Earnings Call: Q4 2013

May 29, 2013

We do appreciate your patience. Please remain on line. Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Michael Kors Holdings Limited 4th Quarter Fiscal 2013 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. As a reminder, today's conference is being 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 Q4 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, www.michaelkoors.com. 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, Christina. Good morning, and welcome to Michael Kors' 4th quarter and full year fiscal 2013 earnings call. Me today is Joe Parsons, Chief Financial and Chief Operating Officer. I will begin the discussion with a brief overview of the quarter and fiscal year and share with you an update on our strategic growth plans. Joe will then provide a detailed review of our Q4 financial results. Additionally, he will provide an outlook for our fiscal 2014 Q1 and full year. Michael Kors delivered record results in 20 total revenue grew 68% exceeding the $2,000,000,000 mark. Comparable store sales increased 40% and operating income grew 132 percent to $630,000,000 excluding one time items. Our global retail store base increased from 2 37 locations to 3 0 4 locations, including concessions. Our international presence expanded with revenue growth of 103% in Europe and 119% in Japan. And we reached approximately 9 50 shop in shops globally in accessories, footwear and women's wear. We attribute our outstanding success to the creative vision of Michael Kors, our exceptional product offering, a highly talented management team and our operational excellence. The year ended on a strong note, with continued momentum in the Q4 as the brand strength, innovative fashion design and jetset in store experience drove strong sales and earnings across all businesses and geographies. Total revenue in the 4th quarter grew 57% to 597,000,000 dollars Gross margin expanded 200 basis points and income from operations grew 102% to 155,000,000 dollars excluding one time items. We also continued to make progress on our 6 key growth strategies during the 4th quarter. First, we delivered our 28th consecutive quarter of comp store growth in North America with a 35% increase. 2nd, we continued our retail expansion efforts in North America, opening 3 new stores during the quarter. 3rd, with 500 department store door conversions to date, we reached the halfway mark on our goal of 1,000 North American accessory shop in shops. 4th, we expanded our presence in Europe with the addition of 1 retail location in the quarter, as well as new wholesale doors. 5th, we further developed our business in Japan with the addition of 3 retail locations. And 6th, we continue to build a foundation for growth in other areas of the Far East through regional licensees. We ended the 4th quarter with 66 retail locations in this region. Now turning to our segment results. In the 4th quarter, retail net sales grew 59% to 273,000,000 dollars and comparable store sales increased 37% globally, underscoring Michael Kors exceptional brand power, compelling luxury merchandise assortment and unique jetset in store experience. Retail sales growth was also driven by 67 net new store openings since the Q4 of last year, including 7 openings during the Q4. We ended the year with 304 company owned global retail stores, including concessions and 400 stores including licensees. Wholesale net sales increased 59% to $305,000,000 in the 4th quarter, driven by continued strong performance of Michael Kors luxury products in department stores and specialty stores, as well as our conversion to shop in shops and department stores. Our accessories, footwear and women's wear businesses all showed strong performance during the quarter. In our licensing segment, revenues increased 16% to $20,000,000 in the 4th quarter, driven by the continued strength in luxury watches, jewelry and eyewear. Turning to our operations by region. For the Q4, North American revenues increased 52% to 517,000,000 and comparable store sales increased 35%. We opened 3 stores during the quarter and ended the year with 231 locations. In our wholesale business, in addition to generating strong comparable store sales, we continue to successfully convert department store locations into branded shop in shops, driving significant sales volume growth per door. In Europe, we continue to see growing brand awareness of the Michael Kors brand as we see our luxury products resonate with European customers. During the 4th quarter, European revenue increased 97% to $73,000,000 and comparable store sales increased 63%. We opened 1 store during the quarter and ended the quarter with 44 retail locations. Additionally, sell through in our wholesale segment remains very strong. We continue to expand this channel primarily with the opening of 216 wholesale doors in the 4th quarter. Turning to Japan. For the 4th quarter, We opened 3 concessions in Japan during the Q4 and ended the year with 29 retail locations. We continue to believe that the Japanese marketplace will be meaningful will be a meaningful contributor to our revenue and net income growth in the future. At the end of the quarter, we operated 96 Michael Kors retail stores through various partnerships worldwide, the Middle East, Korea, Southeast Asia and Greater China. Including these locations, there were 400 Michael Kors stores at the end of the Q4 worldwide. We expect fiscal 2014 to be another outstanding year for Michael Kors as we continue to execute on our growth strategies. Our growing brand recognition, fashion focused luxury product and jetset in store experience will continue to be the drivers of our success. Starting with North America, we expect to drive comp store sales growth with the continued introduction of new luxury merchandise, coupled with our focus on delivering a superior jet set in store