Michael Kors Holdings' CEO Discusses F3Q 2014 Results - Earnings Call Transcript

| About: Michael Kors (KORS)

Michael Kors Holdings Ltd (NYSE:KORS)

F3Q 2014 Earnings Call

February 04, 2014 08:00 am ET


Christina Lack - Investor Relations

John Idol - Chairman, Chief Executive Officer and Director

Joe Parsons - Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer


Lindsay Drucker Mann - Goldman Sachs

Kimberly Greenberger - Morgan Stanley

Brian Tunick - JPMorgan

Erinn Murphy - Piper Jaffray

Omar Saad - ISI Group

Paul Lejuez - Wells Fargo

Randy Konik - Jefferies

Oliver Chen - Citi


Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Michael Kors Holdings Limited Third Quarter Fiscal 2014 Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. As a reminder, today's conference is being recorded.

Now, I would like to turn the conference over to Ms. Christina Lack, Vice President and Treasurer. You may begin.

Christina Lack

Good morning and thank you for joining us for our third quarter earnings call. Presenting on today's call are John Idol, Chairman and Chief Executive Officer; and Joe Parsons, Chief Financial and Chief Operating Officer.

Before we begin, let me remind you that certain statements made on this call may constitute forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those that we expect. Those risks and uncertainties are described in today's press release and in the company's SEC filings, which are available on the company's website. Investors should not assume that the statements made during the call will remain operative at a later time and the company undertakes no obligation to update any information discussed on the call.

I will now turn the call over to Michael Kors' Chairman and Chief Executive Officer, Mr. John Idol.

John Idol

Thank you, Christina. Good morning, and welcome to Michael Kors' third quarter fiscal 2014 earnings call. With me today is Joe Parsons, Chief Financial and Chief Operating Officer. I will begin with a brief overview of our third quarter performance and update you on the advances we have made and our strategic growth plans. Then I will turn it over to Joe for a detailed review of our third quarter financial results and an update on our outlook for the fourth quarter and full year.

Our third quarter results were outstanding as our exceptional product offering created by Michael Kors and our designs teams, as well as our unique jet-set shopping experience made Michael Kors the go-to destination for the holiday season.

Michael's fashion messaging with our customers was strong and well executed throughout the holidays. We communicated with our customers through e-mail, catalog, print, outdoor and social media, which effectively conveyed the glamour and luxury of our holiday offering, capturing the customers' attention and generating strong demand globally.

During the quarter, a strong momentum continued across segments and geographies. Revenue grew 59% to $1 billion, marking our first quarter with revenue in excess of $1 billion. Gross margin expanded 100 basis points to 61%, income from operations grew 68% to $343 million and operating margin was nearly 34%.

We continued to execute on our six key growth strategies in the third quarter. First, in North America, revenue grew 51% and comparable store sales increased 24%. Second, we continued to expand our retail footprint in North America opening 20 new stores. Third, we successfully converted 76 additional department store doors globally into branded shopping shops. Fourth, in Europe, we believe brand recognition further expanded and our luxury products resonated with the consumer. Revenues grew 144%, comparable store sales increased 73% and we opened 19 locations across the region.

Fifth, our business in Japan continued to develop. Revenue grew 54% during the quarter, comparable store sales increased 18% and we opened four locations during the quarter. Sixth, we further expanded our retail presence in the Far East, opening seven new locations during the quarter to our regional licensees. Stores in this region experienced double-digit increases in comparable sales.

Turning to our segment performance during the third quarter, retail net sales grew 51% over the prior period and global comparable store sales increased 28%, representing our 31st quarter of consecutive comp store growth. Retail sales growth was driven by 98 new stores opened since the third quarter of last year. We opened 43 of those stores during the third quarter of fiscal 2014 ending the 395 company-owned retail stores globally and 533 stores in total, including locations operated by our licensees.

In our Wholesale segment, net sales 68%. This increase was driven by our successful conversion of department store doors to shop-in-shops and continued strong performance in both, department and specialty stores, with particular high demand for our luxury accessories and footwear products.

During the third quarter, we converted 76 department store doors to shop-in-shops ending the quarter with approximately 1,400 shop-in-shops globally in accessories, footwear, women's wear and men wear combined.

Our shop-in-shops remain a key strategy for highlight the Michael Kors brand and brining our jet-set luxury experience to department store customers. We believe that as we convert additional doors to shop-in-shops, more customers will discover the brand driving future growth in our wholesale segment. Finally, revenues in our Licensing segment increased 59%, driven by continued strength in our luxury watch and eyewear business.

In addition, we are very pleased with the growing momentum in our jewelry business. We see tremendous growth opportunity for watches and jewelry globally. We will continue to expand these categories in our retail stores while we also rollout additional watches and jewelry shops in our wholesale channel. At the end of the quarter, we had approximately 120 watch and jewelry shops. Ultimately, we believe that we can have 500 shop-in-shops worldwide.

