Capri Holdings Ltd

NYSE:CPRI

Earnings Call Transcript 2019-Q1

[Operator]

Good day, and welcome to the Michael Kors Holdings Limited First Quarter 2019 Earnings Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Katina Metzidakis. Please go ahead.

[Katina E. Metzidakis, Michael Kors Holdings Ltd.]

Good morning, and thank you for joining us for our first quarter fiscal 2019 earnings call. Presenting on today's call are John Idol, Chairman and Chief Executive Officer; and Tom Edwards, Chief Financial and 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.

In addition, certain financial information discussed today will be presented on a non-GAAP basis. These non-GAAP measures exclude certain items related to the company's acquisition of Jimmy Choo, restructuring and non-cash impairment charges, primarily associated with underperforming retail stores. Unless otherwise noted, all information on today's call will be presented on a non-GAAP basis. In addition, all revenue and comparable store sales will be quoted on a reported basis. To view the corresponding GAAP measures and related reconciliations, please view the earnings release posted to our website earlier today at investors.michaelkors.com.

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

[John D. Idol, Michael Kors Holdings Ltd.]

Thank you, Katina, and good morning, everyone. We were pleased with our first quarter results that exceeded expectations for revenue, gross margin, operating margin, and earnings per share. Our revenues were $1.2 billion in the quarter and grew 26% year-over-year. Our gross margin expanded over 200 basis points to 63%, and our operating margin expanded over 300 basis points to 19.4%. Earnings per share of $1.32 grew 65% year-over-year.

We have begun to see the benefits of our long-term growth strategy, driven by our two luxury brands: Michael Kors and Jimmy Choo. The Michael Kors brand grew total revenues 8% year-over-year, while Jimmy Choo's revenues grew 12% on a pro forma basis, demonstrating the strength of our two brands. As a result of our first quarter performance, we are raising our outlook for the year to $4.90 to $5.00, which is a $0.25 per-share increase from our previous guidance.

Turning to the Michael Kors brand, we continued to be encouraged by the progress that we are making on our Runway 2020 plan, which focuses on product innovation, brand engagement, and customer experience. Our customers continued to respond to Michael's fashion leadership and our emphasis on Kors Style head-to-toe dressing, which has helped to increase revenues as our customers continued to engage with our lifestyle vision in both menswear and womenswear. We were encouraged in particular by our Americas Retail results, which returned to positive comparable store sales in the quarter.

Now, turning to product, we continued to increase our fashion and innovation across all categories. In Accessories, Michael Kors Collection saw solid demand for our Bancroft group, driven by the addition of novelty, mixed materials and seasonal color block details. Our on-trend small shoulder Bancroft has been a top seller within the group this quarter.

In our MICHAEL Michael Kors line, the new Blakely group, which was featured in our spring marketing campaign, became a top performer during the quarter. We also saw positive momentum in the new accordion construction of our best-selling iconic Mercer group. We were particularly pleased with the launch of our new Whitney group, which arrived in May and has been a tremendous success. Whitney will be featured in our fall marketing campaign and will add to positive momentum at Retail during the fall and holiday seasons.

In addition, brand ambassador, actress, and fashion influencer, Yang Mi, has partnered with Michael to design a special edition of our Whitney Group. The collaboration was launched this month to coincide with China's Qixi celebration. This launch is an example of how we continue to leverage Yang Mi's star power to increase brand awareness and desirability for the Michael Kors brand among Chinese consumers. Overall, Retail sales and Accessories contributed to positive comparable store sales in the category during the quarter.

Moving to our performance in Footwear, during the quarter, we launched the Tara Group, which was highlighted in our spring marketing campaign and featured leather flowers and Grommet hardware. This new collection helped drive significant revenues. We continued to see strong sales in our core styles, such as point-toe pump, signature flats and fashion wedges.

In fashion active, our Allie and Billie Trainers, as well as our newly-launched knit Skyler booties were all standouts during the quarter. Novelty details in our fashion-active Footwear, which featured floral, perforated and mesh designs, created further engagement with our consumers. Overall, comparable store sales in Footwear increased double digits, showing further acceleration from strong fourth quarter results.

In Women's Ready-to-Wear, we continued to leverage Michael's Runway heritage. As I previously mentioned, our strategic focus on Kors Style head-to-toe dressing has led to continued growth in this category. We also saw strong sales in dresses and outerwear, two strategic categories within this segment. Comparable store sales in Women's Ready-to-Wear increased mid-single digits.