experience. Today, we have 231 stores. We anticipate opening approximately 50 stores in North America in fiscal 2014. And still believe there is long term potential for 400 locations in this region. In our wholesale business, we expect sales to be driven by comparable store sales growth and continued conversion of department stores to shop in shops and accessories, footwear and women's wear. We will also expand shop in shops in men's sportswear and men's leather goods as we view these categories as long term growth opportunities for the company. In Europe, we will continue to increase our brand awareness and capture market share as we expand our retail and wholesale presence. Today, we have 44 stores, including concessions in this region. We plan to open 40 new stores in fiscal 2014. And given how strongly our brand has performed in the market, how well it resonates with European consumers and after careful review of the growth opportunities across the European market, we have concluded that the retail store growth potential is greater than the 100 locations we initially targeted. We now believe we can open 200 retail locations in Europe. In addition, we see significant opportunity to expand our wholesale business through additional wholesale doors and shop in shop locations. Today, we have approximately 1,000 wholesale department store and specialty store doors in Europe, where we are seeing strong performance for the brand. Long term, we continue to target 2,000 doors in this region. Japan is also a key market and a great long term opportunity for the Michael Kors brand. We have 29 stores in Japan and we expect to open 7 locations this fiscal year. We continue to believe we can ultimately operate 100 retail locations in this region. That said, Japan will take time to mature as we are in the early stages of developing brand awareness in this market. In the Far East, we are beginning to establish our brand and will continue to expand in this market through regional partnerships. We believe that the Far East represents a large market opportunity for the company. The stores in this region are showing positive results, which means the consumer is beginning to embrace the Michael Kors luxury lifestyle brand. As such, we are increasing our retail store growth target to 200 locations in this region from our initial target of 150 locations. We continue to focus our growth in Greater China, Korea, Singapore, Malaysia, Indonesia and the Philippines. In terms of our travel business, we remain on track to expand Michael Kors luxury products and jet set in store experience into the finest airports in the world. We continue to see approximately 50 airport and duty free shops worldwide over time, including freestanding stores, shop in shops and stores operated by specialists in the travel retail business. Finally, we'll continue to work towards bringing our North American e commerce business in house in the Q4 of fiscal As we announced on our last call, we will evolve this in house platform to enable us to offer an omni channel experience to our customers and broaden our merchandise offering of Michael Kors luxury products. Customers will have a consistent and exciting Michael Kors experience across our retail stores, our shop in shops and our website. In addition to enhancing the experience of our current customers, we believe this site will also provide us an opportunity to effectively engage new customers. In the long term, we believe that e commerce could represent a multimillion dollar channel opportunity and we expect this business to reach approximately 10% of total retail revenues. In summary, we are pleased to have ended the year on such a strong note, having delivered exceptional financial results and making advances on our operational goals. Looking ahead, we continue to execute on our growth initiatives with the support of a strong balance sheet and cash flow generation, which enables us to make the investments necessary to reach our long term growth targets. We look forward to continuing to build Michael Kors into a leading global luxury lifestyle company. Now I will 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 2013 Q4 financial results followed by our outlook for the Q1 and the full year 2014. For the Q4, total revenue grew 57.1 percent to $597,200,000 as compared to $380,000,000 in the Q4 of last year, with strong growth in each of our retail, wholesale and licensing segments. Retail net sales increased 58.8 percent to $272,700,000 in the quarter as compared to $171,800,000 in the Q4 last year, driven by a comp store increase of 36.7% and the opening of 67 new stores since the Q4 of last year. The comp store sales performance was driven primarily by the continued strength of accessories and watches. Wholesale net sales grew 59.4% to $304,700,000 in the 4th quarter compared to $191,100,000 in the same period last year. The increase was primarily the result of strong growth across all our categories, including accessories, footwear and women's wear, as we continue to enhance our presence in the department and specialty stores with the conversion of existing doors to shop in shops, as well as expansion of our European operations. In our licensing segment, revenue grew 15.7% to $19,800,000 for the quarter as compared to $17,100,000 last year, primarily driven by the continued strength in watches and eyewear. Gross profit increased 62.6 percent to $356,200,000 as compared to $219,100,000 in last year's 4th quarter. Gross margin expanded 200 basis points to 59.7 percent, reflecting strong year over year gross margin increases in both our retail and wholesale segments. The margin increase was driven primarily by lower in store markdowns, discounts and allowances as well as a more favorable product mix shift to higher margin merchandise. Total operating expenses were $200,900,000 in the Q4 of fiscal 2013. Total operating expenses for the Q4 of 2012 were $140,300,000 As a percentage of total revenue, total operating expenses decreased to 33.6% from 36.9% in last year's 4th quarter. For the Q4 of 2013, SG and A expenses increased 41.9% to $185,000,000 as compared to $130,400,000 for the Q4 last year, which included a $2,000,000 IPO related credit. 