Our fragrance and beauty launch was met with great response. We launched this sporty sexy glam collection in North America this past August, which was met with much enthusiasm in both, our retail stores and at Macy's where we have distributed the collection exclusively. We subsequently lost the collection in Europe in the fall and saw similar response from our European consumer. We are excited about the growth potential of our fragrance and beauty offering in Europe. Importantly, we think that the fragrance launch is also helping to enhance brand awareness for Michael Kors in this region.

We plan to continue the global rollout of this new collection in additional markets in Europe, the Middle East and select markets in Asia in calendar 2014. Over the next few years, we expect to be one of the most significant brands in the luxury fragrance and beauty market globally.

Turning to our operations by region. In North America, revenue grew 51% to $863 million during the quarter, with comparable store sales increasing 24%. We grew our North America retail presence to 284 stores with the opening 20 stores during the quarter. In our North America wholesale business growth was driven by comparable store sales increases that were similar or greater to the comparable store sales increases in our retail stores. In addition, our combined successful conversion of department store locations to shop-in-shops helped drive wholesale growth during the quarter.

Looking ahead, we are on pace to open 57 North America retail stores this fiscal year and continue to believe that there is room in the market for 400 stores over the long-term. On the wholesale side, we will continue to convert department store doors to branded shop-in-shops in our accessories, footwear, women's wear and menswear businesses.

Internationally, we are extremely excited about the strong reception to the Michael Kors brand that we are seeing as a recognition expense both, in existing and new markets. In Europe, more and more customers are embracing the glamour and luxury of the Michael Kors' product, driving revenue growth of more than 140% during the third quarter to $140 million.

Comparable store sales in the region increased 73%. We believe this comp store increase reflects the compelling luxury product offering in our stores. We continue to expand our presence in Europe in both, new and existing markets to meet the growing demand for Michael Kors' luxury products.

Our new store openings were met with great anticipation among consumers and the performance thus far has exceeded our expectations. We ended the quarter with 76 retail locations in this region. Our European wholesale business also continued to enjoy strong sell-throughs in both, department and specialty stores. As I have said in the past, we believe that we are well positioned to continue capturing market share in Europe as we further expand our brand presence in the region by growing both, our store base and wholesale distribution.

In fiscal 2014, we are on pace to open 36 new stores in Europe. Over the long-term, we believe the market can support 200 Michael Kors retail locations. We see ongoing growth momentum in the wholesale segment and look forward to further expanding our presence in the channel over the next several years.

Based on the strong results that we have seen recently, we believe that there is significant runway for growth in Europe. We are very excited about the opportunity to expand the Michael Kors brand in the region. Over the next few years, we believe that the European market will achieve revenue in excess of $1 billion.

Turning to Japan, we remain pleased with the progress that we are making in the market. As we said in the past, Japan is a great long-term opportunity and a key market for the company. While we are still in the early stages and recognize that it will take some time to fully develop this market, we continue to see strong momentum in Japan.

During the third quarter, revenues increased 54% to $9 million and comparable store sales increased 18%. We also opened four retail locations during the quarter and now have 35 in Japan. We expect to open one additional location during fiscal 2014, and believe that we can have over 100 retail locations in Japan over the long-term.

We continue to see strong performance in the rest of the Far East as well, with double-digit comp store growth in retail stores operated by our licensed partners. We are focused on continuing to build our brand awareness in the Far East and further developing the market through regional licenses.

During the quarter, we opened seven stores across the region bringing our total to 94 Michael Kors retail locations in Korea, Greater China, Southeast Asia, and Australia. We are excited to announce the opening of our new flagship store in China, High China at [Kerry] Center Nanjing road. This location is the largest of our luxury retail stores in the region at approximately 5,800 square feet and we believe it will be the premier destination for the Michael Kors brand in China. Long-term, we anticipate there will be 200 retail locations in this region.

In Latin America, we are pleased with the progress of our retail expansion. We opened two stores region in the major Brazilian markets of Sao Paulo and Curitiba during the quarter, and have currently have seven locations in this region with three in Brazil, one in Venezuela and three in the Caribbean.

We believe that there is considerable demand for Michael Kors brand in Latin America and we are excited to be expanding our presence across these markets. Ultimately, we believe the Latin American market can support 40 retail locations over the next several years.

Moving to our travel business, at the end of the quarter, we had 45 travel locations in some of the best airports and travel destinations in the world. In total, we now believe that there is a potential for 75 travel retail shops worldwide, including freestanding stores, shop-in-shops and stores operated by specialists in travel retail business.

We believe the travel business is strong and continues to gain momentum, particularly with the growth in the Asian tourism globally. Finally, we are on track to launch our new North American e-commerce site during the fall of 2014. As I have mentioned before, we are working to transition e-commerce platform in-house in order to provide the consumer with a true omnichannel experience.

