Please stand by. We are about to begin. Good morning, ladies and gentlemen. Thank you all for standing by. Welcome to the Michael Kors Holdings Limited second 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, and instructions will be provided at that time for you to queue up for questions. As a reminder, today's call is being recorded. I would like to turn the conference over to Ms. Krystyna Lack, Vice President and Treasurer. You may begin, ma'am.
Good morning, and thank you for joining us for our second quarter earnings call. Presenting on today's call are John Idol, Chairman and Chief Executive Officer, and Joe Parsons, Chief Financial and Chief Operating Officer. Before we begin, let me remind you that certain statements made on this call may constitute forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those that we expect. Those risks and uncertainties are described in today's press release and in the company's SEC filings, which are available on the company's website. Investors should not assume that the statements made during the call will remain operative at a later time, and the company undertakes no obligation to update any information discussed on the call. I will now turn the call over to Michael Kors Chairman and Chief Executive Officer, Mr. John Idol.
Thank you, Krystyna. Good morning and welcome to Michael Kors' second 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 second quarter performance and share with you highlights of our strategic growth plans. Joe will then provide a detailed review of our second quarter financial results, followed by an update on our outlook for the third quarter and full year. Our exceptional second quarter results demonstrate Michael Kors' leading position within the global luxury market. During the quarter, we saw a continuation of our strong momentum across all segments and geographies. Revenue grew 39% to $740 million. Gross margin expanded 150 basis points to 61%, and income from operations grew 40% to $221 million, leading to an operating margin of 30%. In addition, we continued to execute on our six key growth strategies.
First, in North America, we delivered revenue growth of 31% on a 21% comparable store sales increase. Second, we expanded our retail footprint in North American region with opening of 15 new stores. Third, we continued to successfully convert department store doors globally into branded shop-in-shops. Fourth, in Europe, total revenue grew 101% on a 45% comparable store sales increase. This strong performance reflects our growing brand recognition in this region. Fifth, we remained focused in our efforts to develop our business in Japan, delivering revenue growth of 64% on a 15% comparable store sales increase. Sixth, we continued our retail expansion in other areas of the Far East through regional licenses, opening 10 locations during the quarter.
Overall, we continue to see great demand from the Michael Kors brand, a strong acceptance of the fashion luxury products created by Michael Kors and our design teams, and excitement for our unique Jet Set in-store experience that we offer to our customers. We believe the Michael Kors brand has significant growth potential over the long term. Turning to our segment performance. In the second quarter, retail net sales grew 47% over the prior period, and global comparative store sales increased 23%, representing the 30th quarter of consecutive comp store growth. Our luxury product assortment and Jet Set in-store experience continue to resonate very well with our existing customers while attracting new customers to the Michael Kors brand. Retail sales growth was driven by 83 new stores since the second quarter of last year, with 24 of those stores opened in the second quarter of 2014.
At the end of the second quarter, we had 352 company-owned retail stores globally and 477 stores, including locations operated by licensees. Wholesale net sales grew 30% in the second quarter, spurred by our successful shop-in-shop conversions in department stores. Strong performance in both department and specialty stores, and continued strong demand for our luxury products, particularly in our accessories and footwear categories. We converted approximately 175 shop-in-shops in the second quarter and ended the quarter with approximately 1,320 shop-in-shops globally in accessories, footwear, womenswear, and menswear. We expect a continuation of strong sales trends in our wholesale business as we convert additional doors to shop-in-shops as they highlight the Michael Kors brand and bring the Jet Set environment we offer in our retail stores to department stores. Finally, in our licensing segment, revenues increased 65% driven by continued strength in our luxury watch and jewelry business.
As I've stated in the past, we see tremendous opportunity to grow this category globally as we expand the offering in our retail stores and roll out additional watch and jewelry shops in our wholesale channel. At the end of the quarter, we had approximately 85 watch and jewelry shop-in-shops. We believe that we can ultimately support 500 shop-in-shops worldwide. As we stated in our last call, we launched our new fragrance and beauty collection, which exemplifies the sporty, sexy glam aesthetic of the Michael Kors brand. The collection was distributed to our North America retail stores and in the fragrance and beauty departments within numerous Macy's stores. Since the collection's launch, we achieved a top five ranking in the U.S. fragrance category, which is extremely encouraging and indicates strong customer acceptance of our new fragrance collection.
We believe that this collection enhances our fragrance line and will contribute to our global penetration in this category. Turning to our operations by region. In North America, revenues increased 31% in the second quarter to $618 million, with comparable store sales increasing 21%. We opened 15 stores during the quarter, growing our retail presence in North America to 264 locations. Our growth in North American wholesale business was driven by strong comparable store sales, with similar or greater comparable store sales increases in our wholesale channels compared to our retail stores. In addition, growth in the wholesale channel was driven by the successful conversion of department store locations into branded shop-in-shops. We are on track to open approximately 50 North America retail stores in fiscal 2014 and believe the market, long term, can ultimately support 400 stores.
