-billions of dollars over the next few years.
Great. One quick follow-up. As we take a step back, EBIT margin in the high 20s here, it's a level not shared by many. Can you talk about the multi-year sustainability, really the best way to think about EBIT margins longer term?
As we've told you before, I'll speak more to operating margins, if you don't mind. We've said from right when we went public that we have been getting accidental leverage on our operating margin, that was really because we could not catch up to some of the investment spending that we needed to do. We are building a phenomenal new facility in Venlo to support our European development in terms of a warehouse and distribution center, we're buying it. We're owning the land, we're building the facility 100% ourselves. That's a very significant investment. We're adding quite a few different robust systems to our company. That is also going to be a significant investment for us in development, in particular around e-commerce, big data, and data analytics. We're embarking upon a significant renovation in our offices here in New York.
We're almost doubling the size of our space here just because of the amount of people that we're hiring to run this global business. As part of that, we're putting in all new modern office facilities. We haven't really updated our offices in 11 or 12 years. That's a big capital project for us. What is impacting us more than the gross margin, as you can see, is really D&A and some level of SG&A increase. We think most of the other metrics look pretty good and sustainable, and we like the way that the business is being built and grown out.
Great. That's the last.
Thank you.
We'll move along to our next question from Omar Saad with Evercore ISI.
Thanks. Good morning, everyone. I wanted to ask another question about the North America retail business. I know you've got tons of growth internationally, new categories, you mentioned fragrance, and there's so much going on in the business. I wanted to get a sense for how you feel or how you think about the kind of slower run rate, the comp store sales run rate in North America retail. Obviously, the levels you've been running at the last few years have been extremely high and frankly unsustainable. How do you think about North America retail comps kind of on a sustainable basis going forward now that they're coming down to a more normalized level? How are you going to think about planning your business in the North America retail segment? Thanks.
Sure. First off, good morning, Omar. We think about North America first, if I may, and then I'll address North America retail comps. North America still is obviously our largest marketplace, and we see a lot of growth in this marketplace. First, led by our own retail division, which again, we think will grow long term, probably in the high single digits or to very low double digits. It's kind of the range that I think is a more sustainable model for us. Secondly, we see tremendous growth opportunity in our wholesale business. You just saw us come off of a very strong quarter in wholesale, and that's driven by our shop-in-shops with accessories. That's driven by a great new shoe business that's developing, and I think many of you have seen all the shop-in-shops that are going in around that.
That's kind of a new business for us and getting great traction. Our women's ready-to-wear business has come on very strong for us also. There is plenty of growth opportunity in the North American marketplace for Michael Kors. Additionally, we're still finishing our store rollout program in terms of building out our stores. I know that there's concern on many of your parts about the North American comp stores. I think we're reaching levels that are, as you said before, more sustainable. North America as a marketplace has plenty of growth left for us, and we're excited about it, and quite frankly, we're executing on it. You can see that both in our retail business, our wholesale business, and also look at what's happening in our licensed business. Big opportunity with jewelry.
That's coming on quite strong in North America and in Europe, I might add. Our fragrance business is, we can't quote the exact positionings, but we are ranking very high, and we're doing extremely well. We're taking market share in that business, and we are becoming a leader in North America in the fragrance business. Again, that's just going to be more royalty income for the company in a great category that will add to brand awareness and engagement with our customers.
Thanks, John. That's really helpful. One follow-up, if I could. Profitability, the gross margin profitability in North America, it's been so steady. I know it's down a little bit on the retail business, but can you talk about beyond the ability to maintain such steady gross margins in the North America business, despite the size of the business and a little bit slower traffic trends. Is it just maintaining discipline on promotions, or are there other factors that allow you to maintain such a steady profitability level? Because typically we'd start to see gross margins come under much more pressure than what you guys are experiencing.
Omar, I think that the real key to our success is led by a gentleman by the name of Michael Kors. He and the design team are really at the forefront of fashion. When we think of ourselves competing, we're competing globally against the best of the best. That's Louis Vuitton, that's Prada, that's Gucci. That's the level of companies that we really believe that we are competing with. We get up every day, we're excited about building great product for our customers, and as Michael always says, to make them smile, make them happy, make them excited about being an individual who wants to look great.
We think we're one of the best companies in the world at doing that's why the Michael Kors business is so strong today, is because of product, that's why our business is successful in our own freestanding stores as well as the strength inside the department store business. We tend to spend a lot of our time talking in these calls about our retail business, that's important. I don't want to take anything away from that. Our business in department stores is very strong, very healthy, growing, we're taking big market share and servicing customers who are excited to be a part of the Michael Kors lifestyle.
Thanks, John.
We'll take our next question from Simeon Siegel with Nomura.