Our new website will allow us to enhance the level of engagement between our online customers and the Michael Kors brand. It will also serve as a great marketing tool that will give us the opportunity to develop new customer relationships. We are seeing high double-digit increases in our worldwide search volume and in visitors to our existing website. By bringing e-commerce in sight and in-house, we will be able to better focus on communications, marketing and sales strategies to capitalize on the online growth opportunity. Over the long-term, we believe that e-commerce can be a multi-million dollar business for the company and therefore believe that it is prudent to make the necessary investments in this business.

In summary, our momentum remains strong as reflected in our third-quarter performance. We had an extremely successful holiday selling season, which we believe speaks to the strength of our brand. We exceeded our financial expectations and continue to execute on our strategic growth initiatives. We believe that we are well positioned for the long-term growth as we further expand the Michael Kors brand within the global luxury market.

I will now turn the call over to Joe Parsons for additional analysis of our financial results.

Joe Parsons

Thank you, John. Good morning. I will begin with a review of our fiscal 2014 third-quarter financial results, followed by our outlook for the fourth quarter and the full year. During the third quarter, total revenue grew 59.0% to $1.0 billion as compared to $636.8 million in the third quarter of last year, with strong growth in each of our Retail, Wholesale and Licensing segments.

Retail net sales increased 51.3% to $503.4 million as compared to $332.6 million in the third quarter last year, driven by a comp store increase of 27.8% and the opening of 98 new stores since the third quarter of last year. The comp store sales performance was driven primarily by the continued strength of our accessories line.

Whole sale net sales grew 68.2% to $461.4 million in the third quarter, compared to $274.3 million in the same period last year. The increase was primarily the result of strong growth in our accessories and footwear, the continued successful conversion of existing doors to shop-in-shops and the expansion of our European operations.

In our Licensing segment, revenue grew 59.0% to $47.4 million for the quarter as compared to $29.8 million last year, primarily driven by the continued strength in watches. Gross profit increased 61.6% to $619.5 million as compared to $383.5 million in last year's third quarter. Gross margin expanded 100 basis points to 61.2%, reflecting the strong year-over-year gross margin increases in both, our retail and wholesale segments. The margin increase was driven primarily by favorable product mixed shift to higher margin product in addition to the geographic mix and lower product cost in select items.

Total operating expenses grew 54.7% to $276.3 million in the third quarter of fiscal 2014 as compared to $178.6 million last year. As a percent of total revenue, total operating expenses decreased to 27.3% and 28.0% in last year's third quarter. SG & A expenses increased 54.5% to $254.6 million as compared to $164.8 million for the third quarter last year.

The increase in SG&A expenses was primarily due to higher retail occupancy and salary costs related to new store openings, an increase in advertising and marketing expense, higher distribution costs personnel workforce related to the disruption in our U.S. distribution facility and increases in corporate employee related costs. As a percentage of total revenue, SG&A expense was 25.2% compared with 25.9% for the quarter of last year.

I would note that shipping from our U.S. distribution facility has returned to a regular cadence as we address the disruption early in the quarter Going forward, we expect to incur additional distribution expense as we as we look to identify further efficiencies and implement process improvements.

Depreciation and amortization expense was $21.7 million during the third quarter as compared with $13.8 million for the last year, primarily due to the fair amount of new retail locations new stop-in-shops and investments in infrastructure to support our growth. As a result of these factors, income from operations was $343.2 million and 33.9% of total revenue as compared to $204.8 million, or 33.2% of total revenue in the same period last year.

Income taxes were $113.5 million in the third quarter as compared to $73.0 million for the third quarter of last year. Our effective tax rate was 33.1% as compared to 36.0% 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-US subsidiaries, which are subject to lower statutory income tax rates and receiving an income tax benefit related to the restructuring in a certain of our foreign operations during the quarter partially offset by certain adjustments related to blended state income tax rates.

Net income increased 76.6% to $229.6 million in the third quarter and diluted earnings per share were $1.11 based upon 206.1 million weighted average diluted shares outstanding. Net income for the third quarter of fiscal 2013 were $130.0 million or $0.62 per diluted share based upon 202.8 million weighted average diluted shares outstanding.

Turning to the balance sheet, at December 28, 2013, cash and cash equivalents were $828.3 million as compared to $405.8 million at the end of the third quarter last year. There were no outstanding borrowings under the credit facilities in either year.

Inventory totaled $431.6 million that is compared to $290.2 million last year, an increase of 48.7%. Capital expenditures during the quarter totaled $53.4 million and majority of these expenditures related to new store openings with the remainder being used for investments in connection with building new stop-in-shops and enhancing our information system and distribution infrastructure. We opened 43 stores in the quarter, 20 in North America, 19 in Europe and four in Japan and ended the quarter with 395 retail stores, including concessions.

