Earnings Call: Q4 2014

May 28, 2014

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Michael Kors Holdings Limited 4th Quarter and Fiscal Year 2014 Earnings Conference Call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. As a reminder, today's conference is being recorded. And now, I would like to turn the conference over to Ms. Christina Lack, Vice President, Treasurer. You may begin. Good morning, and thank you for joining us for our Q4 earnings call. Presenting on today's call are John Idol, Chairman and Chief Executive Officer and Jill 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 not assume that the statements made during the call will remain operative at a later time and the company undertakes no obligation to update any information discussed on the call. I will now turn the call over to Michael Korsch's Chairman and Chief Executive Officer, Mr. John Idol. Thank you, Christina. Good morning and welcome to Michael Korsch's 4th quarter fiscal 2014 earnings call. With me today is Joe Parsons, Chief Financial and Chief Operating Officer. I will begin with a brief overview of our 4th quarter performance and update you on advances we have made in our strategic growth plans. Then I'll turn it over to Joe for a detailed review of our Q4 financial results and our outlook for fiscal 2015 Q1 and full year. I am very pleased to report that we've had another record year at Michael Kors. One of the reasons for our continued growth lies with our success in communicating our identity as a leading global luxury brand. We've made Michael Kors synonymous with fashion leadership and jetset luxury. That philosophy is at the heart of everything we create from our products to our stores and to our digital innovation. By connecting with our customers globally through consistently exciting products and communications, we've been able to build upon the foundation of Michael Kors jetset vision. The Michael Kors brand is now sought after by consumers around the world who inspire who are aspired to live the luxury jetset lifestyle our brand embodies. Now let's turn to our results. For fiscal 2014, it was an outstanding year for Michael Kors. We achieved earnings growth of over 60% in 2014, following approximately 130% growth in fiscal 20 13, while continuing to make strategic investments in our business that will position us to achieve our long term objectives. We attribute our consistently strong financial results to the exceptional product offerings created by Michael Kors and our design team and to our jetset luxury shopping experience that continues to resonate with consumers globally. In addition, we continue to build brand awareness throughout the world. Based on a recent study, awareness in the U. S. Increased from 82% in 2013 to 89% in 2014. Europe's brand awareness increased from 39% to 49% over the same period. Lastly, brand awareness in Japan is 32%. We have a tremendous opportunity to further increase brand awareness globally through various marketing channels, including traditional advertising, ecommerce site, social media and public relation events. Focusing on our most recent quarter, we saw a very healthy growth across all segments and geographies. Total revenue in the 4th quarter grew 54% to $917,000,000 Income from operations grew 58% to $246,000,000 and operating margin was nearly 27%. This performance was the result of continued execution on our 6 key growth strategies. First, in North America, revenue grew 43% and comparable store sales increased 20.6%. 2nd, we opened 4 new retail stores as we continue to expand our footprint in North America. 3rd, we successfully converted 1 163 additional department stores globally into branded shop in shops. 4th, in Europe, revenues grew 125% and comparable store sales increased 62.7% and we opened 4 locations across the region. 5th, we continue to develop our business in Japan. Revenues grew 89% during the quarter and comparable store sales increased 50% and we opened 2 locations during the quarter. And 6th, we opened 9 new locations through our regional licenses in the Far East. Stores in this region experienced double digit increases in comparable store sales. Turning to our segment performance during the Q4. Retail net sales grew 50% and global comparable store sales increased 26.2 percent representing our 32nd consecutive quarter of store growth comp store growth. Sales growth in the retail segment was driven by 101 new stores opening since the Q4 of last year. 10 of those stores were opened during the Q4 of 2014 and we ended the year with 405 company owned retail stores globally. Including 150 locations operated by our licensees, we ended the year with 5 55 stores and concessions in total. In our wholesale segment, net sales grew 56%, driven by the strong performance of department stores and specialty stores in North America and Europe, where we have continued to see strong demand for our luxury accessories and footwear products, as well as continued successful conversion of department store doors to branded shop in shops. During the Q4, we converted an additional 163 department store doors to Shop in Shops and ended 2014 with approximately 15 60 global shop in shops in accessories, footwear, women's wear and menswear combined. We expect our shop in shop conversions to continue to contribute to our strong growth in our wholesale segment. We anticipate opening 500 new shop in shops globally this year. Our shop in shops are a compelling way to showcase the brand, highlight our luxury products and create an exciting jet set shopping experience for our customers. Finally, revenues segment increased 79%, driven by the strength in our luxury watch, jewelry, fragrance and eyewear business. Our watch business continues to have strong performance and we see momentum building in our jewelry business. We believe that there is an opportunity to grow our watch and