Earnings Call: Q4 2012

Jun 12, 2012

Good day, ladies and gentlemen. Welcome to today's Michael Kors Holdings Limited 4th Quarter and Fiscal 2012 Conference Call. As a reminder, today's conference is being recorded. At this time, all participants are in And now I'd like to turn the call over to Ms. Christina Lapp. Please go ahead. Good morning, and thank you for joining us for Michael Kors' 4th quarter fiscal year 2012 earnings call. Presenting on today's call are John Idol, Chairman and Chief Executive Officer and Jill Parsons, Chief Financial Officer 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 filings with the SEC, which are available on the company's website at 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 our Q4 and annual fiscal 2012 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 year and share with you some highlights on our strategic growth plans. Joe will then provide review of our Q4 and annual financial performance. Additionally, he will provide an outlook for our fiscal 2013 Q1 and full year. As we all know, product is the most important component of a luxury brand. And I would first like to congratulate Michael and his design team for the creative vision they provide to the company, which significantly contributes to our success. Michael and his team conceptualize and direct the design of all of our products and their design leadership is a unique advantage that we possess. While the global economy is seeing mixed results by region, our brand and Michael's designs are resonating with fashion consumers around the world. Michael Kors Holdings Limited is positioned as a global luxury lifestyle brand. We are pleased that our key strategies have resulted in both revenue and earnings growth across all of our business segments and operating We operate in the growing luxury marketplace, which we believe will continue to contribute to our global expansion. Our multichannel segment strategy, unique design, jet set attitude infrastructure provide a platform for our continued growth. Our outstanding management team and strong balance sheet will enable us to execute our growth strategies led by opening freestanding stores and shop in shops globally. During the Q4, we continued implementing our 6 growth strategies. 1st, in North America, our fashion assortment of lifestyle merchandise, increased brand awareness and exceptional jetset in store experience have resulted in 24 consecutive quarters of comparable store sales growth. 2nd, we continued our retail store expansion in North America. 3rd, we converted wholesale department store doors into branded shop in shops in North American department stores. 4th, we are continuing to expand our European presence through retail and wholesale door openings. 5th, 5th, we are developing our business in Japan, which is in the start up phase. And 6th, we are initiating and growing businesses in other areas of the Far East through regional licenses. I would now like to review a few financial highlights for our Q4 and the year, then discuss our segments, our operations by region and finally our expansion in the Far East through our regional licensees. Our total revenue in the quarter grew 58% to $380,000,000 and for the year by 62% to $1,300,000,000 as a result of strong performance in all segments of our luxury business, retail, wholesale and licensing. Michael Kors is unique among American luxury brands with accessories, footwear, watches and eyewear being the largest component of our revenue mix. As we had anticipated, mix. As we had anticipated, accessories and related products has grown and represents now 75% of our product mix for our fiscal year as compared to 62% last year. For the quarter, we delivered gross margin expansion of 180 basis points to 58% and for the year an expansion of 2 30 basis points to 58%. Both quarter and annual increases were primarily as a result of our increased retail and European businesses as a percent of sales mix, which have higher gross margins. Our income totaled $79,000,000 for the quarter or $77,000,000 excluding a one time item and $248,000,000 or $272,000,000 excluding items for the year. This compares to $43,000,000 100 and $37,000,000 in last year's Q4 fiscal year respectively. For our segments, we grew our retail sales by 80% over the prior 4th quarter to $172,000,000 Our comparable store sales grew 36%. We believe that this comp performance reflects our brand's strength, merchandise assortment and exciting jetset in store experience. Retail sales growth was by 71 store openings since the Q4 of last year, including 6 openings during the Q4. We ended the quarter with 237 company owned global retail stores including Concessions. Our wholesale segment sales increased by 46 percent to $191,000,000 for the 4th quarter and 48% to $610,000,000 for the year. Our product assortment continues to be well received by department stores and specialty store customers and we are experiencing strong sell throughs. In strong sell throughs. In our accessories categories, we are seeing similar to or greater comp store increases as compared to our retail stores and department stores. As of March 31, 2012, we had approximately 2,700 doors in America and Europe in wholesale. Our licensing segment revenues increased 27% to $17,000,000 for the 4th quarter and 43% to $65,000,000 