On the wholesale side, we are continuing to convert department store doors to branded shop-in-shops for accessories, footwear, womenswear, and menswear. Taken together, we are well positioned for strong growth in the second half of 2014 in this region. We are excited about our expansion in Europe and remain pleased with the growing brand recognition and demand for the Michael Kors brand as the European customer embraces the glamour, luxury, and versatility of our product offering. During the quarter, revenue grew by over 100% to $114 million, with comparable store sales increasing 45%. We've also opened eight retail locations, bringing our total store count in the region to 57 locations. Most notably, we opened two stores in Milan, one in the prestigious Via della Spiga and the second on the fashionable Corso Vittorio Emanuele. Both streets feature luxury retailing and high traffic.
We are seeing good performance at both locations, indicating a strong potential growth opportunity in Italy. Additionally, we recently opened a new retail store in Budapest, Hungary, further expanding our European market presence. In wholesale, we continue to see strong sell-throughs in both department and specialty stores. As we expand our presence in the region through new store openings and wholesale expansion, we believe that we are well positioned to continue to capture market share in Europe. After careful analysis and planning, we believe the European market will now achieve revenue growth in excess of $1 billion in the next few years. We are on track to open 40 new stores in Europe during fiscal 2014 and believe the market, long term, can ultimately support 200 retail locations. In addition, our presence in Europe will continue to expand through the growth of our wholesale distribution channel.
We are very pleased with our pace of development in this region and expect this growth to continue through the second half of this year. As I said, Europe represents an exciting opportunity for Michael Kors brand with significant runway for growth. Japan is also a great long-term opportunity and key market for Michael Kors, although we are still in the early stages of establishing the brand in this region. Second quarter revenues increased 64% to $8 million and comparable store sales increased 15%. We opened one retail store during the quarter and currently have 31 stores in Japan. We plan to open additional six locations in total this fiscal year and believe this market can ultimately support 100 retail locations in the long term. Overall, we are pleased with the progress we're making in Japan, although we recognize that this is a market that will take time to develop.
In fact, Michael Kors will be in Tokyo with Miranda Kerr next week, celebrating her Michael Kors cover of Elle Japan, as well as an eight-page fashion story in the December issue featuring Miranda in Michael Kors holiday looks. Events with Michael such as this will be instrumental in amplifying our brand awareness in Japan and other international markets. In the balance of the Far East, we continue to see double-digit comp store growth from our licensed partners' retail stores, and we remain confident in the long-term potential in this region. During the quarter, we opened 10 stores across the region, bringing our total to 87 Michael Kors retail locations in Korea, Greater China, and Southeast Asia. We continue to focus on building brand awareness in the Far East and developing this market through regional licenses. We anticipate expanding to 200 retail locations over the long term in this region.
We also continue to grow our travel business in the finest airports and travel destinations in the world. At the end of the quarter, we had 41 travel locations, and we believe there is a potential for 50 travel retail shops worldwide, including freestanding stores, shop-in-shops, and stores operated by specialists in travel retail business. Finally, we are continuing to make progress in the transition of our e-commerce business into a fully integrated business unit. As I've mentioned in the past, we believe it is important to offer the customer an omni-channel experience to enhance their engagement with the Michael Kors brand and also give us the opportunity to develop new customer relationships. We see tremendous opportunity in this channel and see e-commerce becoming a multimillion-dollar business for the company. We expect to launch our new e-commerce site in North America during the fall of 2014.
In summary, I would characterize our first half results as outstanding. We exceeded our financial objectives, and we made significant progress on our strategic growth initiatives. We believe that Michael Kors has become a powerful brand within the global luxury market, poised for exceptional long-term growth. 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 second quarter financial results, followed by our outlook for the third quarter and the full year. For the second quarter, total revenue grew 38.9% to $740.3 million as compared to $532.9 million in the second quarter of last year, with strong growth in each of our retail, wholesale, and licensing segments. Retail net sales increased 46.8% to $355.6 million as compared to $242.3 million in the second quarter last year, driven by a comp store increase of 22.9% and the opening of 83 new stores since the second quarter of last year. The comp store sales performance was driven by the continued strength of our accessories and watch lines. Wholesale net sales grew 29.9% to $351.9 million in the second quarter, compared to $270.8 million in the same period last year.
The increase was primarily the result of strong growth in accessories and footwear, the continued successful conversion of existing doors to shop-in-shops, and expansion of our European operations. In our licensing segment, revenue grew 65.4% to $32.9 million for the quarter as compared to $19.9 million last year, primarily driven by the continued strength in watches. Gross profit increased 42.4% to $449.9 million as compared to $315.9 million in last year's second quarter. Gross margin expanded 150 basis points to 60.8%, reflecting strong year-over-year gross margin increases in both our retail and wholesale segments. The margin increase was driven primarily by a more favorable product mix shift to higher margin product and geographic mix. Total operating expenses grew 44.6% to $228.4 million in the second quarter of fiscal 2014 as compared to $158.0 million last year.
