Earnings Call: Q3 2014

Feb 4, 2014

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Michael Kors Holdings Limited Third Quarter Fiscal 2014 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 your questions. As a reminder, today's conference is recorded. And now, I would like to turn the conference over to Ms. Christina Lach, Vice President, Treasurer. You may begin. Good morning, and thank you for joining us for our Q3 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 Web site. Investors should not assume that the statements made during the call will remain operative at a later time, and the company undertakes no obligation to update any information discussed on the call. I will now turn the call over to Michael Kors' Chairman and Chief Executive Officer, Mr. John Endel. Thank you, Christina. Good morning, and welcome to Miccor's 3rd quarter fiscal 20 14 earnings call. With me today is Joe Parsons, Chief Financial and Chief Operating Officer. I will begin with a brief overview of our Q3 performance and update you on the advances we have made in our strategic growth plans. Then I'll turn it over to Joe for a detailed review of our Q3 financial results and an update on our outlook for the Q4 and full year. Our Q3 results were outstanding. As our exceptional product offering created by Michael Kors and our design teams, as well as our unique jet set shopping experience made Michael Kors the go to destination for the holiday season. Michael's fashion messaging with our customers was strong and well executed throughout the holidays. We communicated with our customer through email, catalog, print, outdoor and social media, which effectively conveyed the glamour and luxury of our holiday offering, capturing the customers' attention and generating strong demand globally. During the quarter, our strong momentum continued across all segments and geographies. Revenue grew 59% to $1,000,000,000 marking our Q1 with revenue in excess of $1,000,000,000 Gross margin expanded 100 basis points to 60 1%, income from operations grew 68% to 343,000,000 and operating margin was nearly 34%. We continue to execute on our 6 key growth strategies in the 3rd quarter. First, in North America, revenue grew 51% and comparable store sales increased 24%. 2nd, we continue to expand our retail footprint in North America, opening 20 new stores. 3rd, we successfully converted 76 additional department store doors globally into branded shop in shops. 4th, in Europe, we believe brand recognition further expanded and our luxury products resonated with the consumer. Revenues grew 144%, comparable store sales increased 73% and we opened 19 locations across the region. 5th, our business in Japan continue to develop. Revenue grew 54% during the quarter. Comparable store sales increased 18% and we opened 4 locations during the quarter. And 6th, we further expanded our retail presence in the Far East, opening 7 new locations during the quarter through our regional licensees. Stores in this region experienced double digit increases in comparable sales. Turning to our segment performance during the Q3. Retail net sales grew 51% over the prior period and global comparable store sales increased 28%, representing our 31st quarter of consecutive comp store growth. Retail sales growth was driven by 98 new stores opened since the Q3 of last year. We opened 43 of those stores during the Q3 of fiscal 2014, ending with 3 95 company owned retail stores globally and 5.33 stores in total, including locations operated by our licensees. In our wholesale segment, net sales grew 68%. This increase was driven by our successful conversion of department store doors to shop in shops and continued strong performance in both department stores with particular high demand for our luxury accessories and footwear products. During the Q3, we converted 76 department store doors to shop in shops, ending the quarter with approximately 1400 shop in shops globally in accessories, footwear, womenswear and menswear combined. Our shop in shops remain a key strategy for highlighting the Michael Kors brand and bringing our jetset luxury experience to department store customers. We believe that as we convert additional doors to shop in shops, more customers will discover the brand driving future growth in our wholesale segment. Finally, revenues in our licensing segment increased 59%, driven by continued strength in our luxury watch and eyewear businesses. In addition, we are very pleased with the growing momentum in our jewelry business. We see tremendous growth opportunity for watches and jewelry globally. We will continue to expand these categories in our retail stores, while we also roll out additional watch and jewelry shops in our wholesale channel. At the end of the quarter, we had approximately 120 watch and jewelry shops. Ultimately, we believe that we can have 500 shop in shops worldwide. Our fragrance and beauty launch was met with great response. We launched the sporty, sexy glam collection in North America this past August, which was met with much enthusiasm in both our retail stores and at Macy's where we have distributed the collection exclusively. We subsequently launched the collection in Europe in the fall and saw similar response from our European consumer. We are excited about the growth potential of our fragrance and beauty offering in Europe. Importantly, we think that the fragrance launch is also helping to enhance brand awareness for Michael Kors in this region. We plan to continue the global rollout of this new collection in additional markets in Europe, the Middle East and select markets in Asia in calendar 2014. Over the next few years, we expect to be one of the most significant brands in the luxury fragrance and beauty market globally. Turning to our operations by region. In North America, revenue grew 51% to $863,000,000 during the quarter with comparable store sales increasing 24%. We grew our North America retail presence to 284 