Great. Thanks. Good morning, guys. Can you help further contextualize the 280 basis points of SG&A deleverage at retail? I guess how much was due to pre-opening expense, accelerated depreciation, maybe initial e-com spend, or really any other expenses that might normalize out on an ongoing basis? Sorry if I didn't get it all. Joe, did you raise the prior gross margin guide for the full year? Thanks.
First of all, understand there's a lot going on in our retail business. We've recently launched the e-commerce site. We expanded our retail stores in Europe, made plans to expand or relocate select stores. We're improving our distribution centers, which obviously impacts the retail segment. We started planning our new distribution center that John just mentioned in Venlo, Holland. We're investing in technology. Really, when you go through the categories, the largest impact was accelerated depreciation, which was approximately 70 basis points. The next impact was really just the increase in depreciation because of our CapEx. Increase in distribution costs, pre-opening costs, which included certain stores that haven't opened, including 520 Broadway, and then amortization of key money. Really, as I mentioned in the script, there were a number of different higher corporate and overhead costs.
That's a rundown of the magnitude of those different costs.
Great, thanks. What was the full-year gross margin number? Sorry, I missed that.
We didn't guide to the full year for retail specifically. Our guidance for full year for gross margin was approximately 61%.
Okay, perfect. All right, thanks a lot, guys.
Thank you.
We'll move along to our next question from Erinn Murphy with Piper Jaffray.
Great, thank you. Good morning, congrats on another successful quarter. John, I was hoping for you could speak a little bit more about Europe. Could you talk throughout the quarter where you saw some of the regional outperformance? What did you see from a trend perspective between the local and the non-European tourist shopper? As we think bigger picture, as you build into that $1.5 billion sales goal within Europe, where are you seeing the incremental growth from a category perspective?
First off, good morning, Erinn. Europe is an exciting and vibrant market for us, as you well know. The consumer is really resonating with the Michael Kors brand and product. As we've said to you before, the business is strong in the U.K., it's strong in Germany, it's strong in France. We're equally as strong in Greece and in Spain. Italy is coming on very strong. Italy was an underdeveloped market for us. I believe we're opening 16-ish freestanding stores between the beginning of the year and the end of this year in Italy. We really went after that marketplace in a significant way. We're not seeing a geographic play on the business in terms of one market being stronger than the other market.
What's also interesting is we are gaining tremendous traction, obviously, in our own lifestyle stores, as well as the department stores showing the same types of comp store increases. We really like the tone of the business. The marketplace has been led by the accessories business, the handbag business in particular, the women's ready-to-wear business was really the second strongest business. What has happened over the past six months is the shoe business is coming on very strong for us in the marketplace. The same thing that we're seeing inside the United States and similar in Asia is that she is reacting to not only just what was originally a handbag, I would say a watch business, but now she's really resonating in terms of the total brand for us. We've seen great strength.
In terms of tourism, again, we're still seeing significant tourist traffic, not only in our own freestanding stores, but of course, you see in the airport businesses that we have. We have very strong European airport businesses that are generating significant revenues for the company. Again, we're resonating with that consumer. Consumers are traveling pan-European into the various markets, then we're obviously seeing Chinese in places like Paris and in Italy. We see also quite a few Brazilians as well in the U.K. and in France and Portugal and in Madrid and Barcelona. We're feeling very good about where we are on our traffic inside of our stores in Europe.
Great. That's helpful. Then just a second question. In North America, the licensing revenue was down 7% in the quarter. Was part of that decline related to your eyewear licensee change into Luxottica? Then beyond that or outside of the eyewear piece, what are you seeing in North America right now for watches and jewelry?
I'll let Joe answer that question.
Great. Thank you.
Thanks, John. In terms of the decrease, are you talking about the decrease in the gross margin? I'm sorry.
Just in the licensing revenue in North America.
Yeah.
The what?
What portion of that was related to maybe the disruption of your eyewear licensees transitioning to move into Luxottica? What are you seeing right now in terms of just that watch and jewelry business in North America?
Remember, North America, when you're looking at the licensing, it did decline, but we need to look at that globally. What really happened was that we took our international IP and moved it to Europe last year. Previously, we were not reporting that as Europe. That's really when you look at, excuse me, the licensing revenue, you need to look at the total international. For the quarter, we actually went from $32.8 million to $46.9 million. Again, last year, we did not report anything for Europe. In the current quarter, we had $16.4 million. And then for the six months, we saw $47.5 million growing to $79.1 million. Again, in Europe, we didn't report anything last year, and it was $30 million this year. That's really a reporting issue.
The watch situation was not impacting Q2, but we do believe that the eyewear situation. Excuse me, the change to Luxottica. We do not believe impacted Q2, but will start to impact in the next two quarters.
Great. Thank you.
Okay, thanks.
You're welcome.
We'll take our next question from Lindsay Drucker Mann with Goldman Sachs.