As a % of total revenue, total operating expenses increased to 30.9% from 29.6% in last year's second quarter. SG&A expenses increased 44.4% to $210.4 million as compared to $145.7 million for the second quarter of last year. The increase in SG&A expense was primarily due to higher retail occupancy and salary costs related to new store openings, an increase in advertising and marketing spend, as well as increases in corporate employee-related costs. As a % of total revenue, SG&A expense was 28.4% compared to 27.3% for the second quarter of last year. Depreciation and amortization expense was $18.1 million during the second quarter as compared to $12.3 million for the second quarter 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 $221.5 million or 29.9% of total revenue as compared to $157.9 million or 29.6% of total revenue in the same period last year. Income taxes were $75.5 million in the second quarter as compared to $59.8 million for the second quarter of last year. Our effective tax rate was 34.1% as compared to 37.9% for the same period last year. The decrease in our effective tax rate was primarily due to increase in taxable income in certain of our non-U.S. subsidiaries, which are subject to lower statutory income tax rates and certain discrete items resulting from favorable outcomes of tax examinations. Net income increased 49.0% to $145.8 million in the second quarter, and diluted earnings per share were $0.71, based upon 205.2 million weighted average diluted shares outstanding.
Net income for the second quarter of fiscal 2013 was $97.8 million, or $0.49 per share, based upon 200.2 million weighted average diluted shares outstanding. Turning to the balance sheet. At September 28th, 2013, cash and cash equivalents were $618.8 million. We had no borrowings under our credit facility. At the end of the second quarter last year, cash and cash equivalents, net of $11.6 million of borrowings, were $300.6 million and included approximately $118 million of stock option proceeds, which were paid out in the subsequent quarter last year. Inventory totaled $404.2 million, and this is compared to $278.4 million last year, an increase of 45.2%. Capital expenditures during the second quarter totaled $40.3 million. 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 system and distribution infrastructure.
We opened 24 stores in the quarter, 15 in North America, eight in Europe, and one in Japan, and ended the quarter with 352 retail stores, including concessions. As we have stated in the past, we will continue to invest in our distribution centers to meet our growing business demands globally. I would like to provide you with an update on the implementation of our material handling equipment and systems upgrades to automate our California distribution facility. These upgrades will increase efficiencies in our warehouse, as well as being more cost-effective than our prior systems. However, this is a complex project, and we have experienced certain disruptions in our warehouse that led to shipping delays during the quarter in our U.S. wholesale channel.
We have taken immediate steps to address this disruption, while we are working diligently to correct the issue, it will likely take some time to fully implement the upgrades. We expect to incur increased shipping, handling, consulting, and payroll expenses related to this disruption in our third and fourth quarters of fiscal 2014 and may also see an impact on net sales. Turning to our outlook. For the third quarter of fiscal 2014, we expect total revenue to be between $845 million and $855 million, assuming a comp store increase in the range of 15%-20%. We expect diluted earnings per share to be in the range of $0.83-$0.85, assuming a tax rate of 35.5% and 205.5 million shares outstanding.
We expect the third quarter growth margin rate to be similar to last year and the operating expense rate to be slightly higher than last year. In fiscal 2014, we now expect total revenue to be between $2.9 billion and $3.0 billion, assuming comp store increase of approximately 20%. We now expect diluted earnings per share to be in the range of $2.77-$2.81, assuming a tax rate of approximately 35.5% and 205.2 million shares outstanding. Our capital spend remains on track. We expect to open approximately 100 retail locations in fiscal 2014, including 54 in North America, 40 in Europe, and six in Japan, and continue with our shop-in-shop conversions, as well as investment in our infrastructure and systems, including bringing e-commerce in-house. In summary, we delivered another strong quarter and made significant progress in our strategic growth initiatives.
We believe that Michael Kors has become a powerful brand within the global luxury market, poised for exceptional long-term growth. Thank you. I will now turn the call back to John Idol.
Thank you, Joe. In closing, we are excited to see the continued acceptance of our fashion luxury products and our unique Jet Set in-store experience as we move forward with our global growth strategies. Our priorities remain the same: drive continued comparable store or sales growth, expand our retail store base, capitalize on the e-commerce opportunity, convert department stores to branded shop-in-shops, and grow our luxury brand internationally. We have solid momentum as we head into the holiday selling season and the back half of the year. We believe that 2014 will be another record year for the company as we continue to expand the Michael Kors luxury lifestyle brand globally. We will now open up the call for questions.
Thank you, sir. At this time, if you'd like to ask a question, please signal by pressing *1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is *1 if you'd like to ask a question. We'll pause for just a moment to allow everyone the chance to signal.
First we'll go to Brian Tunick with JPMorgan.
Thanks. I'll add my congrats to everyone. I guess two questions. First, on the DC upgrade, I just wasn't sure, did you say it had an impact on Q2 wholesale revenues? Just wondering along those lines, if you could talk about the margins on the wholesale side. I think they were down this quarter. The second question on the SG&A side, you've talked about building out an infrastructure now and adding people to the team. Can you just share with us maybe as far as personnel or hires you're still looking for to fill any open seats? Thanks very much.