stores with the opening of 20 stores during the quarter. In our North America wholesale business, growth was driven by comparable store sales increases that were similar or greater to the comparable store sales increases in our retail stores. In addition, our combined successful conversion of department store locations to shop in shops helped drive wholesale growth during the quarter. Looking ahead, we are on pace to open 57 North America retail stores this fiscal year and continue to believe that there is room in the market for 400 stores over the long term. On the wholesale side, we will continue to convert department store doors to branded shop in shops in our accessories, footwear, womenswear and menswear businesses. Internationally, we are extremely excited about the strong reception to the Michael Kors brand that we are seeing as our recognition expands both in existing and new markets. In Europe, more and more customers are embracing the glamour and luxury of the Michael Kors product, driving revenue growth of more than 140% during the Q3 to $140,000,000 Comparable store sales in the region increased 73%. We believe this comp store increase reflects the compelling luxury product offering in our stores. We continue to expand our presence in Europe in both new and existing markets to meet the growing demand for Michael Kors luxury products. Our new store openings were met with great anticipation among consumers and the performance thus far has exceeded our expectations. We ended the quarter with 76 retail locations in this region. Our European wholesale business also continues to enjoy strong sell throughs in both department and specialty stores. As I've said in the past, we believe that we are well positioned to continue capturing market share in Europe as we further expand our brand presence in the region by growing both our store base and wholesale distribution. In fiscal 2014, we are on pace to open 36 new stores in Europe. Over the long term, we believe the market can support 200 Michael Kors retail locations. We see ongoing book momentum in the wholesale segment and look forward to further expanding our presence in this channel over the next several years. Based on the strong results that we've significant runway for growth in Europe. We're very excited about the opportunity to expand the Michael Kors brand in the region. Over the next few years, we believe that the European market will achieve revenue in excess of $1,000,000,000 Turning to Japan. We remain pleased with the progress that we are making in the market. As we said in the past, Japan is a great long term and a key market for the company. While we are still in the early stages and recognize that it will take some time to fully develop this market, we continue to see strong momentum in Japan. During the Q3, revenues increased 54% to 9,000,000 dollars and comparable store sales increased 18%. We also opened 4 retail locations during the quarter and now have 35 in Japan. We expect to open one additional location during fiscal 2014 and believe that we can have over 100 retail locations in Japan over the long term. We continue to see strong performance in the rest of the Far East well, with double digit comp store growth in retail stores operated by our licensed partners. We are focused on continuing to build our brand awareness in the Far East and further developing the market through regional licenses. During the quarter, we opened 7 stores across the region, bringing our total to 94 Michael Kors retail locations in Korea, Greater China, Southeast Asia and Australia. We are excited to announce the opening of our new flagship store in Shanghai, China at Cary Center on Nanjing Road. This location is the largest of our luxury retail stores in the region at approximately 5,800 square feet, and we believe it will be the premier destination for the Michael Kors brand in China. Long term, we anticipate there will be 200 retail locations in this region. In Latin America, we are pleased with the progress of our retail expansion. We opened 2 stores in the major Brazilian markets of Sao Paulo and Curitiba during the quarter, and currently have 7 locations in this region, with 3 in Brazil, 1 in Venezuela and 3 in the Caribbean. We believe that there is considerable demand for Michael Kors brand in Latin America and we are excited to be expanding our presence across these markets. Ultimately, we believe the Latin American market can support 40 retail locations over the next several years. Moving to our travel business, at the end of the quarter, we had 45 travel locations in some of the best airports and travel destinations in the world. In total, we now believe that there is a potential for 75 travel retail shops worldwide, including freestanding stores, shop in shops and stores operated by specialists in travel retail business. We believe the travel business is strong and continues to gain momentum, particularly with the growth in the Asian tourism globally. Finally, we are on track to launch our new North America e commerce site during the fall of 2014. As I've mentioned before, we are working to transition the e commerce platform in house in order to provide the consumer with a true omnichannel experience. Our new website will allow us to enhance the level of engagement between our online customers and the Michael Kors brand. It will also serve as a great marketing tool that will give us the opportunity to develop By bringing e commerce insight in house, we will be able to better focus on communications, marketing and sales strategies to capitalize on the online growth opportunity. Over the long term, we believe that e commerce can be a multimillion dollar business for the company, and therefore, believe that it is prudent to make the necessary investments in this business. In summary, our momentum remains strong as reflected in our Q3 performance. We had an extremely successful holiday selling season, which we believe speaks to