Turning to our outlook, for the fourth quarter of 2014, we expect total revenue to be between $790 million and $800 million, assuming a comp store increase in the range of 15% to 20%. We expect diluted share to be in the range of $0.63 to $0.65 assuming tax rate in 33.5% and 206.8 million shares outstanding. We expect the fourth quarter gross margin rate to be slightly higher than last year and operating expense rate to be moderately higher than last year.

For fiscal 2014, we now expect total revenue to be between $3.18 billion and $3.19 billion, assuming comp store increases of approximately 25%. We now expect diluted earnings per share to be in the range of $3.07 to $3.09, assuming a tax rate of approximately 34% and 205.6 million shares outstanding.

Capital expenditures are expected to total approximately $200 million for fiscal 2014. We expect to open nine additional retail locations in the fourth quarter, including four in North America, four in Europe and one in Japan and continue with our shop-in-shop conversions and investment in an infrastructure and systems.

In summary, we continue to make progress on our strategic growth initiatives during a very strong third quarter. We believe that Michael Kors is well positioned for continued long-term growth.

Thank you. I will now turn the call back to John Idol.

John Idol

Thank you, Joe. In closing, we remain focused on continuing to grow the company by driving comparable store sales growth, expanding our retail store base globally, capitalizing on our e-commerce opportunity, continuing to convert department store doors to branded shopping shops and growing our brand internationally. We are very pleased with our momentum going into the fourth quarter and expect to deliver record results for fiscal 2014.

We will now open up the call for questions.

Question-and-Answer Session


Thank you. (Operator Instructions). We'll go first to Lindsay Drucker Mann of Goldman Sachs.

Lindsay Drucker Mann - Goldman Sachs

Thanks. Good morning, everyone. I wanted to ask first just on holiday. Obviously, you guys have had a very, very strong results and clearly gained a whole lot of share with good performance in the quarter. Can you give us any color on things like pace of markdowns? What you saw happening through your retail partners at the wholesale level. Any detail just on how your business fared? Maybe some more color in light of the very challenging industry backdrop and understanding that you had very strong results. Then secondly, Joe, if you could just maybe clarify if in the wholesale divisions what sort of revenue or margin impact happened from the push-forward of shipments that were delayed from the September quarter. Thanks.

John Idol

Good morning, Lindsay. Lindsay, we had double-digit traffic increases in our stores and we also had double-digit conversion increases in our stores, so we were very pleased with the results during the quarter.

In terms of style that we had on the floor, we were about even this year versus last year in terms of the amount of SKUs that were on the floor. We were a slight bit higher in terms of dollars, in terms of markdowns this year versus last year and a amount that was driven quite frankly from some of the late deliveries we had coming out of the distribution center, but we had good deriving slightly later than we had anticipated, primarily in our wholesale distribution.

All-in-all, really there wasn't anything materially different for us on a year-to-year basis from the promotional standard and cadence. Obviously, there was a tremendous amount promotion going on around us. As we typically do, we opted not to really participate in the that and our customer responded to Michael and our design team's amazing product and I think we are seeing similar response in the very beginning of our new deliveries for the spring season as well, so we think as long as we stay focused on being on trend to right product, she is excited and she is stimulated to comfort Michael Kors luxury products.

I'll turn the second question over to Joe.

Joe Parsons

Yes. As John just mentioned, there was a disruption primarily related to the wholesale side, the woman's ready-to-wear. As John mentioned, we had a lot of deliveries at the same time. We have not disclosed that number and we don't consider it to be significant.

Lindsay Drucker Mann - Goldman Sachs

Okay. Thank you.


We'll go next to Kimberly Greenberger of Morgan Stanley.

Kimberly Greenberger - Morgan Stanley

Great. Thank you. Congratulations on a really fantastic quarter. John, I am wondering if you can step back for a second and just talk to us about how you think about investing behind the brand, to sustain the brand momentum over the longer-term.

It's obviously clear coming out of this quarter that there is a tremendous amount of recurring momentum, but just talk to us about how you think about managing the brand for the longer-term and what kind of infrastructure investments are you in process of making and do you expect to need to make over the next couple of years in order to be able to build this into a real sort of global brand powerhouse?

John Idol

Thanks. First off, good morning, Kimberley. Sustaining the momentum is something we obviously get up and think about every day of the week and we don't think about it just from a U.S. perspective. We think about it from a global perspective.

I think, I know many of you are following on things like Facebook and Twitter and Instagram and we think that continuing to build our platform socially is one of our priorities, because it gives us one of the greatest global reaches, so I would say that's probably our number one priority.

