Earnings Call: Q3 2013

Feb 12, 2013

Earnings release

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Michael Kors Holdings Limited Third 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 for you to queue up for questions. As a reminder, today's conference is being recorded. And now I would like to turn the conference over to Ms. Christina Lack. Please go ahead. Good morning, and thank you for joining us for our Q3 earnings call. Presenting on today's call are John Idol, Chairman and Chief Executive Officer and Joe Parsons, Chief Financial and Chief Operating Officer. Before we begin, let me remind you that certain statements made on this call may constitute forward looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those that we expect. Those risks and uncertainties are described in today's press release and in the company's registration statement on Form F-one, 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 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' 3rd quarter fiscal 2013 earnings call. With me today is Joe Parsons, Chief Financial and Chief Operating Officer. I will begin the discussion with a brief overview of the quarter and share with you an update on our strategic growth plans. Joe will then provide a detailed review of our Q3 financial results. Additionally, he will provide our outlook for the Q4 and for fiscal 2013 the full year. We are extremely pleased with our Q3 performance across all our luxury retail, wholesale and licensing segments throughout North America, Europe and Asia. The brand strength, innovative fashion design and jetset in store experience drove strong sales and earnings during the critical holiday season. Through the creative vision and design leadership of Michael Kors, our talented design team once again delivered exciting designs for the holidays, creating a collaboration that encouraged customers to celebrate the season. In addition, during the quarter, we continue to successfully execute on 6 initiatives of our key growth strategies. To quickly summarize, first, in North America, we delivered a 41% comparable store sales increase, representing the 27th quarter of consecutive comp store growth in this region. 2nd, we continued our retail expansion efforts in North America, opening 14 new stores in the quarter. 3rd, we continued to convert North American wholesale department store doors into branded shop in shops. 4th, we expanded our presence in Europe with the addition of 9 retail locations as well as new wholesale doors. 5th, we further developed our business in Japan. And 6th, we continued to build a foundation for growth in other areas of the Far East through regional licenses. Let me take a minute to review some financial highlights from our Q3. Total revenue in the quarter grew 70% to $637,000,000 driven by strong performance in all segments of our luxury business. On a combined basis, accessories, footwear, watches, jewelry, eyewear and related products comprised 80% of our product mix in the 3rd quarter. Gross margin expanded 80 basis points to 60.2% for the quarter, driven primarily by lower markdowns as our luxury products continue to generate strong sell throughs. Our income from operations grew 139 percent to 205,000,000 for the 3rd quarter compared to the same period last year and excluding one 3,000,000 and comparable store sales increased 41% globally. Our consistently strong comps underscore our exceptional brand power, compelling luxury merchandise assortments and unique jetset in store experience. Retail sales growth was also driven by 66 net new store openings since the Q3 of last year, including 28 openings during the Q3. We ended the quarter with 297 company owned global retail stores, including concessions. Wholesale net sales increased 77 percent to $274,000,000 in the 3rd quarter. Strength in the wholesale segment during the quarter was driven by continued strong performance of our luxury products in department stores and specialty stores, as well as our conversion to shop in shops in department stores. In our accessories categories, we saw similar or greater comparable store sales increases as compared to store sales increases as compared to our retail stores. Both our footwear and womenswear lines showed strong performance during the quarter and these categories continued to be well positioned as we encourage customers to fall in love with Michael Kors this Valentine Day. In our licensing segment, revenues increased 52% to $30,000,000 primarily driven by the continued strength in our luxury watches, which saw accelerated growth as the quarter progressed. We continue to be pleased with the performance of our jewelry category during the 2nd year in both our stores and at wholesale. And we believe the jewelry represents a significant growth opportunity for the brand. Additionally, our eyewear business continued to perform well this quarter and we believe this category also has great potential for future growth. For our operations by region, North American revenues increased 67% to $573,000,000 and comparable store sales increased 41%. We opened 14 stores during and ended the quarter with 2 28 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, resulting in a significant increase in sales volume per door. In Europe, we are very pleased with the strong and growing acceptance of the Michael Kors brand despite a continued weak overall European economy. We believe that we continue to benefit from increasing brand awareness in this region as our strong product portfolio resonates well with the European consumer. During the Q3, European revenue increased 112% to $58,000,000 and comparable store sales increased 58%. We opened 9 stores during the quarter and ended the quarter with 43 retail locations. Additionally, distribution in our wholesale segment continued to expand primarily through specialty store doors where