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Michael Kors Holdings Limited (NYSE:KORS)

F4Q 2014 Earnings Conference Call

May 28, 2014 08:00 ET

Executives

Christina Lack - Vice President and Treasurer

John Idol - Chairman and Chief Executive Officer

Joe Parsons - Chief Financial and Chief Operating Officer

Analysts

Kimberly Greenberger - Morgan Stanley

Omar Saad - ISI Group

Nancy Hilliker - Citi

Erinn Murphy - Piper Jaffray

Paul Lejuez - Wells Fargo

Randy Konik - Jefferies

Operator

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

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

Christina Lack - Vice President and Treasurer

Good morning and thank you for joining us for our fourth 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 - Chairman and Chief Executive Officer

Thank you, Christina. Good morning, and welcome to Michael Kors’ fourth 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 fourth quarter performance and update you on advances we have made in our strategic growth plans. Then I will turn it over to Joe for a detailed review of our fourth quarter financial results and our outlook for fiscal 2015 first quarter and full year.

I am very pleased to report that we have had another record year at Michael Kors. One of the reasons for our continued growth lies with our success in communicating our identity as a leading global luxury brand. We have made Michael Kors synonymous with fashion leadership and jet-set luxury. That philosophy is at the heart of everything we create from our products to our stores and to our digital innovation. By connecting with our customers globally, through consistently exciting products and communications, we have been able to build upon the foundation of Michael Kors jet-set vision. The Michael Kors brand is now sought after by consumers around the world who are aspired to live the luxury jet-set lifestyle, our brand embodies.

Now, let’s turn to our results. For fiscal 2014, it was an outstanding year for Michael Kors. We achieved earnings growth of over 60% in 2014 following approximately 130% growth in fiscal 2013, while continuing to make strategic investments in our business that will position us to achieve our long-term objectives. We attribute our consistently strong financial results to the exceptional product offerings created by Michael Kors and our design team and to our jet-set luxury shopping experience that continues to resonate with consumers globally.

In addition, we continue to build brand awareness throughout the world. Based on our recent study, awareness in the U.S. increased from 82% in 2013 to 89% in 2014. Europe’s brand awareness increased from 39% to 49% over the same period. Lastly, brand awareness in Japan is 32%.

We have a tremendous opportunity to further increase brand awareness globally through various marketing channels, including traditional advertising, our e-commerce site, social media, and public relation events. Focusing on our most recent quarter, we saw very healthy growth across all segments and geographies.

Total revenue in the fourth quarter grew 54% to $917 million. Income from operations grew 58% to $246 million and operating margin was nearly 27%. This performance was the result of continued execution on our six key growth strategies. First, in North America revenue grew 43% and comparable store sales increased 20.6%. Second, we opened four new retail stores as we continued to expand our footprint in North America. Third, we successfully converted 163 additional department store doors globally into branded shop-in-shops. Fourth, in Europe revenues grew 125% and comparable store sales increased 62.7% and we opened four locations across the region. Fifth, we continued to develop our business in Japan, revenues grew 89% during the quarter and comparable store sales increased 50%. And we opened two locations during the quarter. And sixth, we opened nine new locations through our regional licenses in the Far East, stores in this region experienced double digit increases in comparable store sales.

Turning to our segment performance during the fourth quarter, retail net sales grew 50% and global comparable store sales increased 26.2% representing our 32nd consecutive quarter of store growth – comp store growth. Sales growth in the retail segment was driven by 101 new stores opening since the fourth quarter of last year, 10 of those stores were opened during the fourth quarter of 2014 and we ended the year with 405 company owned retail stores globally. Including 150 locations operated by our licensees, we ended the year with 555 stores and concessions in total. In our wholesale segment net sales grew 56% driven by the strong performance of department stores and specialty stores in North America and Europe where we have continued to see strong demand for our luxury accessories and footwear products as well as continued successful conversion of department store doors to branded shop-in-shops.

During the fourth quarter we converted an additional 163 department store doors to shop-in-shops and ended 2014 with approximately 1,560 global shop-in-shops in accessories, footwear, women’s wear and men’s wear combined. We would expect our shop-in-shop conversions to continue to contribute to our strong growth in our wholesale segment. We anticipate opening 500 new shop-in-shops globally this year. Our shop-in-shops are compelling way to showcase the brand, highlight our luxury products and create an exciting jet set shopping experience for our customers. Finally, revenues in our licensing segment increased 79% driven by the strength in our luxury watch, jewelry, fragrances and eyewear business. Our watch business continues to have strong performance and we see momentum building in our jewelry business. We believe that there is an opportunity to grow our watch and jewelry business globally.