for the year. We have experienced double digit increases during both periods at retail in our watch and eyewear businesses. Additionally, we launched jewelry in fall 2011 and we are pleased with the early results. For our operations by region, in North America, revenues increased 52% to $339,000,000 for the 4th quarter and 55 percent to $1,200,000,000 for the year. Our comp store sales increased by 37% for the 4th quarter and 40% for the year. And we opened 3 stores during the quarter and forty seven for the year. We continue to convert department store locations in North America into branded shop in shops, which significantly increases sales volume in each door where a shop was installed. Our strong momentum continued in Europe, where revenues by 123 percent to $37,000,000 for the 4th quarter and $183,000,000 to $109,000,000 for the year. Our comp store sales increased by 14% in the 4th quarter and 22% for the year. We opened 12 stores for the year. We continue to open wholesale doors, primarily specialty stores and sell throughs have maintained a strong pace. In Japan, where we are in the start up phase, our revenues increased to 4,000,000 dollars in the Q4 $10,000,000 for the year. And we opened 3 shops during the Q4 and 12 for the year. We are very focused on brand awareness in Japan and building that awareness through advertising, public relations and social media. As I will discuss in greater detail in a minute, Japan will be an important market for us and we are taking a long term view for development in this region. We continue to build the Michael Kors luxury brand in the Far East other including concessions. Other regional licenses are in Southeast Asia, primarily Singapore, Malaysia and the Philippines, where there are 10 Michael Kors stores. In Greater China, which is in the start up phase, our licensee has opened 4 Michael Kors retail stores, including concessions and is in the early phase of building brand awareness. While we recognize that building our brand in the Far East is a long term proposition, we are excited to be planting the seeds for the future development of these territories. In addition to owned retail stores, the company has 64 additional retail stores, including concessions operated through licensing partners. There are now 301 Michael Kors stores globally, including concessions in Europe, Japan, Korea, the Middle East, Philippines, Singapore, Malaysia and North America. Looking forward, the luxury segment continues to grow globally and our positioning as a jetset lifestyle brand will enable us to continue our global expansion. Now I would like to talk to you about our expectations for our businesses by region. Starting with North America. We will continue our store rollout in North America to expand our retail segment. We expect to open 40 to 50 retail stores annually and continue to believe that we can ultimately reach 400 locations in this region. We expect comp store sales to continue to be strong at approximately 20% and we expect to drive double digit sales growth in our retail segment as we continue to increase brand awareness, introduce new and innovative merchandise and provide a superior jet set in store customers customer experience. In our wholesale business, we will increase sales as we continue to convert department store stores to shop in shops. Consistent with our retail segment, we have experienced strong double digit comp increases and we believe that we can continue at a double digit sales pace in North America wholesale channel. In Europe, I previously noted that our revenues increased by 183% and our comp store sales increased by 22% for the year. I would like to take a minute to talk about the macroeconomic events in Europe and the impact on our business there. While we are of course concerned about the headline news to date, we have not been impacted by these conditions. Michael Kors is a desirable jetset brand with increasing brand awareness and we are taking market share in the European accessories, footwear and apparel markets. Our business has been supported by continued advertising, public relations and social media activities. We are uniquely positioned to build a pan European accessible luxury business. We have 29 retail stores in Europe including concessions and we are on track to open 10 to 15 retail stores annually with continued expansion of wholesale doors. Finally, we have invested in the appropriate inventory, infrastructure and other working capital needs to support our planned expansion in this territory. We are experiencing strong momentum in our current quarter and are excited about both retail and wholesale business prospects in Europe. We continue to believe that we can ultimately have 100 stores and 2,000 wholesale doors in Europe with a potential of achieving $500,000,000 in net sales in the long term. In conclusion, we are excited about prospects in Europe. In Japan, we established our business in September 2010. And as I stated earlier, we are in the early stages of growth. We believe that there is strong potential for the Michael Kors brand in Japan and that we can ultimately have 100 retail stores in this region. We believe that we must take a long term view for development in this market. As the number 2 luxury goods market in the world, we believe Michael Kors brand