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 marketing spend and increases in corporate employee related costs. As a percent of total revenue, SG and A expense was 31.0% compared to 34.8% for the Q4 of last year, excluding the one time credit I mentioned. The improvement in the SG and A rate is due to the leverage on strong sales. Depreciation and amortization expense was $15,200,000 during the 4th quarter as compared to $9,900,000 for the Q4 last year, primarily due to the build out of new retail locations, new shop in shops and investments in our IT infrastructure to support our growth. We also recorded a non cash impairment charge of $725,000 in the 4th quarter related to one of our retail locations. As a result of these factors, income from operations was $155,300,000 or 26.0 percent of total revenue. For the Q4 of fiscal 2012, income from operations was $78,800,000 Excluding the IPO related credit, operating income for the Q4 of fiscal 2012 was $76,800,000 or 20.2% as a percentage of total revenue. Income taxes were $53,500,000 in the 4th quarter as compared to $33,600,000 for the Q4 last year. Our effective tax rate was 34.6% compared to 43.5% 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 a decrease in our U. S. Blended state tax rate. Net income was $101,100,000 in the 4th quarter and diluted earnings per share were $0.50 based upon 203.8 1,000,000 weighted average shares outstanding. Net income for the Q4 of fiscal 2012 was $43,600,000 or $0.22 per diluted share based upon 196,900,000 weighted average diluted shares outstanding. Excluding the aforementioned credit, net income for the Q4 of fiscal 2012 was $41,600,000 or 0.21 dollars per diluted share. Turning to the balance sheet. At March 30, 2013, cash and cash equivalents were $472,500,000 We had no borrowings under our credit facility. At the end of the Q4 last year, cash and cash equivalents net of $22,700,000 of borrowings were $83,700,000 Inventory totaled $266,900,000 and is compared to $187,400,000 last year, an increase of 42%. Capital expenditures during the 4th quarter totaled $46,500,000 The majority of these expenditures related to new store openings with the remainder being used for investments with building new shop in shops and enhancing our information system infrastructure. We opened 7 stores in the quarter, 3 in North America, 1 in Europe and 3 in Japan and ended the quarter with 304 retail stores including concessions. Turning to our outlook. In the Q1 of fiscal 2014, we expect total revenues to be between $555,000,000 $565,000,000 assuming an approximately 20% comp store increase. We expect diluted earnings per share to be in the range of $0.46 to $0.48 assuming a tax rate of 36% and 204,000,000 shares outstanding. We expect the 1st quarter gross margin and SG and A as a percent of total revenue to be similar to last year's Q1. For fiscal 2014, we expect total revenues to be between $2,650,000,000 $2,750,000,000 assuming comp store sales increases in the range of 15% to 20%. We expect diluted earnings per share to be in the range of $2.43 to $2.47 assuming a tax rate of 36% and 204,800,000 shares outstanding. Capital expenditures are expected to be approximately 230,000,000 dollars for fiscal 2014. We expect to open approximately 100 retail locations, including approximately 53 in North America, 40 in Europe and 7 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. Overall, we delivered excellent financial performance, maintained a very healthy balance sheet and generated strong cash flow in fiscal 2013. We remain very excited about our future prospects we continue to execute on our true growth strategies. Thank you. I will now turn the call back to John Idol. Thank you, Joe. In closing, we're pleased to see the momentum continue across all of our business segments. Our success is being driven by Michael Kors luxury product leadership and creative direction, a talented management team and a strong infrastructure. As we look ahead, we are excited about our prospects for future growth. We remain focused on driving continued comparable store sales growth, expanding our retail base, converting our department store doors to shop in shops and growing our brand internationally. In fiscal 2014, we are poised to deliver 25% revenue and 25% EPS growth. As we see the opportunity to expand our presence through 100 retail store openings, 50 new licensed location store openings and an additional 500 global accessories, footwear, womenswear and menswear shop in shops. We believe we are ideally positioned to capitalize on the global growth opportunity in the luxury market with the Michael Kors fashion brand, which is resonating with customers globally. We will now open up the call for questions. Thank you. We'll go first to Kimberly Greenberger with Morgan Stanley. Great. Thank you. Good morning and congratulations on a great Q4 and a really terrific year. John, I'm wondering if you can talk about your outlook here and if there's any comment you can share with us on what you're seeing so far here in the Q1. On the last several conference calls, you've also talked about anticipating a sort of normalization of markdowns either in the wholesale channel or in the retail channel. And I was wondering if you could just share with us what you're seeing there as well? Thanks. Sure. Well, I think Joe talked about our outlook for the Q1. So obviously, that means that we're encouraged by our sales results to date, and we see continued momentum in the business. So we don't see anything that's