We are focused on expanding these offerings in our retail stores and rolling out additional watch and jewelry shops in department stores. At the end of 2014 we had approximately 125 watch and jewelry shops – shop-in-shops and continued to believe that there is an opportunity for 500 worldwide. We continued to be pleased with the performance of our new fragrance and beauty collection in both North America and Europe which exemplifies the sporty sexy glam aesthetic of the Michael Kors brand. We plan to continue the global rollout of this new collection in additional markets in Europe, the Middle East and Latin America this calendar year and additional markets in Asia next year. Long-term we expect to be one of the most significant brands in the luxury fragrance and beauty market globally. We also saw strong performance in our eyewear business during the quarter.

As we previously announced, we have entered into a new exclusive 10-year licensing agreement with Luxottica, the industry leader in eyewear. We think they are an ideal partner for Michael Kors brand as we continue to build the global expansion of our eyewear business and further enhance our luxury image in optical and sunglass marketplace. We are focused on building a strong core assortment of iconic shapes and hardware details to define our eyewear brands and reflect the Michael Kors aesthetic. We are excited for the launch of our first collection with Luxottica in January 2015.

Turning to our operations by region, in North America, revenue grew 43% to $739 million during the quarter with comparable store sales increasing 20.6%. We opened four new stores during the quarter and ended the year with 288 North America retail stores. In our North America wholesale business, we saw overall growth driven by comparable store sales increases in accessories and footwear that were similar or greater to the comparable store sales increases in our own retail stores. Our continued successful conversion of department store locations to branded shop-in-shops also drove wholesale growth in the fourth quarter.

Looking to fiscal 2015, we anticipate opening 45 North America retail stores and remain confident that the market can support 400 stores in the long-term. We are also planning to expand the footprint in select retail stores in key major cities. We are seeing an increasing customer demand for our luxury products and we see an opportunity to expand certain categories, including women’s footwear, women’s ready-to-wear, watches, and jewelry in our stores.

As an example of this strategy, we are excited to be opening our new SoHo flagship store later this year, which will be our largest store to-date at approximately 21,000 square feet. This location will have three floors. The ground floor will feature our luxury accessories, watches, jewelry, fragrance and eyewear. The first floor will feature women’s ready-to-wear and women’s footwear. The lower level will feature our men’s full offering. This will be the first store globally to showcase our men’s ready-to-wear and leather collections.

On the wholesale side, we continued to convert department store doors to branded shop-in-shops in our accessories, footwear, women’s wear, and men’s wear business. Internationally, we continue to see our brand recognition expand in both new and existing markets. In Europe, we have seen great reception to the brand as customers continue to embrace the jet-set luxury experience that Michael Kors brand embodies. This increasing acceptance drove growth of more than 125% during the fourth quarter to $165 million. Comparable store sales in Europe increased 62.7% during the fourth quarter, reflecting the exceptional product in our stores. We also continue to expand our retail presence in Europe opening four locations during the quarter and ending the year with 80 retail locations in the region.

Our new store openings have been met with great excitement among consumers and we are pleased with the performance that we continue to see in this region. In our European wholesale business, we saw strong sell-throughs in both department and specialty stores during the quarter. We continued to believe that we can capture market share in this region as we expand our brand presence and grow our distribution.

For fiscal 2015, we expect to open 55 new stores in Europe. Over the long-term, we see opportunity for 200 Michael Kors retail locations. We also continue to see momentum build in our wholesale business and expect to further expand our presence in this channel. As I have said in the past, we are excited about the opportunity in Europe and believe that over the next several years, we can achieve revenue in excess of $1 billion in this region.

Turning to Japan, we continued to be pleased with our steady progress. Japan remains a great long-term opportunity and a key market for the company. We are in the early stages of developing our brand in Japan and are cognizant that it will take time to fully realize the potential of the Michael Kors brand in the country. That said there is great momentum behind the business now. During the fourth quarter revenues in Japan increased 88.5% to $13.4 million and comparable store sales increased 50%. We opened two retail locations during the quarter and now have 37 in Japan. In fiscal 2015, we expect to open 10 additional locations and believe that we can have 100 retail locations in Japan over the long-term.

The rest of the Far East region continued showed strong growth as well with double digit comp store growth in retail stores operated by our licensed partners. We are continuing to build our brand awareness across the region and we are further developing the markets through our regional licenses. During the quarter we opened nine stores in the Far East bringing our total to 103 Michael Kors retail locations in Greater China, Korea, Southeast Asia and Australia.

As I mentioned on our last call, we recently opened our new flagship store in China at Kerry Center on Nanjing Road. This 6,000 square foot location is the largest of our retail stores in the region and prominently showcases all of our luxury product categories across both our Michael Kors collection and MICHAEL Michael Kors lines. As I mentioned earlier we hosted an exclusive event to celebrate the opening of our Shanghai flagship store and introduced the Michael Kors jet set lifestyle to the Chinese consumer. Guests were treated to a never before seen runway show featuring a signature Michael Kors jet set collection that illustrates the sophisticated and global appeal of Michael Kors design philosophy. This live event was made available across a wide network of social media platforms and produced the highest level of engagement we have seen to-date.