sell throughs remained very strong. In Japan, which we believe is a key growth market going forward, revenues increased 103 percent to $6,000,000 with comparable store sales increasing 11%. We opened 5 stores in Japan during the Q3 and ended the quarter with 26 locations. As I will discuss more in a minute, we're intently focused on developing our brand in this region and believe the Japanese marketplace will be a strong contributor to revenue and net income in the future. In addition to our strong growth in Japan, our brand continues to expand into other regions in the Far East through regional partnerships. While it will take some time to solidly establish our brand in these regions, we believe that the Far East represents meaningful growth opportunity for the company. In the Q3, we opened 5 new stores in the region, bringing our total count including concessions to 65 locations. We believe we can ultimately have 150 locations in the Far East, including Greater China, Korea, Singapore, Malaysia, Indonesia and the Philippines. Additionally, on the international front, we are pleased to announce that we have entered into a joint venture agreement with Exclusive Brands International to create MK Panama Holdings, which will facilitate our retail and wholesale expansion in Central and South America, as well as the Caribbean. While we are in the early stages of development, we believe we have the potential to open approximately 40 freestanding stores and concessions in this region. We are excited about building our business in these markets and we believe it offers exceptional growth opportunity for the Michael Kors luxury brand. Finally, our travel retail business continues to grow rapidly as our luxury products are sold at shops in the finest airports in the world. As of the end of the quarter, we had 27 retail locations, travel retail locations. Although there is potential for 50 airport and duty free shops worldwide, altogether there is a potential for 50 airport and duty free shops worldwide, including freestanding stores, shop in shops and stores operated by specialists in the travel retail business. In total, we have 91 Michael Kors retail stores, including concessions through various partnerships worldwide, including North America and the Caribbean, Europe, the Middle East, Korea, Southeast Asia and Greater China. Including these locations, there were 388 Michael Kors stores at the end of the Q3 worldwide. Looking forward, we expect the global luxury market to maintain a healthy pace of growth. As an international jet set luxury lifestyle brand, Michael Kors is in a great position to capitalize on this opportunity. And we continue to see great potential for growth across our regions. Starting with North America, we expect to continue to drive double digit comp store sales growth fueled by the introduction of new luxury merchandise, paired with our focus on delivering a superior jet set in store experience to every customer that walks through the door. We remain on track to open increased comp store sales. In terms of product categories, we are thoughtfully expanding our menswear collection in both our retail and wholesale channels and see men's leather as a significant opportunity for us over the long term. In Europe, we continue to capture additional market share in the accessories, footwear, watch and apparel markets by increasing brand awareness through our advertising, public relation and social media activities, as well as expansion of our retail and wholesale presence. We remain on track to open 15 retail stores in Europe this year. In addition, as we continue to gain brand recognition, we see significant opportunity to expand our wholesale business in Europe through additional wholesale doors and shop in shop locations. Long term, we believe this region can support 100 retail stores, including concessions and 2,000 wholesale doors. As I mentioned earlier, Japan is a key market for us and we see the development of this region as a long term opportunity. As one of the most important luxury markets in the world, we believe that the Michael Kors brand will resonate with the Japanese fashion consumer. We are on track to open 10 to 15 locations in Japan this fiscal year and believe that this market can ultimately support 100 retail locations, including concessions. This region will take time to mature as we are in the early stages of developing brand awareness in this market. Turning to the e commerce business, we are working to bring our North American e commerce site in house in February 2014. While Neiman Marcus has done an outstanding job with our website, we believe is the right time to begin the transition process. The new in house e commerce platform will enable us to create an omni channel experience for our customers and offer a broader assortment of Michael Kors luxury products. We want our customers to have a consistent and exciting Michael Kors experience, whether it is in our retail stores, in our wholesale channel or on our website. In addition to enabling us to enhance communication with our existing customers, we believe this site will also provide us an opportunity to effectively engage new customers. In the long term, we expect e commerce to be a multimillion dollar channel opportunity. Overall, our strong performance in the quarter was driven by continued growth in comparable store sales, strong performance of our new stores, successful conversion to shop in shops in department stores and the advances in our international expansion strategy as we continue to build brand awareness. We have a talented management team, strong infrastructure and a healthy balance sheet that will enable us to continue to successfully execute our strategic growth initiatives going forward. In closing, according to the Luxury Goods Worldwide Market Study of 2012, the global luxury goods market is estimated