will resonate with Japanese fashion consumers. In summary, this is an exciting time for our company. Michael Kors has strong and expanding global recognition as a brand that embodies the jetset luxury lifestyle that consumers aspire to. We believe that we are uniquely positioned to continue to build our global luxury lifestyle brand that we have a tremendous opportunity for growth. Now I will turn the call over to Joe for additional analysis of the results. Thank you, John. Good morning. I will begin with a review of our fiscal 2012 Q4 financial results, followed by our outlook for the Q1 and full year for fiscal 2013. For the Q4, total revenue grew 58.3 percent to $380,000,000 as compared to $240,000,000 last year with strong growth in each of our retail, wholesale and licensing segments. Retail net sales increased 80.3 percent to $172,200,000 in the quarter as compared to $95,500,000 last year, driven by comparable store increases of 36.1% and the opening of 71 stores since the Q4 of last year. This comp store performance was led by the strength of the accessories and watch categories. Wholesale net sales grew 45.5 percent to 190,700,000 dollars for the quarter, compared to $131,000,000 last year. This growth This growth was primarily the result of increased sales of our accessories business, driven by our unique design and merchandise assortment and the continued conversion of North American department stores doors to shop in shops. In our licensing segment, royalty revenues grew 26 0.9 percent to $17,100,000 for the quarter as compared to $13,500,000 last year, primarily driven by continued strength in watches and eyewear. Gross profit increased 63.4% to $219,100,000 as compared to $134,100,000 last year. Gross profit as percentage of total revenue increased 178 basis points to 57.7 percent, driven primarily by higher sales in our retail business relative to wholesale as the retail business maintains a higher gross margin. Total operating expenses were $140,300,000 in the quarter as compared to $91,500,000 for last year. As a percentage of total revenue, total operating expenses decreased to 36.9% from 38.1% last year. The decrease was primarily due to lower depreciation and $1,000,000 compared to $83,000,000 for the last year. As a percentage of total revenue, SG and A expense decreased marginally to 34.3% from 34.6%. SG and A expenses for the 4th quarter included a $2,000,000 IPO related credit. Excluding this credit, SG and A expenses as a percent of total revenue increased marginally to 34.8% from 34.6%. Depreciation and amortization expense was $9,900,000 during the Q4 as compared to $8,500,000 for the last year, primarily due to new stores and shop in shops. As a result of these factors, income from operations on an adjusted basis grew 80.2 percent to $76,800,000 or 20.2 percent of total revenue as compared to 40 $2,600,000 or 17.8 percent of total revenue for the Q4 of last year. Income taxes were $33,600,000 in the 4th quarter as compared to $20,500,000 for last year. Our effective tax rate was 43.5% compared to 54.1% for the same period last year. The decrease in our effective tax rate resulted primarily due to the decrease in statutory tax rates accrual to certain non U. S. Subsidiaries, a decrease in our U. S. Blended state income tax rate and the recognition of a greater portion of income in jurisdictions with lower income tax rates. Net income on an adjusted basis increased 140.0 percent to $41,600,000 in the 4th quarter as compared to $17,400,000 for the last year. Adjusted diluted earnings per share was $0.21 based upon 196,900,000 weight average shares outstanding. This compares to diluted earnings per share of $0.10 based upon 179,200,000 weight shares outstanding for last year. Turning to the balance sheet. At March 31, 2012, cash and cash equivalents net of $22,700,000 of borrowings under our credit facility were $83,700,000 as compared to $8,300,000 at the end of last year. Inventory was $187,400,000 as compared to $117,200,000 at the end of last year. This 60% increase in inventory was primarily due to an increase in net sales in our retail and wholesale segments as well as the addition of 71 stores since the Q4 of last year. Capital expenditures during fiscal 2012 totaled $88,200,000 The majority of these expenditures relate to new store openings with the remainder being used for investments in connection with building new shop in shops, the build out of our new warehouse, corporate offices and enhancing our information systems infrastructure. We ended the year with 2 37 stores including concessions. We previously reported that the company experienced certain operational difficulties transitioning to our new distribution facility, which impacted deliveries to our wholesale customers and retail stores. I am pleased to report that we completed this transition with minimal additional disruptions. We anticipate the long term benefits of operating in our new facility will serve as a solid foundation for our future growth. Turning to our outlook. For fiscal 2013, total revenue for the year is expected to be between $1,700,000,000 $1,800,000,000 This reflects approximately 70 new stores and comp store sales increased growth of approximately 20%. We expect diluted earnings per share for fiscal 2013 in the range of $1.08 to $1.12 per