Capri Holdings - Earnings Call - Q3 2012

Transcript

Speaker 6

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Capri Holdings Limited Fiscal 2012 Third Quarter Earnings Results 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. I would like to turn the conference over to Ms. Christina Lack, Vice President and Treasurer. Please go ahead.

Good morning, and thank you for joining us for Capri Holdings Limited 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 made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown 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 prospectus filed with the SEC.

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. In addition, during this call, we'll make reference to certain non-GAAP financial measures, including adjusted net income and adjusted diluted earnings per share. A reconciliation of these non-GAAP financial measures to net income and earnings per share is included in today's press release, a copy of which is available on the Investor Relations section of the company's website at www.capriholdings.com. I will now turn the call over to Capri Holdings Limited Chairman and Chief Executive Officer, Mr. John Idol.

Thank you, Christina. Good morning and welcome to our Third Quarter Fiscal 2012 Earnings Call. With me today is Joe Parsons, Chief Financial and Chief Operating Officer. I will begin the discussion with a brief overview of the quarter and share with you some highlights on our strategic growth plans. Joe will then provide a detailed review of our third quarter financial performance and an outlook for our fourth quarter and full fiscal year. Capri Holdings Limited is positioned as a global jet-set luxury lifestyle brand. We are pleased that our strategies have resulted in both revenue and earnings growth across all our business segments. We operate in the fast-growing luxury marketplace, which we believe will continue to contribute to our global expansion. Our multi-channel strategy, unique design, and strong infrastructure have provided the platform for growth.

Our strong balance sheet will enable us to execute our growth strategies, led by opening of freestanding stores and shop-in-shops globally. During the third quarter, we continued to execute on our five growth strategies. First, in North America, our fashion assortment of lifestyle merchandise, increased brand awareness, and exceptional jet-set in-store experience have resulted in 23 consecutive quarters of comparable store sales growth. Second, we continue our retail store rollout in North America. Third, we are converting wholesale department stores into branded shop-in-shops. Fourth, we are continuing to expand our European presence through retail and wholesale door openings. Fifth, we are developing our business in Japan, which is in the startup phase. I would now like to review a few financial highlights about our third quarter, then discuss our segments, and finally discuss our operations by region.

Our total revenues in the quarter grew 68% to $374 million as a result of strong performance in all segments of our luxury business: retail, wholesale, and licensing. We delivered gross margin expansion of 240 basis points to 59% as a result of our increased retail and European businesses as a percent of the sales mix, which have higher gross margins. Our operating income totaled $65 million for the quarter, or $86 million excluding one-time charges that Joe will explain in more detail. This compares to $45 million in last year's third quarter. For our segments, we grew our retail sales by 83% over the prior year in the third quarter to $199 million. Our comparable store sales in the quarter grew 38%. We believe that this comp store performance reflects our brand strength, merchandise assortment, and exciting store experience.

Retail sales growth was also driven by 75 store openings since the third quarter of last year, including 28 store openings during the third quarter. We ended the quarter with 231 retail stores. Our new stores achieve strong sales results and provide a clear vision for our future retail expansion. Our wholesale segment sales increased 55% to $155 million. Our product assortment continues to be well received by department store and specialty store customers, and we are experiencing strong sell-throughs. As of December 31, we are in approximately 2,300 doors in North America and Europe. Our licensing segment revenues increased 44% to $20 million. We have experienced double-digit increases at retail in our watch business, and additionally, we launched jewelry in the fall of 2011, and we are pleased with the initial results. For our operations by region, in North America, revenues increased 61% to $343 million for the quarter.

Our comp store sales increased by 38%, which is on top of a 60% increase in this third quarter of last year, and we opened 19 stores during the quarter. We continued to convert department store locations in North America into branded shop-in-shops, which significantly increases sales volumes in each door where a shop is installed. Our strong momentum continued in Europe, where revenues increased by 229% to $28 million. Our same-store sales increased by 34%, and we opened three stores during the quarter. We continued to open wholesale doors, primarily specialty shops, and sell-throughs maintained a strong pace. In Japan, we are in the startup phase. Our revenues increased to $3 million, and we opened six shops during the quarter. As a part of brand-building initiatives, the company held its first significant launch event in the U.S.

Embassy in Tokyo in connection with the opening of our Roppongi Hills flagship store. The event garnered substantial press coverage of Michael's appearance. Looking forward, the luxury segment continues to grow globally, and our positioning as an American lifestyle luxury brand will enable us to continue our global expansion. Now I would like to talk about our business by region. Starting with North America, our comparable store sales continue to be strong, and we expect to drive low double-digit growth as we continue to increase brand awareness, introduce new and innovative merchandise, and provide a superior customer experience. We will continue our store rollout in North America to expand our retail segment. We expect to open 30 to 40 retail stores annually and believe that we can ultimately reach 400 locations in this region.