the strength of our brand. We've exceeded our financial expectations and continue to execute on our strategic growth initiatives. We believe that we are well positioned for the long term growth as we further expand the Michael Kors brand within 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 Q3 financial results, followed by our outlook for the Q4 and the full year. For the Q3, total revenue grew 59.0 percent to $1,000,000,000 as compared to $636,800,000 in the Q3 of last year, with strong growth in each of our retail, wholesale dollars as compared to $332,600,000 in the Q3 last year, driven by a comp store increase of 27.8% and the opening of 98 new stores since the Q3 of last year. The comp store sales performance was primarily by the continued strength of our accessories line. Wholesale net sales grew 68.2% to $461,400,000 in the 3rd quarter compared to $274,300,000 in the same period last year. The increase was primarily the result of strong growth in our accessories and footwear, the continued successful conversion of existing doors to shop in shops and the expansion of our European operations. In our licensing segment, revenue grew 59.0 9.0 percent to $47,400,000 for the quarter as compared to $29,800,000 last year, primarily driven by the continued strength in watches. Gross profit increased 61.6 percent to $619,500,000 as compared to $383,500,000 in last year's Q3. Gross margin expanded 100 basis points to 61.2%, 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 and lower product costs in select items. Total operating expenses grew 54.7 percent to 276 point $3,000,000 in the Q3 of fiscal 2014 as compared to $178,600,000 last year. As a percent of total revenue, total operating expenses decreased to 27.3% from 28.0% in last year's Q3. SG and A expenses increased 54.5% to $254,600,000 as compared to $164,800,000 for the Q3 last year. The increase in SG and A expense was primarily due to higher retail occupancy and salary costs related to new store openings, an increase in advertising and marketing spend, higher distribution costs, a portion of which was related to the disruption in our U. S. Distribution facility and increases in corporate employee related costs. As a percent of total revenue, SG and A expense was 25.2% compared to 25.9% for the Q3 of last year. I would note that shipping from our U. S. Distribution facility has returned to a regular cadence as we address the disruption early in the quarter. Going forward, we expect to incur additional distribution expense as we look to identify further efficiencies and implement process improvements. Depreciation and amortization expense was $21,700,000 during the 3rd quarter as compared to $13,800,000 for the Q3 of last year, primarily due to the build out of new retail locations, new shop in shops and investments in our infrastructure to support our growth. As a result of these factors, income from operations was $343,200,000 or 33.9 percent of total revenue as compared to $204,800,000 or 32.2 percent of total revenue in the same period last year. Income taxes were $113,500,000 in the Q3 as compared to $73,000,000 for the Q3 of last year. Our effective tax rate was 33.1% as compared to 36.0 percent for the same period last year. The decrease in our effective tax rate was primarily due to the increase in taxable income in certain of our non U. S. Subsidiaries, which are subject to lower statutory income tax rates and receiving an income tax benefit related to the restructuring of certain of our foreign operations during the quarter, partially offset by certain adjustments related to blended state income tax rates. Net income increased 76.6 percent to $229,600,000 in the 3rd quarter and diluted earnings per share were $1.11 based upon 206,100,000 weight average diluted shares outstanding. Net income for the Q3 of fiscal 2013 was $130,000,000 or $0.62 per diluted share based upon 202,800,000 weighted average diluted shares outstanding. Turning to the balance sheet. At December 28, 2013, cash and cash equivalents were $828,300,000 as compared to $405,800,000 at the end of the Q3 last year. There were no outstanding borrowings under our credit facilities in either year. Inventory totaled $431,600,000 and as compared to $290,200,000 last year, an increase of 48.7 percent. Capital expenditures during the quarter totaled 53 point $4,000,000 A 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 system and distribution infrastructure. We opened 43 stores in the quarter, 20 in North America, 19 in Europe and 4 in Japan and ended the quarter with 3 95 retail stores, including concessions. Turning to our outlook. For the Q3 of 2014, we expect total revenue to be between $790,000,000 $800,000,000 assuming a comp store increase in the range of 15% to 20%. We expect diluted earnings per share to be in the range of $0.63 to $0.65 assuming a tax rate of 33.5 percent 206,800,000 shares outstanding. We expect the 4th quarter gross margin rate to be slightly higher than last year and operating expense rate to be moderately higher than last year. For fiscal 2014, we now expect total revenue to be between $3,180,000,000 $3,190,000,000 assuming comp store increases of approximately 25%. We now expect diluted earnings per share to be in the range of $3.07 to $3.09 assuming a tax rate of approximately 34 percent 205,600,000 shares outstanding. Capital expenditures are expected to total approximately $200,000,000 for fiscal 2014. We expect to open 9 additional retail locations in the Q4, including 4 in North America, 4 in Europe and 1 in Japan and continue with our shop in shop conversions and investment in the infrastructure and systems. In summary, we continue to make progress on our strategic growth initiatives during a very strong Q3. We believe that Michael Kors is well positioned for continued long term growth. Thank you. I will now turn the call back to John Idol. Thank you, Joe. In closing, we remain focused on continuing to grow the