share based upon an estimated tax rate of 38 percent 201,200,000 weighted average shares outstanding. For the Q1 of 2013, we expect total revenues to be between $360,000,000 $370,000,000 assuming 12 new stores and a comp store increase of approximately 35%. We expect diluted earnings per share of between $0.18 $0.20 assuming a tax rate of 38% and 199,000,000 shares outstanding. We anticipate the gross margin to be somewhat higher in the Q1 compared to the comparable prior year period and somewhat lower for the full year as markdowns normalize. Total operating expenses for the quarter fiscal year will continue to include public company costs, including equity compensation expense, professional fees, staff costs and other expenses. We expect capital expenditures to be in the range of $150,000,000 to $170,000,000 We plan to open approximately 70 stores, including approximately 45 in North America, 15 in Europe and 10 in Japan. Thank you. And I will now turn the call back to John Idol. Thank you, Joe. We are pleased with our strong performance this quarter and fiscal year. As you can see, these results position us for growth in fiscal 2013 and beyond in all our operating segments and regions. Thank you for participating in this call. We will now open the call We'll take our first question from Brian Tuncay from JPMorgan. Thanks. Good morning, guys, and congrats, John and Joe. I guess looking at the results the last couple of quarters, have you updated your thoughts on what your goals might be for retail as a percentage of the mix over the next couple of years and how that plays into maybe a longer term operating margin target? And then from investing in the Jet Set Luxury brand, have you sort of thought about what marketing spend, bringing ecom in house and maybe hiring a COO, what are those expenses look like over the next couple of quarters? Thank you very much, Brian. I'll start with the first question, the percentage of retail to wholesale. We are on track as we had said that we think we can have approximately 6 100 stores globally, 400 in the U. S, 100 in Europe and 100 in Japan. So we see our plans and being able to execute those plans as remaining very consistent. We believe over time that the mix of our retail and wholesale over the next 3 to 5 years. That being said, this year in fiscal 2013, the mix will still probably feel closer to say 55%, 45%, something in that zone. I'm not giving you the exact accurate number. It's just the wholesale business for us in department stores in North America and Europe is outstanding. We continue to see as we stated in the call strong double digit comp store growth and in many cases we're comping even higher their own retail stores. So the brand is resonating with consumers, whether they be in New York and L. A. And Miami or whether they're in Ohio or whether they're in Madrid or Barcelona or Milan. It's really extraordinary how the product is selling and selling through. So I think that's kind of the answer to the first question. In terms of I'm going to go to the last one first. The COO, we are publicly searching for a Head of Operations to support Joe and the team here. We are growing rapidly and globally. So we need additional people and that's happening all across the company. We're adding many different levels of management and just employees in general because the company is growing so quickly. So our greatest need is actually the people. It's not the positions themselves. So you'll see that all across the company as we go forward. And as we've said to you before, there's 2 things when you're thinking about your model. When we give comp store guidance, Joe talked about what Q1 looks like and that's obviously higher than the year. We do believe that at some point the brand begins to see some normalization in terms of sell throughs and markdowns. And then also some of those expenses on the new hires and other infrastructure improvements we're putting in place are going to start to show up on the SG and A line. And then lastly, as it relates to marketing spend, again, we are very focused on continuing to build brand awareness. I think we've told you in previous meetings and calls, we are spending a lot of money and energies in particular in the social media space. You'll see some information coming out about where Michael Kors ranks in that shortly and we think we're making tremendous inroads in that area. And hence, you can see what it's doing for our brand awareness and how the brand is resonating. And as it relates to e commerce, we're still formulating our plans on that and we'll be making some announcements about that over the next 6 months. Terrific. Thanks so much guys and good luck. And we'll take Jeff Klinefelter from Piper Jaffray. Yes. Thank you and congratulations on a great quarter. I wanted to ask a couple of questions. First of all, in terms of Europe indicating that things are going very, very well for the brand. Just wondering, John, if this enables you to accelerate some of your growth plans in that market with respect to real estate availability, cost of real estate and any other distribution opportunities in that market? And also just curious on the performance relative performance of apparel versus accessories in Europe? Yes. I think in terms of accelerating in the marketplace, I would use it on a more macro term than just real estate. 