indicating any differentiation with how the customer is responding to the business, in North America, Europe, Japan or in Asia. So we feel very confident about our Q1 and the balance of our spring selling both from a product standpoint and from a sell through standpoint. In terms of normalization, I think we've always said to you that our sell throughs are really extraordinary. You can even see by our inventories this quarter. We as good as we are about chasing inventory, we just still couldn't even chase it fast enough given the strong sell throughs that we had at retail. So normalization will come. We don't know when that will come, but it will. And until then, as we've said before, as the consumer is responding to the product, as the demand is there, we're going to do everything we can to fill her desire and hopefully his desire as we go forward as well. And continue to deliver that exciting jetset experience that Michael Kors has been capable of doing for over 30 years now. Great. Thanks so much. We'll go next to Erinn Murphy with Piper Jaffray. Thank you. And let me add my congratulations. John, I was hoping you could spend a little bit more time on Europe, I mean, extremely strong in the quarter. If you could just maybe speak to how you're seeing both the tourist versus the local demand, how that's evolved over the years that you've been in Europe now? Where is brand awareness, if you can give us an update there today? And then as we think about going into these kind of 40 new retail stores this year in Europe, are there any new markets you'll be entering into? And then I guess just last as it relates to Europe, again longer term as you're kind of accelerating the longer term target, how should we think about the gross margin component in Europe? A lot of time in these global markets, we do see higher gross margin generated outside of the U. S. I'm curious if that's something you would see as a longer term driver in your business as well? Thank you. Okay. I think that was 4 questions in one, but let me see if I can get all that. The first answer is that in Europe, our biggest piece of our business is still the local markets. It's the consumers who live in France, who live in Italy, who live in Spain, etcetera. And clearly, they are responding to our product. So we are we're one of the few companies that probably gets on a call today and says we're excited about our business in Spain, we're excited about our business in Italy, we're excited about our business in Greece. All three of those markets continue to do well for us. And obviously, the primary, the bigger, the more healthy markets being the U. K. And Germany and France to a degree are all performing equally as well for us. So we're not seeing any issues on a market by market basis for the brand and for the company. Secondly, in terms of brand awareness, we do the study once a year. So the new study is not going to be out until the latter part of the summer. So I don't think we'll have it for our next conference call, probably after that. But in Europe, we were running at about 44% brand awareness in total. If I'm no, that's not correct, Thomas. I'm sorry, the brand awareness in Europe is 36%, which I think we've reported previously. So we don't know what the results are in terms of has it increased or not until we have that study. The question I'm sorry, I forgot to ask about answer about the tourists. The tourist market is really extraordinary for us in certainly in major cities, in Paris, in London, in locations like that, in Barcelona. And in those markets, as we've told you before, we think we really are doing an extraordinary job. In many of these stores, we speak as many as 10 languages with our sales forces. And we think that we're well equipped to capitalize on that tourist traffic. And what's very interesting for us is how we're seeing customers, I think I've talked about this in the past, when we opened up in Poland, as an example, in Warsaw. And the amount of customers coming in from Eastern Europe to visit the city and who know the brand Michael Kors and are coming in and asking for a Hamilton or Selma that they're finding quite frankly online is really extraordinary for us. So we see that as a continued opportunity. And then of course, we talked about airports and there are many outstanding airports in Europe to capitalize on the tourist traffic with Heathrow and Charles de Gaulle and Schiphol in Amsterdam. And we're opening Michael Kors stores and in certain cases shop in shops inside of those locations. Lastly, in terms of the gross margin, I think we've said before that we do think that there's an opportunity long term for the company's gross margins in total to expand. That's as retail becomes a greater part of our overall mix. And as Europe, in particular, and ultimately Japan come on, those businesses will generate higher gross margins than our current weighted average. Thank you very much. Joe, could I just add just a quick clarification question on the Q4? On the licensing segment, the EBIT margins were a little bit more modest than I think some of us had anticipated. Could you just help us think about if that's a seasonality or kind of what was going on there in the Q4? Thank you very much. Sure. Remember that our advertising costs are charged to the licensing segment. So that will be timing of the advertising. Thank you very much. We'll go next to Brian Tunick with JPMorgan. Thanks. And I'll add my congrats as well. I guess one for Joe on the margin side. I guess you gave us color on Q1 here for gross margins and SG and A. So we were wondering if you can give us some idea what's assumed in your full year guidance on the gross margin and SG and A expectations. Because as we think about the e comm, we're trying to wonder the impact on the P and L. In the shorter term, should we expect a noticeable impact on the SG and A rate