Earnings Call: Q1 2015

Aug 4, 2014

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Michael Kors Holdings Limited First Quarter 2015 Conference Call. Call. As a reminder, today's conference is being And now I would like to turn the conference over to Christine Ehlertz, Vice President, Treasurer. You may begin. Good morning, and thank you 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 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 Higgins. Thank you, Christina. Good morning, and welcome to Michael Kors' 1st quarter fiscal year 2015 earnings call. With me today is Joe Parsons, Chief Financial and Chief Operating Officer. I will begin with a brief overview of our Q1 performance and discuss our long term growth I will then turn it over to Joe for detailed review of our Q1 financial results and our outlook for the Q2 and full year. We are very pleased with our Q1 results, which we believe demonstrate the great momentum in our brand and the significant growth opportunities that lie ahead. Michael and our design team continue to deliver an amazing diversified collection as a as a true luxury lifestyle brand with a compelling offering of handbags, small leather goods, footwear, ready to wear, watches, jewelry, eyewear and fragrance. The strong performance across our product lines and geographies contributed to our financial results in the Q1. Revenue grew 43% to $919,000,000 and gross margin expanded 20 basis points. Income from operations grew 40%, leading to an operating margin of more than 30%. We achieved these strong results as we continued to successfully execute on our 6 growth strategies. First, revenue in North America grew 30%, driven by a comparable store sales increase of 18.7%. We've been very successful in our North American business thus far and we are still building momentum. As we look ahead, we believe that we continue to have significant growth opportunity in this region, driven by comparable store sales growth, new store openings and expansions, shop in shop conversions and expansions and the transition of our e commerce business in house. In addition, we believe that the extension of certain existing categories will fuel incremental growth of footwear, women's ready to wear and menswear. 2nd, we are on track with our retail expansion in North America. During the Q1, we opened 13 net new stores. Long term, we believe that North American market can support 400 stores, excluding potential men's locations. 3rd, we successfully converted 108 department store doors into branded shop in shops globally and ended the Q1 with 16 70 shop in shops worldwide. For fiscal year 2015, we now plan to convert 7 50 department store doors into shop in shops across all categories globally. 4th, in Europe, revenue grew 128%, driven by a comparable store sales increase of 54.2% and the opening of 21 locations. We see great runway for growth in Europe. Over the long term, we continue to believe we can expand our store base to 200 locations and now believe this market can generate revenue of approximately $1,500,000,000 for Michael Kors. This growth will be driven in part by store openings in existing and new markets, the expansion of select retail locations as well as the increased penetration of the wholesale business in this region. 5th, our business in Japan continues to develop. Revenue in the quarter grew 89%, driven by a comparable store sales increase of 48.8% and the opening of 4 new locations during the quarter. Looking forward, we continue to believe that this market can support 100 stores. 6th, we opened 9 locations in the Far East region through our regional licenses, bringing our total to 112 stores. Stores in this region saw strong double digit comparable store increases in the Q1. Overall, there is a tremendous opportunity for us in Asia, and we are in the early stages of growth and believe we can ultimately have 200 stores in this region in the long term. In addition to these core strategies, we are just now starting to put together a greater emphasis on the men's business. And you will see this clearly displayed in our new soon to open SoHo flagship store, which will feature an entire floor devoted to men's. From there, we will begin to test freestanding men's stores next year and believe that there may be the potential for as many as 500 men's stores worldwide over the long term. To lead the development of this important strategy, we recently brought Mark Brashear on board as President of the Men's division. Mark's background with Hugo Boss in Nordstrom makes him a perfect fit to lead our men's expansion. With the right team in place, I believe that we have the potential to be leading to be a leading global menswear brand. Turning to our segment performance for the quarter. Retail net sales grew 48% with global comparable store sales increasing 24.2%. This marks our 33rd consecutive quarter of comp store sales growth, which is best in class performance and speaks to the continuing demand for our luxury products. Growth in the retail segment was driven by net new store openings in the Q1. We ended the quarter with 4 43 company owned retail stores globally. In addition, we had 162 locations operated through our licensing partners, bringing our total to 605 stores and concessions worldwide. There is a great runway for growth in our retail business globally and we continue to strategically open new stores to ensure we are in the best cities and the right locations to serve our customer base. Ultimately, we believe that we can have 700 company owned retail stores worldwide, which does not include potential men's locations. We are also moving forward with our store expansion plans. We expanded or relocated a total of 6 locations globally, roughly doubling the average size of these stores to approximately 5,000 square feet. The larger stores enable us to have a more prominent presentation of footwear, ready to wear, watches and jewelry, which we believe will drive increased frequencies of visits and incremental purchases. We are pleased with the performance of these locations and we believe we can maintain high sales per square foot productivity in our expanded stores. In our wholesale segment, net sales grew 40%, driven by strong performance in both accessories and footwear, as well as the expansion of our European operations and the continued conversion of wholesale doors into branded shopping shops. For fiscal 2015, we now expect to open approximately 750 shop in shops worldwide in ready to wear, accessories and footwear. Overall, we are very pleased with both the Q1 performance and the future opportunities in our wholesale segment. Turning to our licensing segment, revenues increased 30%, driven primarily by the strength in watches and jewelry, as well as growth in our fragrance business. We are expanding our watch and jewelry offering, both in our retail stores and with our wholesale partners and rolled out an additional 30 watch and jewelry shop in shops in department stores worldwide during the Q1. We now have 155 watch and jewelry shops globally and continue to believe that there is an opportunity for approximately 500 shop in shops globally over the long term. We also continue to expand our fragrance offering. Our new men's fragrance, Michael Kors for men will launch in September and will be available exclusively through Macy's as well as our own boutiques and website. The set was created with the man on the go in mind and balances urban sophistication and rugged