1st and foremost, the brand is resonating and the performance at retail is very strong in both our own freestanding stores and in our department store and specialty store business. And in fact, we're actually seeing acceleration in the current quarter that we're in from where we were sequentially in this past quarter. So it's very encouraging to see what's happening there. And we're still in terms of brand awareness, I think we reported in the call at about 35% in that marketplace. So we're very pleased and we look forward as the brand continues to grow in awareness what that will do for sales. So I think we're trying to take advantage of the fact also that there's a lot of companies that are either pan European or locally in each of those countries who are concerned and struggling and whatnot and we're being a bit more aggressive and opportunistic in taking real estate and market share based on the brand's performance and based on the fact that other companies are not taking quite a positive position. So we think that does bode well for us to take market share. As it relates to real estate, it's still complicated as I've told you in the past. Opening stores in Europe is it's a 1 by 1 situation where you're dealing with individual landlords and it's not really a mall based strategy in Europe. So I would say that we're not going to be able to go a lot quicker in our minds on a freestanding store basis. We'll probably be able to go a little bit quicker on the wholesale side. Okay. Thank you. That's helpful. Yes. And then sorry, go ahead. I was just going to ask also with respect to well, the categories, I think you're going to answer apparel versus accessories. But then also if you could just add in the U. S. Market in terms of accessories performance kind of across subcategories a little bit more detail there, any inventory constraints on any of those trending categories? Sure. Apparel versus accessories in Europe, ultimately on the wholesale side, apparel will be a larger business than us than pure accessories just because there's more specialty stores that are in the apparel business than there are accessory stores. So we're a little bit more focused on the apparel on the wholesale side, whereas obviously accessories will be the lead for our retail business in Europe in particular. And but I also want to point out that I think we're going to be in a very strong position at this time next year in accessories from a wholesale standpoint also because of our pan global positioning. Again, we're in all markets. We're in the U. K, in France, in Germany and Italy and Spain, etcetera. So we're becoming dominant in many of those countries as a leading and if not the leading player in the accessible luxury accessories category. And then lastly in terms of sub categories, SLGs continue to be the strongest performer for us small other goods, I'm sorry, in accessories in terms of percentage growth. And we had planned that previously both in our own stores and in the wholesale channel. And currently, we are experiencing sell throughs that are very, very high continuing on. And as we've told you in the past, we have unique relationships with our manufacturers who work closely with us and they've been able to get us the inventories that we've needed to meet those demands and you can clearly see that through our top line and our comp store sales growth. Great. Thank you very much. Our next question comes from Randy Konik from Jefferies. Thanks a lot. Can we just get some color on recent demographic changes? It seems like the brand is getting even a wider demographic, so that's powerful. And then can you give us some color on the monogram percent of sales? And then finally, I think you said that accessories were 75% versus 62% last year. Where do you see that kind of eventually going on a long term basis as a percent of sales? And just can you give us a little bit of a reminder on the margin differential between the accessories category and the apparel category? Thanks a lot. Sure. So I'll start out obviously. The demographic changes, it really hasn't changed much since when we reported to you at the IPO. IPO. So we're fortunate in that we do have a broad demographic. We have our what we refer to as our core customer and we always envision her as being 35 years old. Michael has said many times that every woman wants to be 35. If she's 50, she wants to be 35. And if she's 25, she wants to have the wardrobe of a 35 year old. So we still keep that kind of mental vision of who our customer is. And obviously, our core customer continues to remain in that 25 to 45 year old range. And then our 2nd biggest category of customer is the 18 to 25. So we're very pleased with the demographic balance and age balance of our customer. And we think that's resonating quite well for the brand. And we're in the process of updating our brand awareness studies. So probably in our second our Q3 conference call, we'll probably talk to you more about that. As it relates to monogram as percent of sales, I think we had told you when we went out in the IPO that we were looking for that to reach 25% of sales. We have achieved that level. That came a little quicker than we had anticipated. And again, we're very conscious of not letting that get too large