to grow from $251,000,000,000 in 20 11 to between $314,000,000 $327,000,000,000 dollars in 2015. We believe that Michael Kors is very well positioned to fully Our compelling products, jetset in store experience and highly motivated sales team in our stores and shop in shops globally keep customers coming back for more exciting Michael Kors designs, while also attracting new customers that are experiencing the brand for the first time. Now I will turn the call over to Joe Parsons for additional analysis of our quarterly results. Thank you, John. Good morning. I will begin with a review of our fiscal 2013 Q3 financial results, followed by our outlook for the Q4 and the full year. For the Q3, total revenue grew 70.4% to $636,800,000 as compared to $373,600,000 in the Q3 last year, with strong growth in each of our retail, wholesale and licensing segments. Retail net sales increased 66.8% to $332,600,000 in the quarter as compared to 199,400,000 dollars in the Q3 last year, driven by a comp store increase of 41.4% and the opening of 60 6 net new stores since the Q3 of last year. The comp store sales performance was driven primarily by the continued strength of the accessories line. Wholesale net sales grew 77.4 percent to $274,300,000 in the Q3 compared to $154,600,000 in the same period last year. Similar to retail, the increase was primarily the result of strong growth in our accessories business and women's ready to wear as we continue to enhance our unique design and merchandise assortment. Also benefiting sales was the increased presence in our department store channel with the conversion of existing doors to shop in shops as well as expansion of our European operations. In our licensing segment, revenue grew 52.1 percent to $29,800,000 for the quarter as compared to $19,600,000 last year, primarily driven by the continued strength in watches. Gross profit increased 72.8 percent to $383,500,000 as compared to $221,900,000 in last year's Q3. Gross margin expanded 80 basis points to 60.2 percent with 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 in both segments. Total operating expenses were 170 $8,600,000 in the Q3 of fiscal 2013. Total operating expenses for the Q3 of fiscal 2012 were $157,300,000 or $136,200,000 excluding onetime charges of $15,900,000 related to equity compensations for periods prior to the 3rd quarter and $5,200,000 in IPO related costs. As a percentage of total revenue, total operating is decreased to 28.0 percent from 36.5% in last year's Q3, excluding the one time charges. For the Q3 of 2013, SG and A expenses increased 34.7% to $164,800,000 as compared to $122,300,000 for the Q3 last year, excluding the one time charges I just mentioned. The increase in SG and A expense for this year's Q3 was primarily due to higher retail occupancy and salary costs related to new store openings. As a percent of total revenue, SG and A expense was 25.9% compared to 32.7% for the Q3 of last year, excluding the one time charges. The improvement in the SG and A rate is primarily due to the leverage on strong sales. Depreciation and amortization expense was $13,800,000 during the Q3 as compared to $10,600,000 for the Q3 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. As a result of these factors, income from operations was $204,800,000 or 32.2 percent of total revenue. Income from operations was $64,600,000 in the Q3 of last year. For the Q3 of fiscal 2012, excluding the one time charges mentioned earlier, operating income was 85 point $7,000,000 or 22.9 percent of total revenue. Income taxes were $73,000,000 in the Q3 as compared to $27,300,000 for the Q3 last year. Our effective tax rate was 36.0% compared to 41.2% 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 during the 3 months ended December 29, 2012. Net income was $130,000,000 in the 3rd quarter as compared to $39,000,000 for the Q3 last year. Diluted earnings per share were $0.64 based upon 202,800,000 weighted average shares outstanding. Net income for the 3rd quarter of 2012, excluding the aforementioned one time charges, was $53,600,000 or $0.28 per diluted share. Turning to the balance sheet. At December 29, 2012 cash and cash equivalents were $405,800,000 We had no borrowings under our credit facility. At the end of the Q3 last year, cash and cash equivalents net of $15,500,000 of borrowings were $90,100,000 I would like to note that subsequent to the end of the quarter, we completed the refinancing of our credit facility. The new revolving credit facility is a $200,000,000 unsecured cash flow agreement with a 5 year term that provides for more flexibility as the business continues to grow. You can find a more detailed description of the terms of the agreement in our financial statements, which will be filed later today. Inventories totaled $290,200,000 as compared to $160,800,000 last year, an increase of 80%. As we said in prior calls, we expect inventory growth to outpace sales as we expand our retail and wholesale businesses, grow our replenishment business for basic merchandise and broaden our production schedules. Capital expenditures during the Q3 totaled $32,000,000 The majority of these expenditures related to new store openings with the remainder being used for investments in connection with building new shop in shops and enhancing our information system infrastructure. We opened 28 stores in the quarter, 14 in North America, 9 in Europe and 5 in Japan and ended the quarter with 297 retail stores including concessions. Turning to our outlook. For the Q4 of fiscal 2013, we expect total revenues to be between $515,000,000 525 $1,000,000 assuming a low to mid-twenty percent comp store sales increase. We expect diluted earnings per share to be in the range of $0.32 to 0 point 3 $4 assuming a tax rate of 38% and 203,500,000 shares outstanding. For fiscal 2013, total revenue for the year is now be approximately $2,100,000,000 This reflects a mid-thirty percent comp store sales increase. We now expect diluted earnings per share for fiscal 2013 in the range of $1.80 to $1.82 per share based upon an estimated tax rate of 38 percent 201,500,000 weighted average shares outstanding. We expect gross margin to increase modestly over last year, but I would note that 4th quarter gross margin is seasonally lower than Q3 by a couple of 100 basis points. SG and A is expected to grow about the same rate as the 3rd quarter, excluding any one time items. Capital expenditures are expected to total approximately $130,000,000 for fiscal 2013. We expect to open approximately 8 retail locations in the Q4, including approximately 4 in North America, 1 in Europe and 3 in Japan. In addition, our conversions of North American accessories doors to shop in shops are continuing on track and approximately one half of our initial target of 1,000 doors will be completed this fiscal year. Overall, we are extremely pleased with our financial performance this quarter. We remain excited about our long term growth potential supported our strong balance sheet and cash flow generation. Thank you. I will now turn the call back to John Idol. Thank you, Joe. We are delighted with the strong momentum in the Michael Kors brand. We believe that our unique position in the global luxury lifestyle category, combined with our healthy financial position, will enable us to capitalize on significant growth opportunities that lie ahead. We will now open up the call to questions. Thank We'll take our first question from Kimberly Greenberger with Morgan Stanley. Great. Thank you. Good morning and congratulations on a really fantastic quarter. John and Joe, I'm wondering if you can comment on a couple of things. The comp drivers in the quarter, are traffic trends still running up mid-20s or higher and the primary driver of your comp? Or are there some other metrics that are kicking in there? My second question is on department store markdowns. The department stores seem to be a little more promotional this year than maybe they were last year. And I'm wondering if all of the markdown allowances that would be afforded to the department stores during the holiday season were accounted for in your Q3 or are there any leftover for the Q4? Thank you, Kimberly. I'll talk to your first question, which is the comp drivers. And we really saw tremendous acceleration in the Q4 as the holiday season built. And I think that again really says a lot for the consumers' response to Michael's designs. Again, I think we were we had the right product in the right stores at the right time. And our design teams did an amazing job of putting that together. The and of course, really the desirability of the product, I think we were very top of mind for gift giving during the holiday season on people's gift giving lists. So number one driver of comps was at small leather goods. Again, we're seeing that triple digit increase as we had talked about before. The handbag business for us had very, very strong acceleration during the 4th our 3rd quarter retailers' 4th quarter. So we were very pleased with the results there. And our watch business was outstanding again and again coming off of very, very large comps for the last 2 years in a row. So all those categories really delivered. And then on the new front was jewelry, which in both our wholesale channel and our own stores had a very nice performance during the holiday season. And we think we're at the very beginning stages of what could develop into a significant business for us globally in jewelry. Traffic trends continue about the same. So we were pleased again to see where that was. And our conversions are around the same. So really, the metrics all stayed about the same and our average transactions were about the same. So it's all working pretty much the same sequentially as we've seen in the previous quarters. Regarding markdowns, I have to correct you in a comment. Actually, in our department store channel, markdowns were down this year versus last year. So I've heard this comment a few different times about something about markdowns. We're on the exact same cadence as we were in all the previous quarters. And in fact, in the department store channel, we had lower markdowns, which meant that our consumer responded better to our product. I think you might be confused with our competitors, who were very promotional during the 4th the retailer Q4 and our Q3. And we, in fact, chose not to participate in that activity. And I think that boded well for us and continues to say a lot about the brand. Terrific. My last question is just on the new store lease that you signed in SoHo. This new store seems to be a bit bigger than what we've seen from you in past. And I'm wondering if you have any particular strategies in mind on that particular location. Sure. There's probably 10 locations around the world that we're going to be looking very carefully at in terms of larger format stores. It's obviously, it's New York, it's London, it's Paris, we actually have the ability to expand the store with the current real estate that's there. Tokyo, etcetera. And those are really for 2 things. Obviously, they're great opportunities for us to add volume for the company. And secondly, it gives us an opportunity to really present the brand in its fullest just very, very, very productive as well as our Bleecker Street store. And when this opportunity came up, we took it. And to be honest with you, it also afforded us the opportunity to do men's in the store, which is will be an interesting test for us. We do have a men's business that is comprised of tailored clothing, dress furnishings, sportswear and now our new introduction of men's leather accessories, which very small early indications we've had some very strong results with. So this store will be something