company by driving comparable store sales growth, expanding our retail store base globally, capitalizing on our e commerce opportunity, continuing to convert department store doors to branded shop in shops and growing our brand internationally. We are very pleased with our momentum going into the Q4 and expect to deliver record results for fiscal 2014. We will now open up the call for questions. Thank We'll go first to Lindsay Drexelmann of Goldman Sachs. Thanks. Good morning, everyone. I wanted to ask first just on Holiday. Obviously, you guys had very, very strong results and clearly gained a whole lot of share with good performance in the quarter. Can you give us any color on things like pace of markdowns, what you saw happening through your retail partners at the wholesale results? And then secondly, Joe, if you could just maybe push forward of shipments that were delayed from the September quarter? Yes, I think the push forward of shipments that were delayed from the September quarter? Thanks. Good morning, Lindsey. Lindsay, we had double digit traffic increases in our stores and we also had double digit conversion increases in our stores. So we were very pleased with the results during the quarter. In terms of styles that we had on the floor, we were about even this year versus last year in terms of the amount of SKUs that were on the floor. We were a slight bit higher in terms of dollars, in terms of markdowns this year versus last year. And a fair amount of that was driven, quite frankly, from some of the late deliveries we had coming out of the distribution center, but we had good deriving slightly later than we had anticipated. That was primarily in our wholesale distribution. So all in all, really it wasn't anything material different for us on a year to year basis from the promotional standard and cadence. Obviously, there was a tremendous amount of promotion going on around us. And as we typically do, we opted not to really participate in that. And our customer responded to Michael and our design team's amazing product. And I think we're seeing similar response in the very beginning of our new deliveries for the spring season as well. So we think as long as we stay focused on being on trend with the right product, She's excited and she's stimulated to come purchase Michael Kors luxury products. I'll turn the second question over to Yes. As John just mentioned, there was a disruption primarily related to the wholesale side of women's ready to wear. As John mentioned, we had a lot of deliveries at the same time. We have not disclosed that number and we don't consider it to be significant. Okay. Thank you. We'll go next to Kimberly Greenberger of Morgan Stanley. Great. Thank you. Congratulations on a really fantastic quarter. John, I'm wondering if you can step back for a second and just talk to us about how you think about investing behind the brand to sustain the brand momentum over the longer term. It's obviously clear coming out of this quarter that there is a tremendous amount of current momentum. But just talk to us about how you think about managing the brand for the longer term? And what kind of infrastructure investments are you in the process of making and do you expect to need to make over the next couple of years in order to be able to build this into a real sort of global brand powerhouse? Sure. I'll start. Thanks, first off. Good morning, Kimberly. The sustaining the momentum is something we obviously get up and think about every day of the week. And we don't think about it just from a U. S. Perspective, we think about it from a global perspective. I think I know many of you are tracking our following on things like Facebook and Twitter and Instagram. We're very proud of the fact that we cleared over 10,000,000 Facebook fans recently. We're in the kind of 1,500,000 range for Twitter and Instagram. And we think that continuing to build our platform socially is one of our priorities because it gives us one of the greatest global reaches. So I'd say that's probably our number one priority. Our number 2 priority is the development of our own website in house. While everyone talks about the amount of sales transacted during the holiday season over the website, and we certainly enjoyed that as well. Website, and we certainly enjoyed that as well, seeing strong, strong, strong double digit increases far in excess of what our comp stores were. So obviously, people are actively purchasing more online than they have in the past. But it is a place where people come to shop. And when you hear a lot about mall traffic being off and clearly that was a theme that you heard during the holiday season, what is happening, we believe, is that are actually shopping 1st online, doing their selection and then coming in, in many cases, still into the store to buy. And they know what they want. They're very clear about what they've seen, size, color, price, everything. And we see that happening not only domestically, but internationally. So we have a significant amount of traffic that's coming through our website from all over the world as she is shopping for our brand. And by the way, some of that shopping is even before she's traveling. So as you know, travel the tourism business is an extremely important business for us on a global basis. And she gets ready for her trip that she might be taking to Paris or to London or to Sao Paulo or wherever she's going. And she's shopping beforehand knowing what she's going to purchase during that trip. So we think that by focusing on social, focusing on our own web development. And then lastly, we think opening retail stores in major cities and in secondary cities is critical to the brand development. When you open in secondary markets and we've talked about this in the past and you see the kind of numbers we're putting on, what does that tell you? That tells you that the customer, A, has a pent up demand for our product, but B, there's probably continue to be sustained on a global basis. On an infrastructure side, we're about to embark on a very, very significant infrastructure upgrade in the company, starting with expansion of distribution facilities. We will stand up a minimum of 3 brand new very large facilities over the next 24 months, one in the United States to help support our retail growth. We will have an independent facility for retail distribution both to our stores and for e commerce. 