Turning to our Men's business, in sportswear, logo was a popular choice for Father's Day gifting, particularly the Greenwich polo and our knit logo baseball jacket. Refined pieces such as washed leather jackets and lightweight sweaters in Fine Yarns were also top sellers in the quarter.

In our leather goods group, our iconic Bryant collection continued to resonate with consumers, driven by an expanded pebble leather offering. Backpacks remained the number one best-selling silhouette, and our nylon Kent backpack was a top seller in both core solid colors, as well as seasonal camo and palm prints. We've also seen good traction in our newly-launched Henry smooth leather group featured in our latest marketing campaign. Our Men's business continues to grow both in our own Retail and Wholesale channels.

In our Watch and Jewelry segment, our ACCESS smartwatches continued to gain traction. We're excited to announce the launch of the latest edition of our new ACCESS smart watch called Runway. This smartwatch will offer new features such as heart-rate monitoring and near-field communications with the ability to make payments using Google Pay.

While we're encouraged by the growth trajectory in our Smartwatch business, the development of this category is not yet large enough to offset declines in fashion watches. That said, the declines in our Watch business are moderating. Watches comped down negatively during the quarter.

Separately, we remain excited about the launch of our new fine jewelry line this fall, which will be a perfect complement to our Michael Kors luxury lifestyle assortment and provide an additional avenue for growth in the future.

Now, I would like to turn to a new initiative that we are all very excited about. During the fall season, we will be launching our first-ever capsule collection, featured under our new MK Go series. The first is our MK Graffiti capsule which celebrates New York City's street art and its influence on fashion. MK Graffiti just launched last month, and we have already seen a tremendous response to our new black-and-white Graffiti logo print, which put a graphic spin on our best-selling jackets, shoes and bags.

In October, we're coming back with MK Bold, a capsule focused on athletic wear inspired by the current street-style fashion trend, and showcases our new Kors logo products across all categories, men's and womenswear. Both of these collections are expected to help drive our fashion-active Accessories, Footwear, and Ready-to-Wear businesses.

We will be amplifying these collections with engaging marketing campaigns throughout the fall season. These capsule collections should add further sales momentum in the fall and holiday season. I look forward to updating you on the performance of our capsule collections on future calls.

Now, turning to brand engagement, we have approximately 30 million customers in our database globally, which is a 20% increase over last year, demonstrating the continued strength and desirability of the Michael Kors brand.

Our KORSVIP loyalty program now boasts approximately 1 million members in the U.S., and we are working on expanding the program in other regions. More importantly, KORSVIP has been driving consistent increases in both engagement and conversion from loyalty members compared to non-members. Depending on a customer's tier within the KORSVIP, members may receive early access to product, invitations to special members-only events, as well as accrue points by submitting product reviews, creating wish lists and, of course, buying products. Looking ahead, we will be continuing to build our personalization capabilities on our digital flagship site to deliver even more tailored content to our customers, both online and in-store.

On a similar note, we also continue to engage consumers through social media across all platforms. In the first quarter, we grew our global social media audience by 13% over last year, to nearly 43 million followers, reaffirming Michael's position as one of the most-followed fashion designers in the world.

Turning to our stores, we continue to enhance the in-store experience with technology to better connect and engage with customers. Our Kors Connect tool, which, as of this quarter, has been fully rolled out in the U.S. and Europe, provides sales associates with the ability to augment the in-store selection with products available online and in other Michael Kors stores. Kors Connect will also offer enhanced clienteling services, allowing associates to build user profiles and personalized looks to create a tailored styling experience for customers every time they shop with us.

Our stores also continue to be key assets allowing us to both showcase our innovative designs and serve as a destination for consumers to engage with Michael Kors brand, including through exceptional customer service. We plan to renovate approximately 200 store locations to our new luxury concept over the next two years and remain encouraged by the performance of these stores which are outperforming the balance of the chain.

Turning now to regional highlights for the Michael Kors brand during the quarter, in the Americas, revenues increased high-single digits. Americas Retail revenue increased low-single digits with positive comparable store sales, which were up in the low-single digits. The increase in comparable sales performance represents a meaningful inflection point for our Americas Retail business. This better performance was largely driven by favorable response to our fashion luxury assortments across Accessories, Footwear and Women's Ready-to-Wear.

Wholesale revenue in the Americas increased double digits. While a portion of the higher revenue was timing, which Tom will discuss further, we are very encouraged by the overall response to our product in the department store channel.