jewelry business globally. We are focused on expanding these offerings in our retail stores and rolling out additional watch and jewelry shops in department stores. At the end of 20 14, we had approximately 125 watch and jewelry shops shop in shops and continue to believe that there is an opportunity for 500 worldwide. We continue to be pleased with the performance of our new fragrance and beauty collection in both North America and Europe, which exemplifies the sporty, sexy, glam aesthetic of the Michael Kors brand. We plan to continue the global rollout of this new collection in additional markets in Europe, the Middle East and Latin America this calendar year and additional markets in Asia next year. Long term, we expect to be one of the most significant brands in the luxury fragrance and beauty market globally. We also saw strong performance in our eyewear business during the quarter. As we previously announced, we have entered into a new exclusive 10 year licensing agreement with Luxottica, the industry leader in eyewear. We think they are an ideal partner for Michael Kors brand as we continue to build the global expansion of our eyewear business and further enhance our luxury image in optical and sunglass marketplace. We are focused on building a strong core assortment of iconic shapes and hardware details to define our eyewear brand and reflect the Michael Kors aesthetic. We are excited for the launch of our first collection with Luxottica in January 2015. Turning to our operations by region. In North America, revenue grew 43% to $739,000,000 during the quarter with comparable store sales increasing 20 0.6%. We opened 4 new stores during the quarter and ended the year with 288 North America retail stores. In our North America wholesale business, we saw overall growth driven by comparable store sales increases in accessories and footwear that were similar or greater to the comparable store sales increases in our own retail stores. Continued successful conversion of department store locations to branded shop in shops also drove wholesale growth in the 4th quarter. Looking to fiscal 2015, we anticipate opening 45 North America retail stores and remain confident that the market can support 400 stores in the long term. We're also planning to expand the footprint in select retail stores in key major cities. We are seeing an increasing customer demand for our luxury products and we see an opportunity to expand certain categories including women's footwear, women's ready to wear, watches and jewelry in our stores. As an example of this strategy, we are excited to be opening our new SoHo flagship store later this year, which will be our largest store to date at approximately 21,000 square feet. This location will have 3 floors. The ground floor will feature our luxury accessories, watches, jewelry, fragrance and eyewear. The first floor will feature women's ready to wear and women's footwear. The lower level will feature our men's full offering. This will be the 1st store globally to showcase our men's ready to wear and leather collections. On the wholesale side, we continue to convert department store doors to branded shop in shops in our accessories, footwear, womenswear and menswear business. Internationally, we continue to see our brand recognition expand in both new and existing markets. In Europe, we have seen great reception to the brand as customers continue to embrace the jetset luxury experience that Michael Kors brand embodies. This increasing acceptance drove growth of more than 125% during the Q4 to $165,000,000 Comparable store sales in Europe increased 62.7% during the Q4, reflecting the exceptional product in our stores. We also continue to expand our retail presence in Europe, opening 4 locations during the quarter and ending the year with 80 retail locations in the region. Our new store openings have been met with great excitement among consumers and we are pleased with the performance that we continue to see in this region. In our European wholesale business, we saw strong sell throughs in both department and specialty stores during the quarter. We continue to believe that we can capture market share in this region as we expand our brand presence and grow our distribution. For fiscal 2015, we expect to open 55 new stores in Europe. Over the long term, we see opportunity for 200 Michael Kors retail locations. We also continue to see momentum build in our wholesale business and expect to further expand our presence in this channel. As I've said in the past, we're excited about the opportunity in Europe and believe that over the next several years, we can achieve revenue in excess of $1,000,000,000 in this region. Turning to Japan. We continue to be pleased with our steady progress. Japan remains a great long term opportunity and a key market for the company. We're in the early stages of developing our brand in Japan and are cognizant that it will take time to fully realize the potential of the Michael Kors brand in the country. That said, there is great momentum behind the business now. During the Q4, revenues in Japan increased 88.5% to $13,400,000 and comparable store sales increased 50%. We opened 2 retail locations during the quarter and now have 37 in Japan. In fiscal 2015, we expect to open 10 additional locations and believe that we can have 100 retail locations in Japan over the long term. The rest of the Far East region continued to show strong growth as well with double digit comp store growth in retail stores operated by our licensed partners. We are continuing to build our brand awareness across the region and we are further developing the market through our regional licenses. During the quarter, we opened 9 stores in the Far East, bringing our total to 103 Michael Kors retail locations in Greater China, Korea, Southeast Asia and Australia. As I mentioned on our last call, we recently