of a percentage of the business. So it will grow, but we're going to keep our eye on that because again we founded our company on luxury leather and we do not want to have the logo business becoming the dominant piece of our company. So I think if you look at other luxury companies, particularly European luxury companies, they're very careful about monitoring that and will be in the same position. And then lastly, as it relates to the accessories business at 75%, Again, we got there a little quicker than we had anticipated. That will probably grow to between 80% 85% of the company's revenues and that's just going to be by natural opening more of our lifestyle stores and because we're opening more shop in shops for accessories than we are for women's ready to wear. And so that balance will move to that level. And then in terms of margins, all of the accessories categories carry higher margins. We have never see is operating margins will in the future in the out years potentially expand as retail becomes a higher component of the business and Europe becomes a higher business and Europe becomes a higher component of the business. Thanks a lot. Our next question comes from Paul O'Gus from Nomura. Thanks. It's Tracy Kogan filling in for Paul. Two questions. You guys mentioned that your gross margin expansion in the quarter was mainly driven by channel shift. And I was wondering if the gross margins within each channel were also up and what the magnitude of that increase was? And then secondly, I was wondering if you could talk about the performance of your new stores this year and how that compared to your expectations? And also what you're seeing from your outlet business? Thanks. In terms of channel shift, we do not disclose margins by channel. We will say that margins have been consistent to slightly up and we're feeling that is across the business. As John and I both mentioned, we're having very good results in terms of markdowns and other performance related items that drive margins. In terms of the stores, I'm going to turn that back over to John. I'm going to respond to the stores by first telling you that we did an analysis right before this call. It's quite interesting. And I think I've mentioned it in previous in the IPO, etcetera. When we look back at the stores that are 1 year old, 2 years old, 5 years old, there is almost very, very minor differentiation in terms of comp store performance in legacy stores versus new stores, which really is a testament to 1st and foremost the brand, the product that Michael and the design team that I spoke about earlier are putting out because you don't have a business like we have today unless you have fantastic product and that's led by Michael himself and an incredible design team. And then of course the amazing Jet Set in store experience that we're having and we think again that's something that we work very hard on spend a lot of time, energy, effort on training the employees. And I might add that you not only find that in our freestanding stores, but you also find that in our department stores where have quite a few MicroKors employees based in those department stores globally. So the new store performances that we're seeing across the world are Alice And again, as it relates to you asked a question about outlet stores, we've said many times before, we're benign to full price versus outlet store from the standpoint that our outlet store our full price stores are highly productive. You'll be able to we don't disclose it, but I think you guys will be able back into where the numbers are. We believe we're one of the highest sales per square foot companies, particularly in the U. S. In shopping malls. And we don't see tremendous differentiation between our full price and our outlets in terms of productivity. So we're not a company that's looking to drive the outlet business at the expense of the full price business. We're quite frankly the opposite because we see such fantastic profitability in our full price channel. We continue to want to focus on that and have that be the core to our openings. Great. Thank you. Our next question comes from Blair Mulanier from Robert W. Baird. Hi. Thank you. Certainly, the top margin driver for you is the growth in the retail business and in Europe, but then probably Japan becoming more profitable. Just wondering given your comments about taking the long term view there and building brand awareness, any change in your thinking for how much spend might be necessary and how much time that could take? Sure. I'll talk about that. Before we go to that, the other thing that's obviously driving gross margin for us besides retail and Europe is I want to point out again our outstanding performance at wholesale in our shop in shops both domestically and internationally for accessories. The comp store sales as I indicated are really extraordinary and we're taking market share. We're becoming a leader as we are in watches in many of these department stores. So that velocity clearly adds to the margin of the overall company. It's not as high as retail, but it certainly makes for overall driving the SG and A down because the performance of the sales being so strong. In terms of marketing, we are continuing to spend at levels that we think are appropriate in each of the markets. Now you