this year? And then conversely, as you grow that business to a $50,000,000 to $100,000,000 business over time, could there be a positive benefit noticeable on the gross margin rate? And the second question, I guess, for John, maybe just the discussion around the wholesale, the comps have been so strong. We're just sort of wondering from a conversion to the shop in shop perspective, where are we sort of in the best doors? And where do you think we'll see those conversions going forward? Thanks so much. So in terms of e commerce, remember that e commerce will come in, in the Q4 of our fiscal year. So it will have an insignificant impact actually on the results. And in terms of SG and A and CapEx, the e commerce is all built into those numbers. I think we've indicated to you before that SG and A will grow in similar fashion with the growth in the revenues, which is true this year. We anticipate for the full year for SG and A to be similar to the prior year. Yes. Brian, the other thing added on that note, obviously, we're taking on a lot of expense this year and setting up the e com with basically no revenue. So there is a fairly large SG and A impact this year to the setup of e commerce. And if anyone tells you it's simple or inexpensive, they're not being maybe they haven't gone through it before, but it is a very expensive and complicated process to do it the way that we're setting it up, which is not only for a domestic launch in calendar 2014, but we also hope to be live with an international launch at the end of 2014 as well. So the way we're building the platform is a global platform, not just a domestic platform. So the costs associated with that are really quite high. And secondly, the interesting thing is, as we model the business out, we're not seeing tremendous upside in terms of operating margin in that business to our current retail business. And I think if you talk to other people who are starting to see the same, the impact of ultimately omni channel and free shipping are really take a big bite out of the profitability of the Internet. I think there were probably 2 or 3 years ago where you were able to charge for everything and it wasn't free shipping. I think that the operating margin of that business was probably a little healthier, but it's just become a competitive fact of life that the customer expects to get whatever they order on the Internet in probably some people do it in 24 hours, but let's say 48 to whatever hours. So they're expecting very quick turnaround and that's an expensive proposition. So we see the revenue, we see the operating income, but I don't know if there's going to be tremendous leverage on that as it relates to what we're seeing in our current retail business. To the wholesale side, I'm pleased to once again report to you that the comp store increases in department stores was actually higher than our freestanding store comp stores, which really for me is just says volumes about what's happening with the brand and Michael and our design team and the designs that they're putting forth because you know very well that our competitors are very promotional around us and we are not doing that. And we're still powering through and having extraordinary comp store increases. So that means the consumers walking in, she really is excited about what Michael and the design teams are giving them in terms of fashion and fashion leadership and product and quality. And all of that is resonating. And we're seeing it happen U. S, Europe, we're starting to see it happen in Asia now ever so slightly. Every week, the business is is getting better and better and better. So I think these are all just saying when you're focused on product and you're focused on the lifestyle experience, the end consumer is smart and she really is that's what she wants. She wants the best product from whomever the designer is. We'll go next to Lindsay Druckerman with Goldman Sachs. Hi, can you hear me? Yes, we can. Hey, guys. Thanks for taking the question. So just two quick ones. First of all, John, I was hoping you could elaborate a little more on what you commented about driving U. S. Comps for next year. You mentioned specifically adding more luxury I guess luxury products to the store. Maybe just if you could break down some of the big comp drivers that are embedded in your guidance and some of the specifics around that? And then just another clarification. I know you mentioned that your expectation is that the online business won't necessarily be margin accretive to retail, but I just want to clarify that it would be accretive relative to the margin you're capturing today where you're just getting a wholesale cut of that business? Thanks. Sure. I'll answer the second one first. The answer to that is yes. It will be more profitable for us to bring the business in house versus our current wholesale arrangement with Neiman Marcus. But that will take a little time. You have to build up scale and to be able to achieve that. Again, we have a nice sized Internet business today and Neiman's has done an outstanding job and it's been amazing partner for us. So we thank them again for all that they've done in our partnership. So we're taking over a business that's quite healthy and this year won't be accretive from that standpoint because of all the buildup and the cost, but next year it will be accretive versus our wholesale structure. In terms of the first question, the comp drivers, again, we go right to the top. It's in terms of dollars comp store, it's clearly handbags. Our handbag business continues to accelerate across all the entire globe. And so that will be the number one dollar driver. The number one percentage driver will continue to be SLGs, small leather goods. That business just gets stronger and stronger and stronger. There's also some nice trends developing there in the swing pack business as