opened our new flagship store in China at Cary Center on Menjing Road. This 6,000 square foot location is the largest of our retail stores in the region and prominently showcases all of our luxury product categories across both our Michael Kors collection and Michael Michael Kors lines. As I mentioned earlier, we hosted an exclusive event to celebrate the opening of our Shanghai flagship store and introduced the Michael Kors jetset lifestyle to the Chinese consumer. Guests were treated to a never before seen runway show featuring a signature Michael Kors jet set collection that illustrates the sophisticated and global appeal of Michael Kors' design philosophy. This live event was made available across a wide network of social media platforms and produce the highest level of engagement we have seen to date. We are incredibly excited about building the brand in the Asian market and believe that the resounding success of this event shows that the consumer is truly beginning to understand that the Michael Kors brand is a global fashion leader for men and women leading a jetset lifestyle. Importantly, events like this serve to build awareness for Michael Kors brand not only in China, but across the globe. Overall, we believe that the Far East is an important and growing market. The Asian consumer is traveling more and spending more while traveling, which bodes well for our brand and we believe that we are well positioned to capitalize on this growing trend, which brings us to our travel retail business. The travel retail business is strong and continues to gain momentum. We ended 2014 with 50 travel retail locations in some of the best airports and travel destinations in the world. Over the long term, we believe that there is potential for 75 travel retail shops worldwide, including freestanding stores, shop in shops and stores operated by specialists in the travel retail business. Finally, we are on track to launch our new North America e commerce site this fall. Increasingly, consumers are turning to our website and to social media platforms to shop and connect with the Michael Kors brand. In fact, we saw our reach continue to expand across all social media channels, including Facebook, Twitter, Instagram and Weibo. Our growing base of fans and followers on these platforms drove increased traffic to our website during the quarter and these platforms will continue to build brand awareness globally. There's a lot of momentum behind the e commerce business. We think it's an ideal time to launch the new site, which will serve as a powerful marketing tool, enabling us to create a strong connection to Michael Kors customers as well as reach a broader audience. We are excited about the potential of this channel and over time we believe that the e commerce business can be a multimillion dollar platform for the company. In summary, fiscal 2014 was another year of exceptional growth for Michael Kors. We exceeded our financial expectations and continue to make progress on our strategic growth initiatives. Overall, there is great momentum behind the Michael Kors luxury brand and we are poised to achieve our long term sales and earnings growth objectives as a premier brand in the global luxury market. 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 2014 Q4 financial results, followed by our outlook for the Q1 and full year of fiscal 2015. For the Q4, total revenue grew 50 3.6 percent to $917,500,000 as compared to 597 point $2,000,000 for the Q4 of last year, with strong growth in each of our retail, wholesale and licensing segments. Retail net sales increased 49.7 percent to $408,400,000 as compared to 272 point $7,000,000 in the Q4 of last year, resulting from a comp store increase of 26.2% and the opening of 101 new stores since the Q4 of last year. The comp store performance was driven primarily by the continued strength of our accessories line and watches. Wholesale net sales grew 55.5 percent to $473,700,000 in the 4th quarter compared to $304,700,000 in the same period last year. The increase was led by strength in our accessories and footwear categories, the continued successful conversion of existing doors to shop in shops and the expansion of our European operations. In our licensing segment, revenue grew 79.1% to $35,400,000 for the quarter as compared to $19,800,000 last year, primarily driven by the continued strength in watches. Gross profit increased 54.2 percent to $549,400,000 as compared to $356,200,000 in last year's Q4. Gross margin expanded 20 basis points to 59.9 percent, reflecting the strong year over year gross margin increases in both our retail and wholesale segments. The margin increase was driven primarily by favorable product mix shift to higher margin product in addition to geographic mix. Total operating expenses grew 51.1 percent to $303,500,000 in the Q4 of fiscal 2014 as compared to $200,900,000 last year. As a percent of total revenue, total operating expenses decreased to 33.1% from 33.6% in last year's Q4. SG and A expenses increased 50.4% to $278,200,000 as compared to $185,000,000 for the 4th quarter last year. The increase in SG and A expense is primarily due to higher retail occupancy and salary costs related to new store openings, an increase in advertising and marketing expense, higher distribution costs and increases in corporate employee related percent for the Q4 of last year. Depreciation and amortization expense was $24,000,000 during the 4th quarter as compared to $15,200,000 for the Q4 of last year, primarily due to the build out of new retail locations, new shop in shops and investment in our infrastructure to support our growth. As a result of these factors, income from operations was $245,900,000 or 26.8 percent of total revenue as compared to $155,300,000 or 26.0 percent of total revenue in the same period last year. Income taxes were $85,000,000 in the 4th quarter