2nd, we will stand up a very new and large facility in Europe to support the obviously very rapid growth we have there and that facility will handle wholesale, retail and Internet. And thirdly, we will invest in a brand new facility in Canada. We have a very, very substantial and growing business in Canada, and that infrastructure needs upgrading as well. So we think between what we're doing to continue to build brand awareness, continue to develop luxury product, again, we think we have some of the highest quality products in the industry and led by Michael and his great design team. And then lastly, the money that we're going to spend on the back end of the infrastructure, we think that this company will be well positioned for many, many years of future growth. We'll go next to Brian Tuncay of JPMorgan. Thanks guys and my congrats as well. It's pretty amazing in this environment. I guess two questions for you guys. Number 1 on product mix, if you could maybe just give us some update of how the holiday shook out, non accessories versus accessories? And as you look forward, what categories do you think have still the biggest runway for growth? And then the second question really on the international margin side, can you remind us what size does Europe or Japan need to get to reach parity of your domestic EBIT margins? Thanks so much. Okay. Thank you, Brian. Good morning. We ran north of 85% of our business during the Q4, again, in what we term accessories. So accessories for us is handbags, small leather goods, footwear, watches, eyewear and fragrance. And those categories are continuing to grow really right across the board. I forgot to mention jewelry as well. The dominant category for us during the holiday season in terms of dollar growth and percentage growth was handbags and small leather goods. So that clearly drove the predominant amount of our business right across the board domestically, internationally, etcetera. The 2nd biggest category for us was watches. And again, we saw double digit increase in our watch business, and we continue to see that business moving ahead very nicely. So those two categories were really the 2 driving forces and that's obviously in our retail stores. On a wholesale side, what we're seeing is really an extraordinary development. Our footwear business, as we reported to you in the past, is really becoming a dominant player, the same way we are a dominant player in the wholesale channel in handbags, We're a dominant player in watches. We think we're reaching that same level of dominance in footwear, but with tremendous runway for growth. I think we've reported to you in the past that we have we are going to install approximately 150 shop in shops for footwear over the next 12 months across many domestic and international retailers. I think you've been down to Macy's to see our extraordinary presentation, which is really positioning us for the future of what footwear can look like in our wholesale distribution, and that's being embraced by our partners. So I would say to you that that's one of the real big strong growth categories for us. And then our women's ready to wear is doing very, very well. We had some difficulty in the Q4 and that was really due to some shipping issues. But in general, that category is also moving ahead very nicely for us. So and then lastly, going back to our own retail stores and wholesale combined, the jewelry opportunity is enormous. We believe that we will over the next 2 to 3 years become one of the leading players in that market. And as you know, when you look at certain of our other competitors in that business, they're anywhere between $1,000,000,000 $3,000,000,000 So we see that as a category that we can ultimately grow to those kinds of levels. So again, lots of opportunity for the company for growth in product categories. And then lastly is the men's. We've said before, we think that we can reach $1,000,000,000 about a third of that coming in our wholesale sportswear business, about a third of that coming in the men's leather goods business and then a third of that coming from the watch business. So we have a long way to go in terms of growth products and continuing to build the brand. And I'll let Joe talk about the margin. And Brian, as you know, we don't disclose regional either gross margin or operating margin or EBIT margins. We have talked in general that consistent with the industry, our margins in Europe our gross margins in Europe will tend to be somewhat higher than the U. S. Gross margins. And that as the business the operating expenses are also going to be somewhat higher. As the business grows, we expect that that business will be more profitable, but we are not there yet and we've not disclosed what the timeframe for that is. We'll go next to Erinn Murphy of Piper Jaffray. Great. Thank you. Good morning and congratulations on just a great quarter. John, just wanted you to maybe focus a little bit more on Europe. If you could just talk a bit more about the mechanics in that market. I mean, it seems like you guys are really shaking things up across the continent in a very positive way. Maybe help us understand Europe's importance strategically as you tourist flow there? And then the holiday quarter in Europe, could you just kind of share some perspective on what you saw from a local versus tourist consumer there? Sure. I'll start with Europe first. And good morning, Erin. Good morning. Europe was an extraordinary holiday season for us. While there was conversation