well, which we think is going to continue to accelerate that along with the money pieces and certainly some of the tech products that are resonating well with consumers in that category. The next big dollar driver will really continue to be watches. Our watch business remains very, very strong, again, both domestically and even stronger internationally, as I'm sure Fossil has commented to you. Our business in watches in Europe and the beginnings of what we're seeing in Asia are really just outstanding and extraordinary. So we see that business as being something that's going to be continued to drive our comp store sales for us. And then jewelry, it's we got as we told you before, we got in year 1, it's already developed to be 5% of our business in our stores, and we think that's got tremendous more legs and opportunity for us. We take that very seriously. We don't look at it as a little piece of an accessory in the store. In fact, as we look at stores going forward in the future, you will see much larger presentations of watches and jewelry in the stores, much more commensurate with what you're seeing in Rockefeller Center, where approximately a third of the store space is dedicated to watches and jewelry. We think we're the leader in that category. We're the number one designer watch business in the world today. And we have a goal to be the number one jewelry designer business in the world also. It will take us a little time, but we think given our success rate in the past that we can do that. And then of course, we are our footwear business is coming on very, very strong, both in our own stores and in our department store channel as well. So we like the development of that. And I might just also add, not necessarily in our own stores, but in total, our women's ready to wear business has been excellent, just excellent. So right now, all the businesses will contribute, but in terms of dollars, it will be handbags first, dollars second will be watches. And then in percentage, the 2 largest businesses will be jewelry and small leather goods. We'll go next to Bob Drbul with Barclays. Hi. Excuse me. Good morning. I guess if I could follow on the last question. Can you talk a little bit about traffic and ticket? Sort of what was in the quarter? And then your guidance for the year, the expectation on the 15% to 20% for the full year? Sure. We don't just say we don't guide for traffic, etcetera. But our ticket remains the same, just FYI. It's the strangest thing since we opened our first retail store in 2 1,007, I think it was. Our average transaction, that's what we really look at, our average transaction really hasn't changed. It runs around 2.15 dollars and it just doesn't change, which was interesting because when we added jewelry, which is a much lower average transaction or not much lower average ticket, we thought it would drive the average transaction down. And in fact, what happened was the UPTs went up. So our average transaction remains just very similar. Traffic was up, again, very consistent with where we've been in the past, well over 20%, and our conversions are running well over 10%. So again, we're getting nice lift in both of those areas and you put the 2 together and that's how we kind of get to our comp store numbers. So we have not seen any differentiation in terms of our traffic or conversion growth. It's been both very strong and solid. Okay, great. And then my second question is, the men's business, you're just beginning to focus on that. Like what do you see as the opportunity there either sort of near term or longer term? Sure. We've been in the men's business since we bought the company in 2003, 2002. And if you go to Bloomingdale's and to Saks and into Nordstrom, etcetera, you're going to see the product represented in beautiful shop in shop environments. And we're having some very good success in our men's sportswear business. You'll also see in Europe, we've expanded. We're in over 100 locations today in Europe. And we're also having very good stone for us is really sportswear. Because remember, we do have a we have a we're a lifestyle company, even though we're focused on accessories, we truly do have a business like the other large luxury players around the world in men's and women's sportswear. And that being said, there's an opportunity in men's leather accessories. We will be opening some flagship shops in some of the very, very prominent department stores, both domestically and internationally with men's leather. Very, very, very early days, but it's important business and it's obviously in Asia, it's a very, very important business. So we are learning our way through that, but we do see it as an opportunity for growth for the company in the future. Great. Thank you very much. We'll go next to Paul Lejuez with Wells Fargo. Hey, thanks guys. Can you talk about the mix of business in Europe retail stores? How that differs from the U. S. Maybe from a category and price point perspective? What are they buying over there versus here? And then just secondly, can you maybe go through your CapEx guidance this year and bucket that out for us in terms of how much for new stores, how much for e com and what's a more normalized level of CapEx going forward if it is different than what we're expected to see this year? Thanks. Obviously, the transaction is higher because the retail Obviously, the transaction is higher because the retail price points are higher in Europe. They run approximately 30% to 35% higher than the U. S. Retails. So, but really the percentage doesn't change much between the accessories and the watches and the jewelry and the footwear and the women's ready to wear. We are in Europe building certain stores are multilevel in Europe. So we are getting the opportunity to put full women's ready to wear collections in a certain amount of the European stores, which we're excited