style. We are also launching an ad campaign to support the scent, including a thrilling TV spot reminiscent of an action movie and print ads that exude Jet Set glamour. Now for our operations by region. In North America, revenue grew 30% to $719,000,000 during the quarter. Comparable store sales increased 18.7 percent and we opened 13 net new locations, ending the quarter with 301 North American retail stores. Looking ahead, we remain on track to open 45 North American retail stores this fiscal year. We are also on track to bring our North American e commerce site in house this fall, which we see as a tremendous opportunity to grow our brand. Our new site will serve as a powerful marketing tool and will also allow us to more fully engage our customers every step of the way on their path to purchasing a Michael Kors luxury product. In our North American wholesale business, overall growth was driven by comparable store sales increases, primarily in accessories and footwear, which were similar to or greater than the increases in our retail stores. We also continue to successfully convert North American department store doors into shop in shops. We will continue these conversions going forward to create a world class presentation of our brand within department stores. Our brand is expanding internationally as well. In Europe, we saw revenue growth of 100 and 28% during the quarter to $185,000,000 with a comparable store sales increase of 54.2%. We opened 21 stores in the region and ended the quarter with 101 retail locations across Europe. We continue to see a positive response from consumers as we are very pleased with the performance in this region. In the wholesale business, strong sell throughs continued in both department and specialty stores and comparable store sales, primarily in accessories and footwear were similar to or higher than our retail store comp growth during the quarter. We clearly continue to gain strength in Europe as our exceptional product and unique JetSec experience drive acceptance of our brand. That said, we have only just begun to maximize our potential in this region. For fiscal year 2015, we expect to open 55 new stores in Europe and are on our way to 200 Michael Kors retail locations in the long term. We also anticipate that our wholesale business will continue to expand as we capture market share and increase our brand This growth is coming from several categories including accessories, footwear, ready to wear as well as jewelry and watches. Based on the strong acceptance of our brand in Europe, as I said earlier, we now believe that we can reach revenue of approximately 1,500,000,000 over the long term in this region. Turning to Japan. We continue to make steady progress with our business and remain excited about the great opportunity that this market provides for the company. We are still in the early stages of building this business and remain focused on creating a strategic framework to support long term growth. During the Q1, revenue in Japan increased 89 percent to $15,000,000 and comparable store sales increased 48.8%. We opened 4 net new retail locations during the quarter and now have 41 locations in this market. We also saw strong growth in the rest of the Far East with a double digit comparable store increase in retail stores operated by licensed partners. During the quarter, 9 stores were opened in the Far East and we now have 112 Michael Kors retail locations in Greater China, Korea, Southeast Asia and Australia. Overall, Asia is an important region for development as we continue to grow our luxury brand globally. As such, we recently brought Stephane Le Fay on board to serve as President of Asia. Stephane has a long history of building luxury businesses in the region, including his recent experience leading Tiffany's growth in Asia. He will be tasked with capitalizing on the momentum that we have created thus far to reach our long term goals. As we have said, we believe that the Asian consumer is truly starting to understand the essence of Michael Kors as a global fashion luxury brand. Under Stephan's direction, we will continue to build the brand in this region and grow the business over the long term. Finally, the travel retail business continues to be strong during the quarter. We now have 66 locations in the best airport and travel destinations worldwide and believe that we can ultimately have 100 travel retail shops global. In summary, we are off to a great start in fiscal 2015, but our focus goes well beyond 1 year. In order to support our growth objectives, we are making strategic investments in our business. We are building our store base, expanding or relocating select stores, building shop in shops, investing in marketing as well as in our distribution centers and technology to ensure we have the foundation to support our global growth. Looking forward, we have a long runway ahead of us to remain poised to deliver our long term sales and earning growth objectives. 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 Q1 financial results, followed by our outlook for the Q2 and full year. We exceeded our top and bottom line expectations in the Q1, reflecting strong demand for the Michael Kors brand and continued progress across our strategic growth initiatives. We are raising our full year guidance primarily to reflect the better than expected the better than expected performance in the Q1, which I will discuss in more detail in a few minutes. We will continue to make strategic investments in our business to support our growth plans and position us to realize our long term potential as a global luxury lifestyle brand. Now turning to the Q1 results. Total revenue grew 43.4 percent to $919,200,000 as compared to $640,900,000 for the increased 47.5 percent to $480,200,000 as compared to $325,700,000 in the Q1 of last year, resulting from a comp store increase of 24.2% and the opening of 115 net new stores since the Q1 of last year. Our comp store sales performance was driven by increases in traffic and conversion. We also saw strong performance across categories with the largest increase in accessories, primarily handbags and small leather goods. Wholesale net sales grew 40.0 percent to $406,800,000 in the first quarter compared to $290,600,000 in the same period last year. The increase was led by accessories and footwear categories as well as our continued conversion of wholesale doors to shop in shops and the expansion of our European operations. In our licensing segment, revenue grew 30.5 percent to $32,100,000 for the quarter as compared to $24,600,000 last year, primarily driven by watches as well as jewelry. As you know, we are transitioning our new eyewear partner, Luxottica, in January 2015, and we expect this transition to impact our royalties for at least 2 quarters. We are anticipating single digit to low teen revenue growth in our 3rd and 4th quarters in the licensing segment. Additionally, because advertising expense is charged to licensing, we anticipate lower operating margins as the expense will be higher relative to the revenue increases in the licensing segment. Gross profit increased 43.9 percent to $571,600,000 as compared to $397,300,000 in last year's Q1. Gross margin expanded 20 basis points to 60 2.2%, reflecting a year over year increase of 63 basis points in our Wholesale segment, primarily driven by a geographic mix shift, offset in part by a decrease of 48 basis points in our retail segment, resulting from increased markdowns. Total