Thanks. Good morning, everyone. I had a few questions. The first, in the quarter, your inventory outpaced sales growth. I know you had talked about why that might be lumpy or might be negative as of last quarter, but I was hoping you could give us some details about the quality of your inventory and then also extrapolate to what inventories look like at your department store and other retail partners. Second, I know that you had an issue with your distribution center last year in the second quarter that pushed sales into the third quarter and also led you to incur extra expenses to air freight and for consultants. I was hoping you could try to split apart what benefit that may have had to you in this quarter. Lastly, I was happy to see your share repurchase announced.
I was wondering if there was any change in the criteria you've had before about wanting 10% of your market cap to be cash before you buy back any stocks. Thanks.
Good morning, Lindsay. The inventory that we've always outpaced. Inventory has always outpaced our sales, and that's been historical, and it's been as high as 100%, and it's been as low as slightly under what our sales growth rate is. When we look at the inventory increase that we have this year versus last year, it's kind of right on pace with what we would normally be doing. We believe that the quality of that inventory is excellent. That is all inventory that is planned for either new store openings, new shops, for continued replenishment programs. I think we talked to you the last quarter about the fact that in Europe in particular, we increased our inventory levels to put in greater replenishment programs into that region. Inventory is in excellent shape. Also at our retail partners in excellent shape.
There is no inventory issues at those stores because our sell-throughs are still very, very strong. We're turning inventories very, very quickly. We feel great about what we're doing in terms of continuing to feed product, getting the right product to the right stores at the right time. Inventory is not an issue for us at all. I'll let Joe talk to the warehouse in a second, but let me just talk to the share repurchase. We believe two things. Number one, we are generating sufficient cash flow, free cash flow, to have a sizable share repurchase program and continue to maintain a very sizable cash balance on our balance sheet. We will probably have less than a 10% of our market cap.
It is still something that we think is an important issue for us to maintain a very high cash balance for opportunities for our growth, for opportunities for us to possibly develop repurchases of licenses or joint ventures with licenses. Lastly, in the long term, the company may or may not look at other opportunities that are presented to it. We think that the share repurchase is secondly, an indication of how strongly we feel about our share price and the fact that the share price, we believe the company is significantly undervalued at this point. Therefore, we will take advantage of the marketplace and the disconnect between our value and where the share price is today. We think that's going to provide an excellent opportunity to create value for our shareholders the long-term, as we retire shares on an ongoing basis.
I'll turn it over to Joe to speak about the warehouse.
You are correct that we did have a disruption in the warehouse a year ago. We clearly put out a warning about the possible impacts of that. At the end of the day, there really wasn't much of a shift between quarters. We did ship a lot very late in the second quarter last year, which caused some timing issues and some cash flow issues. In terms of looking at quarter to quarter, the shift in sales resulting from that was really minor. We did not call that out. In terms of additional expenses
We did incur additional expenses related to that disruption. However, we have been incurring expenses since then in order to, one, re-engineer our warehouse in Whittier, California, and two, as we mentioned previously, to start working on the plans for our distribution center in Europe. Again, there are different types of costs being incurred, but we have continued to incur costs related to our distribution centers, we did not do a call-out related to the difference in those costs.
Thanks.
We'll move along to our next question from Dana Telsey with Telsey Advisory Group. Caller, please check to make sure that your phone is not on mute.
Okay. Operator, we'll take one last call.
All right.
One last question, sorry.
We'll take our next question from Paul Lejuez from Wells Fargo.
Hey, good morning, guys. Just a couple of questions. One, just wondering what the North America comp assumption is that's built into your third quarter comp guidance of low double digits. Second, you'd mentioned weaker mall traffic. Just wondering if that applied equally to factory outlet malls versus regional malls, and I'm curious how that stacked up against street locations. Last, you do have a competitor talking about a more promotional factory outlet channel. Just wondering if you feel you need to be more promotional in that channel to compete these days. Thanks.
Sure. North America, we've said for the year that we're looking for mid-teens. We're assuming low teens in the third quarter and kind of the similar type of thing in the fourth quarter. Low double digits. Sorry. Low double digits. Apologize. Let me correct that for the third quarter and fourth quarter, low double digits.
That's North America or overall?
That's for North America.
Okay.
We saw traffic declining both in factory and in the lifestyle stores as well. We've been watching this sequentially, and it's less so in the factory channel and more so in the lifestyle channel. We have not felt a need to take a different position in our promotional activity, whether that be in our own lifestyle stores or in our factory channel. We are kind of doing the same thing that we do year in, year out, and trying to really give the most beautiful product to our customer in the best shopping environment with a Jet Set service. Continue to win with mind share and market share through the beautiful product that Michael and his design team are putting out there for us. Okay. Thank you very much, and I look forward to speaking to you all on our next conference call.
That concludes today's conference call. We thank you for your participation.