We are incredibly excited about building the brand in the Asian market and believe that the resounding success of this event shows that the consumer is truly beginning to understand that the Michael Kors brand is a global fashion leader for men and women leading a jet set lifestyle. Importantly events like this serve to build awareness for Michael Kors brand not only in China but across the globe. Overall, we believe that the Far East is an important and growing market. The Asian consumer is traveling more and spending more while traveling, which bodes well for our brand and we believe that we are well positioned to capitalize on this growing trend which brings us to our travel retail business.

The travel retail business is strong and continues to gain momentum. We ended 2014 with 50 travel retail locations in some of the best airports and travel destinations in the world. Over the long-term we believe that there is potential for 75 travel retails shops worldwide including freestanding stores shop-in-shops and stores operated by specialists in the travel retail business.

Finally, we are on track to launch our new North America ecommerce site this fall. Increasingly consumers are turning to our website and to social media platforms to shop and connect with the Michael Kors brand. In fact, we saw our reach continued to expand across all social media channels including Facebook, Twitter, Instagram and Weibo. Our growing base of fans and followers on these platforms drove increased traffic to our website during the quarter. And these platforms will continue to build brand awareness globally.

There is a lot of momentum behind the ecommerce business. We think it’s an ideal time to launch the new site which will serve as a powerful marketing tool enabling us to create a strong connection to Michael Kors customers as well as reach a broader audience. We are excited about the potential of this channel and over time we believe that the e-commerce business can be a multi-million dollar platform for the company.

In summary, fiscal 2014 was another year of exceptional growth for Michael Kors. We exceeded our financial expectations and continued to make progress on our strategic growth initiatives. Overall, there is great momentum behind the Michael Kors luxury brand and we are poised to achieve our long-term sales and earnings growth objectives as a premier brand in the global luxury market.

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

Joe Parsons - Chief Financial and Chief Operating Officer

Thank you, John. Good morning. I will begin with a review of our fiscal 2014 fourth quarter financial results followed by our outlook for the first quarter and full year of fiscal 2015. For the fourth quarter, total revenue grew 53.6% to $917.5 million as compared to $597.2 million for the fourth quarter of last year, with strong growth in each of our retail, wholesale, and licensing segments.

Retail net sales increased 49.7% to $408.4 million as compared to $272.7 million in the fourth quarter of last year, resulting from a comp store increase of 26.2% and the opening of 101 new stores since the fourth quarter of last year. The comp store performance was driven primarily by the continued strength of our accessories line and watches.

Wholesale net sales grew 55.5% to $473.7 million in the fourth quarter compared to $304.7 million in the same period last year. The increase was derived by strength in our accessories and footwear categories, the continued successful conversion of existing doors of shop-in-shops, and the expansion of our European operations.

In our licensing segment, revenue grew 79.1% to $35.4 for the quarter as compared to $19.8 million last year primarily driven by the continued strength in watches. Gross profit increased 54.2% to $549.4 million as compared to $356.2 million in last year’s fourth quarter. Gross margin expanded 20 basis points to 59.9% 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 mix shift to higher margin product in addition to geographic mix.

Total operating expenses grew 51.1% to $303.5 million in the fourth quarter of fiscal 2014 as compared to $200.9 million last year. As a percent of total revenue, total operating expenses decreased to 33.1% from 33.6% in last year’s fourth quarter. SG&A expenses increased 50.4% to $278.2 million as compared to $185.0 million for the fourth quarter last year. The increase in SG&A expense is primarily due to higher retail occupancy and salary cost related to new store openings and increase in advertising and marketing expense, higher distribution costs, and the increases in corporate employee related costs. As a percent of total revenue, SG&A expense was 30.3% compared to 31.0% for the fourth quarter of last year.

Depreciation and amortization expense was $24.0 million during the fourth quarter as compared to $15.2 million for the fourth quarter of last year primarily due to the build-out of new retail locations, new shop-in-shops, and investment in our infrastructure to support the growth. As a result of these factors, income from operations was $245.9 million or 26.8% of total revenue as compared to $155.3 million or 26.0% of total revenue in the same period last year.

Income taxes were $85.0 million in the fourth quarter as compared to $53.5 million for the fourth quarter of last year. Our effective tax rate was 34.6% flat with the same period last year. Net income increased 59.3% to $161.0 million for the fourth quarter and diluted earnings per share were $0.78 based upon 207.0 million weighted average diluted shares outstanding. Net income for the fourth quarter of fiscal 2013 was $101.1 million or $0.50 per diluted share based upon 203.8 million weighted average diluted shares outstanding.