In our wholesale business, we will increase sales as we continue to convert department store doors to shop-in-shops. Consistent with our retail segment, we have experienced strong double-digit comp increases, and we believe that we can continue at a low double-digit pace in the North America wholesale channel. In Europe, we will continue our retail and wholesale growth. We have 29 retail stores, including concessions, and we are on track to open 10 to 15 retail stores annually. Despite the difficult economic environment in Europe, we continue to perform very well and are excited about our prospects to build a Pan-European luxury accessories business along with our other businesses. We believe that we can ultimately have 100 retail stores in this region. We established our Japan business in September 2010, and as I stated earlier, we are in the early stages of our growth.

We believe that there is a strong potential for the Michael Kors brand in Japan and that we can ultimately have 100 retail stores in this region. In summary, this is a very exciting time for our company. Michael Kors has strong and expanding global recognition as a brand that embodies the jet-set lifestyle that consumers aspire to. We believe that we are uniquely positioned to continue to build our global luxury lifestyle brand and that we have a tremendous opportunity for growth. Now I will turn the call over to Joe Parsons for additional analysis of our results. Thank you, John. Good morning. I will begin with a review of our fiscal third quarter financial results, followed by our outlook for the fourth quarter and fiscal year.

Total revenue grew 67.9% to $373.6 million for the third quarter of fiscal 2012 as compared to $222.5 million in the third quarter of last year, with mid to high double-digit increases in each of our retail, wholesale, and licensing segments. Retail net sales increased 82.8% to $199.4 million as compared to $109.1 million for the third quarter of last year, driven by comparable store increases of 38% and the opening of 75 stores since the third quarter of last year. This comp performance was led by the strength of the accessories and watch categories. Wholesale net sales grew 55% to $154.6 million for the third quarter, compared to $99.8 million for the same period last year. The growth was primarily the result of increased sales of our accessories line as we continue to convert North American department store doors to shop-in-shops.

Sales in our European wholesale operations almost tripled during the quarter to $14.8 million as compared to the third quarter last year, due largely to an increase in doors from 246 to 478. In our licensing business, royalty revenues rose 44.0% to $19.6 million for the third quarter of fiscal 2012 as compared to $13.6 million for the third quarter last year, primarily driven by continued strength in watches. Gross profit increased 75.1% to $221.9 million during the third quarter as compared to $126.8 million for the third quarter of fiscal 2011. Gross profit as a percentage of total revenue increased to 59.4% during the third quarter as compared to 57.0% in the third quarter of last year. The increase in gross margin was primarily the result of higher sales in our retail business relative to wholesale, as the retail business maintains a higher gross margin.

Total operating expenses were $157.3 million in the third quarter of fiscal 2012 as compared to $81.8 million for the third quarter of fiscal 2011. As a percentage of revenue, total operating expenses increased to 42.1% as compared to 36.8% for the three months ended January 1, 2011. FG&A expenses were $143.4 million for the third quarter compared to $75.5 million for the third quarter of last year. FG&A expense as a percentage of total revenue increased to 38.4% from 33.9%. The increase in the FG&A expense was driven by one-time charges of $15.9 million related to equity compensation for periods prior to the third quarter and $5.2 million in IPO-related costs.

The remainder of the increase was primarily due to higher retail occupancy and salary costs related to new store openings and an increase in corporate employee-related costs associated with adding store to corporate staff to support our North American and international growth, as well as the infrastructure, professional fees, and other costs required as a public company. Depreciation and amortization expense increased 66.7% to $10.6 million during the third quarter, primarily due to new stores, shop-in-shops locations, and investments in IT to support growth. We also recorded a non-cash impairment charge of $3.3 million in the third quarter of fiscal 2012. As a result of these factors, operating income grew 43.7% to $64.6 million, or 17.3% of total revenue, as compared to $44.9 million, or 20.2% of revenue for the three months ended January 1, 2011.

Excluding the one-time charges mentioned earlier, operating income would have been $85.7 million, or 22.9% of total revenue, as compared to 20.2% of total revenue in the third quarter of last year. Income taxes were $27.3 million in the third quarter as compared to $19.1 million for the three months ended January 1, 2011. Our effective tax rate for the three months ended December 31, 2011, was 41.2% compared to 40.7% for the three months ended January 1, 2011. The increase in our effective rate resulted primarily due to increased income taxes applicable to certain of our non-U.S. subsidiaries. Net income increased $11.2 million, or 40.4%, to $39.0 million during the three months ended December 31, 2011, compared to $27.8 million for the three months ended January 1, 2011. Excluding the aforementioned one-time equity compensation and IPO-related expenses, net income was $53.6 million, or $0.28 per diluted share.