Our number two priority is development of our own website in-house. While everyone talks about the amount of sales transacted during the holiday season over the website and we certainly enjoyed that, Venezuela seeing, strong, strong, strong double-digit increases far in excess of what our comp store were, so obviously people are actively purchasing more online than they have in the past, but it is a place for people come to shop, and when you hear a lot about mall traffic being off and clearly that was the theme that you heard during the holiday season, what is happening, we believe is that people are actually shopping first online, doing the selection and then coming in, in many cases still into the store to buy and they know what they want, they are very clear about what they have seen size, color, price, everything and we see that happening not only domestically, but internationally, so we have significant amount of traffic that's coming through our website from all over the world as she is shopping for our brand.

By the way, some of that shopping is even before she is traveling, so as you know the tourism business is an extremely important business for us on a global basis. If she gets ready for her trip that she might be taking to Paris or to London or to Sao Paulo or wherever she is going and she is shopping beforehand knowing what she is going to purchase during that trip, so we think that by focusing on social, focusing on our own web development and then lastly we think opening retail stores in major cities and in secondary cities is critical to the brand development.

When you look in secondary markets and we have talked about this in the past and you see the kind of numbers we are putting on, what does that tell you? That tells you the customer, A, the pent-up demand for our product, but, B, there's probably some of these locations not as many options for her to buy luxury product, so we think that's why the development of our brand will continue to be sustained on a global basis.

On infrastructure side, we are about to embark on a very, very significant infrastructure upgrade in the company starting with the expansion of distribution facilities. We will stand up a minimum of three brand-new very large facilities over the next 24 months. One in the United States to help support our retail growth, but will have an independent facility for our retail distribution both, to our stores and for e-commerce.

Second, we will stand up a very large facility in Europe to support the obviously very rapid growth we have there and that facility will handle wholesale, retail and Internet.

Thirdly, we will invest in a brand-new facility in Canada. We have a very, very substantial and growing business in Canada, and that infrastructure needs upgrading as well, so we think between what we are doing to continue to build brand awareness, continue to develop luxury product. Again, we think we have some of the highest quality products in the industry and led by Michael and his great design team.

Then lastly, the money that we are going to spend on the backend of the infrastructure, we think this company will be well-positioned for many, many years of future products.

Kimberly Greenberger - Morgan Stanley

Thanks so much.


We'll go next to Brian Tunick of JPMorgan.

Brian Tunick - JPMorgan

Thanks, guys. I'd add my congrats as well. It's pretty amazing in this environment. I guess, two questions for you guys. Number one on product mix, if you could maybe just give us some update of how the holiday shook out non-accessories versus accessories. As you look forward, what category do you think have still the biggest runway for growth? Then the second question really on the international margin side, can you remind us what size the Europe or Japan need to get to, to reach parity of your domestic EBIT margins? Thanks so much.

John Idol

Okay. Thank you, Brian. Good morning. We ran north of 85% of our business during the fourth quarter, again, in what we term accessories, so accessories for us handbags, small leather goods, footwear, watches, eyewear and fragrance and those categories are continuing to grow really right across the board I forgot to mention jewelry as well.

The dominant category for us during the holiday season in terms of dollar growth and percentage growth was handbags and small leather goods, so that clearly drove the predominant amount of our business right across the board, domestically and internationally, et cetera.

The second biggest category for us was watches. Again, we saw double-digit increase in our watch business and we continue to see that business moving ahead very nicely, so those two categories were really the two driving forces and that's obviously in our retail stores.

On wholesale side, what we are seeing is really an extraordinary development. Our footwear businesses as we reported to you in the past is really becoming a dominant players, the same way we are dominant player in the wholesale channel in handbags, we are a dominant player in watches. We think we are reaching that same level of dominance in footwear, but with tremendous runway for growth, but I think we have reported to you in the past that we are going to install approximately 150 shop-in-shops or footwear over the next 12 months across many domestic and international retailers.

I think you have been down to Macy's to see our extraordinary presentation, which is really positioning us for the future, what footwear can look like in our wholesale partner distribution and that's being embraced by our partners, so I would say to you that that's one of the real big, strong growth categories for us.

Then our women's ready-to-wear is doing very, very well. We had some difficulty in the fourth quarter and that was really due to some shipping issues, but in general that category is also moving ahead very nicely for us.

Then lastly, going back to our own retail stores and wholesale combined, the jewelry opportunity is enormous. We believe that we will, over the next two to three years become one of the leading players in that market. As you know, when you look at certain of our other competitors in that business, they are anywhere between $1 billion and $3 billion, so we see that as a category that we can ultimately growth to those kinds of levels, again, lots of opportunity for the company for growth in product categories.

Then lastly is the men's. We've said before, we think that we can reach $1 billion, about a third of that coming in our wholesale sportswear business, about a third of that coming in the men's leather goods business and then a third of that coming from the watch business, so we have a long way to go in terms of growth, products and continuing to build the brand.

I'll let Joe talk about the margin.