Turning to the balance sheet, while we continued to make significant investments in the company both for CapEx and infrastructure SG&A expense, we are generating strong cash flow from operations. At March 29, 2014 cash and cash equivalents were $955.1 million, over two times the prior year balance of $472.5 million. Free cash flow for fiscal 2014 was $416.3 million as compared with $217.2 million in fiscal 2013. The cash balance is primarily being driven by the increase in earnings. There were no outstanding borrowings under the credit facilities in either year. Inventory totaled $426.9 million and is compared to $266.9 million last year, an increase of 60.0%. The growth in inventory was driven by increased sales as compared to the fourth quarter of last year new stores as well as our continued build out of new shop-in-shops.

Capital expenditures for the quarter totaled $57.8 million. The majority of these expenditures related to new store openings with the remainder being used for investments in connection with building new shop-in-shops and enhancing our information systems and distribution infrastructure. We opened 10 stores in the quarter four in North America, four in Europe and two in Japan and ended the quarter with 405 retail stores including concessions.

Turning to our outlook for the first quarter of fiscal 2015, we expect total revenue to be between $840 million and $850 million assuming a comp store increase of approximately 20%. We expect diluted earnings per share to be in the range of $0.78 to $0.80 assuming a tax rate of 33.5% and 207.5 million shares outstanding. We expect the first quarter gross margin rate to be slightly lower than last year and operating expense rate to be moderately higher than last year.

For fiscal 2015 we expect total revenue to be between $4.0 billion and $4.1 billion assuming the comp store increase in the high teens. We expect diluted earnings per share to be in the range of $3.85 to $3.91 assuming a tax rate of approximately 33.5% and 208.6 million shares outstanding. Capital expenditures are expected to total approximately $400 million for fiscal 2015. We expect to open 110 retail locations including 45 in North America, 55 in Europe and 10 in Japan in large select locations in key major cities, continue with our shop-in-shops conversions and investment in infrastructure and systems.

In summary, we made great progress in our strategic growth initiatives during the fourth quarter. We continued to invest in the company and are making plans for new warehouses and systems in all of our international locations. Our strong cash position will allow us to make these investments in our infrastructure in order to support our global expansion. Overall, we believe that Michael Kors is well positioned for continued long-term growth.

I will now turn the call back to John Idol.

John Idol - Chairman and Chief Executive Officer

Thank you, Joe. In closing there is strong momentum and a significant runway for growth at Michael Kors. We not only delivered excellent results in fiscal 2014, but we made strides in enhancing our infrastructure and strengthening our foundation so that we can deliver upon our growth objectives for 2015 and beyond. Everything we do embodies our jet set luxury brand. As we continue to evolve and elevate Michael Kors products and retail experience to appeal to our fashion consumers. There is a tremendous growth potential in each business region and product category and we are well-positioned to capitalize on these opportunities. Our strong momentum and leading position within the rapidly expanding global luxury market gives us confidence that we can continue to deliver double-digit revenue and earnings per share growth over the long-term.

We will now open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will take our first question from Kimberly Greenberger with Morgan Stanley.

Kimberly Greenberger - Morgan Stanley

Thank you. I am sorry, had a problem getting my mute off. Good morning and congratulations on a very fine cap to a great year. John, I am wondering if you can talk about or Joe specifically on the segment reporting margins. There was a huge increase in wholesale, a declining retail and a big increase in licensing. Is that a reclassification of or change in the methodology in the way you are calculating those? That will be super helpful.

And then John, if you look out to the upcoming fiscal year, given that you are talking about still very strong revenue and earnings growth, what are the things that you are seeing out in the market that, that are most exciting within the next four quarters? And is there some start to the normalization of markdowns that you are seeing beginning here in Q1 given that the outlook you have for, it sounds like a slight declining gross margin? Thanks.

Joe Parsons

So, I will start with the operating profit margins. There was no change in the methodology. We do continue to see very strong operating margins in wholesale because of the performance in wholesale. There are very limited markdowns in allowances. The licensing will tend to change a little bit, because we charge our advertising expense to licensing. Therefore, licensing may change somewhat due to the timing of our advertising expense.

John Idol

So, good morning Kimberly and thank you for those kind remarks about our quarter. We were very excited to see the results in the fourth quarter, obviously given everything that was being talked about in the retail environment, while we believe that we are probably best-in-class in terms of performance in our own freestanding stores and obviously the strength in our shop-in-shops and department stores globally.