Okay. I'm going to take the upgrade. Joe will take the margin, I'll come back to the SG&A. The DC upgrade, I think we've talked to you guys about it in the past. Our business continues to grow rapidly domestically, obviously the same internationally. But on the U.S. side, we are now operating in approximately 1 million sq ft of space. We want to improve the efficiencies in those facilities so that we can continue to maintain those sizes and grow within those sizes. We recently added about 300,000 sq ft to our facilities, so going from 700,000 sq ft to about 1 million. In doing that, it's complicated, Brian. We're adding all material handling equipment, new warehouse management systems.
That disruption that we discussed affected our U.S. wholesale business and even with inside of that, it's predominantly affecting our women's ready-to-wear wholesale business is really the one that's being the most affected by this because we have actually, we're in the process of moving it out of our main facility. We anticipate that that will take us through the third and fourth quarter to really get everything operating at the kind of efficiency levels that we need. We've included what we believe to be those effects in our guidance that we've given you. Again, this has not affected our retail business. Again, this is focused on our U.S. business. Probably a year and a half or two years from now, we'll go through a similar situation in Europe as well as we move to upgrade that facility, enlarge that facility and meet the growing demands.
We obviously told you that Europe now represents a billion-dollar opportunity for this company, which is really extraordinary, we're going to need the infrastructure in place to handle that. Joe, I'll let you speak to the margin.
As you know, we don't talk about gross margin in terms of the segments. Our overall gross margin increased from 59.3%-60.8%. That's second quarter compared to second quarter last year. In terms of operating margins, operating margins did decrease from 28.6%-28.0% this year. As we've said, we're continuing to invest in the company. We expected slightly higher SG&A costs, they are indeed impacting our gross margin or our operating margin, excuse me.
Brian, that's really more a reflection of the sales associates that we're putting inside of our stores. One of the things that we think is a real advantage to our company versus many other companies is that we invest a tremendous amount in sales associates inside of our shop-in-shops, both domestically and internationally. They're company employees. We think that that really gives that Jet Set selling experience to the consumer that quite frankly, some other companies might not offer. Again, we think that's been a very positive thing for us. On the SG&A side, again, we've told you before we're going to continue to add people to this company where we need them. We have all of our predominantly major senior hires in place. We are going to be adding a president to our men's division. That search is underway today.
I think we announced in our last call that we think that the men's business is a billion-dollar opportunity for the company. About a third of that coming from the growth in our menswear business, about a third of that coming from men's leather goods, and another third of that coming from watches where we think we have a huge men's watch opportunity. We will be hiring a global men's head, and we will be building out the men's division going forward. SG&A will continue to grow obviously in dollars and then maybe even slightly as a % to sales. We've told you that we're not as focused on keeping the current operating margin where it is. In fact, we'd rather invest in the company over the next three plus years and even if that meant the operating margin declines slightly.
We think it's more important that we grow the top line and the overall dollars that we're creating for the operating margins.
Terrific. Thanks so much.
Thanks, Brian.
Next, we'll go to Kimberly Greenberger with Morgan Stanley.
Great. Thank you. Good morning, I'll add my congratulations on a great quarter as well. John and Joe, I'm wondering if you can talk about the 23% comp. Was traffic still the primary driver of that comp increase? In terms of the wholesale channel and the revenue slowdown from Q1 into Q2, was that in your opinion, largely driven by the materials and handling equipment implementation and the inability to ship as you would have liked or are you seeing any kind of reduced demand in that wholesale channel? Maybe you could just talk about overall demand for the product, are you seeing similar markdown rates to last year across all channels, higher markdown rates to last year, or lower markdown rates to last year? Thank you.
Okay. Thank you, Kimberly. First off, the traffic was still running at a double-digit rate for us. As we've seen in the past, our combination is really traffic double-digit. Our conversion was up single-digits. Our average ticket, as we've said to you before, really doesn't change for us. It hasn't really changed in, I don't know, six or seven years. Again, we did see double-digit traffic increases in the stores. In terms of the wholesale channel, we did not see a slowdown. Our accessories business remains very strong. As we told you in the call, we are running at or higher comp store growth in our wholesale accessories business. We believe in the wholesale channel, we are the number one brand for our department store partners. Our footwear business also ran at a very strong double-digit comp store growth.
I also believe that we, in most of our retail partners, have now become the number one singular designer footwear brand in that channel, that business is really accelerating. We are going to open quite a few footwear shops. Our initial reaction, as we told you on the last call to the footwear shops, has been good. It has gotten even better since we spoke to you last. We anticipate opening probably a couple of 100 footwear shop-in-shops, which will be a very nice lift to that category. The one business that did see a difficulty during the quarter was our women's ready-to-wear business, which is really quite unfortunate because I think we told you on the last call that business had gotten very healthy for us.