operating expense grew 47 0.6 percent to $294,900,000 in the Q1 of fiscal year 2015 as compared to $199,700,000 last year. As a percent of total revenue, total operating expenses increased to 32.1% from 31.2% in last year's Q1. Selling, general and administrative expenses increased 44.7 percent to $265,900,000 as compared to 183 $700,000 for the Q1 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, higher distribution costs as we continue to improve warehouse increases in corporate employee related 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 28.7% for the Q1 of last year. Depreciation and amortization expense was $29,000,000 for the Q1 as compared to $16,000,000 for the Q1 of last year, primarily due to the build out of new retail locations and the expansion of existing locations, accelerated depreciation related to store expansions, new shop in shops, increase in lease rates purchased for our new European stores and investment in our infrastructure to support our growth. Depreciation and amortization increased to 3.2 percent of total revenue during the Q1 compared to 2.5% for the same quarter last year. As John mentioned, we are strategically investing in our business, including building our store base, expanding or relocating select stores, converting and expanding shop in shops and improving our distribution centers and technology. As a result of these investments, 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 $276,800,000 or 30.1 percent of total revenue as compared to $197,600,000 or 30.8 percent of total revenue in the same period last year. In the retail segment, operating margin declined 198 basis points. 150 basis points of the decline was due to an increase in retail operating costs attributable to accelerated depreciation expense associated with expansions and relocations, retail overhead costs, including preopening rent expense and higher e commerce costs. The remainder was primarily due to a decrease in gross margins. For fiscal 2015, we believe the gross margins for the retail segment will decline approximately 50 basis points and operating margins for the Retail segment will decline 100 basis points due to the continued investments that I mentioned earlier. Wholesale operating margin expanded 100 basis points, primarily as a result of the gross margin improvement discussed earlier, as well as operating expense leverage. Finally, the licensing segment margin decreased 3.30 basis points due to an increase in operating expenses, including advertising costs as well as administrative expenses incurred in connection with the formation of our new licensing operations in Europe. Income taxes were $88,300,000 in the Q1 as compared to $72,100,000 in the Q1 of last year. Our effective tax rate was 32.0 percent as compared to 36.6% in the same period last year. The decrease in our effective tax rate was primarily due to the increase in taxable income in certain non U. S. Subsidiaries, which are subject to lower statutory tax rates. Net income increased 50.2 percent to $187,700,000 for the 1st quarter and diluted earnings per share were $0.91 based upon 207,200,000 weighted average diluted shares outstanding. Net income for the Q1 of 2014 was $125,000,000 or $0.61 per diluted share based upon 204 point 3,000,000 weighted average diluted shares outstanding. Turning to the balance sheet. At the end of the quarter, cash and cash equivalents were $1,100,000,000 as compared to $639,200,000 at the end of the Q1 last year. There were no outstanding borrowings under our credit facilities or or 65.0 percent versus last year, which compares to a 43.9% increase in our sales for the same period last for the same time period. As you know, we typically plan inventory growth in excess of our sales growth. During the Q1, there were some factors that resulted in our current inventory levels. Approximately 1 half of the additional inventory increase was related to the expansion of our retail business, including an additional 42 store openings and expansions planned for the 1st 3 quarters of this year as compared to the same period last year, inventory for comp store sales growth and the preparation of the e commerce launch. The remainder was primarily related to timing differences due to early receipt of goods this year versus last year and in Europe, the increase in replenishment stock and a category mix shift towards higher priced goods. As we have stated in the past, given our stage of growth, 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 $43,200,000 These expenditures were related to global retail store expansion and renovation, construction and renovation of shop in shops, investment in infrastructure, systems, infrastructure and expansion of our distribution and corporate facilities. We opened 38 net new stores in the quarter, 13 in North America, 21 in Europe and 4 in Japan and ended the quarter with 4 43 retail stores including concessions. In addition, we expanded 6 locations globally, 5 in North America and 1 in Europe and converted 100 and 8 department store doors into shop and shops. Turning to our outlook. For the Q2 of fiscal year 2015, we expect total revenue to be between $950,000,000 $960,000,000 assuming a comp store increase in the high teens. We expect diluted earnings per share to be in the range of $0.85 to 0 point 8 $7 assuming a tax rate of 32.5 percent 208,000,000 shares outstanding. We expect gross profit margin to be approximately 50 basis points lower compared to the Q2 last year and operating margin to decrease approximately 200 basis points as compared to the Q2 last year. Operating expense during the second quarter increased overhead costs relating increased overhead costs relating to enhancements of our distribution center and technology and higher depreciation and amortization expense, including the impact of accelerated depreciation related to store expansions. For the fiscal year 2015, we expect total revenue to be between $4,250,000,000 $4,350,000,000 assuming a comp store increase in the high teens. We expect diluted earnings per share to be in the range of $4 to $4.05 representing approximately 26% growth versus fiscal year 2014. The expected diluted earnings per share range assumes a tax rate of approximately 32.5 percent 208,400,000 shares outstanding. We expect gross margin to be approximately 50 basis points lower and operating margin to decrease approximately 150 basis points to 200 basis points as compared to fiscal year 2014. The operating expense increase for the year will be associated with the investments I described earlier. Capital expenditures are expected to total approximately $400,000,000 for fiscal year 2015. The majority of these expected expenditures related to new retail store planned openings for the year, with the remainder being used for investments in connection with developing new shop in shops, build out of our corporate offices and distribution centers and enhancing our information system infrastructure. We expect to open 110 retail locations, including 45 in North America, 55 in Europe and 10 in Japan expand in select locations in key cities and convert 750 shop in shops. In summary, we continue to make progress on our strategic initiatives as we invest in the business and remain well positioned for long term growth. I will now turn the call back to John Idol. Thank you, Joe. In closing, we are extremely pleased with the strong momentum we have behind our brand. As we solidify our leading position within the