Joe Parsons

Brian, as you know, we don't disclose regional either gross margin or operating margin or EBIT margins. We have talked in general consistent with the industry. Our gross margins in Europe will tend to be somewhat higher than the U.S. gross margins and the operating expenses are also going to be somewhat higher. As the business grows, we expect that business will be more profitable, but we are now clearly at and we have not disclosed what the concurrent to that is.


We'll go next to Erinn Murphy of Piper Jaffray.

Erinn Murphy - Piper Jaffray

Thank you. Good morning and congratulations on just a great quarter. John, just wanted you to maybe focus a little bit more on Europe. If you could just talk a bit more about the mechanics in that market? I mean, it seems like you guys are really shaking things up across the content in a very positive way. Maybe you help us understand Europe's importance strategically as you further build brand awareness in newer market even like Latin America, China, given the tourist flow there. Then just stick with the holiday quarter in Europe, could you just share some perspective on what you saw from a local versus tourist consumer there?

John Idol

Sure. I'll start with Europe, first. Good morning, Erinn. Europe was an extraordinary holiday season for us. You know while there was conversation about traffic in the United States, the traffic flows in Europe were just extraordinary. I think that speaks to two things.

Number one, we talked before about where we are building the business and who we are taking market share from et cetera, and I know lots of conversation has been around one of our main competitors, but in fact we think we are beginning to take market share from very large luxury companies that some of you cover.

In particular, in Europe that's we have two sets of competitors. We have very large luxury players and then we have all these regional players that are across the board. We clearly are becoming the number one, and if we are not already there, the number one accessible luxury handbag company in the market, but we are also by virtue of where we are opening our retail locations on streets next to all of the very large significant and heritage luxury companies, we are starting to take market share there and we think the customer is resonating with the Michael Kors' product design.

Michael has been on trend and really season-after-season, delivery-after-delivery just delivering exciting product. The European consumer, it has always been very astute at what fashion is and having the right products for the right season, so we think that's really where we are dominating.

The second issue is, again just like in the United States, our jet-set in-store training programs and our sales associates, we think are [path] for churning our competitors. We are there to be a fashion consultant for our consumer and I think we think she is really responding to that, so we are very, very pleased with what we saw happen in Europe and are seeing happening and it's right across the board.

Again, I keep telling you in all the calls. Our business is excellent in Spain, our business is excellent in Italy, our business is excellent in Greece and a lot of the countries that you would think would be being hit by the economic downturns, which they are, but there's still money being spent in these markets and consumers are responding to the right product, presented in the right way and delivered in the fashion environment.

We are at the very beginning stages of understanding what's happening in Latin America. We know she desires our product. We have very, very high brand awareness in the Latin American market, which is quite interesting. We never ran any ads, we had least tourists there, so our initial results are quite outstanding, so we are very comfortable with where we are going to be in the Latin American market.

China is going to take us time. We are very new to the market, we are only there a few years and obviously there's a lot of competition and we are under late to the market, so that will take us many years to develop, but what we do see is, in our travel retail reports they are popping up as you know anywhere between number two and three in the airports for us, so that means she is searching us and in other duty-free locations and she is very interested in getting the product, and so we think that it bodes extremely well for our long-term future in that marketplace.

Erinn Murphy - Piper Jaffray

Thank you. That's helpful. Could just sneak in one more for Joe? I guess, how do you think about prioritization of cash use. You said you should have about $1 billion-plus cash by the end of this year. Could you just help us think about the priorities there? Thank you, guys.

Joe Parsons

As John mentioned, we have a lot of projects that we were going - in addition to the projects that John mentioned, we will begin investigating what are the placement for our legacy system here, so we have a lot of investments to do in the company. In our minds, we will not think about utilization of cash other than investment in the company until the cash balance becomes about 10% of our market cap.

Erinn Murphy - Piper Jaffray

Thank you, guys and best of luck.

Joe Parsons

Thank you.


We'll go next to Omar Saad of ISI Group.

Omar Saad - ISI Group

Thanks. Good morning, guys.

John Idol

Good morning, Omar.

Omar Saad - ISI Group

I wanted to talk about - you got all the strength going on in your business right now. Europe, North America. As you think two, three steps ahead, can I ask you about men's? How you feel the brand, obviously, men are half the population. How you feel the brand is set up with the male consumer, maybe some initial things you are working on to get the male consumer more familiar with it. Does the brand have too much of a feminine edge to it to really generate a big men's business as we started to think about that or dressing. Any color on that as you think about the next evolution of where the growth is going to come from.

John Idol

Sure. Thank you, Omar. Good question. Omar, we talked if you remember all the way back to the roadshow the waterfall and we first consider the North American market our primary market and still plenty of room to grow in there, but over time the North American market will mature and that's we felt very strongly investing heavily in Europe, and as we have said, we think that's an opportunity to be $1 billion in the not too distant future and there may even be upside from there. Again, we feel that's kind of the next stage of the role of the waterfall.

