Michael Kors Holdings' CFO Presents at Morgan Stanley Global Consumer Conference (Transcript)

Nov.19.13 | About: Michael Kors (KORS)

Michael Kors Holdings (NYSE:KORS)

Morgan Stanley Global Consumer Conference

November 19, 2013 09:10 am ET

Executives

Joe Parsons – Chief Financial Officer & Chief Operating Officer

Analysts

Kimberly Greenberger – Morgan Stanley

Kimberly Greenberger – Morgan Stanley

Okay, let’s get started with our next session. I’m Kimberly Greenberger, Morgan Stanley’s North America Softlines Analyst. It’s great to see you all today at our Global Consumer Conference, and I’m pleased to have with us today Joe Parsons. Joe is Michael Kors’ Executive Vice President, Chief Financial Officer, COO and Treasurer as our next speaker.

We think Michael Kors is the single best growth retailer in our coverage universe. Kors is one of the most sough-after brands in the robust accessible luxury market. In addition to Kors’ outstanding North American growth the company’s also seeing very significant success in its global geographic expansion in Europe and also expansion into additional categories including its recent fragrance and cosmetics launch.

So with a lot of excitement in store for Kors I’m pleased to welcome Joe Parsons.

Joe Parsons

Thank you very much. Good morning, thank you for joining me today.

[Refers to slides] So this is an image of kind of what we think about Michael Kors. Our advertising tends to be what we call WWW, or wings, wheels and water. We’re a very aspirational brand. This is obviously the water view but this is the image of what we want people to think about for Michael Kors.

So Michael Kors, the investment highlights: we’re a global luxury lifestyle brand with compelling growth metrics. We’ll go over that in a minute. We have a design vision led by a world renowned, award-winning designer. We’re poised to take share in a growing global accessories product category. We have a proven retail format that offers a jet set in-store experience. We have strong relationships with premier wholesale customers. We have a growing licensing business and we have a very experienced and seasoned management team.

So in terms of the growing global luxury market, this is just an indication of how big and how quickly it’s growing. The global luxury goods market is estimated to grow from about $283 billion in 2012 to between $320 billion and $333 billion in 2015. A very big portion of that segment is accessories which was 27% of the sector sales in 2012, and the accessories segment grew 14% in 2012.

In terms of Michael Kors revenue by product, accessories and related merchandise – so that’s accessories, small leather goods, eyewear, fragrance, etc. – they amounted to 83% of our total sales during F2Q 2014 and that compares to 79% during the same period last year. We expect these products to continue to grow and become an increasingly important driver of the global comp store sales growth.

So we operate with two different collections. We have the legacy Michael Kors brand which was introduced in 1981 and it really reflects the pinnacle of luxury in the accessories, women’s wear and men’s wear. It’s the cornerstone in the Michael Kors semi-annual runway shows and it establishes the aesthetic authority of the brand.

And then we have the MICHAEL Michael Kors line which was introduced in 2004; and it’s positioned to address a younger demographic in the accessible luxury segment. And this label focuses on the accessories market.

In terms of the design process, Michael Kors leads the overall design direction of the company, and he is actively involved in the company and the design process and he personally reviews the majority of the company’s designs. He himself obviously cannot design all our products so he’s got a team of about 60 designers that supports him.

The company’s global reputation enables us to attract and retain the best design talent, and the product is designed to support retail merchandising. We have four collections produced annually. Within those four collections there are three deliveries, so we have collections that are delivered twelve times per year.

In terms of the growth strategies, we’re expanding in our North American retail presence. We’re increasing global comp store sales. We’re continuing to convert department stores into branded shop-in-shops globally. We’re developing our European retail and wholesale businesses. We’re building out the Japan business. We’re growing in other regions in the Far East through regional licensees and we’re establishing a global ecommerce business to provide true omni-channel customer experience.

In terms of our retail store growth, our new store growth strategy is to open new stores predominantly in high traffic areas and mall locations in high-income demographic areas. And we adhere to an already successful retail store format which reinforces brand image and generates strong sales per square foot.

So you can see from the graph the expansion of our retail stores. At the end of F2Q we had 352 stores globally. Our goal is to have 700 stores which would be 400 stores in North America, 200 stores in Europe and then 100 stores in Japan.