This compares to $27.8 million for $0.16 per diluted share, based upon 179.2 million in weighted average diluted shares for the third quarter of fiscal 2011. Turning to the balance sheet at December 31, 2011, cash and cash equivalents net of $15.5 million of borrowings under our credit facility were $90.1 million as compared to $30.9 million at the end of the third quarter last year. Inventory at the end of the quarter was $160.8 million as compared to $106.0 million in the third quarter of last year. The 51.7% increase in inventory was primarily due to the increase in net sales in our retail and wholesale segments, as well as the addition of 75 stores since the third quarter of last year.

We expect to spend approximately $95 to $105 million on capital expenditures during fiscal 2012, of which we've spent $56.8 million for the nine months ended December 31, 2011. The majority of these expected expenditures relate to new store openings planned for the year, with the remainder being used for investments in connection with building new shop-in-shops, build-out of our new warehouse and material handling equipment, corporate offices, and enhancing our information systems infrastructure. We ended the quarter with 231 stores, including concessions. We are providing guidance for the first time. On a go-forward basis, we will provide guidance for the upcoming quarter and fiscal year that we are in in our first through third quarterly conference calls. During our fourth quarter call, we will provide guidance for the upcoming first quarter and upcoming fiscal year. Now I will provide an outlook for our fourth quarter.

We anticipate total revenue in the range of $350 to $355 million, with a total company comparable store sales increase of 25% to 30%. We plan to open four stores in North America during the fourth quarter. In the wholesale segment, we anticipate growing doors primarily in specialty shops in Europe, as well as door expansion in North America. We anticipate that the gross margin will contract somewhat in the fourth quarter as compared to the fourth quarter of last year due to normalized markdowns in both the retail and wholesale segments, somewhat offset by the faster growth in a higher margin retail business as compared to the wholesale business. Total operating expenses will continue to include public company costs, including equity compensation expense, professional fees, staff costs, and other expenses.

Excluding the aforementioned one-time charges, total operating expenses grew 66.5% in the third quarter of this year as compared to last year, and we anticipate a higher growth in the fourth quarter as compared to the same period in the prior year as we have a full quarter of public company costs. Assuming a tax rate of 40% and 197 million diluted average shares outstanding, we expect the earnings per share in the fourth quarter to be in the range of $0.10 to $0.12. This implies a full-year net revenue range of $1.27 to $1.28 billion, with gross margins somewhat higher than the prior year.

Excluding the effect of the one-time charges for the nine months ended December 31, which impacted the diluted EPS by $0.09, we expect fiscal 2012 diluted earnings per share in the range of $0.74 to $0.76, assuming a 40% effective tax rate and 190 million diluted weighted average shares outstanding. As John Idol said, Michael Kors Holdings Limited is positioned as a global jet-set luxury lifestyle brand. Our strong balance sheet will enable us to execute our growth strategies, led by the opening of freestanding stores and shop-in-shops globally. Thank you for participating in this call. We will now open the call for questions. Thank you. The question and answer session will be conducted electronically. If you'd like to ask a question, simply press *1 on your touch-tone telephone. Again, *1 for questions.

If you're joining us on a speakerphone, please pick up the handset to allow your signal to reach our equipment. Again, *1. We'll pause for just a moment. First question comes from Kimberly Greenberger with Morgan Stanley.

Speaker 5

Thank you. Good morning and congratulations on a very fine quarter. John, I'm wondering, it looks like the December comparable store sales really accelerated relative to the update that we saw prior to the IPO. I'm wondering if you can talk to us about the performance through the holiday season and how that informs your merchandising strategy here for calendar 2012. If you could just talk about the performance of the 75 new stores that you've opened over the past year and how those new stores are performing relative to your expectations and plans. Thanks.

Speaker 7

Sure. Third quarter was obviously, the performance was excellent for the company. December was quite strong, as you can see from the ending comp results. That was driven by, first and foremost, our luxury leather accessory business, both handbags and small leather goods. We had, again, another very, very strong season with our watch sales in our lifestyle stores. The third area that drove the business was jewelry. Jewelry was excellent for us. We've, I think we've hit on another category that's going to be, quite frankly, explosive. We felt that we, as an organization, executed both from a product level and also from an in-store sales experience. You know, that's a very big focus for us, our whole jet-set initiative on the consumer experience inside of our store. That really paid off for us on all levels.