about traffic in the United States, the traffic flows in Europe were just extraordinary. And I think that speaks to 2 things. Number 1, we've talked before about where we are building the business and who we are taking market share from, etcetera. And I know lots of conversation has been around one of our main competitors. But in fact, we think we're taking beginning to take market share from many luxury, very large luxury companies that some of you cover. And in particular in Europe that's we have 2 sets of competitors. We have very large luxury players and then we have all these regional players that are across the board. We clearly are becoming the number 1 and if we're not already there, the number 1 accessible luxury handbag company in the market. But we are also by virtue of where we are opening our retail locations on streets next to all of the very large significant and heritage luxury companies, we're starting to take market share there. And we think the customer is resonating with the Michaels' core's product design. Michaels has been on trend and really season after season, delivery after delivery, just delivering exciting product. The European consumer has always been very astute at what fashion is and having the right products for the right season. So we think that's really where we are dominating. And the second issue is, again, just like in the United States, our jetset in store training programs and our sales associates, we think are far outshining our competitors. We are there to be a fashion consultant for our consumer and we think she's really responding to that. So we're very, very pleased with what we saw happen in Europe and are seeing happening and it's right across the board. Again, I keep telling you in all the calls, our business is excellent in Spain, our business is excellent in our business is excellent in Italy, our business is excellent in Greece and a lot of the countries that you would think would be being hit by the economic downturns, which they are, but there's still money being spent in these markets and consumers are responding to the right product presented in the right way and delivered in the fashion environment. We're at the very beginning stages of understanding what's happening in Latin America. We know she desires our product. We have very, very high brand awareness in the Latin American market, which is quite interesting. We never ran any ads. We never had any stores there. So our initial results are quite outstanding. And so we're very comfortable with very new to the market. We're only there a few years. And obviously, there's a lot of competition and we're late to the market. So that will take us many years to develop. But what we do see is in our travel retail reports, they're popping up as anywhere between number 23 in the airports for us. So that means she's searching us and in other duty free locations and she's very interested in getting the product. And so we think that bodes extremely well for our long term future in that marketplace. Thank you. That's helpful. Can I just sneak in one more for Joe? I just how do you think about prioritization of cash usage? You should have about $1,000,000,000 plus cash by the end of this year. Could you just help us think about the priorities there? Thank you, guys. Yes. As John mentioned, we have a lot of projects that we were going on. And in addition to the projects that John mentioned, we will begin investigating what our replacement for our legacy system here is. So we have a lot of investments to do in the company. In our minds, we will not think about utilization of cash other than investment in the company until the cash balance becomes about 10% of the market cap. Thank you, guys, and best of luck. Thank you. We'll go next to Omar Saad of ISI Group. Thanks. Good morning, guys. Good morning. Good morning, Omar. So wanted to talk about you got all the strength going on in your business right now. Europe is North America. If you think 2, 3 steps ahead, can I ask you about men's? How you feel the brand obviously men are half the population. How you feel the brand is set up with the male consumer? Maybe some initial things you're working on to get the male consumer more familiar with it? And does the brand have too much of a feminine edge to it to really generate a big men's business? Have you started to think about that or address it? Any color around that as you think about the next evolution of where the growth is going to come from? Sure. Thank you, Omar. Good question. Omar, we talked, if you remember all the way back to the road show, the waterfall. And we first consider the North American market our primary market and still plenty of room to grow in there. But over time, the North American market will mature. And that's why we felt very strongly investing heavily in Europe, because we and as we've said, we think that's an opportunity to be $1,000,000,000 for us in the not too distant future. And there may even be upside from there. So again, we feel that that's kind of the next stage of the role of the waterfall. Then the next piece is going to be Asia. There will be some acquisitions of or certain licenses will come due. And so we'll bring some of those things in house. Japan is going to come on stream, which we think is going to be a very big business for us on a go forward basis. So that kind of takes us over the next few years. And then lastly, we really believe in the men's business. And we have a small men's business today, but it's doing quite well. It's really gotten entrenched very nicely in the best retailers in the United States, being Bloomingdale's and Neiman Marcus and Saks. And then in Europe, we started to roll it out. We're in about 150 specialty stores and we're doing quite well there. We have shop installations going on in Europe. And we would expect in the next 30 days that we will have announced a new Men's President from a very successful large global Men's