global luxury market, we are investing in our company to enable us to fully capitalize on the long term potential in our business segments across our categories and throughout our geographic regions. When we look at our growth opportunities, we see ample runway in North America, our largest market, as well as in our emerging regions, including Europe, Asia and Latin America. Our assortments with the highest quality standards that our customers demand and trust. We are a leader in the global luxury market, but we still have enormous growth potential ahead of us. Handbags and small leather goods represent approximately 70% of our global net sales. We see additional growth opportunity in our less developed categories. Today, men's and women's ready to wear combined represent 13% of our global net sales. Footwear is 10% and watches and jewelry are 7% combined. We believe that there is an opportunity to expand market share in each of these categories given their current size and the great performance in our stores and shop in shops. The driving force behind our product is Michael himself, an iconic designer who has his finger on pulse of global luxury fashion. People around the world look to him for fashion and style cues and trust him to create products that make them look and feel fabulous. Michael's motto is, why not have it all? And the passion for design that is embodied in every product combined with its unique Michael Kors experience makes you feel like you can have that. It is this attitude that has made Michael Kors synonymous with fashion leadership and jetset luxury. And finally, our jetsetluxury in store experience creates a state of mind for consumers embodying glamour and style. Our consumer aspires to have a lifestyle that is on the go. Our jetset philosophy enables us to give each customer a luxury experience and to create a personal attachment to the brand. In the end, we believe the ultimate luxury in life is to feel great about yourself. And that is how we make consumers feel every time they wear the Michael Kors brand or step into a Michael Kors store. When you combine all these unique facets of our business, it is clear why Michael Kors has multiple geographic and product and product expansion opportunities as a global luxury fashion brand. For fiscal 2015, we are poised to achieve 30 percent plus projected revenue growth and 26% projected earnings growth. At the same time, we are positioning ourselves to deliver sustainable double digit revenue and earnings growth over the long term. We will now open up the call for questions. And we'll take our first question from Kimberly John, I'm wondering if you can talk about the progress on bringing e commerce in house and what you have planned for that business? And any way to sort of integrate e commerce with your in store experience here over the next 1 to 2 years? Okay. First off, thank you, Kimberly. We're very proud of that quarter. And I just might add that I think we delivered best in class results given what other retailers have reported. And I might also add, we delivered best in class results in what other luxury retailers reported. Many time analysts look at us compared only one company and I think the analysts should look at us compared to the global luxury marketplace and look at the results that we achieved. The e commerce business is really exciting. We're on track to launch the e commerce site in the beginning of September. So please all of you go on and shop, we would be very appreciative. The site looks phenomenal. And as I've said to you previously, we really did not think we were best in class in our current e commerce experience. So that experience will now be what we believe will be best in class in terms of a shopping experience, also in terms of the branding experience, in particular, our destination course portion of our website, which really will tell you everything about what's happening with the brand around the world, what's going with Michael's fashion advice. And we're really very powerful that way with consumers. They look to us as almost their personal stylist. And again, not many companies have that ability. Certain companies are brands. We are a fashion leadership company globally. And the integration will be through omnichannel, and that will come on through the balance of the year, where we will be able to create a seamless experience for the consumer. When they shop online, we can deliver it from the store, we can deliver it from the website. And as you know, this is becoming a more and more of a competitive issue in the marketplace and the speed at which you can deliver product. So we're working very, very diligently on that. And I'd say that would be more of 1st part of next year, where again we're going to try and take a leadership position in how we give service to that customer. We believe that part of being a luxury brand is service and that is going to mean speed to delivery in house. And then lastly, I just might add that we view this as a very substantial for the business long term. We ultimately think that this can be up to 20% of our global revenues generated in the retail side from e commerce. It's going to take us some time to reach that goal, but that is our goal and we think that that will really enhance our overall experience with our customer. Perfect. Can I just ask one quick follow-up? I'm wondering if you have an update on Kimberly, can you speak up? We can't hear you. Sorry. I hear the sirens in the background there for New York Day. So I'm wondering if you can just update us on the China business you're thinking. Have you considered the timeframe in which you might consider bringing that business in house? Yes. So let me talk about Asia first in total. As you know, we're very pleased with what's happening in Japan. You saw excellent comp store results there. And that's very similar to what's happening in Asia. Not only are we seeing that in Asia, but we're seeing the Asian consumer traveling. We're seeing her in all throughout Europe in our larger tourist destinations, obviously, France, London and certain parts of Italy and then in our airport locations. So they are fast becoming our number one traveling customer for us, overtaking what used to be Brazilian and Russian. So we know that this is taking hold. And as I'm sure you're aware, it's estimated that 50% of all the luxury goods purchased by Chinese are in particular are purchased outside of Mainland China. So we are Stephan has joined the company. We are going to be analyzing certain changes and arrangements with certain licenses that are actually coming due shortly and other ones that we might convert into joint ventures or in 100% take backs into the company. So we're not really ready to discuss that yet, but you can be assured that some of that will be on the horizon in the not too distant future. Terrific. Thank you and good luck here. Thanks, Kimberly. And we'll take our next question from Brian Tanuk from JPMorgan. Thanks. Good morning. I'll add my congrats as well. I guess one question for John and one for Joe. I guess John on Europe, you maybe update us sort of on where are you from a brand awareness perspective? Where are the share gains coming from now? And as importantly, as you try to be a $1,500,000,000 opportunity in Europe, where does that share come from? And then maybe just Joe, on the gross margins that retail, I think you said down 50 basis points. So just curious there, is that mix shift, markdowns, competition, just