This is an image of two of our retail locations. On the left-hand side is Madison Avenue which is our flagship collections store in Madison Avenue and then on the right-hand side is what we call a lifestyle store which is on Regent Street in London, a very active street. And you can see the differences between the two store formats here – the left, Madison Avenue is going to be primarily a ready-to-wear format; and then on the right, Regent Street is going to be an accessories format which is going to be primarily driven by handbags.

So for obvious reasons comp stores are a very important part of the business so we think every day about comp sales. Comp sales growth is driven by increased traffic as brand awareness continues to grow and we expand our product offering which attracts a broader customer base.

So we have logo products – logo handbags, small leather goods, active footwear – and we believe that the logo products should continue to represent about 30% of our retail sales. And we will intentionally hold that back so it doesn’t reach more than 30%.

Then small leather goods, we were previously underpenetrated in small leather goods so we’ve introduced a broader selection of small leather goods. Small leather goods should continue to represent about 15% of our retail sales over the long term.

And then fashion jewelry, jewelry was actually our most recent introduction. It was launched in retail stores in fall of 2011. This new category continues to grow and is expected to represent about 5% of our retail sales in the long term. So on the bottom of this chart you can see the comp store sales growth. We’re very proud that we’ve had a long run of both annual and quarterly comp store increases.

Our ecommerce, we think it’s going to be very important to communicate through ecommerce via a full product assortment displayed on the website. This will reinforce the luxury image of Michael Kors and it communicates directly with customers and drives store traffic. Ecommerce is currently outsourced, so it’s done through Neiman Marcus and we’re in the process of transitioning to ecommerce in-house. So the ecommerce site with Neiman Marcus was launched in 2007.

In terms of wholesale growth initiatives, we continued to transform the North American department store locations into branded shop-in-shops with custom fixtures. Where it’s appropriate we are expanding the size of these department store shop-in-shops. We have growing wholesale distribution in Europe where we expect to grow to about 2000 specialty shop and department store doors in the long term. And then we’re expanding shop-in-shop footprints in selected department stores through Europe.

In terms of our global wholesale customers, in North America we will be in very different types of stores – so we’ll be in a Bergdorf and a Macy’s; the same type of thing in the international doors. So in North America we’re currently in about 2300 doors as of the end of Q2, and in international we’re in slightly less than 1200 doors – again, a very broad away of different types of stores.

In terms of our licensing partners, we have three major licensees. So this is an opportunity to grow through a select number of licenses who produce brand-enhancing products across categories that require specialized expertise. The first one is Fossil.

So Fossil does both watches and jewelry – we’ll start with watches. They’ve been the exclusive watch licensee since April of 2004. Watches are really a must-have status item among young fashion consumers. So the brand loyalty among the younger customers creates an opportunity for us to leverage the success across other demographics, and the price point here is between $150 and $500.

Then more recently, using Fossil as a partner we’ve introduced the fashion jewelry and that was launched in December of 2010. The jewelry line consists of bracelets, necklaces, rings, earrings – and these are all items that we believe will complement our watch and accessories lines. Price points here range from $45 to $400.

Our fragrance is done in partnership with Estee Lauder, and Estee Lauder has been the exclusive women’s and men’s fragrance licensee since May, 2003. We launched a new Michael Kors fragrance and beauty collection in August of 2013 and here the price points range from $20 to $115.

Marchon is our eyewear partner. Marchon has been the exclusive eyewear licensee since January of 2004. Here we focus on logo and status eyewear and the prices range from $85 to $285.

In terms of management, this is a chart of our senior management led by Michael Kors – the honorary Chairman and Chief Creative Officer and Director; and then John Idol – our Chairman and Chief Executive Officer and Director. And I think the biggest takeaway from this slide is there’s been essentially no turnover amongst senior management since we started the company ten years ago. So the only additions you see on here, the more recent dates, are people that we’ve added as we’ve expanded into Europe, then Japan; and most recently we added an SVP of Global Operations.

So financial overview: during the first half of F2014 compared to F2013 revenues grew 46%; gross profit grew 50%. Gross profit for the first six months of last year was 59.8% and that compares to 61.3% in the current year. Then adjusted income from operations grew 55% from $270 million to $419 million and adjusted net income grew 63% from $166 million to $271 million for the six months.