that we'll see if there's more opportunity for us in the future. And we like the fact that the SoHo market is a very strong men's market. So it will tell us a lot there. Terrific and good luck for the rest of the year. Thank you. And we'll take our next question from Brian Tunic with JP Morgan. Thanks. And I'll add my congrats as well to everyone on the team. I guess two questions. First maybe for John, sort of what you've seen over the past 12 months, has it changed your longer term view of what kind of mix you think the business ultimately will look like, retail versus wholesale or accessories versus apparel? Just curious if you change your thinking there. And maybe for Joe, just as we think about SG and A over the next 12, 18 months and you're bringing ecom in house and you're trying to ramp up marketing. Any ROI that you guys can talk about from building brand awareness either domestically or in Europe or Japan? Sort of where are you now in brand awareness the first question regarding the mix, let me just speak to wholesale versus retail. Again, we ultimately believe long term, the company will be 75 plus percent retail. Obviously, we keep saying that we think that mix is going to start to show up in the financials and every time we report, the wholesale business continues to grow at very, very accelerated paces. And that isn't shop installations that have gone in. To the shop in shop installations that have gone in. And I might add not just for the accessories. If you've been to Macy's Herald Square and you've seen our new shoe shop that's gone in, the results are extraordinary what's happened in our shoe business. And we will expand shoe shops, not to the degree we have accessory shops, but we are going to begin to open more shoe shops across the United States and internationally. And then secondly, on the additional shops, as we've indicated in the call, our women's ready to wear business is performing at a very healthy pace. And we're very pleased with that. We've made some product adjustments that are really resonating with the consumer. And I think both the footwear and the women's ready to wear are just feeling the overall brand presence and resonating with the consumer as they further get deep into the lifestyle brand of Michael Kors. So we believe retail will ultimately be 75%. And in terms of the actual mix, we're a little more excited than we were before about women's ready to wear. Again, it is a very large opportunity inside the United States, and we're seeing some real strong gains on that. You'll see some expansion of that in some of our retail stores as well. The new SoHo store will have a full floor dedicated to women's ready to wear. And in certain locations where we can expand it, given spaces in certain mall environments, we will do that. Again, you're not going to see the mix change dramatically, but we think it positions us in a fashion leadership position. As I told you guys back from when we went public, we are a fashion company. And I think that's one of our strengths is Michael's leadership, our runway fashion show, which happens tomorrow, the fact that consumers look to us to really be someone who helps put their wardrobe together. And we think ready to wear is a very strong component of that. I'm going to before I turn it over to Joe, in terms of ROI on brand awareness, our marketing and public relations team is doing an incredible job. I think you can see this is public information. We have 4,000,000 Facebook fans. We have over 1,000,000 Twitter fans. I think it's over 100,000 followers on Pinterest. We've got a team who's arrived in this company who has done an outstanding job with building our social media presence. That complements the strong presence we had in our print and outdoor. And we're seeing growth on a regular basis in terms of brand awareness, and we think that's going to continue. We released our brand awareness numbers the last call, and we only do that on an annual basis. So if you refer back to the last numbers we went to, that will tell you kind of where we are. Joe? And in terms of SG and A, as we said any number of times, we are not attempting to get leverage right now. We're aggressively investing in the business. It appears that we're getting leverage because our sales are coming in higher than what our expectations are. But we are indeed investing very heavily in the company and it's very consistent with what we've told you before. An obvious example is e commerce, where we're bringing it in house, we're building the platforms, we're building the infrastructure and we're building the team to run that business. And we're also, Brian, as we've told you and the other analysts, we're strengthening the management team. So a lot of senior positions being added to the company, because when you're where we are today, dollars 2,000,000,000 and obviously that we expect rapid growth to to continue. We need great management on a global basis in all of our regions, and we think we've been able to track that kind of management, and you'll see some of that show up in the SG and A as well. Terrific. That's very helpful. Thanks so much and good luck guys. Okay. Thanks, Brian. We'll take our next question from Erinn Murphy with Piper Jaffray. Great. Thank you. And let me add my congratulations. I wanted to focus a little bit on Europe. John, if you could speak to that. I mean, you're just doing a fantastic job of really developing a pan European brand. Could you maybe help us appreciate kind of the major markets that you're in today? What you're learning about that consumer both from the local consumer as well as the tourist consumer? And how should we be sizing up some of the biggest market opportunities in that space? Yes. Well, Aaron, that's a good question. So it was a little hard to hear. I'll just repeat it for the group. Aaron was just asking about the