about. We think that's an opportunity for us to showcase our full ready to wear in certain countries. And again, we have a very large specialty store business there. So that resonates well with our ready to wear customer accounts in the territory. And the product is having some very strong sell through. So that's really the only difference you'll see in a handful of flagship locations where we do have that opportunity. Typically, those will be 2 level stores. And I'll let Joe answer the CapEx piece. Sure. Paul, we don't actually break down the CapEx. In general, we're spending most of our money in the building the retail stores. The next biggest bucket will be shop in shops and then the last bucket will be kind of corporate type expenses. And again, part of what you're seeing this year will be some spend for e commerce that will down a little bit. But we would anticipate that CapEx in the future will be at a run rate similar to what we're seeing this year. Okay. Thanks guys. Good luck. Thank you. We'll go next to Randy Konik with Jefferies. Hey, thanks a lot. I guess John, can you just give us some perspective on how your demographic is starting to change over the last 12 to 18 months? And now we've had a couple of really accelerating sales over the last couple of years, there's obviously been repurchase activity by your customers. What are they how is their buying behavior changing? Are they moving up in price point? Are they moving to purchasing Bags Plus apparel? Just give us some perspective on how your repeat customers are changing their buying behavior and what's happening with demographics? Thanks. Yes. The demographics, about 3 or 4 years ago, we made a concerted effort to talk to a slightly younger customer. Being younger, I'm talking more 18 to 25. And that really resonated well with that consumer and in a funny way helped us actually with some of the older customers, because there was a point in their very early development where people said, well, Michael Kors isn't for me, that's for my daughter. And there's so much mother daughter shopping that happens today in stores. And whether you're 60 years old or you're 25 years old, everyone sees everything on the Internet or on television or wherever it is. So the information is so free flowing. And as Michael always says, if you're 50 years old, you want to look like you're 35 years old or if you're 25 years old, you want to have a wardrobe of a 35 year old. So we still believe in that mantra and that philosophy. And so our demographics shifted about 3 years ago. They haven't really shifted much since then. And that's we like where we are today. And we think that what we're seeing with the customer to kind of answer your second question is that she's coming to the store a little bit more frequently. That we do know, which we like. And as I said to you before, UPTs are actually up in the stores. And we have a very nice balance of still new customers coming to the store, which is something we look at. We like to drive our repeat customers through retargeting and mailing and all the different engagement activities that we're working on with Facebook and Twitter and Instagram, etcetera. But and today. If you look at, we were the number one search brand fashion brand on Google for last year from the data that we've seen. So that means consumers are really reaching out. They want to understand what's going on with the brand. They want to engage with the brand. Our engagement rates on Facebook are one of the highest of any brand that Facebook is operating with today. We know that from our deep relationship with them. So we think that we're going to continue to deliver her the newest, most exciting fashion product. And secondly, with our sales associates in the store and the engagement that we have with the customer, where we're really putting time, energy and effort into, frankly, upselling and cross selling with them, that we have more opportunity to get her to come back in the store and that clearly is happening. We'll go next to Oliver Chen with Citi. Hi, congratulations guys. Regarding the gross margin, there was commentary on the product mix benefiting this line. Could you just clarify what happened in the upside there and if that's an opportunity lead you're the lead fashion executor. But if you could comment on your thoughts on electronic watches and the spending that may or may not happen there? Oliver, I didn't I couldn't really hear you clearly. What was your first question again? On the gross margin line, if there was an upside driven by product mix and if that's something that will continue, I think you mentioned that earlier in your call. Yes. Joe mentioned that. Oliver, that's just a result of a certain products that we're selling today that our leather costs are a little bit more favorable than some of our other leather costs. So we've actually seen some very nice pickup on that. That's not something you can count on to continue. It's just trending if it's a certain leather that sells better than another leather and we might buy that for slightly lower cost. That's you enjoy the fruits of those things when they happen. But as Joe indicated before, we think our gross margins are going to be similar on a year on year basis in the quarter and slightly down maybe for the year, but not by much. So we're feeling good about the product sell through and the gross margin mix that's in the assortment today. On the second issue, I don't really want to comment about what we're doing in the watch business and it's because we are we think we're one of the leaders in terms of what's happening in design, technology and materials. And quite frankly, we have a lot of companies chasing us. So if you don't mind, I'm going to not answer that question. But we're looking at all the technologies that are in the watch business and viewing them very carefully and how