Looking forward in 2015, fiscal 2015, we are really excited about a number of things. Number one, our freestanding stores continued – hi, there is some background noise, if someone could mute their phone we are very excited about what is happening in our freestanding stores. And again, we are capturing market share both here in the U.S. and internationally. And it’s really driven by our product first and foremost always Michael and the team are continuing to be setting the trend and the tone for exciting fashion products, everything from our collection runway to our own Michael lines. And then so we continue to see that as our cornerstone for strength. Secondly, we think that we have really become a leader also in social media and the way that we are communicating to our customers. Again, whether that’s through Facebook or Instagram or Twitter or we are very focused now on Weibo and how we are going to continue to talk to her and him around the globe.

Thirdly, the thing that excites us is the e-commerce business coming in-house. As you know, there is definitively a trend, where consumers are spending more time not necessarily buying always online for the various brands, but shopping, for sure, they are shopping more online before they actually make their purchases. So we believe that our ecommerce, our internet site is really not only critical for us from a growth and revenue standpoint, but also from an ability to excite and engage our customer in a shopping experience before they have ever come into the stores. And we will be talking in the quarters ahead about some very exciting technology that we are rolling out to our stores to complement that experience online.

In terms of normalization, our trends kind of remain the same. We are off to a very good start again in our first quarter. So I am not sure we are yet seeing what you are mentioning. And by the way we have specifically said to you it’s going to come. It is going to come. We just haven’t seen it yet and hence the strong operating profit, strong gross margins in the company that you can see us delivering on today’s call and projecting out into the future.

Kimberly Greenberger - Morgan Stanley

Thanks so much and good luck for the second quarter and first quarter.

John Idol

Thank you.

Operator

Thank you. We will move on to our next question Brian Tunick with JPMorgan.

Unidentified Analyst

Good morning. This is (indiscernible) filling in for Brian. Thanks for taking my question. I wanted to ask on your comp guidance basically how you are thinking about the traffic versus ticket or UPTs particularly North America, maybe in terms of the product mix, is there anything you could share with us on your outlook for accessories versus non-accessories mix and touch on performance of adjacent categories like jewelry, fragrance and maybe comment on if you would see an uptick to UPTs from those. And finally, from a pricing perspective, do you see any shift towards higher price points or any of your changes per AUR is from mix shift? Thanks.

John Idol

Okay. Let me see if I can answer all those things, I understood them all. First off, good morning. We view traffic as a very important barometer of our growth and we experienced double digit comp store traffic globally which we were very pleased to see. We are equally as focused on conversion. And I am also proud to say that we experienced double digit conversion globally and in North America. So we continue to look at those metrics as the most important metrics and us being able to achieve our comp store growth.

We have never really looked to drive up and I am going to talk about the average transaction. Average transactions in our stores have remained relatively flat for the past almost since 2007 when we opened one of our first lifestyle stores. So that is not something that we are really looking to do. We think that one of the great things about Michael Kors is that you can come in and have an amazing fashion experience and want to come back multiple times because your whole purchase for your season isn’t taken in one visit with us.

In terms of accessories, clearly the small leather goods business continues to outpace the actual handbag business in terms of growth. And part of that’s driven by the smaller bags also which we classify into small leather goods business. So it’s not just money pieces we are talking about, but it is products that are referred to sometimes as swing packs. And those products are from a fashion trend standpoint they are on fire right now. Jewelry continues to be a very, very strong category inside of our own stores and then of course in the department stores and our specialty store distribution. And we see just tremendous growth opportunity in that business. We actually believe that it could be 50% to 60% the size of our watch business and as you know globally we believe we are one of the top ten watch companies in the world today. So we think that would put us as one of the top three or four jewelry companies if we can really achieve our growth over the – our goals over the next three to five years.

Again a lot of that will be driven by our own freestanding stores and some expansion that we are putting around. And then really on the pricing side the only place that we expect to see higher prices on a go forward basis will really be in our collection handbag business. We are seeing great response to that category that’s really in our kind of $1000 and up category. And especially as we build these larger flagship stores or in large some of our existing lifestyle stores, that category becomes more relevant for us. And so – and in general as you know, the higher priced luxury bags have moved up in pricing. We don’t expect that for the Michael Kors line, but we do expect that for our Michael Kors collection line.

Unidentified Analyst

Okay, thank you very much. Best of luck.

John Idol

Thank you.

Operator

We will move on to our next question from Omar Saad with ISI Group.

Omar Saad - ISI Group

Hi, thanks. Two quick questions guys. Great job by the way. I guess the first question is on the retail segment, the operating margins to you, they are under pressure a little bit in fourth quarter. Do you expect them to kind of stabilize and maybe rebound going forward given that calendar 1Q was kind of funky with all the weather and the Easter shift? And then my second question is as you look out at your revenue guidance for the year, I think the high-teens comps 21% to 24% overall top line growth, that’s probably the smallest spread that you have seen at least since being a public company. Are you expecting to slow kind of the wholesale business with the shop-in-shop conversions or new store openings? And I am just kind of wondering that spread between comp store sales growth that you expect and the overall revenue number seems a bit small? Thanks guys.