European business and could I discuss the sizing up the opportunities and how we're doing as a pan European designer company. So we're very excited as we've told you for quite some time, and I know there's not a lot of companies who get up and say we're really excited about Europe, but we're really excited about Europe. And 1st and foremost, Michael's designs are resonating globally and you have to have great product that people appreciate for a brand to be successful. And our jet set imagery and the fact that Michael is always looking to create glamorous, chic and sexy product is resonating with this customer very well. There's an interesting thing that's going on for us. We've told you in the past that, for example, legacy stores for the past almost 5 years So whether it's in Greece, whether it's in Spain, whether it's in Italy, obviously, what are very difficult markets, our business is very strong there. And our business is obviously strong in the U. K. And in Germany and in France. Also interesting, we're doing very well in France, which is very unusual for American brands that typically have a difficult time there. Again, I preface this all by talking about product. And I think Michael is really delivering on that. So we take inspiration from our Runway product sometimes to put into the Michael line or sometimes it's Michael's innovating new product inside the Michael line that you don't see anywhere else in the company. We really focus internally on discussing what does she want to wear in Scandinavia, what does she want to wear in Paris, what does she look like in London. So our company is geared towards thinking about not only the European market, but obviously the Asian markets as well. So we continue to believe that Europe is a 500 $1,000,000 opportunity for us. We just came back from a multi country, multi city tour. We are very comfortable with the ability to open 100 stores in that marketplace. And as we mentioned to you on the last call, we might be we might be looking longer term at an opportunity that's greater than that. We're still in the early days of assessing that, but some of the indications are pointing to opportunities beyond what we had initially thought about. So all in all, I think that as there's a few other American companies that have been quite successful building pan European brands, I think you will see Michael Kors in that same category. Thank you. I appreciate that. And just a quick follow-up. Just in terms of the health of your vendor base, I mean, clearly with the pace of growth that you are expanding and growing at, I'm just curious if you are expanding the either vendor base or just strengthening those relationships within your existing vendor base and how we should be thinking about that longer term? Thank you so much. Yes. We certainly are looking at expansion in certain categories of the vendor base, and we've got some very strong relationships with obviously our existing vendors who are growing with us. But as we move forward, we will definitively have to expand that. We're going to do it selectively. I think, again, one of the reasons why we've been able to deliver these comp store sales growths is because we are so closely aligned with our existing vendor base, and they have been very, very helpful in responding when we needed things done quickly. So we want to make sure that we're continuing that relationship with them and then bringing on some additional vendors as the business continues to scale. Thank you, Aaron. We'll take our next question from Lindsey Druckermann with Goldman Sachs. Hi, thanks. Good morning, everyone. I just had first a quick question on commerce. As you guys think about bringing that platform in, Joe, I was hoping maybe you could expand on some of the incremental costs associated with that move and then also how much revenue that's generating right now that you would plan to bring onto your P and L and also from an earnings accretion perspective, what the implications of that might be? And then as you bring it in house, how you might expect to make any changes to your merchandising or perhaps marketing use of the website? Thanks. I think in terms I'm going to turn it over to John, but I think in terms of the incremental expenses, we're not going to detail that. We do include it in obviously the overall costs that we have in our guidance for CapEx. So you see all those costs and what we are guiding you to. John, you want to talk about things? Yes. Let me just Lindsay, look, we believe that ultimately in North America, the web could account for as much as 10% of our revenues of retail revenues. So that's a goal. I can't tell you when we're going to get there. I can only tell you it's a goal for us. And I think that's a realistic goal because of the there's a lot of precedence out there with other retailers who are operating web businesses that are at that level. And obviously, there are certain ones that are operating much higher than that. So that can give you an idea of where we're thinking of trying to get to. I don't think we can really begin to tell you that until we have the business in our hands and we're operating it fully ourselves. And I would expect that to be kind of 3rd, maybe even after Q4 of next calendar year of 2014. I think we'll have a real good handle on how quickly we can scale that up. And the second thing is we will definitely have broadened assortments on the website. We are building an entirely new website that will that you'll see in February. Again, our creative team here is doing an extraordinary job putting that site together. We think we're going to have a much better brand experience today. I do not give us very high marks for our brand experience on our website. I give us high marks for our shopping experiences. Our site is very easy to shop and but I don't give us high marks on our brand experience. So