have to understand in Europe and in Japan, we're spending at much, much higher levels than our typical of a business that is at some level of maturity. And we're doing that obviously for two reasons. Number 1, we're doing it to build brand awareness and emphasize the brand to the consumer. But also we take a slightly different perspective and that is that when we go into a market place, we have to act initially like we're a bigger brand than we actually are. And by doing that whether that was in Europe or whether that's been in licensed territories, we're off to a terrific start in Malaysia and Singapore and of course Japan we're seeing some very nice results there as well. So as we see the brand continue to accelerate, we actually will feed on that and drive more into it. So that's how we approach the marketing in those areas. And again, lastly, we are definitely talking to our customer globally through Facebook, through Twitter, through Instagram and through multiple other channels on social media. And I think many of you get the numbers and can see things, but our growth on those different communication vehicles has been really extraordinary. And we're going to continue to spend a lot of focus time and energy on those. And of course, Michael is a great voice. And so again, we think we have competitive advantage against other companies that are brands. We have Michael, the man who is tweeting or putting communications out to his customer on Facebook, Instagramming pictures, etcetera. Thanks, John. And you kind of touched on my follow-up, which was just on the Far East side of the spend and marketing investment. Saw some of the articles on the Taiwan opening and wondering in general how much involvement that takes from either you or from Michael and kind of what you're doing there? Or is it your license partners that are really making those investments? Sure. That's an excellent question. First off, customers travel globally I want to start with that. We have a probably our strongest global consumer after Europeans traveling to buy our products around the world is South Americans. And we don't have a store in South And we're certainly looking at that market and we'll be making some announcements in the future. And so hence the focus on the regional territories through licenses is not only about the business that you do in Korea, the Philippines, Malaysia, Singapore or Greater China. But as you well know, I think it's reported in certain studies that 50% of all business done by the Chinese or where they're purchasing luxury goods is outside of China. That would include greater parts of Greater China, but they're traveling in Europe, they're traveling in small numbers here to the U. S. And whatnot. But we're seeing it in our travel airport business, whether it's Koreans or Japanese or Chinese. So the our emphasis is not only on developing the business in those individual marketplaces, but really capturing them in all the different places that they're traveling around the world. So the licensees are actively developing and spending money in those marketplaces and we're actively spending time, energy, marketing in those marketplaces. You saw that we did the big event in Taiwan, which was quite successful. And we have other events planned in the region to help bring brand build brand awareness both short term, long term in those domestic marketplaces and as they travel internationally. Great. Thanks very much. We'll take our next question from Omar Saad from ISI Group. Hi. This is Sam Lee in for Omar Saad. Congratulations on a great quarter guys. My question is on the Europe comp of 14%. It's a good solid comp number that's stronger than what we've been seeing from other names, but it wasn't as strong as the U. S. Is that just the macro environment impacting or is it something else? And secondly, can you give us sense for which stores are in the comp base? And finally, can you give us an idea of the comp expectations by region you are embedding in the overall guidance for 20% this year? Sure. Addressing the first question, the comp in Europe was actually a bit more of a reflection of us getting product to that region. We think we've gotten that taken care of. And as I stated earlier in the call, we're actually seeing acceleration in that marketplace on a sequential basis. So we're very pleased with what's happening. Again, it's a little trickier for us in Europe just operating because of all the different countries and our infrastructure, which we think is in pretty good shape right now. But we're clearly seeing trends happening that we're reacting to and we think we've got ourselves in a good place. Europe is not going to trend though like the domestic marketplaces because the brand awareness is not as high. So I would anticipate that the U. S. Will continue or North America will continue to have higher comp store sales than both Europe and Japan just as a kind of an overall issue. In terms of which stores are in the comp base, it's store that's been open for over a year. So we handle comp the same way that we do everything else. Actually any stores open over 13 months. And then the comps by region, obviously North America as Joe said before, is going to be approximately 20%. And again, if the trend continues that we are currently seeing for the 4th quarter