We think that strategy will remain in place, as you know, going forward on all the stores that we open. The 75 new stores performed basically at or above our plan. I think I had mentioned to you in previous times that we've talked with investors, etc., we actually, over the last three to four years, continue to look at legacy stores, and legacy stores are comping at the same rates as even some of the new one-year open stores. Again, we think that's a testament to first and foremost Michael Kors himself and the designs that he and our design teams put forth, the product in total, the selling experience, and then also, of course, the brand awareness and what our teams are doing from a marketing and communication to our customers, everything from, obviously, our traditional print media to what we're doing with our website.

Lastly, social media, we think we're doing a pretty amazing job with that. You wrap all that together, and I think that's what's driving the business in the stores. Of course, our traffic is up dramatically, continuing on a year-on-year basis.

Speaker 5

Of the 38% comp, would you say the vast majority of that comp was driven by higher traffic and conversion relative to the prior year?

Speaker 7

It's a little bit of both. Traffic's up over 20%, and conversions are up as well.

Speaker 5

Okay. Great. Last question on inventory. It looks like inventory is still growing well below your sales pace, yet your forward gross margin guidance is for some pressure, as you assume normalized markdown rates. Does that feel to you like, likely given the momentum in your business? Does it feel conservative to you? It just strikes us that perhaps we would have seen maybe some pressure in the December quarter on higher sourcing costs and also some normalizing markdowns. The normalized markdowns have been a little bit evasive, and we're just wondering how you're feeling in general about that particular line on your go-forward guidance.

Speaker 7

Yeah. Sourcing costs have not been a significant issue for us to date. Obviously, last year when there was more pressure in the apparel part of the business, in particular the cotton, we did feel it there. In the accessories piece of the business, we have had cost increases, but they've been small relative to our growth and what we've been able to do from a sourcing standpoint. We were one of the very early companies, a few years ago, and we have moved production out of China, and we've done that consistently for some time. That's really not causing pressure. We anticipate more what I call normalized markdowns both at our own full price, our own retail stores, and at the department stores. At this point in time, our guidance would be as Joe had indicated earlier.

Speaker 5

Okay, thanks, and good luck here for spring.

Speaker 7

Thank you, Christina.

Speaker 6

Next up with Goldman Sachs, we have Michelle Tan.

Speaker 3

Great. Thanks. Hey, guys. I was wondering if you, John, if you could give us a little more color on the jewelry opportunity. I know you just launched it, but how big is the business through holiday relative to what you're doing in watches, and how big do you think it can ultimately become relative to the watch category?

Speaker 7

First off, good morning. I'm going to be somewhat careful because I think 9:00 A.M. Fossil's got a phone call, and I don't want to take away their thunder at all. You know, I think we told you guys when we went out on the roadshow, we would ultimately like jewelry to represent 5% of our sales in our freestanding stores. We are well on track to achieve that quicker than we had actually anticipated. We don't know how high is high because we ran out of product, quite frankly, because of the sell-throughs. As you know, in life, the 80/20 rule, it's 80% of our business was done on 20% of our styles. We do believe that business, long term, can, as I said, represent approximately 5% of our business in our retail stores.

I'll let you let Fossil answer how big they think that can be as it relates to a wholesale % to their sales. I think you know Fossil had reported publicly before that Michael Kors will achieve approximately $300 million in shipments from Fossil. Again, we believe that positions this jewelry business to be a very sizable business long term.

Speaker 3

Yeah, that makes sense. I would think that the category potentially is even larger than what the watch category looks like, so perhaps the opportunity could ultimately be even bigger than you guys have laid out.

Speaker 7

Yeah. I'll just say one thing to you. You know, just like we did in the watch business, you know, when we really entered this business with Fossil, who I might add is just an absolutely spectacular partner, you know, we really broke new ground where the average price point of fashion watches was probably 50% less than what we really entered the category at. Again, same thing in jewelry. We're entering in the fashion jewelry business at a much higher price point than is traditionally out there. Again, assuming that the consumer responds and the initial results are that they are, we think we'll actually even create a bit new strata in that business, which will bode well for the whole industry.

Speaker 3

That's great. I think Kimberly asked this already in some form, but my other question was looking at the spring and how you're thinking about the opportunities. Is there anything that you would really highlight for us as being, beyond jewelry, the biggest incremental year-over-year focus for you from a product standpoint, and any initial reads you can give us on how the consumer's responding beyond the obvious holiday gifting period?

Speaker 7

Yeah. As Joe Parsons said earlier, you know, we're looking at 25% to 30% comparable store sales growth in the first quarter, which is, I think by industry standards, I think that still puts us close to best in class. Obviously, to do that, we have to drive that with increased store traffic, which, again, with our marketing initiatives, we think we are absolutely doing. From a product standpoint, we're very pleased with the initial results, again, of our logo. As you recall, we said ultimately we think that business could represent about 25% of our sales, and we saw very, very, very strong results from that category. That would be a driver for us. Secondly is small leather goods. Again, we saw triple-digit comparable store increases in that category. We see that continuing on, and we believe we're very underpenetrated in that classification.