we think we're going to greatly enhance that presentation. And lastly, what we know today is that there's a tremendous amount of people who come to the site, who actually are browsing the site to shop in the stores. So as important as the e commerce piece of this is, equally as important as the omnichannel piece, where we want to be able to create a ability for the consumer to not only shop online, but to be able to get something from the store, to reserve it at the store, etcetera. So there's a lot that's going to go into this beyond just e commerce. And then lastly, I'll give you a pretty startling fact. We're running close to 40% of our e commerce traffic today from international visitors, which we cannot fulfill those orders today. So I can't just it's so exciting to us that all these people internationally are searching, are coming, they're browsing, and we think there's just tremendous opportunity for us to grow internationally on the site. So we expect to bring up North America and Canada in February of 2014. Europe will probably come on right behind that in, let's say, 6 months, hopefully earlier, and Japan will be behind that. China will be a bit further down the road. That's with a whole different platform that we have to execute to put that into place. So that will probably be closer to Your Q4 comp guidance, does that represent how you're planning the business? Is there any specific reason that we should see deceleration? Has there been any impact from the recent storms? Yes. I smile slightly when you say deceleration. To plan 20 plus percent comp store growth, I think, is pretty healthy. And so we consider that to be still a very, very strong growth trajectory for the brand. And as we've said in the past, if the consumer is there she wants more, we have been we have shown signs of being able to fill her needs. Again, this 40% comp store growth is not going to go on forever. I want to reiterate that strongly. So we do plan the business at that level. Obviously, we're guiding to that, so we're planning to that. We do have the ability to do better if the product consumer is there. But I would be thinking in those kinds of ranges going forward because it's I think it's unlikely that we will continue to operate at those kinds of levels. I might add also that as said in the earnings statements, we saw that or higher in the department store channel, which was really exciting for us because we have our own sales associates in many of the shops, but not all the shops. So to be able to hit those comp stores and higher inside of our, in particular, accessories business and very healthy comps in our ready to wear business and our shoe business at wholesale, I think again really says a lot about the way the brand is resonating with the customers. Thank you. We'll take our next question from Omar Saad with ISI Group. Thanks. Nice job guys. John, why don't I follow-up? Mark, can you speak up? It's hard to hear you. Absolutely. I wanted to follow-up on the last question actually. As you think about planning the business, obviously, you're taking a little bit conservative approach, but you've been obviously you've been able to execute and do a lot of chasing. Can you talk about the supply chain and how you've been able to develop a supply chain that has that flexibility and allows you to kind of mitigate inventory risk as you plan it out and think about where the comps come in and where you're able to take them to. Can you just give us a little bit more insight on the supply chain? And then I have one follow-up question. Sure. And Omar, for the rest of the analysts, I'm not trying to be defensive here, but we're not planning conservatively. Again, 20% plus comp store growth is we think is pretty aggressive growth. So that's the way we've been planning the business all along. What happens is, is the consumer responds higher to than what we are planning the business. So again, I'm not trying to be combative, but it's really the way we look at the business. Supply chain is we have a very close relationship with a lot of vendors around the world. So they understand our potential to swing up in the business. And so what we do is we work ahead with them. We're obviously working with them 30 days, 60 days in advance and letting them know where the trends are heading. Certain suppliers might keep additional materials on hand, all at their expense to be able to feed us the product. And you'll see that not only in our handbag and small other goods businesses, but you'll see that in our shoe business and in some cases, our ready to wear business. So we feel very confident that our current supply chain network is capable of continuing to support our existing growth and help us if we need to accelerate that growth. Understood. Great. And I appreciate those nuances, John. And then just thinking about over the next couple of years, it sounds like Japan, you're getting a little bit more confident there. Europe, obviously, incredible e commerce category side jewelry, other new categories, maybe men's, beauty, who knows? Like what are the big kind of over the next few years, what are the biggest chunks of growth that you're most excited about? Well, 1st and foremost, obviously, the North American growth continues to be the biggest dollar increase that you will see over the next 2 to 3 years, just by the sheer size of the market and the store growth opportunity. 