Then the next piece is going to be Asia. There will be some acquisitions of our work. Certain licenses will come due, so we will bring some of those things in-house. Japan is going to come on stream, which we think is going to be a very business for us on a go-forward basis, so that kind of takes us over the next few years.

Then lastly, we really believe in the men's business and we have a small business today, but it's doing quite well. It's really gotten entrenched very nicely in the best retailers in the United States being Bloomingdale's and Neiman Marcus and Saks.

Then in Europe, we started to roll it out. We are in about 150 specialty stores and we are doing quite well there. We had installations going on in Europe, and we would expect in the next 30 days that we will have announced a new men's president from a very successful large global men's company and we think that's going to be an important further first step.

The next thing that you will see in terms of men's is, we will be launching a men's fragrance for the fall season. That will be accompanied by tremendous advertising and, so between what we are doing in shop-in-shops, in-stores between what we are going to do with men's fragrance and you are going to see a very major push on men's watches.

Typically, our men's watch competitors, and again we think of the Swiss luxury companies as our men's watch competitors, because today we are one of the top-10 selling watch brands in the world. Typically, our competitors will do 50% of their business in men's watches and 50% in women's and we are not at that level today. We see there is a huge opportunity, so over the next kind of 24 months, you are going to see a significant push in the men's business, we have a very clear vision of who the Michael Kors man is. I think you will start to see that resonate in our advertising both, in print, outdoor and then of course online on our website and socially.

I think, we have been patient about how we were going to go about this, but we view it as a sizable opportunity for the company and we think we will be positioned in a very good segment to achieve that. By the way, most of that volume long-term for us, we think, will come internationally and a little lesser domestically.

Omar Saad - ISI Group

Excellent. Appreciate the insight.


We'll go next to Paul Lejuez of Wells Fargo.

Paul Lejuez - Wells Fargo

Great. Thanks, guys. Congrats. Just want to ask you about your average price points in your handbags this holiday season versus last year. How are you thinking about that going forward? Do you think you have an opportunity to move price points higher or shift some of the mix into higher price point handbag categories? Thanks.

John Idol

Good morning, Paul. Thank you. We've said this for the past three years. We have really haven't changed our pricing on almost all of our products in the company. We think our customer appreciates the fact that we are offering them incredibly high quality values that still is luxury pricing, but she knows that it's something that she can come back and access on a regular basis.

Our AURs in our retail stores have not changed since 2007. Our average transaction is really quite extraordinary and that was with also the adding of jewelry, which is a lower price point as a purchase. UPTs have up slightly, but our overall average transaction remains about identical.

The other thing I might point out is since the day we started in this company, we always had luxury price point, so we have everything from $10,000 Crocodile bags to $248 jet-set Tote, so we've always had a luxury offering in our accessories and we are very proud of the fact that we just recently bought our luxury footwear back in-house. It was licensed and we are producing that in-house and have an excellent response to that.

We believe in luxury category, we have the Michael Kors runway collection, which will be shown here very shortly in New York, and that's where we come from as a company is from a luxury background. That is Michael's beginning of the company, so we have that in our women's ready-to-wear, we have in our handbags, we have it in our footwear and we will continue to make sure that that product is represented in basically all our lifestyle stores and handbags, to some degree in shoes and select stores with women's branded wear.


We'll go next to Randy Konik of Jefferies.

Randy Konik - Jefferies

Hey. How are you? Thanks a lot. A quick question, you guys - I guess, first for John. You have given us some frame of reference of how you are thinking about the opportunity from a revenue perspective in Europe above $1 billion. I think Asia above $1 billion. How do you about the U.S. market of what you revenue opportunity is, a total market share, total revenue perspective. I guess, for Joe, how should we be thinking about the CapEx run rate of the company given these distribution center projects? Then can you just walk us through how you are going to be picking on these projects without disrupting the company? Thanks.

John Idol

Thanks, Randy. Randy, first off, just one minor correction. We did not say $1 billion in Asia, I think that's what you were thinking of men's that we talked about $1 billion. We have not put revenue projection on Asia yet.

The total revenue in the United States, we have not guided to the number there. I think what we have said is and you have seen our consistent commitment to double-digit comp store growth and we see that as a continuing goal for us. Obviously, we have been able to achieve that goal and we do that with a lot precision.

First with product, again, led by Michael's genius design vision, but really secondly by an amazing group. We have almost 10,000 employees worldwide today led by outstanding senior management team and are very focused on planning and on having the right product in the right stores at the right time. We think we are very good at that, so again we think that the market has as a substantial opportunity for growth both, in store count and in shop counts in terms of department stores and we think that the market will continue to grow at a double-digit rate for us. Again, we will give you guidance on the fourth quarter for where we are going to be, but the market has plenty of room for us to continue to grow and I guess there has been a lot of market share information.