into the balance of the year, we think we'll be able to react from an inventory position and be able to support the stores. But currently, we're forecasting approximately 20%. And then I would assume that both that Europe will be in and around that range also and Japan would be below that because Japan has the lowest brand awareness. So we would kind of look in the high single digits to low double digits. Great. Thank you very much. And we have a question from Dana Telsey from Telsey Group. Hi. Good morning, everyone, and congratulations. Can you talk a little bit about pricing, how pricing has changed, what you're expecting going forward in terms of price changes? And also can you give any commentary on new store productivity and how you're planning that for next year given the rate of store openings? The pricing is we don't see any real pricing change for us. I'll let Joe speak in a minute about manufacturing on a global basis. But we like the sell throughs of what our product is today. We've kind of always kept that strategy that we're in the accessible that's our predominant business is accessible luxury. And we want to continue to have the customer having a fantastic experience in our store from a jet set standpoint and service and really embrace what Michael does from a design standpoint. And then we want them to walk out of the store feeling great about what they bought and feeling that they've had the sense of, wow, I got this incredible handbag for $400 and it looks to me like it's $1,000 handbag. Walked out with a $2.50 watch and it looks to me like that's a $2,000 watch. And that's something that we think is really important part of what makes our brand successful. And I'll let Joe talk about manufacturing globally for a second. Yes. And we're not seeing any particular pressure on the manufacturing side. Honestly, our biggest issue right now is currency. For our international divisions, we do hedge our purchases. They're not accounting hedges, but they are economic hedges. So we are entering hedges in order to try to minimize currency fluctuations. And then on the new store productivity going forward, we're still at the same place that we've said from our original IPO. New stores will not trend at the same because you guys can all back into roughly where we are. We don't publicly state that, but you can look at the square footage and the sales and you'll come up with an estimation. But new store openings are below our total average just because we're open in America, we've covered most of the A markets and now we're in building out the B and C market categories. Europe, we still have many A markets to go. But in America, which is the bulk of the store openings, the productivities will be below what the chain wide average is. Thank you. And we'll take our last question from Corina Friedman from Wedbush Securities. Hi. Just several questions. First, were there any operating expense increases this year versus last year related to the running of the multiple it stores in the base versus the last time that Michael appeared, is there an opportunity for co branding or a store tie in? Or are you looking at anything on the marketing side on that front? Thanks. So in terms of the operating expenses, certainly there were marginal expenses as we transitioned. Actuals or in anticipated expenses. So we don't think that any of those are going to cause kind of any anomalies in terms of the ultimate performance. And again, we have completed that transition. We are operating in our new warehouse. There are many things that we need to do to create efficiencies there, but we have the move behind us. So we're feeling good about that. And in terms of Project Runway, I will turn it back to John. Project Runway is scheduled to I believe start airing somewhere in September. I'm in the zone. I apologize to you that may not be 100% accurate, but I think it's around September. And no, we don't do any tie ins between Project Runway and the brand. I might add, we're very proud to be a part of Project Runway. I believe it's Michael's 9th year on the show 10th season sorry on the show. And it certainly has added value to our brand awareness. But remember, in totality, it's only a piece of what we do. Our main activities relate still to print advertising. Our 2nd largest activity in the company for building brand awareness is public relations through traditional means everything from newspaper to blogs to that type of medium. And then our 3rd, which is our fastest growing and where we're spending our most amount of time, energy, effort and ultimately long term probably will be money is in social media. And we're seeing some really strong results from those efforts. So like where we think we are today in terms of store productivity and the way we operate stores. We think we're one of the best in class on a global basis. We view our marketing PR and social media efforts to have the same standard where we want to be and hopefully are getting there to be best in class in terms of that category. Great. Thank you. Okay. I'd like to thank everyone for being on the call today and we forward to speaking to you at our next conference call for our Q1 earnings of 2013. Thank you. Once again, ladies and gentlemen, that concludes today's conference. We appreciate your participation today.