maybe give us a little more color. You did say ultimately gross margins would start coming down, but just curious what's going on there? Thanks very much. Okay, Brian. Well, first off, thank you for joining the call today. Number 1, as we've said in the past, market share in the U. S. Is at around 89%, just as a frame of reference. I'm sorry, brand awareness is around 89%. And in Europe, brand awareness is now at approximately 49%. So we've always said to everyone that once we get north of that 50% area, you really start to see an inflection develop. The only market that we are north of 50% is in the UK, and we're kind of on the cusp in Germany. The balance of the markets are still in the kind of the 30% to 40% range, 40%, 5%. So lots of opportunity for growth there. So market share, and this is a really good point and I'm glad you raised it. Obviously, we've said in previous calls, where was that market share coming from? And in our opinion, at that point in time, it was coming from a lot of smaller regional players. We don't believe that's true today. We actually know that we are today taking market luxury companies that many of you cover. And we are watching. We are watching the customers go into those stores, come into our stores, shop and leave with shopping bags from Michael Kors and they might be carrying those other luxury shopping bags as well. So in Europe, we are definitively taking market share from that category. And by the way, we're seeing the same thing happen in Asia as well. So we feel really good about our opportunity. We will probably just tip north of $1,000,000,000 next year for the European business. So that's already no one has built a business of this size that quickly. And with the sustainability of which we're building it in terms of the locations and the way we're building the brand with the consumer is really extraordinary and that's being done by our obviously our 10,000 employees around the world. I'm going to touch on the gross margin for one second and then turn it over to Joe as well. The gross margin in North America, because I'd like to just clarify some reports that I read, which were actually incorrect. We have the same amount of SKUs on sale this year as we did last year. So whomever wrote the earlier reports, that's incorrect. Secondly, we did not take any different position on our markdowns inside the stores as we did last year at the same point in time. So we're very proud of the fact that we decided not to enter into the deep discounting of freight that obviously occurred in the 2nd calendar quarter due to excess inventories by a lot of retailers. That being said, what we did have is we did try to bring some fall merchandise in early into our stores in the latter part of May and early part of June to try and get a jump on the fashion trend. That did not really work for us, to be frank. So we're kind of probably look at that on a go forward basis. And especially after there was a long winter, I think people were really ready to continue to buy spring a little bit longer than they were previously. So and we just anticipate that a more normal pace for the business is really what's relevant and hence the guidance for the margin. And again, we don't think that 0.5% is anything significant. We've always said that our margins are probably a little outsized both in gross margin and in operating margin, somewhat because of the very, very, very quick sell throughs that we had. And secondly, because of the fact that we've had, as Joe has mentioned many times, accidental leverage, and I'll let him speak about that. Yes. I mean, the business has just been so good. I really don't have a lot to add to historically, it's been so strong. I don't have a lot to add other than we're seeing the trends today. And we're feeling very good about the business, but we think that we're anticipating this 50 basis points decline. And by the way, one last thing, Brian, too. Our handbag and small leather goods business continues to come at the rates you saw in our report and or higher. So again, it just shows the strength of the brand and the business with the consumer. And I'll talk a little bit later about that in the call. Thank you, Brian. And we'll take our next question from Erinn Murphy with Piper Jaffray. Great. Thank you. Good morning and congrats on a very solid Q1. I guess, John, first for you, as you think about the comp drivers during the Q1, could you just maybe speak to how the trends varied between April, May June in the U. S. As well as in Europe? And then as we head into the back to school fall season, what product categories and launches are you most excited about as you think about fueling this growth? Yes, Erin, we actually had a very good April May. June was a little softer for us. And as I said, that was really sadly self inflicted. We brought that fall merchandise in earlier. You may have seen it in the stores. It just wasn't the right thing to do in hindsight. That being said, we converted very quickly. As you know, we're fast and we moved out of that product quickly and then have our new camouflage delivery on the floor right now. And I might add that we're off to a very successful start in July so far. So our customer is super, super smart. We've always told you that fashion is what leads our company. That's what's leading us globally. Many people write about us and competitors against this and that. Why is Michael Kors successful? It's because of our product category. So then when you talk about in terms of what are we excited about for the fall season, again, what's interesting is 2 really big drivers for us are kind of coming on stronger than we continue to anticipate is our shoe business did excellent during the quarter, both in our own retail stores and in the wholesale environment. And then also the jewelry business continues to be strong. And what we like about those two businesses, they're just bringing more customers into our stores for shopping different categories. And hence, that's why we are going to upsize, Joe mentioned earlier in the call, we're going to upsize approximately 41 stores. And the primary reason we're doing that is really we're not enlarging the handbag spaces in the stores. We're enlarging watches and jewelry, footwear and our women's ready to wear. And the early results of that are quite strong. And so, yes, we will end up with 400 stores in North America and I've seen the comment that we are opening too many stores, which we would absolutely disagree with. And in fact, we'll be pretty much complete with our North American store rollout within the next 24 months or so. And then what we're going to be doing is really looking at upsizing our best stores, our high productivity locations and that expansion will come from our product extensions. So again, we think we're poised to continue our growth in North America and have the right strategy to do that. And I might also add, we never changed our strategy in this company since 2,006, 2007. So everything that we've been saying since before our IPO, during our IPO and to this day is exactly what we're doing in terms of our pace and in terms of how we're building out the business. That's great to hear. And just if I could just follow-up on the watch business, I mean it continues to be a standout as you mentioned just the continued stellar productivity there. How do you think about just some of the longer term drivers? And then, smartwatch category? Thank you. Sure. The