John Idol

Yes. Let me just address one thing in the operating margins in retail. Actually, our gross margins in retail were very similar on a year-on-year basis. So that wasn’t where what you are seeing in some of those operating margin declines is actually where we are taking rents of stores early, retail locations that we might not have opened. So, you have something like SoHo sitting without any sales and the rents starting. So, there are some things inside of that. So, we really didn’t see any more promotional activities in our business. So, it wasn’t that we had pressure on our retail business from a sales or markdown strategies. We saw the same kind of sell-throughs in wholesale that we did in retail. And also Europe, again, as we are taking buildings in advance and some of the other startup costs that are going along with the expansion in Europe, that’s really what’s impacting more of the operating on retail. And I think you will see that more normalize out over the next couple of quarters, especially as we get some of these stores opened.

That being said, we are also looking at some additional fairly large flagships in Europe, which will go through a similar situations with us. And we told you in past calls, this is very difficult for us to kind of time those things. Rolling out in malls is relatively simple, not simple, but it’s easier for us to predict. And we also have shorter construction periods. When you get into buildings, especially whether it’s here in North America, the building that we are building in SoHo, we are probably six months late due to construction issues and things. When you get into these buildings, there is a lot more going on than you anticipate. So, there will be some of that fluctuation and we will hopefully be a little bit more clear in the next call and define how that breaks out.

In terms of the comps and our overall top line growth, honestly comp store growth accounts for a very large piece of the retail growth. Opening 50 stores is impressive and it’s nice, I am sorry, opening 100 stores is impressive, but it doesn’t move the needle as much for us as comp store growth does. So, I think both in wholesale and in retail, comp store growth remains a critical measure for success for us on a go forward basis.

Omar Saad - ISI Group

Thanks, John. That’s really helpful.

Operator

We will take our next question from Oliver Chen with Citi.

Nancy Hilliker - Citi

Hi, everyone. This is Nancy Hilliker in for Oliver Chen. Congratulations on the strong quarter. A question is related to the margin impact, you said it influenced by a mix shift in product and geography can you talk about the impacts that will have the rest of the year? And also if you could talk to us a little bit about e-commerce, is that factored into guidance in terms of top line in margins and also what percent of sales do you anticipate that might be this year? That will be great. Thank you.

John Idol

Nancy, I am not sure we said that there was a margin impact. Can you just maybe define your question a little?

Joe Parsons

I will take that question. So, we did say that there was a positive impact due to both product mix and geographic mix. And this is a trend that we have been talking about for quite a long-term. We have said for some time that both product and geographic mix was going to have a positive impact, and we are seeing some of that. So this year, this quarter our total accessories which we define as everything other than ready to wear increased from 80% last year to 85% this year. And obviously we had accelerated growth in Europe relative to the growth in North America which has a positive impact. So yes, that’s a trend that we have discussed in the past, and we do believe that will continue to have a positive impact in the company’s operations.

In terms of ecommerce John obviously talked about the ecommerce and the impact. And yes the numbers are included in the projections. However, ecommerce we don’t breakout at this point and they are not going to have a significant impact in terms of revenue or operating income. It’s more of the aspects that John has discussed which we believe will be the short-term positive impacts from putting ecommerce in.

John Idol

And ecommerce just so everyone knows is will not be a positive impact to our EPS in the first year due to all the investments that we are making. We really see that as having a more positive impact over the next two to three years.

Nancy Hilliker - Citi

Thanks so much and congratulations again.

John Idol

Thanks.

Operator

Our next question comes from Erinn Murphy with Piper Jaffray.

Erinn Murphy - Piper Jaffray

Great. Thank you. Good morning and congratulations on a great quarter. John just for you, you made a very interesting higher (rate point), you brought in a Senior Vice President of Global Operations, could you just provide a little bit more context on some of her priorities as you starts there. And then Joe a follow-up on that guidance, you did mention the gross margin is slightly down in Q1, operating expense is a little bit higher in Q1, I may have missed it, but could you just quantify how you are thinking about margins for the full year. And then as we take a step back longer term are you guys still thinking about longer term sales growth and that kind of low to mid-20% range in comparison to 25% plus range? Thank you.

John Idol

So actually I will take the SVP Global Operations who reports to me. Her main focus is on our distribution centers today. So we continued to work on the Whittier distribution center to ensure that it will be ready to provide distribution in North America over the next several years. We then have a next major project of putting in a new warehouse which is going to be owned and run by us in Europe. And following that we are then considering a new warehouse in North America.