that might continue to excite and enhance our watch business. But one last thing I will leave you with the watch businesses, as I said to you before, it continues to have just strong, strong, strong double digit sell throughs both in our own stores and at retail. I hope everyone goes down to see our new flagship shop at Macy's. It's extraordinary that opened, I believe yesterday, and really is, I think, something that's world class for any watch company. But our customer continues to collect. She wants everything from a rose gold watch to a silver watch to a gold watch to a tortoise to a bone. And our key to success is to continue to drive newness and innovation. We'll go next to Omar Saad with ISI Group. Thanks. Good morning. I wanted to ask about inventory guys. I think it's the first time we've seen a sequential decline, quarterly decline in inventory, which obviously given the amount of growth you've had, you've been growing inventories, but quarter over quarter inventories fell and it kind of begs 2 questions. Number 1, how does that bode for kind of near to to medium term gross margin trends? It looks like your inventories are quite clean coming out of the quarter. And then I guess the second question would be, how is the setup? Did you have enough inventory? It sounded like in the quarter, you didn't really even have enough sounded like in the quarter you didn't really even have enough to kind of chase the business. So how do you feel about your inventory position overall in light of those things? Thanks. We Omar, we feel very good about our inventory position. As we've indicated to you before, it's really in a high growth mode. It's difficult to for you to be able to project what our inventory is going to be. We are opening stores, opening shops and the timing of those openings will change and drive kind of what our inventory needs are. And the other thing is obviously we're as we're growing replenishment programs, we're constantly reviewing those and adjusting those, and it's a normal type thing. But at the end of the day, we are feeling very comfortable with our inventory position. We think that we will probably get back to where the inventory will be growing slightly higher than revenues, but we're in a very good position today. And you are correct, our inventories are indeed very clean. Yes. And Omar, I wouldn't expect any significant increase in gross margin because remember, even when we had higher inventories, our sell throughs were so good. So it's not like we were taking higher markdowns to get rid of higher inventories. So that's not our situation. So I think you can feel comfortable that that will not be the trend. But that being said, inventories should be growing faster than sales just because we're opening more stores. So the inventory has to be there between the shop in shops and the stores to be ready to fill them as they're opening. And our final question comes from Dana Telsey with Telsey Advisory Group. Good morning, everyone, and congratulations on the terrific results. Can you talk a little bit about what you're seeing in real estate in terms of average store size? How you're planning that going forward? And also pricing, do you see any change in that going forward? And also pricing, do you see any changes in pricing this year, whether on new products or what's happening with raw material cost per core? Thank you. Sure. I'll address the second one first. Pricing, we don't see any changes for us. Our pricing has remained pretty consistent over the past 5, 6 years. We did raise small leather goods prices over the past 2 years somewhat, nothing really significant. So again, we feel that our customer is responding to the value that we create for her, 1st with the design of the product, 2nd with the quality and then thirdly, the price value relationship. Michael feels very strongly the consumers are smart today that they shop the Internet. They have the opportunity to compare our product versus our competitors' product. And not only do we have to win on design, but we've got to win on quality and price value relationship. And that doesn't mean we're selling things for cheap. It just means people are smart today. And we like the fact that people leave our store and they feel great about when they bought a $400 Michael Kors handbag, they look at it and they think it looks like $1,000 handbag or when they walk out with a Michael Kors watch for $2.50 they think it looks like a $2,000 watch. And that's one of the real keys to our success is delivering that high quality price value relationship along with the design integrity. In terms of shop size, I will tell you the following. Number 1, we will continue on our kind of average of 2000 to 2,500 square foot stores. The majority of the openings will be in that range in the U. S. We have indicated in the past that there are certain of our freestanding stores today that need to be upsized. The productivity levels are very, very high in our stores. And we've said before, we have stores that are doing between $10,000,000 $15,000,000 in 2000 to 3000 square feet. So clearly, those stores need to be upsized. There's not going to be many of them, but we are looking at upsizing a handful of stores more into the 5,000 square foot range. And again, we will still be very, very productive upsizing into that. Believe it or not, not a lot of that space will go into actual more presentation of product. It will go into more stock space inside the stores just to be able to service the daily and in some cases hourly needs of what are happening in very, very high productivity stores. Well, I would like to thank everyone for joining us on today's call and I look forward to speaking to you on future calls to update you on the success and the growth of the Michael Kors business. Thank you. And that concludes today's conference. We thank you for your participation.