watch business is just like the rest of our businesses. We have to have newness. We have to have excitement to stimulate the customer. We know our loyal customer has somewhere between 23 watches that they're purchasing from us. And we've got to excite her to want a third and a fourth and a 5th. And we think we do that well. You certainly saw with our Watch Hunger Stop campaign. I mean, that was just an extraordinary success for us, both the good that we are doing around the world and the fact that people just love the whole colored dial story. So colored dials have been really, really strong for us and we see that continuing into the fall season. And again, that's just another way of exciting her about Michael Kors watches. And we have some amazing things coming actually for spring season on that category. But the eyewear business, I mean, we've got just a brilliant partner in Luxottica. They've developed an entirely new line. By the way, we had already a very sizable eyewear business. We didn't talk about it a lot. So it is substantial and hence why Joe mentioned the impact in our licensing area because it was a very sizable business for us. So we go through the transition mean, Luxottic has mean Luxottic has turned out to be an amazing partner and I think we are going to be one of the leaders in the world in both sun and in optical due to our great partnership. Thank you, Eric. And we'll take our next question from Simon Segal from Nomura Securities. Great. Thanks. Good morning. So John, just to your point about the gross margin, I mean, you guys still beat the gross margin guidance you had given. Can you talk about where the beat came from? And then can you just quantify how much retail operating margin pressure may have felt from the preopening expenses and or e commerce spend this quarter? Thanks. I'll turn that over to Joe. So the beat for the guidance, again, as we've always said, the margins are going to be impacted most by markdowns. So the decrease was a markdown, but the beat was primarily related to that, somewhat due to the strength of our European business, which, as you know, has a slightly higher margin. In terms of the operating margins, all those items that we mentioned are going to be impacting operating margin, as John mentioned. We are definitely investing in the company and the investments that we're doing do have an impact in the operating margins. We feel very good about those investments. But they do, as I say, impact operating margins. Yes. Simon, I might add, we have said all along from again, the day we went public, we never believed that a 30% operating margin was a sustainable margin for the company. And by the way, we don't want that. So I want to be very clear, let no one be misunderstanding. We don't think that's the right way to run our business. We need more investment. We are building this company for the long term. We're not here for a quarter by quarter situation. We're here to build something that is very sustainable. And to do that, you have to invest. We're investing in people. You saw amazing talent that we're bringing in this company. We have some more announcements to make I think will even further strengthen the bench here. We are investing in distribution facilities. When you're growing as fast as us and putting on $800,000,000 to $900,000,000 a year, you need to invest in state of the art distribution facilities, you need to upgrade your technology. By the way, bringing in e commerce in house is I don't know how anyone could assume that that's not going to impact our operating margins. Those are all the right things to do to build And then lastly, the impact of the development of these stores, the expansions, we're going to have accelerated write offs on these stores. That's going to impact our DNA. So again, these are all good things that we're doing to build this business and to build this company, which I hope that you all will understand and respect. And don't just look at the little changes in a bit here and there. That's not what drives the business. What drives the business is good strategic investment and also building your brand with the consumer, which again, I'll talk about a little bit more in the end of the call. Great. Thanks. And we'll take our next question from Faye Landis with Cowen and Company. Hello. Hi. I echo the congratulations. Can you just do us a favor and go back and give us a little bit more texture on the inventory increase, because although you've talked you said you have said that in the past inventory will grow faster than sales. This is a big percentage. So if you could just break that out a little bit more and what's different this time than in previous like in the previous quarters? Ed, you're correct. It is a big increase relative to the increase in revenues. However, our increases in inventory in the past have varied from our increases in sales as well. So we're very comfortable with what happened. As we said, if you kind of take the inventory increase for at a revenue increase level, The amount in excess of that, about half of it relates to building up retail and building up retail commerce. Another half of that relates to timing. We accelerated production and brought goods in earlier this year. And also, as Europe becomes bigger, we're investing more in inventories in Europe. So in Europe, we have a buildup of replenishment and we also Europe has transitioned as a percent of business more to accessories and therefore the inventory cost is higher as we develop the business. Okay. And also just one quick question, which I on the early fall receipts, did that impact the results in June or in July? I just want to make that. So the receipts are really not impacting the sales. John talked a little bit about deliveries into our retail stores, which did have some impact late in the quarter. But the inventory receipts themselves Not in terms of inventory, I'm talking segue, I'm sorry, and in terms of sales and margins. The fact that the early fall receipts were not as well received as you expected because of weather etcetera, for whatever various issues. So Faye let me explain. So we timed and planned to have those receipts in the stores in June. As I said, that didn't work for us and we took that out of the stores very rapidly. And so and that immediately impacted the traffic in the stores, etcetera. So we feel really good about moving quickly. When Joe is talking about the early receipts of merchandise I understand the difference. I understand the difference. Let me just explain. It's also what's called in transit. So there's times when we have a fair amount of in transit inventory. So the in transit he is referring to is actually goods that we will receive physically in the warehouse. These goods are on the water. So they're actually not in our warehouse yet. Yes. No, I understand. Understood that. I'm just saying in terms of what I think there's going to be a lot of focus after this call on your comments on the early fall product that did not sell through the way that you liked and then you moved quickly etcetera. I just want to clarify where that shows up in the numbers? That's already in our guidance, Fay. It's all done. But I'm saying it's a July issue. No, some of those in June. We did take markdowns in the store in June and we moved on. And you would have seen that. And also I might add to that remember we have e commerce now as well, which we did not have at this time next last year. So you're going to see e commerce