Again, it gives us another reason for a multiple sale to, you know, someone coming in and buying a handbag, we want to sell them a wallet, or if it's a young girl coming in for a, maybe a birthday gift or whatnot. It really gives us an opportunity to talk multiple times to the customer. Those two categories will really help drive some of this comparable store increase, in particular, in the spring season.

Speaker 3

Great. Remind us where the logo category is today for you.

Speaker 7

On the roadshow, we said it was kind of in that 5% to 10% category, and we'd like to get it up to 25%. We're north of the 5% to 10%. We're not quite at the 25%, so we're well on our way to achieving our objective.

Speaker 3

Okay. Excellent. Thanks very much. Good luck, guys.

Speaker 7

Thank you.

Speaker 6

Next up is Brian Tunick with JPMorgan.

Speaker 4

Thanks. Congrats, guys. I guess first question really on the spending side, just trying to figure out where you are from the infrastructure in Europe and Japan, where you are in the key hire ramp-up. John, you mentioned the marketing spend, and I know you talked about wanting to ramp up the spend. Where did that shake out for holiday, either as a percentage of sales or new media? The question on real estate, how many leases have you guys signed already for next year? How are you thinking of them between A and B malls?

Speaker 7

Okay. I'm going to repeat. I think you asked the first off, good morning, Brian.

Speaker 4

Morning, John.

Speaker 7

I think you asked three questions about spend. You asked about infrastructure, you asked about media, and you asked about leases.

Speaker 4

Yes.

Speaker 7

I'm going to let Joe Parsons answer the first one, regarding infrastructure.

Speaker 8

We are in the process now of moving to our new warehouse. It is going to be moved in three phases. We have just completed the first phase, and the other two phases will be sometime during the spring. We have not yet talked about putting the new warehouse management system into this group. We have not done that yet. That will also be coming this spring. Those are the two big things that we are looking at. In terms of other movement, we have moved our Sokakis office into a larger single facility, and we think that we are underway to have kind of the complete infrastructure to continue growing.

Speaker 7

Yeah. Obviously, there are other initiatives from a systems standpoint that are going on in the company. As you recall, again, from the roadshow, you know, this company, when it went public, really wasn't a company that had to go back and then kind of catch up with a tremendous amount of systems and investment. At the same point in time, we said to you, we were going to continue to invest in appropriate systems, from planning systems for the company, from new systems to support our growth in both Europe and in Japan. There is a lot of additional systems work that's going on in the company that we think is a good investment for the management of our business going forward. On the media side, we did intend on and we did spend more on the media during the third quarter.

We didn't get quite up to the levels that we were anticipating, but we do anticipate getting to the more fulsome levels for next year. When I say next year, it really begins calendar year, because we'll start to see more magazine advertising. As I said, we're spending a lot more money on the communications on our website, in terms of email blasts, etc. We are spending a lot of money on social media. Lisa Pomeranz joined us, our company, about six months ago and has really taken us to a whole new platform in terms of where we are on social media. We think we'll break over a million Facebook fans by kind of the May or June time period. We are over a half a million on Twitter fans today.

I believe Michael is now the second largest designer followed on Twitter in the world, which is really extraordinary. We are really building out the staff and infrastructure to be involved with all these different communication areas. We're also beginning to ramp up for e-commerce in Japan and in China, and so there's a lot that's going on behind that to get ourselves ready. You'll start to see all that spending coming on. We don't have as many of the people in place as we had hoped or anticipated at this point in time, but that'll all be ramping up over the next three to six months, as we had told you as we go along. In terms of leases, we're in the same place. Again, I would say that, you know, kind of, 85% to 90% of the leases are all done and in place for our fiscal 2013.

Some of the ones that move around, again, are the European leases, as I mentioned to you. It's not like we're dealing with the large mall developers here in the U.S. You're dealing with individual owners of buildings. We are making very good progress, and we hope to have some very nice announcements for you on that level. U.S., no issues with getting the pipeline filled for our store growth. Europe, it's just a little bit of a different situation where we can't forecast it as accurately. Japan, the pipeline to be able to fill that is not an issue at all. Again, there's over 150 locations and department stores for us to be able to open concessions there.

Speaker 4

Terrific. Thanks so much.

Speaker 7

Okay. Thank you, Christina.

Speaker 6

Next up, we have Robert Drbul with Piper Jaffray.