That was purely a result of our inability to ship that product for quite a period of time now due to that transition of the warehouse building and the implementation of material handling. Again, that's really been the business that was predominantly impacted. We have not seen a slowdown. Everything I spoke to you about was in North America. Outside of North America, all the businesses, including our menswear business, had excellent results in the European marketplace. There, the women's business was very strong, and we're very pleased with our men's business as well. Markdown rates are running similar to where we've been in the past. As we have continued to warn you that we don't think that will go on forever, we had another very solid quarter of sell-throughs for our product.
Terrific. Thanks, John.
Next, we'll go to Lindsay Drucker Mann with Goldman Sachs.
Hi, everyone. I really had two questions. First of all, the inventory increase you had in the period, how much of that was related to or was any of it related to some of the shipment issues that you talked about on women's ready-to-wear, and how much of it was other factors? Then secondly, Joe, I think you addressed for Brian the issues with some of the wholesale margin decline at the division level. I was actually hoping you could also address the retail margin, which increased in the period but had a bit of a slower increase than what we saw in the first quarter. Any sort of differences you're seeing in that business between Q2 versus what we had in 1Q would be helpful. Thanks.
Before Joe answers that question, I want to clarify one thing. We did not have a decline in wholesale margins. The operating margins were impacted, and that's really been an effect of SG&A. I just want to clarify that. Joe, go ahead on the inventory.
We were actually expecting inventory to grow somewhat faster than our revenue growth. We've said before as we open stores, as we open shops, we think it's actually important to grow inventory somewhat faster than the retail growth. We did have some impact, as John mentioned, from our shipping issues in that inventory. Most of it was a planned increase to cover rollouts. In terms of our retail operating margin, we were actually very pleased with it. This year it's 29.0% versus 28.2% in the prior year. As we mentioned in the call, that's primarily because of two mix issues. One is we're going to slightly higher margin business and also as Europe grows, the European margin is slightly higher.
Lindsay, I would also add, I don't think you're going to see much operating margin expansion in the retail side from here on out. I mean, we're operating at pretty healthy margins right now. Again, we'll get a little bit of that increase because of the European mix. I think predominantly, we're very pleased with where it is today.
Okay. Nothing's really changed, though, versus you had almost 400 basis points of improvement in the fourth quarter. You had almost 900 basis points across all of last year. As I think about Q2 versus 1Q, this is just sort of reaching what you believe will be kind of the run rate of improvement going forward, maybe a little less than that.
I think that's right. I think, again, when you really think about Michael Kors, the company, on a long-term basis, we've said to you before, we have this 20%-25% growth rate opportunity for quite some time ahead of us. If we can maintain or even if our margins are just slightly lower than where they are today, we're going to be very pleased with that. We think that keeps us in the category of a high-growth retailer. We want to always invest in the infrastructure, in people, in brand building, and in making sure that we're operating in a luxury marketplace. As we've also told you before, I know that many of you consider our competitors to be really one North American competitor, and we view ourselves competing against two or three of the very largest global Italian and French luxury goods players.
We think we're starting to have some impact there in terms of when you talk about market share. Obviously, the total market is growing, but we know that we're starting to garner some customers who might have been loyal to certain other brands who are converting over to our brand. We think it's critical that we continue to make all the investments that a luxury goods company would make.
Next, we'll go to Erinn Murphy with Piper Jaffray.
Great. Thank you, congratulations on a solid quarter. John, I was hoping you could elaborate a little bit more about Europe. It's great to hear the update on your perspective of the longer-term goal in that market. Could you just speak a little bit more about the European wholesale growth in the quarter? I know retail comps are up 45%. Then how are we seeing the tourist flow within the stores in Europe at this point?
Sure. Our wholesale business in Europe is growing very rapidly. Again, we're seeing the same levels of acceptance in the wholesale market that we are inside the retail market. In fact, the same thing is happening as we install shop-in-shops in department stores. We're getting that same three to one or better lift in the marketplace. You're going to see quite a few expansions happen in calendar 2014 with our significant department store partners in Europe. Then in terms of the specialty store business, again, we're taking market share away from fragmented competitors in the accessories business. We're starting to get some very solid traction in our shoe business, where again, I think we are taking market share from certain competitors. Lastly, our women's ready-to-wear business, actually, it had been healthier even last year than our domestic business, and it continues on at that rate.
We're really filling a niche and a void that's been vacated by a few players over there. Europe is a very exciting opportunity for us. Again, I highlighted the two extremes. Opening two stores in Milan, which were far beyond our expectation in terms of sales results. We have a number of new stores planned in Italy, which is really exciting for us because that's a marketplace we really haven't been well penetrated in. I'm also excited about a marketplace like Budapest, where we opened our store, again, we're doing far better than we had anticipated in that store opening. Again, I would like to tell you it's all because of the brand awareness growing, but I think we are servicing a market that's really being underserved. I don't think the customers know the brand extremely well in Hungary.