company. And we think that's going to be an important further step. The next thing that you will see in terms of men's is we will be launching a men's fragrance for the fall season. That will be accompanied by tremendous advertising and so between what we're doing in shop in shops in the stores, between what we're going to do with men's fragrance and you're going to see a very major push on men's watches. Typically, men's are men's watch competitors. And again, we think of the Swiss luxury companies as our men's watch competitors, because today we're one of the top 10 selling watch brands in the world. Typically, our competitors will do 50% of their business in men's watches and 50% in women's. And we are not at that level today. We see that as a huge opportunity. So over the next kind of 24 months, you're going to see a significant push in the men's business. We have a very clear vision of who the Michael Kors man is. I think you'll start to see that resonate in our advertising, both in print, outdoor and then, of course, online on our own website and socially. So I think we've been patient about how we were going to go about this, but we view it as a sizable opportunity for the company, and we think we'll be positioned in a very good segment to achieve that. And by the way, most of that volume long term for us we think will come internationally and a little less so domestically. Excellent. Appreciate the insight. We'll go next to Paul Lejuez of Wells Fargo. Hey, thanks guys. Congrats. Just wanted to ask you about your average price points in your handbags this holiday season versus last year. How are you thinking about that going forward? Do you think you have an opportunity to move price points higher or shift some of the mix into higher price point handbag categories? Thanks. Good morning, Paul. Thank you. We've said this for the past 3 years, we really haven't changed our pricing on almost all of our products in the company. We think our customer appreciates the fact that we are offering them incredibly high quality for a value that still is luxury pricing, but she knows that it's something that she can come back and access on a regular basis. Our AURs in our retail stores have not changed since 2007. Our average transaction is really quite extraordinary. And that was with also the adding of jewelry, which is a lower price point as of purchase. Our UPTs have gone up slightly, but our overall average transaction remains about identical. And the other thing I might point out is, since the day we started in this company, we always had luxury price points. So we have everything from $10,000 crocodile bags to a $2.48 jetset tote. So we've always had a luxury offering in our accessories. We're very proud of the fact that we just recently brought our luxury footwear back in house. It was licensed and we're producing that in house and we're having excellent response to that. So we believe in the luxury category. We have the Michael Kors runway collection, which will be shown here very shortly in New York. And that's where we come from as a company is from a luxury background. That is Michael's beginning of the company. So we have that in our women's ready to wear, we have our handbags, we have it in our footwear, and we will continue to make sure that that product is represented in basically all of our lifestyle stores and handbags to some degree in shoes and select stores with the women's ready to work. We'll go next to Randy Konik of Jefferies. Hey, how are you? Thanks a lot. A quick question, you guys, I guess first for John, you've given us some frame of reference of how you're thinking about the opportunity from a revenue perspective in Europe above $1,000,000,000 I think Asia above 1,000,000,000 dollars How do you think about the U. S. Market of what the revenue opportunity is from a total market share, total revenue perspective? And then I guess for Joe, how should we be thinking about the CapEx run rate of the company given these distribution center projects? And then can you just walk us through how you're going to be taking on these projects without disrupting the company? Thanks. Thanks, Randy. Randy, first off, just one minor correction. We did not say $1,000,000,000 in Asia. I think that was you were thinking of men's that we talked about $1,000,000,000 We have not put a revenue projection on Asia yet. The total revenue in the United States, we have not guided to a number there. I think what we've said is and you've seen our consistent commitment to double digit comp store growth. And we see that as a continuing goal for us. And obviously, we've been able to achieve that goal. And we do that with a lot of precision, 1st with product, again, led by Michael's genius design vision, but really secondly, by an amazing group, we have almost 10,000 employees worldwide today, led by outstanding senior management team, and we are very focused on planning and on having the right product in the right stores at the right time. And we think we're very good at that. So again, we think that the market has substantial opportunity for growth both in store count and in shop count in terms of department stores. And we think that the market will continue to grow at a double digit rate for us. Again, we will give you guidance on the Q4 for where we're going to be. But the market has plenty of room for us to continue to grow. And again, there's been a lot of market share information. Again, when you compare Michael Kors numbers to our competitors, remember, we do a lot of business in in not just handbags. So again, if you're comparing market share to market share, sometimes I see the analysis are not really done correctly because they compare our total revenues to other competitors who are really more of a handbag company. So we feel great about that. And just one thing before I turn the second piece over to Joe, we will continue to make very significant senior hires in the company to support our growth