In Europe, our sales were down low-single digits for the quarter. Wholesale revenue was up mid-single digits, while our Retail sales declined in the low-single digits, as we continued to take steps to decrease inventory and drive higher full-price sell-through.

Turning to Asia, we continued to generate strong growth with revenue up double digits. We continued to expand our presence in the region, opening 24 net new stores since the first quarter of last year. Retail comparable sales increased in the low-single digits, as consumers responded to our fashion assortment. Performance was driven by the strength in Mainland China and Japan, and improved performance in Korea. This was somewhat offset by continued sales declines in Hong Kong and Macau. Going forward, we plan to continue to invest and execute on our growth strategy in the region.

Now, turning to Jimmy Choo, we're extremely encouraged by the performance of this brand during the quarter, delivering pro forma revenues that grew in the low-double digits, led by comparable store sales increases in the high-single digits. These results were driven by robust performance of Footwear, which demonstrates both the strength of the Jimmy Choo brand, as well as Sandra Choi's design leadership.

In Footwear, our high-fashion Mischka and I WANT CHOO logo groups, as well as our new Oakland Sneaker were top sellers in the quarter. From our core 24/7 line, the Romy and Emily remained strong as well. As widely covered by the press, Jimmy Choo dominated the red carpet during this year's Met Gala in May, with 22 celebrities wearing our shoes, including Kendall Jenner, Hailey Baldwin and Jennifer Lopez. Coverage was amplified on Jimmy Choo's Instagram which boasts nearly 8.5 million followers.

In Accessories, we continued to transition to new fashion groups in this category. Accessories remains a strategic focus for us, and we look forward to launching the new Marianne group in the fall. We continue to believe that this category amplification will help lead Jimmy Choo to accelerated growth.

With regard to marketing, Jimmy Choo is launching an exciting new fall/winter campaign focused on boots and booties featuring Joan Smalls, Lily Aldridge and Rosie Huntington-Whiteley. This campaign will also highlight our new Marianne Bag to support our Accessories expansion.

Finally, during the quarter, we expanded our flagship store on Madison Avenue, which embodies all the codes of our most elevated store concept. We also opened nine net new stores during the quarter, and continued to see a strong runway to expand Jimmy Choo's presence, particularly in Asia.

We will also continue to focus on e-commerce where our technology investments have started to bear fruit, driving robust growth in the quarter. We remain very excited about the addition of Jimmy Choo to our global luxury portfolio, and believe that our goal to achieve $1 billion in revenue is on track.

In conclusion, we are well-positioned to continue to drive long-term sustainable growth across both of our luxury brands, Michael Kors and Jimmy Choo, and are excited about our fall and holiday collections.

With that, I'll turn the call over to Tom.

[Thomas J. Edwards, Jr., Michael Kors Holdings Ltd.]

Thank you, John, and good morning, everyone. We're pleased to begin the year with first quarter performance above expectations, delivering net income of $201 million and diluted earnings per share of $1.32, a 65% increase over prior year. We also achieved better-than-expected operating margin for the fifth consecutive quarter, driven by revenue growth and gross margin expansion.

Total revenue of $1.2 billion increased 26% compared to last year. This increase reflects $173 million of incremental revenue from Jimmy Choo and an 8% increase in Michael Kors revenue compared to last year. Michael Kors Retail revenue increased 3%, reflecting nine net new store openings and higher sales from stores not in the comparable store base. Comparable sales were in line with expectations and flat to prior year, with global e-commerce benefiting comparable sales by 250 basis points.

From a regional perspective, we were extremely pleased to see a return to comparable sales growth in the Americas. In Europe, we continued to take steps to decrease inventory and drive higher full-price sell-through, which, as expected, resulted in lower comparable sales performance. In Asia, we continue to drive positive comparable sales as we execute on our growth strategy in the region.

For the Michael Kors Wholesale business, revenue increased 20%. While we expected Q1 growth in Wholesale, first quarter results were above our expectations due to better sell-through and a shift in shipment timing from Q2 that benefited Q1. In the Americas, the Wholesale revenue increase was driven by better sell-through across multiple categories, in addition to the shift in shipment timing. In Europe, revenues increased in line with our expectations, and we are early in the process of resetting the Wholesale base in this region.

Michael Kors Licensing revenue decreased 5% versus the prior year. In Watches, we were very encouraged by the favorable response to our new-fashion slim-line offering, as well as the continued growth in Michael Kors ACCESS smartwatches. However, these results were not enough to offset the continued decline of fashion watches and the transition from our fashion jewelry line to a new elevated fine jewelry collection. We believe our watch initiative, combined with the elevated fine jewelry collection that will be fully in place in the fall season, will position licensing for growth in fiscal 2020.