I think they like the product, I think they like the sales associates, and I think they like the fashion sensibility that we're projecting in our category.
That's great. Then I just have a quick follow-up on the fragrance. It sounds like it was a very successful initial launch. How should we think about the rollout, whether incremental doors or accounts as we head into the holiday season, both in the U.S. and then potential for that to grow internationally? Thank you.
Sure. The international launch really starts right about now, over the next couple of weeks. We have a very large launch happening with Douglas across many parts of Europe. Then in the U.K., obviously with the major players, and then El Corte Inglés in Spain. We have a lot of television running in a number of the key marketplaces. We're anticipating the same type of results that we saw in the U.S. In the U.S., we actually garnered the number 1 position during the launch weeks of our fragrance, which is always a nice thing. We're expecting big things from the category in Europe. As you know, the fragrance market is larger in Europe than it actually is in the United States.
A lot of emphasis and focus will be put on that business as we go forward, which, by the way, we think will also enhance brand awareness for the Michael Kors brand. Again, we've reached the kind of brand awareness levels that we have without even having a strong fragrance business, both domestically and internationally. Imagine when we really get that going. We intend over the next 2 to 3 years to be one of the most significant fragrance companies in the luxury fragrance business. Europe will become a very critical part to achieving that goal.
Thank you, guys, and best of luck.
Thank you.
We'll go to Randal Konik with Jefferies.
Hey, great. Thanks a lot. Can you just talk about the road to $1 billion in Europe? How do you foresee that playing out in terms of own stores, licensed stores, wholesale distribution, what pace do you think, how many years you think it takes to get there? How do you contrast that with the Asia opportunity and your comments regarding Japan? Thanks.
Sure. I just say in general, this is just a thought process on our part. About half of the business should come from our own retail stores in Europe, that's really kind of our thought process. The other half of the business would be split between department stores and specialty stores, actually specialty stores being larger than department stores. That gives you kind of a general feel of how we look at it. We've said to you that we see an opportunity for 200 stores in the marketplace. We have a lot of stores in Europe today that are doing four million EUR, five million EUR, six million EUR on a store. Again, we're not going to see that in all stores, but we have plenty of stores that will generate those levels or higher.
Our productivity in terms of individual sales per square foot in Europe can actually be higher than it is in the U.S. We're very encouraged by that development, again, see that as kind of the cornerstone for the growth for our business in Europe. Of course, on top of that, none of us really know how big the e-commerce business will be in Europe. In the U.S., we think that it will be at least 10% of our business, if not greater, over a few year period of time.
10% of our retail business.
I'm sorry, 10% of our retail business. Thank you, Joe. In Europe, that's a number that we can't really 100% quantify yet. I don't think there's as many retailers as well penetrated as they are in the U.S. in that category. Year wise, it's going to be a few years. Again, you can see how rapidly we're moving, and how the consumer is accepting that. I think that that's going to be something that you'll see playing into our projections as we announce in June our forecasts for fiscal 2015. Europe is going to become a much more significant part of the company's overall business, as we had always planned it to be. In Asia, I wish we could go faster. We just can't because it's a matter of building the brand awareness, building the consumer acceptance.
There are a couple of examples of American companies who have built very successful businesses, luxury businesses in Asia, they're really quite small. The majority of the luxury companies that have built business in Asia are French, Italian, and to a lesser degree, English. There's not as big of a history of American luxury in both Japan and China, and it's just going to take us patience. You can see we've already got 80 plus stores open in the region. We are having better results in certain marketplaces in Southeast Asia. In particular, I would tell you the brand is operating at almost similar levels to the U.S. and to what you see in Europe. We're not operating at those same levels in Greater China and in Japan yet, it gives us great hope that we will be able to achieve that.
I will tell you, we are 1,000% committed to making those regions important. We want to make sure that we do it at a pace that will ultimately be sustainable.
Next we'll go to Omar Saad with the ISI Group.
Thanks. Good morning. Great job, guys. Two quick questions. Number one, if I seem to remember last year this time on the call, we were talking a lot about Hurricane Sandy and the impact it had on your business. Wondering if you're seeing that situation reverse, hopefully now that we're not having any super storms. I also wanted to ask you about training. One of the things we consistently hear in some of our checks is that the way the sales approaches the customer, the sales associate's approach to the customer is actually pretty unique and differentiated on top of the store environment, especially relative to some of the competition in Europe. Thanks.
Yeah. Hurricane Sandy, we're definitely having some nice flashes on our comp stores this week or so. I don't want to smile about anything that was tragic, but from that standpoint. Hurricane Sandy did affect us in the tri-state area, but it was very limited point in time, I think, if you recall. It only really happened for a few weeks, then our business came right back. I think that was people wanting to get out and just not be depressed over what they had gone through and were going to continue to face. We think that the impact of that was really minimal to us, and we'll have a little bit of upside based on that, but nothing material. In terms of training, Omar, I'm really glad you brought that up because it's something we pride ourselves on.