as compared to 53 point $5,000,000 for the Q4 of last year. Our effective tax rate was 34.6% flat with the same period last year. Net income increased 59.3 percent to $161,000,000 for the 4th quarter and diluted earnings per share were $0.78 based upon 207,000,000 weight average diluted shares outstanding. Net income for the Q4 of fiscal 2013 was $101,100,000 or $0.50 per diluted share based upon 203,800,000 weighted average diluted shares outstanding. Turning to the balance sheet. While we continue to make significant investments in the company, both for CapEx and infrastructure SG and A expense, we are generating strong cash flow from operations. At March 29, 2014, cash and cash equivalents were $955,100,000 over 2 times the prior year balance of $472,500,000 Free cash flow for fiscal 2014 was $416,300,000 as compared to $217,200,000 in fiscal 2013. The cash balance is primarily being driven by the increase in earnings. There were no outstanding borrowings under our credit facilities in either year. Inventory totaled $426,900,000 and as compared to $266,900,000 last year, an increase of 60.0 percent. The growth in inventory was driven by increased sales as compared to the Q4 of last year, new stores as well as our continued build out of new shop in shops. Capital expenditures for the quarter totaled 57.8 $1,000,000 The majority of these expenditures related to new store openings with the remainder being used for investments in connection with building new shop in shops and enhancing our information systems and distribution infrastructure. We opened 10 stores in the quarter, 4 in North America, 4 in Europe and 2 in Japan and ended the quarter with 405 retail stores including concessions. Turning to our outlook. For the Q1 of fiscal 2015, we expect total revenue to be between $840,000,000 $850,000,000 assuming a comp store increase of approximately 20%. We expect diluted earnings per share to be in the range of $0.78 to $0.80 assuming a tax rate of 33.5 percent and 207,500,000 shares outstanding. We expect the 1st quarter gross margin rate to be slightly lower than last year and operating expense rate to be moderately higher than last year. For fiscal 2015, we expect total revenue to be between $4,000,000,000 $4,100,000,000 assuming comp store increase in the high teens. We expect diluted earnings per share to be in the range of $3.85 to $3.91 assuming a tax rate of approximately 33.5 percent and 208.6 1,000,000 shares outstanding. Capital expenditures are expected to total approximately 400,000,000 for fiscal 2015. We expect to open 110 retail locations, including 45 in North America, 55 in Europe and 10 in Japan, in large select locations in key major cities, continue with our shop in shop conversions and investment in infrastructure and systems. In summary, we made great progress in our strategic growth initiatives during the Q4. We continue to invest in the company and are making plans for new warehouses and systems in all of our international locations. Our strong cash position will allow us to make these investments in our infrastructure in order to support our global expansion. Overall, we believe that Michael Kors is well positioned for continued long term growth. I will now turn the call back to John Idol. You, Joe. In closing, there is strong momentum and significant runway for growth at Michael Kors. We not only delivered excellent results in fiscal 2014, but we made strides in enhancing our infrastructure and strengthening our foundation, so that we can deliver upon our growth objectives for 2015 and beyond. Everything we do embodies our jetset luxury brand. As we continue to evolve and elevate Michael Kors products and retail experience to appeal to our fashion consumers. There is a tremendous growth potential in each business, region and product category, and we are well positioned to capitalize on these Our strong momentum and leading position within the rapidly expanding global luxury market gives us confidence that we can continue to deliver double digit revenue and earnings per share growth over the long term. We will now open up the call for questions. Thank We'll take our first question from Kimberly Greenberger with Morgan Stanley. Thank you. Sorry, I had a problem getting my news off. Good morning and congratulations on a really fine cap to a great year. John, I'm wondering if you can talk about or Joe specifically on this segment reporting margins. There was a huge increase in wholesale, a decline in retail and a big increase in licensing. Is that a reclassification of or change in the methodology and the way you're calculating those? That would be super helpful. And then John, as you look out to the upcoming fiscal year, given that you are talking about still very strong revenue and earnings growth, What are the things that you're seeing out in the market that are most exciting over the next 4 quarters? And is there some start to the normalization of markdowns that you're seeing beginning here in Q1, given the outlook you have for it sounds like a slight decline in gross margin? Thanks. So I will start with the operating profit margins. There was no change in the methodology. We do continue to see very strong operating margins in wholesale because of very limited Good afternoon, Marcus Stanley. Very limited markdowns in allowances. The licensing will tend to change a little bit because we charge our advertising expense to licensing. Therefore, licensing may change somewhat due to the timing of our advertising expense. So good morning, Kimberly, and thank you for those kind remarks about our quarter. We were very excited to see the results in the Q4. Obviously, given everything that was being talked about in the retail environment, we believe that we were probably best in class in terms of performance in our own freestanding stores and obviously the strength in our shop in shops and department stores globally. And looking forward in 2015, fiscal 2015, we're really excited about a number of things. Number 1, our freestanding stores continue to deliver There's some background noise if someone could mute their phone or whatever. We're very excited about what is happening in our freestanding stores. And again, we are capturing market share both here in the U. S. And internationally. And it's really driven by our product. 