In addition to that we are looking at new warehouse in Canada and looking at our distribution. In particular she is focused on fulfillment for the ecommerce. So she has got a lot of things on her plate and consistent with what we have discussed about building the infrastructure, she will be focused on doing that. In terms of the gross margin, we talked about that for sometime we will be having some normalization we believe and hence the slight decrease despite the positive trends that I have talked about in particular the growth of Europe and then that’s going to be consistent with full year.

In terms of operating expense, I believe I have talked to everybody about kind of accidental leverage in the past. And looks like we are attempting to obtain leverage, in fact we are expecting to reinvest in the company and so we are doing a lot of investments and that we will drive a slight increase in operating expense.

Erinn Murphy - Piper Jaffray

Thank you. And then Joe on the longer term?

Joe Parsons

Yes, on the longer term we have provided guidance for fiscal 2015. And beyond that we have said that we believe that given our runway for growth and in particular in Europe and ultimately what Asia will provide us that we do think that we have double digit comp store capability. We think that we have double digit revenue and double digit EPS. We are not prepared to guide to a specific number at this point, but we feel really good about all of our opportunities.

And then of course you know we spoke I think it was two calls ago about the growing importance of the men’s business in our company and what that would mean for us long-term. We think that is $1 billion opportunity and I have kind of went through that $300 million in men’s sportswear, $300 million in men’s leather goods and then $300 million to $400 million in men’s watches. Now we won’t have revenue (growth) because of the men’s watches, but that will be clearly a licensing income opportunity for the company. So we see that as a big priority for us.

We will be announcing shortly that there will be freestanding men’s stores that we are going to be opening globally. It’s a little premature to talk about the locations and how many and when, but that is in our strategy. So we are taking that men’s business very seriously. As you know many of our global luxury competitors drive very high percentages of their sales from men’s and in particular leather. But we think there is a great sportswear opportunity out there for us as well. So we think that will provide additional growth for the company over the long-term.

Erinn Murphy - Piper Jaffray

Great. Thank you, guys and best of luck.

Christina Lack

Thank you.

Operator

Our next question comes from Paul Lejuez from Wells Fargo.

Paul Lejuez - Wells Fargo

Thanks guys. Just talk on ecomm for a second, sorry if I missed this, but will you be including ecomm sales in your comps this year or will you wait until you run it for a year before you include it. And then second just regarding Japan and China, how are customers responding differently to products, what are the main differences between what the customers are looking for in your Asian stores versus U.S. and Europe and I am just wondering what the brand awareness is in China? Thanks.

John Idol

Ecommerce will not be in comp, it would be in – it will be reported in retail revenues and it will comp when it’s 53 weeks old or whatever just like when you report any other comp store. And obviously we will – as ecommerce gets up and running, we will talk a little bit more granular about it in the conference calls. It is just too early days for us to really to be able to give you a lot of guidance on it because quite frankly we are going to learn our way through it.

We have a nice size business that we are transferring over from Neiman Marcus to ourselves, so it gives us a good based platform to operate on, but it’s not something today that would significantly impact on our revenues. As it relates to Japan and Chinese consumers, I would actually put them into two different buckets. The interesting thing for us is the best sellers in the United States are the best sellers in Europe, are the best sellers in Asia. So it really doesn’t change globally.

What you have is in particular I will start with handbags. Handbags whether its in Japan, we might have some color variations that need to be addressed. The color pink is very important in Japan. Sizing issues are very important. Obviously there are certain height differences between people in North America, Europe and in Japan. So those modifications we do in merchandising adjustments. In watches we obviously have a much more broader presentation of our demi watches as opposed to our larger watches which you will find again more broadly embraced in North America and in Europe. And in footwear in Japan there is obviously some different sizing issues, so we have wider last etcetera. So we are doing all those things.

Japan is just it’s going to take us time because the consumer really needs to understand what does American luxury means. There is not a great history in Asia of American luxury. I would tip my hat to Tiffany. I think they have done a brilliant job of defining American luxury, but there is not a lot of other companies who have done that well. And so we really are working very hard at trying to do that.

In China there is not a lot of differentiation between the product again that’s selling there versus what’s selling in the U.S. and Europe. It’s much more closely aligned. And so we don’t have to make a tremendous amount of merchandising changes there. Again, there are some tweaks that we are making. Obviously, there is not a lot of people with blonde hair in that region of the world. So, we are selling certain colors differently than we would sell if we are in Norway or in different northern regions of Europe etcetera. So, we do make some of those changes. And again, we have merchandising teams on the ground in all the various regions around the world. So we are close to the business. And I think you know us as a company. We move very, very rapidly in terms of making changes to adjust to the different marketplaces, but again, we see the brand really starting to gain some traction with the Japanese and the Chinese and we see them interesting enough traveling a lot and we see them in our travel destinations and we are watching very closely how they are purchasing. And it’s starting to accelerate nicely.