and we're bringing on people who will help us really execute many of these large projects that we talked about. And let me just add to what John said. We have learned lessons. We are continuing to understand what our infrastructure should be like. Hiring people is difficult today, but we are continuing to build up the infrastructure that we need to get these projects done and are very, very focused on that. In terms of our CapEx in the future, we, as you know, don't disclose anything other than 1 year out or the year that we're in, in the Q4, we will disclose or we will guide you to the next year. So I cannot give you further guidance to that other than to say, one, it's the company's philosophy to at this point to continue to invest heavily in the company. And second is, as we've indicated, we have a lot of significant projects continuing in addition to our regular program of building retail and shop in shops and investing in the systems. So you can expect continued significant CapEx in the future. And Randy, one last point into earlier question that Kimberly asked. I've said this before and I know it always doesn't make everyone happy when I say it, but we're not as concerned about the percentage of operating margin. That is not our concern. Our concern is revenue growth, sustainability of the brand and investment in the brand and then obviously bottom line EPS growth. If our operating margins contract, which over time I would think they would given our investment in infrastructure, yet the top line is growing and the EPS is growing, we would think that would be the appropriate thing. Again, we have not been able to catch up to many of the needs that the company has just because the company is growing so fast. So there will be a normalization. We've talked about normalization of sales in terms of markdowns, etcetera, and there will be a normalization of expense to revenue ratios. I think we'll take one more question. We'll go next to Dana Telsey of Telsey Advisory Group. You might want to check your mute function. Operator, why don't we take one other question? Yes, sir. We'll go next to Oliver Chen of Citi. Hi, guys. Congratulations. Regarding the environment and your comments earlier, where are were the in store markdowns versus last year? If you could also help us understand the evolution of the SKU profile and if you see the number of silhouettes evolving over time? And lastly, if you could just give us some thoughts on what you saw in trends in factory versus full price, we'd appreciate it. Thank you. So, first off, good morning, Oliver. As I said to you earlier, we had the same amount of SKUs on the floor in total this year versus last year in terms of markdowns. So we really didn't have a desire to become more promotional. That is not our philosophy in the company and it's not something that we think we need We think we always need is better product, more exciting product and really giving our consumer a way to be stimulated and excited to buy something new from our company. So that's our first strategy. In terms of SKUs, the company's line will grow in size because of the Internet. We're very excited when the Internet comes in house. We don't have any place today that we can show all the products that we produce. And we're super excited about the ability to have a format to be able to present that. We also have some very large format stores that are opening. We think we've told you previously about our 22,000 square foot store that's going to open in SoHo in September and that will be our largest store globally, presenting the largest assortment of our merchandise of accessories, watches, jewelry, women's ready to wear, footwear and handbags I'm sorry, and menswear. What we're also excited about in that store is and you will see this in some new stores being built. We are going to take our format up to approximately 4000 to 5000 feet in a number of locations. And that is really to present additional watch and jewelry space, to present additional footwear space. We really are excited about having what we call a salon approach inside of our stores. And then as I said to you before, our women's ready to wear is experiencing great results. And we see that as an opportunity for us to be able to present properly, again, inside a limited amount of our own stores. And then lastly, we enjoyed double digit comp store increases in all of our formats across the world. So again, the consumer resonated with product in both of the formats. And as you know, we're much more concentrated on our full price format because we believe that that's where the core growth of the company is. And we think that's the way we should be focusing our efforts. Thank you. And on the e comm side, when we work through our models, which quarter will model the revenue upside in terms of that build and how might the productivity ramp? Well, we're not going to give for the moment a range. We'll probably we'll talk about that in the Q4 call in terms of the size. But assume it starts in August 1 is when we will turn the switch on and please pray for us that that transition goes smoothly. We certainly are praying every day, but we're excited. And I just might add on that, it took us a little longer than we had anticipated, but we have built the ability to have a global platform. So once the platform is complete, we will bring up the United States and Canada simultaneously. We will then move on to Europe and Japan and then we will then move on to other parts of the Far East Asia Far East. But the good news for us is that we will have a global platform. So we spent a lot of money, a lot of time to get it right, hopefully the first time, so that we can really roll this out and grow the platform. On that note, I'd like to thank everyone for participating in the call this 2014 earnings update. Thank you. All right. Fiscal 2014 earnings update. Thank you. That does conclude today's conference. We thank you for your participation.