We spend a lot of time, money, and resources on our sales associates inside the store. We think they are the greatest ambassador for the company. Our most important voice is Michael, we have his voice through our website, through our Twitter, through Facebook, I'll talk about that in a second. Our second most important voice is our sales associates. We really pride ourselves on the training. We think we're unique both in the U.S. and in Europe, I would even further say in Asia, where it's even more culturally different, the way that we do approach the customer with an excited point of view. We think shopping should be a fun experience. Quite frankly, we view our sales associates as not only an ambassador, but really your own personal shopper.
If that person can have style and can help you feel like they're your style consultant, we're going to have a much more engaging experience with our customer relative to certain of our other competitors. We think that has people coming back to shop at our stores more regularly. You'll continue to see us invest heavily in that, both in our company-owned retail stores and through our wholesale channel as well. Lastly, I just might add that the engagement, we try to replicate it. We can't do it exactly the same, but our engagement on social media, we hope is reflecting what is happening inside of our stores as well. I'm proud to report that we're almost at 10 million Facebook fans. Probably in a few more weeks, we'll be there. At this time last year, we had about 1.8 million Facebook fans.
The engagement that we're getting is just tremendous. Twitter, the same thing. We had about 900,000 fans, and we're at 1.5 million as we sit today. We're trying to make this whole customer experience 360-degree, both in store and outside the store.
Thanks, John.
Next we go to Paul Lejuez with Wells Fargo.
Thanks. It is Tracy Cogan filling in for Paul. I had a question on the shop-in-shop conversions. I know you have mentioned before in the U.S., and you mentioned today in Europe that you get a three-to-one lift, and I wonder if that figure in the U.S. has changed at all as you get further into your rollouts. Secondly, I was wondering what kind of bump you are seeing when you build the women's ready-to-wear and the footwear shop-in-shops. Is it a similar bump? Is it greater or is it smaller? Thanks a lot.
Yeah. The three-to-one lift is still the same. As we have said to you before, it is getting smaller in terms of raw dollars when you get to smaller doors. If you had a $200,000 door in a big top door at a Macy's or a Dillard's or a Galeries Lafayette, if it was $200,000, you are going to go to $600,000. As you get down to a smaller size door, if it is a $100,000 door, it is only going to go to $300,000. We are not going to see the same dollar increases as we roll out the balance of the shop-in-shops here in the U.S., and to a little lesser degree in Europe. In Europe, we have still got some larger doors to convert. In the women's ready-to-wear, it is about the same. In footwear, I cannot really comment to that yet because we have only opened a handful of them.
We do have agreement with our retail partners to open about 200 of these. I think it is a little too early in the game to say what that is going to look like on a more broad base. Obviously, we achieved those kinds of levels in the first few doors that we opened. It will take us a little time to determine that. We did see kind of two-to-one lifts just in the table drops that we did inside of footwear doors, which was very encouraging, which really gives us great hope for what we are going to see in these shop-in-shop doors.
Great. Thank you.
Now we'll go to Oliver Chen with Citi.
Hi. Congratulations. Regarding your statements on Europe, what are the strategic implications for potential how you think about pricing and the assortment as you embark on the $1 billion mark? Also, what are the biggest countries of the incrementality on that revenue growth? Secondly, if you could brief us on watches and how they performed relative to the overall comp and your thoughts on the smartwatch longer-term idea. Lastly, on the gross margin line, it was really spectacular performance this quarter. It sounded like these were factors that could continue next quarter. I'm just curious about the caution stance there on your guidance.
Okay. Let me see if I can get all these questions. I think I counted four or five in that one question. That was really good. Pricing, we've said before, really, you're not going to see any adjustment in our pricing on a global basis. There'll be a little bit of pricing adjustment ultimately in Japan because of the yen to the dollar kind of moving around all over the place. Otherwise than that, we're very comfortable with the consistency of our pricing. Quite frankly, we think our customer has really responded to that fact that we haven't moved the pricing around on them. They come into the store, they have this great luxury experience, but they can walk out feeling like there was value in what they bought when they were inside of a Michael Kors store.
In terms of the countries, obviously it's going to be the big players. It's going to be the U.K. and Germany and France and Italy, and to a lesser degree, Spain. You'll see that. I will tell you that, as I've mentioned before, we're so pleased with what's happening in some of these call them tier 2 countries, whether it's Poland, whether with the initial results we're seeing in Hungary, some of the opportunities that we see in Portugal as an example. There's stuff going on for us that really we don't look at Europe and say, "Well, oh, we're going to try and drive 30% of our business through Germany." We don't view it that way. We really look at it more on a city-by-city basis, where the wealth is, where luxury is best understood, and where we think the brand will be most successful.