showing up in our inventories for at least 3 quarters until the revenues really catch up with where the inventory levels are, because we kind of don't know how big the e commerce business is. We have an idea based upon our previous relationship with Neiman Marcus, but we just don't know exactly how big that's going to be. So there will be some mismatching for a period of time as we get comfortable with that business. We'll take our next question from Omar Saad with ISI Group. Hey, thanks. Nice quarter guys. A technical question. So just to be clear, you guys made a bit of a mistake this quarter on this early fall decision to go early with fall. You were able to cycle through it, take some work downs. You were able to still expand gross margins in the quarter. And then it sounds like you're off to a good start with the new product in the Q2. Is that all a fair characterization? Yes, but you should identify that to a month, the month of June, which is what the question was asked earlier. So it's not the quarter. There was 1 month worth of delivery that we by the way, that's very similar to what we've done in the past, where we had a transition group. We just brought it in a few weeks earlier, and we found out the customer didn't respond to that. Understood. But you were able to react and respond and you're kind of back on track? Exactly. Okay. And then another kind of clarification question. I think the EBIT the implied EBIT margin guidance for the full year that you gave on the last call, the Q4 call, I think it's down about 80 bps or 100 bps something like that. And I think today you're guiding to EBIT margins for the year down 150 to 200. It's really the biggest part of the differential opportunities to kind of accelerate investment to support further growth and all the opportunities that you guys have? Yes, that's correct. Clearly, we are investing continue to invest. We have some accelerated depreciation for the stores that we're going to change. So yes, we've developed our point of view in terms of the operating margin since Q4. But the primary change is not some sort of fundamental change in how you view the gross margin cadence? It is not. Right. Thanks guys. It is really as John has said, we are investing in this company for the future and that's what's driving that. That's great. Thanks guys. Thank you. We'll take our next question from Paul Lejuez from Wells Fargo. Hey, thanks guys. Hey, can you talk about the average price point of a handbag in the U. S. Versus Europe versus Japan? And how has that changed over the last couple of quarters on a year over year basis or even years? And what do you expect going forward? How should we think about average price points? Thanks. Yes. As we've said in the past, really average price points have not changed dramatically in the company, almost flat. Our average transaction is running about flat. Average price point is up just slightly a tick, and that's really more because of the consumer responding to certain higher priced handbags from us. That is not a strategic change on our part. We still offer product from more or less in the $2.50 to $4.50 range. That's kind of our range of sweet spot with really $3.50 being the core price point for us. And then in SLGs, again, that's average is ticking up a little bit there because of cross bodies being a bigger percentage of our small leather goods business. But we don't really view anything there as being different. And then, of course, in Europe, our product is more expensive due to VAT and our operating expenses are a bit more are a bit higher in Europe as a percent of total. So therefore, we run the product at a higher price. And then in Asia, it's obviously the most expensive. And again, that's really driven from real estate costs and what it costs to operate in department stores in certain markets where we have concessions and or freestanding stores, which have typically higher rents in particular than North America and in some cases even in Europe. Right. And the steady price points that you've talked about, you're seeing that across geographies, you're not seeing the average price point be higher in Europe and Japan relative to themselves? No, no. So it runs pretty much about the same. And we shouldn't expect any change in the future in that number as well? No. Okay, cool. Thank you. Good luck. Thank you. And we'll take our next question from Adrienne Tennant with Andy Capital Markets. Hi, good morning and congratulations on the quarter. I guess my question is, from a longer term perspective, if not if 30% is not the sort of right off margin number that we should be thinking about, how long should the investment phase last? And where should we think about kind of those margins settling in? And then really quickly, the mid teen comp assumption for the year would assume ongoing deceleration. I'm just wondering why that might be? Thank you very much. Okay. So, two things. Let me just discuss the comp first and then the operating margin. I think you've seen us give guidance before. And I think fortunately, we have been able to do better than the guidance. And as we've said to you in the past, we like to guide with what we know that we can deliver. And then if the consumer is there, as she has been and demanding our product, We've been able through our factory relationships and other situations with the way we flow product, be able to achieve those comp stores. So I think we're planning as we had from the beginning of the year. And if the product continues have the strong results that we're seeing, then you might see us do better. But so we view our double digit comp store growth as still being best in class. I don't think there's any other luxury retailer in the world who is delivering the kind of comp store results that we are. And I think you all in the investment community need to look at that as a very positive sign for the strength of the business. Let me just point out something on that note and then we'll come to the operating margin. There's a number of people who are picking and choosing little spots to discuss trends in the business and we can't come out and respond to every single piece of information like that. But I will tell you the traffic to our website with us, by the way, backing off of marketing as we were transitioning is up 26%. Our CRM database went up 69% in the quarter. Our Facebook fans went up 160% in the quarter. Our Instagram fans went up 155%. Our Twitter fans went up 58% and that's on a like for like quarter. So I think Michael Kors is still feeling a very, very strong momentum, both domestically and globally. And even in search for Michael Kors, the name was up over 20% in the quarter. So I think that just resonates to the brand and what the potentials are if the consumer continues to respond that way. But we're always going to plan where we think we can deliver on and then hopefully exceed that. Secondly, as it relates to the operating margins, I would tell you that we think that 28% to 29% range is a more sustainable range for us. Investment will go on forever. That's the right place to be. And by the way, that's still by all metrics that we look at, still incredibly best in class in terms of operating margin. So again, I hope that you all I know you love to all look at sequential deceleration. But remember, it is the fact that we're going to deliver a 30% top line and a 25% bottom line this year. And we've said that we're going to continue to have double digit top