1st and foremost, always Michael and the team are continuing to be setting the trend and the tone for exciting fashion products, everything from our collection runway to our Michael lines. And then so we continue to see that as our cornerstone for strength. Secondly, we think that we have really become a leader also in social media and the way that we are communicating to our customers, again, whether that's through Facebook or Instagram or Twitter or we're very focused now on Weibo and how we're going to continue to talk to her and him around the globe. Thirdly, the thing that excites us is the e commerce business coming in house. As you know, there is definitively a trend where consumers are spending more time, not necessarily buying always online for the various brands, but shopping. For sure, they are shopping more online before they actually make their purchases. So we believe that our e commerce, our Internet site is really not only critical for us from a growth and revenue standpoint, but also from an ability to excite and engage our customer in a shopping experience before they've ever even come into the stores. And we'll be talking in the quarters ahead about some very exciting technology that we're rolling out to stores to complement that experience online. In terms of normalization, our trends kind of remain the same. We're off to a very good start again in our Q1. So I'm not sure we are yet seeing what you're mentioning. And by the way, we have specifically said to you, it's going to come. It is going to come. We just haven't seen it yet. And hence, the strong operating profit, strong gross margins in the company that you can see us delivering on today's call and projecting out into the future. Thanks so much and good luck for the second quarter, Q1. Thank you. Thank you. We'll move on to our next question, Brian Tunick with JPMorgan. Good morning. This is Biena Boina filling in for Brian. Thanks for taking our question. We wanted to ask on your comp guidance specifically how you're thinking about the traffic versus ticket or UPTs particularly for North America? Maybe in terms of the product mix, is there anything you could share with us on your outlook for accessories versus non accessories mix and touch on performance of adjacent categories like jewelry, fragrance and maybe comment on if you see an uptick to UPTs from those? And finally, from a pricing perspective, do you see any shift towards higher price points or any real changes to AURs from mix shift? Thanks. Okay. Let me see if I can answer all those things. I understood them all. First off, good morning. We view traffic as a very important barometer of our growth and we experienced double digit comp store traffic globally, which we were very pleased to see. We are equally as focused on conversion. And I'm also proud to say that we experienced double digit conversion globally and in North America. So we continue to look at those metrics as the most important metrics in us being able to achieve our comp store growth. We have never really looked to drive up and I'm going to talk about the average transaction. Average transactions in our stores have remained relatively flat for the past almost since 2007 when we opened one of our first lifestyle stores. So that is not something that we're really looking to do. We think that one of the great things about Michael Kors is that you can come in and have an amazing fashion experience and want to come back multiple times because your whole purchase for your season isn't taken in one visit with us. In terms of accessories, clearly, the small leather goods business continues to outpace the actual handbag business in terms of growth. And part of that's driven by the smaller bags also, which we classify into the small leather goods business. So it's not just money pieces we're talking about, but it is products that are referred to sometimes as swing packs. And those products are from a fashion trend standpoint, they're on fire right now. Jewelry continues to be a very, very strong category inside of our own stores and then of course in the department stores and our specialty store distribution. Know, 50% to 60% the size of our watch business. And as you know, globally, we believe we're one of the top 10 watch companies in the world today. So we think that would put us as one of the top 3 or 4 jewelry companies if we can really achieve our goals over the next 3 to 5 years. Again, a lot of that will be driven by our own freestanding stores and some expansion that we're putting around the watch and jewelry category and our own freestanding stores. And then really on the pricing side, the only place that we expect to see higher prices on a go forward basis will really be in our collection handbag business. We're seeing great response to that category. That's really in our kind of $1,000 and up category. And especially as we build these larger flagship stores or enlarge some of our existing lifestyle stores, that category becomes more relevant for us. And so in general, as you know, the higher priced luxury bags have moved up in pricing. We don't expect that for the Michael Kors line, but we do expect that for our Michael Kors collection line. Great. Thank you very much. Best of luck. Thank you. We'll move on to our next question from Omar Saad with ISI Group. Hi, thanks. Two quick questions guys. Great job by the way. I guess the first question is on the Retail segment, the