As I said, we're not necessarily trying to focus on a specific country. I will still give you the caveat that we are very disappointed in our lack of penetration in Italy, you will see that absolutely corrected next year. We have a lot of freestanding stores opening in all the best streets, in the best locations. We have a major fragrance launch planned for that. We're going to ramp up our watch presence in the marketplace. We internally tease ourselves and call it the Year of Italy. We're very focused on that marketplace. Again, even though many of you may be concerned because of the European economy, we don't view it that way because our market share today is still so small in totality there, that for us it's all upside in all of these countries.
As I've indicated previously, our business is strong in Spain, our business is strong in Greece, our business is strong in France. All marketplaces that, from everything that you read and hear, are suffering given the economic situation in Europe. Watches, we were pleased with our performance. I think that both Joe and I indicated that through the licensing, that we had a very strong increase in our revenues from watches. The shop-in-shops that are going in are obviously propelling our business, and if any of you are here in the New York area, I hope you get to see our new spectacular shop that opened at Macy's in Herald Square, which really is the flagship location globally. Our business is definitely growing faster in Europe and in Asia, where we had less penetration. We told you that previously.
Again, in watches, we are typically the number one watch resource at most of the department store partners that we have here in the U.S. A little bit as we go is as the watch business goes. We've had some very strong performance. We're going to see some sequential deceleration just because of the size of the business, as we have in our own freestanding stores, et cetera, but still very solid double-digit comp store growth. The smartwatch, we are absolutely viewing that and looking at it very seriously. We are working closely with Fossil on what our entry into the smartwatch market will be. We don't think it's something that's imminent for the world at large. We definitely think it's something that will be relevant, and probably more for men than women.
We will somehow be involved in the smartwatch market, but that's going to take us a little time to really sort through. Again, I might add that the watch business, we view as really a jewelry accessory. People use smartphones today to tell time, so the watch, while it is necessary, is probably really viewed more by men and women as a jewelry item than necessarily a piece that they utilize given the fact that there are smartphones. I will let Joe speak to the gross margin piece.
Sure. You know that we've had very strong gross margins because of our strong sell-throughs, so we're not getting a lot of markdowns and allowances. Our guidance for Q3 and for the full year is gross margin similar to last year. We could continue to caution you that very consistent with what we've said, our business will normalize, which means that our markdowns and allowances will normalize, which will have an impact on margins. Over the longer term, our business structure is positive for margins, both because retail will be growing somewhat faster than the wholesale. Europe will be growing somewhat faster than North America. Ultimately, again, very long term, Japan will be coming online, which will have strong gross margins.
Just one last thing I would like to add about the watch business. As we are highly penetrated in the watch marketplace in the U.S., we do not have that same level of penetration in Europe and in Asia. That really bodes to tremendous growth opportunity for us, given where a typical watch company would be at this point in their life cycle. Secondly, the men's category, we are very under-penetrated in that, and most of the luxury watch companies run as close as 50/50 in watches, and we're probably around 10% in the men's category. That is a big opportunity for us. In terms of looking at runway for growth in watches, we think international, a nice kind of low double digits in the U.S., and then this opportunity in menswear.
Thank you. Fossil's talking about Swiss mechanisms. Is that something you need for Europe and watches in Asia?
Yeah, we're exploring that. Again, we're going to probably do some things that will be taking our watch in a more elevated direction that might not take advantage of Swiss to begin with. We think there's some other areas that we can go into, which I think we'll be making some announcements about shortly. Long term, that will be another category, and particularly important for Asia for us. I think we're going to take one more question, and that will be it for the call.
Okay. We'll take our final question from Dana Telsey with Telsey Advisory Group.
Good morning, everyone, and congratulations. Any more color as you're looking at the real estate portfolio and productivity outlets versus full price stores and what you're seeing there? Lastly, as you're looking at the drivers of gross margin, whether it's IMU or pricing, I know you'd mentioned that earlier, what should we be looking at as the drivers underneath the gross margin? Thank you.
Okay. On the real estate portfolio, our productivity, as you know, is quite high, really the only other companies that are close to us in the industry are really the luxury goods companies. We pride ourselves on the fact that we operate in those very high sales per square foot productivity. We are really at a point today where there's a number of stores that we have to upsize because the productivity is in excess of $3,000 and $4,000 a square foot which puts a lot of stress on the facility itself. Also it takes away from a luxury experience. When you have that many people in a store, it doesn't really feel luxurious. We're working on that today. We've got a number of stores that we're trying to upsize. Again, it's going to be in the obvious locations. Nothing's going to surprise anybody.
Those will obviously create opportunities for us to enlarge the sales volumes in those stores. Again, on the gross margin side, I wouldn't be looking at any additional drivers on gross margin. We're very comfortable with our IMUs today. We like the way that we put quality into product. We don't want to take quality out of product to create IMU expansion. I don't think you're going to see much of that there. I don't think you're going to see a lot of leverage on the operating side, because we're going to be growing that SG&A pretty quickly as we are continuing to invest in people, facilities, and other investments to continue to grow our company. I'd like to thank everyone for joining us today and look forward to speaking to you on our next conference call. Thank you. Good day.
That does conclude today's call. We thank everyone again for their participation.