line and bottom line growth in this company. Again, I don't see many luxury retail companies out forecasting that type of growth. Great. Thank you very much for the color. It's helpful. And we'll take our next question from Dana Telsey from Tag. Good morning, everyone, and congratulations on the terrific results. As you look at the just a couple of quick questions. How did Ticket perform in the quarter? And any other timing changes in the second half of the calendar year that we should look to in terms of the timing of bringing in goods? And lastly, just the SoHo store opening, when do you expect that to open and how is the impact of those costs on overall operating expenses? Thank you. Great. Ticket is exactly the same. From 2,007 to where we are today, it's almost identical. It was a little bit, it's been climbing a tad, but nothing to really call significant at all. Average transaction UPTs has gone up and I mentioned that to you for the past year or so and that was really driven by jewelry, by more people coming in and buying more product in total. So we feel good about that. The timing thing, let me just explain this again. The reason why we try to do this, the fall delivery is a good example, is because we don't want to compete in the mark down arena. Again, both in our wholesale business and in our retail business, we remain on the same cadence. So every day of the week, we try to think how to sell more full price product. I saw an analyst wrote a note about the unmentioned 500 stores, which by the way is exactly we've been in all those department stores since we've been operating in this company. We've been upsizing those shop in shops. And guess what? They sell mostly full price product. So again, I think there's been a little misdirection that needs to be looked at. And again, what we're trying to do is we're trying to sell more full price products. So we're going to push the envelope. We're going to try and get new fashion in the stores earlier. And are we going to make some mistakes at times? Absolutely. That's what fashion is about. And so that timing issue for us, same thing we do, by the way, in the holidays, in January, we try to get out of the sales product as quickly as possible and we try to bring spring product into our stores in January. Sometimes that works, sometimes that doesn't work depending on how the weather is outside, depending what the season was before. So but again, I want you to know we are not going to back off being a fashion company, trying to deliver newness and trying to excite our customer. That is our competitive edge, period, end of story. That's why we're winning around the globe. And in terms of the Soho store, that timing is now moved to October, sadly. It is going to be spectacular. And I do want to tell you, we're going to hold an Analyst Day at the store when it is completed. And we're going to invite you all in and talk the future direction of this company. In particular, we're going to walk you through the men's line and what we're doing there and some of the exciting developments we have. But it's really going to be a cornerstone project for us. And as I also mentioned, there will be a couple more of those level stores that we're working on. Again, that's not our real strategy. Our real strategy is to go to the 5,000 foot stores going from 2,500 to 5,000. But there are a few locations globally where we think we could have a slightly larger flagship store and incorporate men's, women's together. But as we said in the call earlier, most of the men's projects will be freestanding stores that we're working on and quite frankly have a few locations already identified. Thank you. And we'll take our final question from Camilo Lyon with Canaccord Genuity. Thanks and also congrats on a great quarter. I just wanted one final clarification on gross margin concerns. I think that that's going to be a highly debated topic. As you think about the guidance that you spoke about down 50 basis points for the year, it seems like a lot of the markdowns on the fall line have already been taken maybe a little bit seeps into Q2. How are you approaching the promotional landscape around back to school and holiday? And more importantly, how are you viewing your relationships with your wholesale partners and how they're planning their business from a markdown cadence perspective? Okay. So again, I want to reiterate, I think 0.5% of gross margin movement off of a very high gross margin is I wouldn't view that as you may view that as highly debatable. We will take the position that that's not given the fact that we're a luxury goods company growing our business. But we're going to take the exact same point of view that we have always taken. We are not going to become more promotional. That is not what we've built this company on. And I think our consumer has responded to that. And so we by the way, we don't participate in a back to school promotional cadence, never have, never will. What we will do is we'll introduce great new product. For example, backpacks are becoming quite strong today and those are leather backpacks as well. And so we've got a whole collection of those that happen to be retailing quite strong for us. So we will do things like that. We'll increase our assortment of flats. That way we can take advantage of some of the younger customer who might need those shoes for back to school. Again, we're focused on trying to excite customers with fashion, not with price. That's not how we're going to win as a luxury company. Thank you for that clarity. Could you just one more point on that. Could you just clarify then what is the main driver for the gross margin decline expectation? Sure. As we've said earlier on the call, we believe that there is just some more normalized selling rates that are happening inside the store. Those were unsustainable gross margin. We told everyone that for multiple quarters. We also told everyone that the operating margins were not sustainable. And we've had planned them to come down. So I've said that to you guys in previous conversations. I think the shock and the reality of seeing that has everyone a bit unfocused in my opinion, because you're not focusing on what is the true development of this business. We put on 20 plus percent comp store growth. We had 43% top line sales. We're adding stores. We're growing the business to $1,500,000,000 in Europe. And when you focus on only one little detail, that's not the whole picture of the company. And the other thing that I want to end on note is, remember, we don't compete with 1 company in the world. And I believe that many, and I'm going to say this, many analysts are just focused on that. I think it's wrong. I think you need to focus on the fact that there are a lot of luxury goods companies in the world. There's a very large luxury market in the world and we don't compete in just one category as we said earlier. 70% of our business is coming from handbags and small leather goods, 30% is coming from other categories and those categories are growing very, very quickly for us. So look at some of the other luxury players and what percentage as they run-in some of those categories, and I think you might see opportunity for Michael Kors in its growth and development. I want to thank everyone for participating in the call today. Look forward to speaking to you all and hopefully on the next call that we're all together. Thank you very much. This concludes today's conference. Thank you for your