operating margins, do you they were under pressure a little bit in Q4. Do you expect them to kind of stabilize and maybe rebound going forward given that calendar 1Q was kind of fun and clunky with all the weather and the Easter 21% to 24% overall top line growth. That's probably the smallest spread that you've seen at least since being a public company. Are you expecting to slow kind of the wholesale business or the shop in shop conversions or new store openings? I'm just kind of wondering that spread between comp store sales growth that you expect and the overall revenue number seems a bit small. Thanks guys. Let me just address one thing in the operating margins in retail. Actually, our gross margins in retail were very similar on a year on year basis. So that wasn't where what you're seeing in some of those operating margin declines is actually where we're taking rents of stores early, retail locations that we might not have opened. So you have something like SoHo sitting without any sales and the rents starting. So there's some things inside of that. So we really didn't see any more promotional activities in our business. So it wasn't that we had pressure on our retail business from a sales or markdown strategies. We saw the same kind of sell throughs in wholesale that we did in retail. And also Europe, again, as we're taking buildings in advance and some of the other start up costs that are going along with the expansion in Europe, that's really what's impacting more of the operating on retail. And I think you'll see that more normalize out over the next couple of quarters, especially as we get some of these stores open. That being said, we are also looking at some additional fairly large flagships in Europe, which will go through a similar situation to us. And we've told you in past calls, it's very difficult for us to kind of time those things. Rolling out in malls is relatively simple, not simple, but it's easier for us to predict. And we also have shorter construction periods. When you get into buildings, especially whether it's here in North America, the building that we're building in SoHo, we're probably 6 months late due to construction issues and things when you get into these buildings, there's a lot more going on than you anticipate. So there'll be some of that fluctuation and we'll hope to hopefully be a little bit more clear in the next call and define how that breaks out. In terms of the comps and our overall top line growth, honestly, comp store growth 100 stores is impressive, but it doesn't move the needle as much for us as comp store growth does. So I think both in wholesale and in retail, comp store growth remains a critical measure for success for us on a go forward basis. Thanks, John. That's really helpful. We'll take our next question from Oliver Chen with Citi. Hi, everyone. This is Nancy Hilicker in for Oliver Chen. Congratulations on the strong quarter. Our question is related to the margin impact you said was influenced by a mix shift in product and geography. Can you talk about the impact that will have the rest of the year? And also if you could talk to us a little bit about e commerce, is that factored into guidance in terms of top line and margins? And also what percent of sales do you anticipate that might be this year? That would be great. Thank you. Nancy, I'm not sure we said that there was a margin impact. Can you just maybe define your question overall? I'll take that question. So we did say that there was a positive impact due to both product mix and geographic mix. And this is a trend that we've been talking about for quite a long term. We've said for some time that both product and geographic mix was going to have a positive impact and we are seeing some of that. So this year or this quarter, our total accessories, which we define as everything other than ready to wear, increased from 80% last year to 85% this year. And obviously, we had accelerated growth in Europe relative to the growth in North America, which has a positive impact. So yes, that's a trend that we have discussed in the past and we do believe that that will continue to have a positive impact in the company's operations. In terms of e commerce, John's obviously talked about the e commerce and the impact. And yes, the numbers are included in the projections. However, e commerce, we don't break out at this point and they're not going to have a significant impact in terms of revenue or operating income. It's more the aspects that John has discussed, which we believe will be the short term positive impacts from putting e commerce in. And e commerce just so everyone knows is it will not be a positive impact to our EPS in the 1st year due to all the investments that we're making. We really see that as having a more positive impact over the next 2 to 3 years. Thanks so much and congratulations again. Thanks, guys. Our next question comes from Erinn Murphy with Piper Jaffray. Great. Thank you. Good morning and congratulations on a great quarter. John, just for you, you made a very interesting hire recently. You brought in a Senior Vice President of Global Operations. Could you just provide a little bit more context on some of her priorities as she starts there? And then, Joe, a follow-up on the guidance. You had mentioned the gross margin slightly down in Q1. Operating expenses a little bit higher in Q1. I may have missed this, but could you just quantify how you're thinking about margins for the full year? And then as we take a step back longer term, are you guys still thinking about longer term sales growth in that kind of low to mid 20% range and income growth in the 25% plus range? Thank you. So actually, I'll take the Global Operations who reports to me. She her main focus is on our distribution centers today. So we continue to work on the Whittier distribution center to ensure that it will be ready to