Revenue by segment and then by region – on the left is by segment. During the first six months of F2014 you can see that wholesale and retail were very similar in terms of their size. And then by region you can see that our largest regional segment is in North America. But that means that there’s a lot of opportunity to continue to grow in Europe and then ultimately in Japan.

In terms of our F2Q performance, again total revenue is growing very quickly. It grew 39%. Gross profit grew 42% and is up 150 basis points. Income from operations grew 40% and is up 30 basis points, and net income grew 49% and is up 200 basis points.

So in retail our global comp store growth was 23% and was driven by continued strength of the accessories line. During the period we opened 24 stores globally and we again ended with a store count of 352 stores. On the wholesale our net sales grew 30%. We continued to have very strong sell-throughs. We continued conversion of wholesale department store doors into shop-in-shops and that resulted in increased sales volume per door. And licensing had a revenue growth of 65% driven by continued strength of the company’s luxury watches.

In terms of our financial position we have a strong cash position and very strong liquidity, so our balance sheet as of the end of F2Q – we had over $600 million. Our strong cash flow is enough to pay for all our cash needs including building out the stores.

Our CAPEX expenditures support our long-term growth – not only store openings but we’re investing in shop-in-shops, we’re investing in warehouses, corporate investments and information systems.

Investment highlights: we’re a global luxury lifestyle brand with compelling growth metrics. We’re a design vision led by a world renowned, award-winning designer. We’re poised to take market share in a growing global accessories product category. We have a proven retail format, strong relationships with premier wholesale customers, a growing license business and an experienced management team.

Okay, we’ve got a couple more minutes left so I will open it up for questions. Yes?

Question-and-Answer Session

Analyst

Using Coach as an example, can you just talk a little bit to what you’re doing differently in the North American market? How does your strategy differ? Why are you gaining so much share here versus them?

Joe Parsons

Yeah, we don’t really compare ourselves to competitors so much. We’re very focused on our own business and we believe that our best strategy is to continue to focus on what we’re doing and do it the best we can.

We think it’s really we have two key differences. One is we do have Mr. Michael Kors so we have a halo in terms of a luxury brand – we have the fashion shows so he stands as a true runway fashion designer. The second is we’re a very fashion-forward business, so our sweet spot is a fashion leather handbag and that’s the type of business that we focus on. And we think that’s what’s growing our business.

Obviously also we’re growing rapidly in Europe which is a great asset to the company, again, being a fashion-forward company. And we are finding ourselves to be considered a very desirable product in Europe. Anybody else? Yes?

Analyst

Hi. Do you think there’s any natural balance you need to keep between full retail and factory outlets within the US market to ensure the growth continues so successfully?

Joe Parsons

I’m sorry, I’m not sure I understood the question – are we concerned about the outlet strategy versus the lifestyle standard? Yeah, we intentionally keep about two lifestyle stores for every outlet store. We think the outlet business is very important for us but we want to be perceived as a lifestyle store. We find the economics are similar so we’re very comfortable with continuing basically a lifestyle strategy with some outlet stores. And we don’t think that they create a conflict.

Analyst

I had one other question. You put up a slide about accessories being 83% and then you talked about small leather goods. So would it be fair to say that watches represent about 55%, 60% of sales?

Joe Parsons

Yeah, we’re not going to get into the size of our product category but with all those pieces represent 83%. And we think that that is, again going back to what differentiates us, we do have an important component of ready-to-wear but the major part of our business is that accessories and accessories-related products.

Kimberly?

Kimberly Greenberger – Morgan Stanley

Joe, you talked on your most recent conference call about upgrades you were making at the distribution center, and I just wondered if you could update us on the progress of getting that distribution center up and running and sort of caught up in some of the delayed shipments.

Joe Parsons

Sure. So we’re comfortable in saying that we are caught up in terms of our shipments. We’re not out of our risk period. We will be continuing to tweak the processes within that warehouse and we’ve hired consultants to come in and help us analyze that situation. But we are caught up with our shipping on a normal cadence today.

Anybody else? Great, well thank you all for coming. I appreciate the opportunity to talk.

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