Speaker 2

Hi. Yes. Good morning. Congratulations, everyone, on a great quarter. I wanted to ask you two quick questions, John and the team. First of all, in the domestic shop-in-shops business, I talked about the strength of that business and how it's helping to drive the productivity. I was wondering if you could just update us again on how many you currently have domestically and kind of what the expectation is for the addition of those shop-in-shops as we go into next year or maybe on an annualized basis. Any compare and contrast in performance between the shop-in-shops and a regular wholesale door? One other question would be on Europe. If you could just help us with the compare and contrast so far in your European business, categories that are performing well there versus North America, any differences that you see would be helpful. Thank you.

Speaker 7

Okay. Great. First off, good morning, Jeff. The shop-in-shops rollout is predominantly North America for the moment. Europe is there, but it's just not as many doors from an opportunities standpoint. As we said to you, we think there's over 1,000 fixturable doors in the U.S., and we're about a quarter of our way there. Now, by the way, in some of those doors, you may have more than one Michael Kors shop-in-shop. You may have a handbag shop, you may have a women's ready-to-wear shop, and you may have a footwear shop. We don't necessarily count that as three, even though you will look at that. When I tell you there's 1,000 fixturable shop-in-shops, there are multiple businesses that we can fixture inside of there.

Kind of staying focused on the accessories piece, the handbag piece, which is the bigger piece, we're about a quarter of the way into that development. As I think I had mentioned to you previously, we think that we'll open up about 100 plus a year for accessory shop-in-shops, and we get a one to three lift, typically, when we put it in a shop into those locations. We will not be reporting on a quarterly basis how many we're kind of tracking on. I just want to let you know that. You can assume that we'll talk annually to a number that we think that we'll attain. I just want to add that number may accelerate slightly because the department stores are having such strong performance from the Michael Kors accessories brand. Macy's, Dillard's, Lord & Taylor, and Bloomingdale's, they're all requesting more shop-in-shops.

There is a chance that number could go up over the 100 by a fair amount. We're looking at that.

Speaker 2

Hey, John.

Speaker 7

Yes, Jeff?

Speaker 2

Just one quick question. Did you say it goes up approximately three times the volume of a regular wholesale door?

Speaker 7

Yes, that's correct.

Speaker 2

Okay.

Speaker 7

That's correct.

Speaker 2

Thank you.

Speaker 7

We actually had a pretty good third quarter in our women's ready-to-wear. Our women's sportswear business was healthy, and we are also seeing shop-in-shop expansion in that business as well. In Europe, from a category strength standpoint, clearly handbags is number one. We believe we were one of the top selling accessible luxury handbag brands in Europe. I'd put us in the top three there. We know what our competitors are doing, and we think we're really performing at a very high level of productivity. We were also very pleased with our women's apparel business, which is tracking very nicely in terms of its development and growth there. We see the opportunity in both of those categories.

Shop-in-shops are a little bit more limited for us over in Europe just because the department store environment is such that there are not as many doors that we will be selling as opposed to specialty stores. As I said to you in the previous meetings, long term, women's ready-to-wear will be a very important business for us in Europe because there ultimately are 1,500 to 2,000 doors that we can be in with women's ready-to-wear throughout Europe.

Speaker 2

Great. Thank you very much.

Speaker 6

Randy Konik with Jefferies is up next.

Speaker 0

Hey, great. Good morning. John, can you just talk, maybe remind us, for those that didn't hear it on the IPO roadshow or what have you, just remind us of what you see as the core consumer for your product. When you talked about the Facebook fans, the Twitter followers, and obviously the strong comps, can you talk about maybe how you see the consumer, what consumer you're adopting, what additional consumer you're adopting, maybe a different older, younger person? Are you seeing any differences in the types of products that the consumers are buying by channel, possibly by the Kors doors versus the wholesale versus the internet? Just trying to get some perspective on the broadening of the consumer set here and the rapid adoption of the brands. Thanks.

Speaker 7

Yeah. Our core customer is really 35 years old. That's our biggest customer, kind of resides in that category. Our second big, call it the 30 to 40-year-old customer, but we kind of use the 35 as the target. Our second biggest category is really that 18 to 25-year-old, which has been the fastest growing category for us over the past three years just in terms of sheer numbers. We believe that, obviously, traditional media and our web business help us continue to drive our core customer. I might add, we are also mailing millions of catalogs a year. I hope many of you have seen that. While that sounds like an old-school methodology, we really see the lift in our own freestanding stores and our web business dramatically when we drop the catalog multiple times per year.

We are going to continue to increase circulation on the catalog and use that. We're going to start to use it in Europe, and ultimately, we'll use it in Japan as well. The social piece is really driving that younger customer into our stores. I believe that we see that Michael's relationship through Twitter and through Facebook, where, quite frankly, it's Michael doing the tweets or Michael putting together different things that he wants to talk to his loyal customers or fans about, really has become a whole issue of engaging that customer and them understanding the brand more broadly than just as another designer brand. We think that has really helped drive that younger customer into the store. We're trying to do that. It's kind of in the 20% range for us. It's not like we're trying to only have a young teen customer in the store.