Again, when you compare Michael Kors numbers to our competitors, remember, we do a lot of business in not just handbags, so again if you are comparing market share to market share, sometimes I see the analysis are not really done correctly, because they compare our total revenues to other competitors who are really more of a handbag company, so we feel great about that.

Just one thing before I turn the second piece over to Joe, we will continue to make very significant senior hires in the company to support our growth and we are bringing on people who will help us really execute many of these large projects that we talked about.

Joe Parsons

Let me just add to what John said. We have learned lessons. We are continuing to understand what our infrastructure should be like, hiring people is difficult today, but we are continuing to build up the infrastructure that we need to get these projects done and are very, very focused on that.

In terms of our CapEx in the future, we as you know don't disclose anything other than one year out (Inaudible) and the fourth quarter we will disclose and we will guide you to the next year, so I cannot give you further guidance to that other than to say, one, the company's philosophy to at this to continue to invest heavily in the company.

Second is, as we've indicated, we have a lot of significant projects continuing in addition to our regular program of building retail in shop-in-shops and investing in the systems, so you can expect continued significant CapEx in the future.

John Idol

Randy, one last point into earlier question that Kimberley asked, you know, I have said this before and I know it always doesn't make everyone happy when I say it, but we are not as concerned about the percentage of operating margin. That is not our concern.

Our concern is, revenue growth, sustainability of the brand and investment in the brand and then obviously bottom line EPS growth. If our operating margins contract, which over time I would think they would, given our investment and infrastructure yet the top line is growing and the EPS is growing, we would think that would be the appropriate thing.\

Again, we have not been able to catch up to many of the needs in the company has just because the company is growing so fast, so there will be a normalization. I talked about normalization of sales, in terms of markdowns et cetera and there will be a normalization of expense to revenue ratios.

I think, we will take one more question.


We'll go next to Dana Telsey of Telsey Advisory Group. Dana, go ahead. Your line is open. You might want to check your mute function.

John Idol

Operator, why don't we take one other question?


Yes, sir. We'll go next to Oliver Chen of Citi.

Oliver Chen - Citi

Hi, guys. Congratulations. Regarding the environment and your comments earlier, where are the in-store markdowns versus last year? If you could also help us understand the evolution of the SKU profile and if you could see as a number of silhouettes evolving over time. Lastly, if you could just give us some thoughts on what you saw on trends in factory versus full priced, we would appreciate it. Thank you.

John Idol

First of good morning, Oliver. As I said to you earlier, we had the same amount of SKUs on the floor in total this year versus last year in terms of the markdowns, so we really didn't have a desire to become more promotional. That is not our philosophy in the company and it's not something that we think we need. We think we always need is better product, more exciting product and really giving our consumer a way to be simulated and excited to buy something new from our company, so that's our first strategy.

In terms of SKUs, the company's line will grow in size because of the Internet, but we are very excited when the internet comes in-house, we don't have any place today that we can show all the products that we produce and we are super-excited about the ability to have a format to be able to present that.

We also have some very large format stores that are opening, I think we have told you previously about our 22,000 square foot stores opened in Soho in September and that will be our largest globally, presenting the largest assortment of our merchandise of accessories, watches, jewelry, women's ready-to-wear footwear and men's wear. What we are also excited about in that store is, and you will see this in some new stores being built, where we are going to take our formats to approximately 4,000 to 5,000 feet in a number of locations and that is really to present additional watches and jewelry space to present additional footwear space we really are excited about having, what we call, salon approach inside of our stores.

Then as I said to you before, our women's ready-to-wear is experiencing great results and we see that as an opportunity for us to be able to present properly. Again, so there are a limited amount of our own stores.

Then lastly, we enjoyed double-digit comp store increases in all of our formats across the world, so again the consumer resonated with product in both of the formats. As you know, we are much more concentrated on our full priced format, because we believe that that's where the core route of the company is and we think that's the way we should be focusing our efforts.

Oliver Chen - Citi

Thank you. On the e-com side, when we work through our models, which quarter will model the revenue upside in terms that build and how might the productivity ramp?

John Idol

Well, we are not going to give for the moment a range. We will probably talk about that in the fourth quarter call in terms of the size, but I assume it in August 1st, is when we will turn the switch on and please pray for us that transition goes smoothly. We certainly are praying every day, but we are excited and I just might add on that. It took us a little longer than we had anticipated, but we have built the ability to have a global platform, so once the platform is complete, we will bring up the United States and Canada simultaneously. We will then move onto Europe and Japan, and then we will then move onto other parts of the Far East. The good news for us is that we will have a global platform, so we spent a lot of money, a lot of time to get it right hopefully the first time, so that we can really roll this out and grow the platform.

With that I would like to thank everyone for participating in the call this morning and we look forward to speaking to you, again, for our fourth quarter and fiscal 2014 earnings update. Thank you.


That does conclude today's conference. We thank you for your participation.

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