provide distribution in North America over the next several years. We then have a next major project of putting in a new warehouse, which is going to be owned and run by us in Europe. And following that, we are then considering a new warehouse in North America. In addition to that, we are looking at a new warehouse in Canada and looking at our distribution, in particular, she's focused on fulfillment for the e commerce. So she's got a lot of things on her plate and consistent with what we've discussed about building the infrastructure, she will be focused on doing that. In terms of the gross margin, we've talked about that for some time, we will be having some normalization, we believe and hence the slight decrease despite the positive trends that I've talked about, in particular the growth of Europe. And then that's going to be consistent with the full year. In terms of operating expense, I believe I talked to everybody about kind of accidental leverage in the past. It looks like we're attempting to obtain leverage. In fact, we are expecting to reinvest in the company. And so we're doing a lot of Yes. On the longer term, we Yes. On the longer term, we've provided guidance for fiscal 2015. And beyond that, we have said that we believe that given our runway for growth and in particular in Europe and ultimately what Asia will provide us that we do think that we have double digit comp store capability. We think that we have double digit revenue and double digit EPS. We're not prepared to guide to a specific number at this point, But we feel really good about all of our opportunities. And then of course, we spoke, I think it was 2 calls ago about the growing importance of the men's business in our company and what that will mean for us long term. We think that is a $1,000,000,000 opportunity and I kind of went through that $300,000,000 in men's sportswear, dollars 300,000,000 in men's leather goods and then $300,000,000 to $400,000,000 in men's watches. Now we won't have revenue because of the men's watches, but that will be clearly a licensing income opportunity for the company. So we see that as a big priority for us. We will be announcing shortly that there will be freestanding men's stores that we're going to be opening globally. It's a little premature to talk about the locations and how many and when, but that is in our strategy. So we're taking the men's business very seriously. As you know, many of our global luxury competitors derive very high percentages of their sales from men's and in particular leather. But we think there's a great sportswear opportunity out there for us as well. So we think that will provide additional growth for the company over the long term. Great. Thank you guys and best of luck. Thank you. Our next question comes from Paul Lequuez from Wells Fargo. Hey, thanks guys. Just back on e comm for a second. Sorry if I missed this, but will you be including e comm sales in your comps this year? Or will you wait until you run it for a year before you include it? And then second, just regarding Japan and China, how are customers responding differently to product? What are the main differences customers are looking for in your Asian stores versus U. S. And Europe? And just wondering what the brand awareness is in China? Thanks. E commerce will not be in comp. It will be reported in retail revenues and it will comp when it's 53 weeks old or whatever, just like we would report any other comp store. And obviously, we'll as e commerce gets up and running, we'll talk a little bit more granular about it in the conference calls. It's just too early days for us to really be able to give you a lot of guidance on it because quite frankly, we're going to learn our way through it. We have a nice sized business that we're transferring over from even markets to ourselves. So it gives us a good base platform to operate on, but it's not something today that will significantly impact our revenues. As it relates to Japan and Chinese consumers, I would actually put them into 2 different buckets. The interesting thing for us is the best sellers in the United States are the best sellers in Europe are the best sellers in Asia. So it really doesn't change globally. What you have is, in particular, I'll start with handbags. Handbags, whether it's in Japan, we might have some color variations that need to be addressed. The color pink is very important in Japan. Sizing issues are very important. Obviously, there are certain height differences between people in North America, Europe and in Japan. So those modifications we do in merchandising adjustments. In watches, we obviously have a much more broader presentation of our Demi watches as opposed to our larger watches, which you'll find again more broadly embraced in North America and in Europe. And in footwear in Japan, there's obviously some different sizing issues. So we have wider last, etcetera. So we're doing all those things. Japan is just it's going to take us time because the consumer really needs to understand what does American luxury mean. There's not a great history in Asia of American luxury. I would tip my hat to Tiffany. I think they've done a brilliant job of defining American luxury. But there's not a lot of other companies who have done that and done that well. And so we really are working very hard at trying to do that. In China, there's not a lot of differentiation between the product again that's selling there versus what's selling in the U. S. And Europe. It's much more closely aligned. And so we don't have to make a tremendous amount of merchandising changes there. Again, there are some tweaks that we're making. Obviously, there's not a lot of people with blonde hair in that region of the world. So we're selling certain colors differently than we would sell if we're in Norway or in different northern regions of Europe, etcetera. So we do make some