That's not our goal. We do think it's balanced because as this young woman grows with us, she's going to be a loyal customer in the future. We think it's very, very important how we're marketing, as well as how we're creating the store experience. When the customer kind of puts those two things together, they get that whole jet-set sensibility.

Speaker 0

Do you see any differences in the types of products that the women are buying in terms of the Kors stores versus the wholesale versus the internet?

Speaker 7

Not really, to be honest with you. It's what's also interesting, we don't see it geographically, globally either. There's not a very big difference. Our top selling items are the same in the U.S., in Europe, and to date in Asia, that they are in the department stores and in our own freestanding stores. It's pretty close, and even from an average price point and transaction standpoint, not a whole lot different.

Speaker 0

Great, thanks a lot. Appreciate it.

Speaker 6

In the interest of time, we ask that you please limit yourself to one question. We'll move on to Paul Lejuez with Nomura.

Speaker 1

Hey, guys. Paul Lejuez. Your sales performance was obviously great, but you did mention that you ran out of jewelry. I'm wondering if there were any other spots where you felt you were inventory constrained. If that is the case, how long will it be before you get back in a position that you're happy with? Also, separately, just wondering about price points. How are you thinking about price points next year? Do you have opportunities to take them higher? If you could share your thoughts on that as well. Thanks, guys.

Speaker 7

Sure. I would say jewelry was the, and we did have some, we did run low on certain categories in the handbag world just only because we sold out too quickly. We believe we'll be back in stock, more or less are back in stock as we speak. I think, again, we told you on the roadshow, we kind of on bestsellers can get back into it in, let's say, six to eight weeks time period. I think we've got the, you know, we have best-selling items back in the store. Jewelry, we were actually caught up on deliveries there as well. You can see from the inventories, obviously, we had better sell-throughs than we anticipated, and hence why the inventories are below the sales. You had a, I'm sorry. There was a second question. The first one was on.

Speaker 1

The second one was on price points.

Speaker 7

Price points. We've really, over the last five years, worked very hard to maintain the kind of core price points for us. In the handbag world, it's really the sweet spot for us, kind of the $348 to $398. That's where our big volume comes from. In the SLGs, we're in that $100 to $150 range. Those are our areas. We think that we're not really focused on trying to get expansion, and I've talked to you about this before, of margin, as much as we want to continue to have the customer coming in. We're more interested in getting our UPTs, our units per transaction, up in the stores. We think if the customer has this great experience with what they buy, that we'll get it in gross margin dollars and top line. We're not really focused on margin expansion at this point.

Speaker 1

All right. What percentage of your business is done at that $348 to $398 versus above $398, and how has that changed over time?

Speaker 7

It's remained relatively similar. I'm going to give you an estimate. I apologize. I don't have that number right off the top of my head, but I believe we're doing about 25% to 30% of our business over the $400 category. I'm in the zone there. It's not 100% accurate. Remember, in our lifestyle stores also, we have our collection handbag business. We sell luxury handbags in our lifestyle stores, which are everything from $698 all the way through $5,000. That's real first-line product, everything from the finest skins from around the world to the finest leathers and hardware. We've always had a business in that, and we like that because, again, it pushes our average transaction up in the stores.

Speaker 6

Next up, we have Erica Moshmeier with Robert W. Baird.

Speaker 3

Thanks. Good morning. I'll also add my congratulations on a very strong first quarter out of the gate. First question, could you talk a little bit about apparel and footwear category sales? Have you seen any differences in North America versus Europe, besides I know it's a bigger category in general for you in Europe or has the potential to be? Have you seen any impact on the outerwear and sweaters and boots from the warm weather that we've had?

Speaker 7

Okay. On the Europe side, it's interesting you mentioned that. In Europe, potentially, the ready-to-wear and footwear actually have more door opportunities than we do in handbags from a wholesale distribution standpoint in Europe. That's predominantly, again, because the wholesale business in handbags is really limited to more department stores and a handful of top specialty stores. Most of the specialty stores in Europe focus on ready-to-wear, and they will have limited footwear in those stores or there are obviously footwear specialty stores. In order of how we did in Europe: handbags, small leather goods, outstanding. I might add watches, outstanding. Women's ready-to-wear was really our second category, and footwear was our third category. We're doing well with it. It probably doesn't have the same velocity levels that we have in the U.S., and that's really more of a product differentiator.