2nd for me is Europe, and I'm very and I think everyone in the company is thrilled at our response rate. And I forgot when I think Aaron asked the question earlier. It's amazing the tourist business that we're doing in our stores globally. And I think we've done an excellent job. So if you go to our store in Paris, we probably speak 7 to 8 languages in the store. If you go to our store on Bond Street, the same thing, we're speaking Portuguese, we're speaking Russian, we're speaking Mandarin, we're speaking so we're very focused on the traveling tourists. And so we like what's happening in Europe from a tourist standpoint. And then, of course, we also like what's happening in the local markets. I'm going I'll give you an example. We just opened a store in Poland at a mall called Mokotov. And the numbers are just staggering, what we're doing in the store. And here's a marketplace that it's not the typical London, Paris, Madrid markets, and we're really seeing the power of the product. It's even beyond the brand. I think the customer is first responding to the product and secondly, they're responding to the brand. So that would be our 2nd market for us. I would say in terms of dollar volume, I'd say that the web would be 3rd. That will be the next big exciting opportunity. We'll be able to scale that more quickly than Japan. And I think it will reach profitability relatively quickly for us. And then I would put Japan as the 4th market in terms of our level of excitement and excitement for us is always based around sales and profitability. Again, we're many years out from being profitable in Japan, but we've made this commitment, we're going to invest and we do think that's a multi-100 dollars 1,000,000 opportunity for the company over the next few years. We'll take our next question from Joan Pason with Barclays. Hi, good morning and congratulations. Just first off to think a little bit more about the comp trends during the quarter, you mentioned that watches accelerated as you got further through. But what was that similarly for overall comps, what was the monthly trend? And then how have you been tracking quarter to date? And then as a follow-up, just in terms of the retail base as you've gained scale on that, what have been the learnings or surprises? And how is that shaping the opening of new stores? Sure. The watch comps are slightly below our overall comps. And again, the watch business was more developed, I think, than any other business in our stores, quite frankly, over the last years, but not significantly below. So but it was above our internal projections and estimates and I think even Fossil's internal estimates. And the same thing happened with our wholesale accounts. The watch business was just far outpaced what we had anticipated. In particular in Europe. The watch business in Europe is really gaining some significant traction. So we're very pleased with what's happening not only in our own retail stores, but in our wholesale accounts. So I think we continue to view the watch business as a part of the jewelry business. Today, it is a fashion accessory for the consumer. And I will also tell you, maybe Kosta will talk about it in his 9 call, but the freestanding shop in shops that we're putting in, in the department stores for watches and jewelry are having the same kind of effects that we're seeing in the handbag and accessory shops in terms of amazing comp store increases and really hitting some significant numbers inside of these stores. So we're very pleased. We're not going to talk about quarter to date trends, but obviously, we had an outstanding 4th quarter. And then Q3. Sorry, Q3. I keep thinking the retailer 4th quarter. I apologize. And then in terms of new store openings, we're seeing the same trends that we've seen all along. New stores are coming out of the gate very strong. There's really been no change in that. And we're obviously opening in the United States in more B and C markets, as we've told you in the past. And Europe, we've been focused on more of the A market. So we see no change in any of our strategies in terms of new store openings. Okay. We'll take our next question from Oliver Chen with Citi. Hey, congratulations. Thanks for taking my question. Regarding the watch business and what you see as the longer term prospects there, we're taking e commerce in house. Is the watch business something you would consider down the line? Also, could you speak to us a little bit about the differences in your portfolio with regards to price points? Some people in the sector have been speaking to better performance at higher price points. Yes. First off, in terms of the watch business, we are very comfortable with our relationship with Fossil and Costa Carisotos' leadership of that company is outstanding and the teams that are there that we work with, we're very, very comfortable with our relationship. So we see nothing but growth together going forward in the future. So that's not something that's on our agenda. Secondly, in terms of the price points, unlike other companies, we've always had higher price points in our stores. I think one of the reasons why our stores are called Michael Kors and not Michael Michael Kors, because obviously a large part of the product is Michael Michael Kors sold in the stores is because we sell our collection handbags inside the stores, which are on average, let's say, dollars 800 to $1500 And that's always accounted for a very nice piece of business in our stores. So we sell what we call collection level price points. Remember, on Bond Street, we're sitting across from Gucci and Prada and Vuitton. And in Macy's, we're sitting across from Gucci and Prada and Vuitton. So we need to have and have always had not only accessible luxury price points, but we've had luxury price points in our stores. And that's always been a strong performer for us. And we continue that as the ethos of the brand comes from the designer collection level pricing, which is where Michael started the brand over 30 years ago. So I'm going to have to say that's going to be our last question. And I want to thank everyone for participating in the call today, and we look forward to speaking to you on our next earnings call to discuss Michael Kors results. Thank you very much. This does conclude today's conference. Thank you for your participation.