of those changes. And again, we have merchandising teams on the ground in all the various regions around the world. So we're close to the business. And I think you know us as a company, we move very, very rapidly in terms of making changes to adjust to the different marketplaces. But again, we see the brand really starting to gain some traction with the Japanese and the Chinese and we see them interestingly enough traveling a lot and we see them in our travel destinations and we're watching very closely how they're purchasing and it's starting to accelerate nicely. Thanks. Great. Yes. We haven't done it yet in China, mainly because we know the answer to the question and we will do it this year. We know it's very low. We've really only been at this for 2.5 years in China. So we're just not even focused on that for the moment. But we will do the brand awareness study this coming up year and then begin to build off of it at that point. Thanks guys. Good luck. We'll take our next question from Randy Konik with Jefferies. Hey, great. Thanks a lot. I guess my first question is regarding just going back to the to the margin commentary. So are you just making a statement that you expect, I guess, Joe, when you look at the model that we should expect year over year improvement in the retail segment operating margins on a sequential go forward basis given that we'll start to get these stores opened in Europe? And then just longer term, how should we be thinking about the retail segment operating margin potential versus the wholesale segment operating margin potential? And then I guess just lastly, how should we be thinking about the revenue split of the $1,000,000,000 potential in Europe between wholesale and retail? Thanks. This is John. I'm going to address that just for a moment. It's going to be a little difficult to predict the actual quarter by quarter operating margin for retail. As I said before, due to some of the timing of the openings of stores and certain investments that we're making in retail regions, in particular in Europe, where it impacts us. So we really don't see any dramatic sequential change in the gross margins and the slightly next year only because as we've talked about normalization, we think will ultimately be more of a factor in the business. But when you look at our gross profit for the Q4, which was 59.9% against last year's 59.7%, we're really about flat. So it moved around a little bit in the mix in the categories, but it's really not something that we are planning to have dramatically decline or dramatically increase in either direction. What you will see happen over time and especially over the next 2 years, retail is going to become a bigger part of the total business of the company, where today retail and wholesale are roughly equal. Over the long term, we've told you that retail will probably look more like 70%, 75%, maybe as high as 80% of our company's business. And you're going to start to see that happen over the next kind of 2 to 3 years. Then you'll see some change that will be reflected because that will impact the profitability and in particular the gross margin of the company because the retail division has higher gross margins than the wholesale division. So in terms of the retail split in Europe, we will as you know, the European wholesale business is going to be a very important part of our business. Is primarily the specialty shops. It's a very clean and strong business. But eventually Europe will be slightly more retail than it will be wholesale. Got it. Can you hear me? Yes. I'm sorry. So just to be clear, from a end of fiscal 2014 year retail operating margin versus and where the wholesale operating margin kind of sat for the whole year, do you see room for the retail operating margin to continue to move higher and the wholesale operating margin to continue to move higher European business tends to be a little bit more expensive. So therefore, the retail operating margins tend to have some pressure on them. We kind of accelerated our rollout in Europe in fiscal 2014. We again in fiscal 2015 have a significant rollout of retail stores in Europe. After that, I believe that there will be an upside to the European to the retail operating margins. On the wholesale operating margins, we don't have that upside potential. And as a matter of fact, my expectation would be that the wholesale operating margins would come down as the business normalizes and we have more normal markdowns and allowance cadence. Okay. That's very helpful. Thank you. Yes. And just to further clarify, because I do believe there's a bit of misconception at least I'm hearing a theme from the questions. At the year end, our retail operating margins are roughly flat as a percentage on a year on year basis. And our wholesale margins operating margins were up slightly. So again, to reiterate what Joe said, we don't think next year our operating margins in retail will change significantly higher or lower. So I think given given normalization. So I just I want to make sure everyone's clear because our gross margins in actual in our retail business increased this year. So I want to repeat that. Our gross margins in retail actually increased this year. And the reason why I want to point that out is that points out the health of the business for the company. That concludes today's question and answer session. I'll turn the conference back over to Mr. John Idol for any additional or closing remarks. I want to thank everyone for joining us today. And I want to again applaud our 10,000 employees around the world who helped deliver some extraordinary results for fiscal 2014, and they are poised, ready and excited to deliver very exciting results for this company in fiscal 2015. We look forward to speaking to you on the next call. Have a great day. That concludes today's conference. We thank you for your participation.