The European customer wants a shoe that has a little bit more fashion, a little bit more design into that. I think we've got that balanced for the go-forward. That's really true for us in everything that we do in Europe. Much more fashion-forward customer and much less price-sensitive. They want quality, design, and more fashion than the U.S. customer. That is on that. The impact on outerwear, clearly, like everyone else, the outerwear sales were impacted. We don't ready-to-wear in our lifestyle stores is kind of around 10% of the business, so it was not a huge component. Interestingly enough, we did a lot of business in faux furs, which was a big fashion trend, as I'm sure you're aware.

Our outerwear category, when you look at it from our actual performance, we had an excellent season, but it was more driven by specialty items that were more fashion and less actual wearing to keep you warm.

Speaker 6

Next up with the ISI Group, we have Omar Saad.

Speaker 2

Thanks. Good morning. My one question is really revolving around the brand's positioning internationally. Could you talk a little bit about the brand awareness level in Europe and Japan and the progress you've made in terms of raising the awareness and positioning the brand around this jet-set luxury lifestyle and the work that needs to be done there? In that context, too, given the rise in global travel and tourism, could you talk about your strategy, if you have any, in terms of travel retail? Thanks.

Speaker 7

Sure. I think we've told you before that our brand awareness in the U.S., amongst the group that we study, runs at approximately 70%. That same brand awareness in Europe is around 35%. We've just got recent studies back. I think that answers the question of how much work we have to do. Again, we like that. We think that just shows nothing but opportunity for us to build. Clearly, once we got above that 50%, 55%, 60% in the U.S., you just saw the business trajectory take off, because so many more people knew the brand. That's where we're going to be, you know, considerable more advertising spend that we're putting forward in Europe to help build that brand awareness.

Europe is an expensive proposition because, in the U.S., you have titles or publications or different media outlets, socially, that cover America, where in Europe, the only thing consistent about the EEC is that it's not consistent. We have to do something slightly different in Germany and slightly different in France and slightly different in the UK and Italy and Spain. That actually becomes more expensive on a per capita basis. Again, we're committed to that. We think we've got a very good strategy behind that. Japan is a different story. Michael Kors has a reasonable brand awareness there. It's around 25%, 30%. That was because Aomura Kashiyama had the brand in the marketplace for some 10 years. It's not that Michael Kors is not known, but he was not known as an accessories designer.

As you may or may not recall, we shut the business down in Japan at the end of December with Aomura Kashiyama, started up the accessories business in September of 2010. Now we are positioned on the ground floor of most department stores and/or in the luxury accessories area, which sometimes is on the second floor, next to everything from Gucci and Prada Group and Coach and other brands of that ilk. People in the marketplace don't know Michael Kors as an accessories designer. We believe that is going to take us three to five years to really create a level of brand awareness related to the product that we're most interested in focusing on to make that happen. Lastly, in travel retail, we are having outstanding results. We're in Incheon Airport, Changi Airport, Heathrow Airport. We're opening JFK momentarily.

We have probably about seven other airports that are lined up ready to go, and we'll be opening between now and the end of the year. We are aggressively moving on the airport strategy, and our customers are responding very positively to the Michael Kors luxury brand in that travel setting.

Speaker 6

We now have Karina Friedman with Wedbush Securities.

Speaker 3

Hi there. My question just relates to your current sales trends. It seems like there's an incremental marketing campaign around Valentine's Day with some window advertising. I'm wondering if that's new for this year and if there's any color you can give us on the outlet business. Thanks.

Speaker 7

Sure. We're very proud of our Valentine's Day campaign. Our marketing team did an extraordinary job in putting that together. We literally think there will be millions of people between our own website, Facebook, Twitter, Pinterest, all the different social media outlets that they have really worked incredibly hard to develop this 360-degree campaign. Of course, it's what are you falling in love with? We've actually seen other companies hashtagging our site to actually drive customers to their site because of what's happening with our campaign. I think you can look forward to more of those exciting initiatives. We have Michael's voice. Michael is a real person who is really helping with all this as well. That's been an outstanding thing for us. Our outlet business continues to trend at similar levels to our lifestyle business.

It's been an excellent business for us, and we use that to exit product from our lifestyle stores. We also manufacture for that channel as well. We intend on keeping a lid on that business because we don't want to turn the company into something that it is not, which is first and foremost a luxury accessory company on a global basis.

Speaker 6

This does conclude.

Speaker 7

Sorry, go ahead.

Speaker 6

I'm sorry. This does conclude the conference call question and answer session. I'll turn things back over to Mr. John Idol for any further concluding remarks.

Speaker 7

Thank you everyone for taking the time to join us this morning. We look forward to talking to you on the next call to report our future results. Thank you very much.

Speaker 6

Once again, everyone, this will conclude today's program. Thank you for joining us. Please enjoy the rest of your day.