Paul Lejuez - Wells Fargo

(indiscernible) by the women?

John Idol

Yes. We haven’t done it yet in China mainly because we don’t answer to the question and we will do it this year. We know it’s very low. We have really only been at this for 2.5 years in China. So, we are just not even focused on that for the moment, but we will do the brand awareness with that study this coming up year and then begin to build off of it at that point.

Paul Lejuez - Wells Fargo

Yes. Thanks guys. Good luck.

Operator

We will take our next question from Randy Konik with Jefferies.

Randy Konik - Jefferies

Hey, great. Thanks a lot. I guess my first question is regarding just going back to the margin commentary, so are you just making a statement that you expect I guess Joe when you look at the model that we should expect year-over-year improvement in the retail segment operating margins on a sequential go forward basis given that we will start to get the stores opened in Europe? And then just longer term, how should we be thinking about the retail segment operating margin potential versus the wholesale segment operating margin potential? And then I guess just lastly how should we be thinking about the revenue split of the $1 billion dollar potential in Europe between a wholesale and retail? Thanks.

John Idol

This is John. I am going to address that just for a moment. It’s going to be a little difficult to predict the actual quarter-by-quarter operating margin for retail as I said before due to some of the timing of the openings of stores and certain investments that we are making in retail regions, in particular in Europe, where it impacts us. So, we really don’t see any dramatic sequential change in the gross margins and the operating margins. They are going to – as we have pointed to you, we think that will be down slightly next year only because as we have talked about normalization we think will ultimately be more of a factor in the business. But when you look at our gross profit for the fourth quarter, which was 59.9% against last year’s 59.7%, we are really about flat. So, it moved around a little bit, the mix and the categories, but it’s really not something that we are planning to have dramatically decline or dramatically increase in either direction.

What we will see happen over time and especially over the next two years, retail is going to become a bigger part of the total business of the company, where today retail and wholesale are roughly equal. Over the long-term, we have told you that retail will probably look more like 70%, 75%, maybe as high as 80% of our company’s business. And you are going to start to see that happen over the next kind of two to three years. Then you will see some change that will be reflected, because that will impact the profitability and in particular the gross margin of the company, because the retail division has higher gross margins than the wholesale division.

Joe Parsons

I am sorry, in terms of the retail split in Europe, we will as you know the European wholesale business is going to be very important part of our business. It’s primarily the specialty shops, it’s a very clean and strong business, but eventually Europe will be slightly more retail than it will be wholesale.

Randy Konik - Jefferies

Got it. Can you hear me?

John Idol

Yes.

Randy Konik - Jefferies

I am sorry, just to be clear, from end of fiscal ‘14 year retail operating margin versus and where the wholesale operating margin kind of sat for the whole year. Do you see room for the retail operating margin to continue to move higher and the wholesale operating margin to continue to move higher long-term?

Joe Parsons

So, in terms of retail, as John mentioned, the startup of the European business tends to be a little bit more expensive. So, therefore, the retail operating margins tend to have some pressure on them. We kind of accelerated our rollout in Europe in fiscal ‘14. We again in fiscal ‘15 have a significant rollout of retail stores in Europe. After that, I believe that there will be an upside to the European, to the retail operating margins. On the wholesale operating margins, we don’t have that upside potential. And as a matter of fact, my expectation would be that the wholesale operating margins would come down as the business normalizes and we have more normal markdowns and allowance cadence.

Randy Konik - Jefferies

Okay, that’s very helpful. Thank you.

John Idol

Yes. And just to further clarify, because I do believe there is a bit of misconception at least I am hearing a theme some of the questions. At the year end, our retail operating margins are roughly flat as a percentage on a year-on-year basis. And our wholesale margins, operating margins were up slightly. So, again to reiterate what Joe said, we don’t think next year our operating margins in retail will change significantly higher or lower. So, I think they are relatively consistent. And if anything we would say our wholesale would come down slightly from where it is today given normalization. So, I just want to make sure everyone is clear, because our gross margins in actual in our retail business increased this year. So, I want to repeat that. Our gross margins in retail actually increased this year. And the reason why I want to point that out is that points out the health of the business for the company.

Randy Konik - Jefferies

Thank you.

Operator

That concludes today’s question-and-answer session. I will turn the conference back over to Mr. John Idol for any additional or closing remarks.

John Idol - Chairman and Chief Executive Officer

We want to thank everyone for joining us today. And I want to again applaud our 10,000 employees around the world who help deliver some extraordinary results for fiscal 2014 and they are poised ready and excited to deliver very exciting results for this company in fiscal 2015. We look forward to speaking to you on the next call. Have a great day.

Operator

That concludes today’s conference. We thank you for your participation.

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