Now, I would like to turn to Jimmy Choo. As John noted, we're extremely pleased with the performance of the brand. Revenue of $173 million was above our expectations, representing a low-double digit increase on a pro forma basis compared to last year. These results were driven by a high-single digit comparable sales growth, as well as the addition of nine net new stores since last quarter, bringing our total global fleet to 191 Retail stores. In addition, Jimmy Choo also benefited from a shift in shipment timing of Wholesale from Q2 that benefited Q1.

From a product perspective, we continued to see strong momentum in the Footwear business globally, led by exceptional product innovation and resonance of core offerings. In Accessories, we continued our transition to new collections as we begin to significantly expand this business as a key pillar of reaching our long-term revenue target of $1 billion. Given this strong start to the year, we are improving our full year EPS outlook for Jimmy Choo to a dilution of $0.05 to flat.

Now, turning to total company margin performance, gross margin was 62.6%, an increase of 230 basis points over prior year. This increase was attributable to a 170-basis-point improvement in gross margins for Michael Kors, combined with a 60-basis-point benefit from the inclusion of Jimmy Choo. Michael Kors Retail gross margin increased 110 basis points. Michael Kors Wholesale gross margin increased 530 basis points compared to the prior year, reflecting lower costs and reduced allowances.

Total operating expense increased $95 million, including $90 million from Jimmy Choo. As a percentage of revenue, operating expense decreased 150 basis points to 43.2%, reflecting an improvement for Michael Kors, partially offset by a 140-basis-point impact from the inclusion of Jimmy Choo. Michael Kors' operating expense as a percent of revenue was 41.8%, down 290 basis points versus prior year, driven by leverage on higher sales and timing of expenses.

Total operating margin was 19.4% compared to 15.7% last year. Michael Kors' operating margin was 20.2%, an increase of 450 basis points compared to the prior year. Michael Kors Retail operating margin was 15.9%, a 100-basis-point increase versus prior year, primarily driven by higher gross margin.

Wholesale operating margin for the Michael Kors brand was 27%, reflecting gross margin expansion and leverage on lower costs. Licensing operating margin for Michael Kors was 33.5% compared to 47.4% last year, primarily reflecting deleverage. Jimmy Choo's operating margin of 14.3% was above expectations due to higher sales and better gross margin, and was dilutive to the consolidated operating margin by 80 basis points.

Our tax rate for the quarter was 10.2% compared to 16.4% in the prior year, reflecting the expected benefit of the lower U.S. tax rate from the new U.S. tax reform legislation, as well as a tax benefit related to employee equity compensation.

Turning now to our balance sheet, we ended the quarter with $170 million in cash and cash equivalents and $821 million of debt. During the quarter, we repurchased approximately 1.7 million shares for $100 million and have an additional $542 million of availability remaining on our share repurchase authorization.

Capital expenditures for the quarter were approximately $41 million and were related to new store development, renovations and information technology and e-commerce enhancements. Inventory was $697 million, including $147 million associated with the acquisition of Jimmy Choo, compared to inventory of $616 million in the same quarter last year. Inventory for the Michael Kors brand of $550 million was down 11% compared to the prior year.

Now, I'd like to turn to guidance. We are raising our full year EPS guidance by $0.25 to reflect the better-than-anticipated first quarter performance for both the Michael Kors and Jimmy Choo brands. For the full year, we expect total revenues of approximately $5.125 billion, including between $580 million and $590 million of incremental revenue from Jimmy Choo. We expect Retail revenue for Michael Kors to grow in the mid-single digits with flat comparable store sales, Wholesale revenue to decline in the low-single digits, which is an improvement from our prior forecast, and Licensing revenue to decrease in the high-single digits.

We raised our operating margin expectation to approximately 18%. We continue to assume a Michael Kors operating margin in line with the prior year reflecting modest gross margin expansion and slightly higher operating expense as a percentage of sales as we grow the Retail business, as well as approximately 170 basis points of dilution from Jimmy Choo.

Our assumed tax rate is approximately 15.5%. We forecast weighted average shares outstanding of 152 million resulting in a diluted earnings per share range of $4.90 to $5.00. For Jimmy Choo, we now forecast improved full year results and expect lower EPS dilution of $0.05 to flat, which is a $0.05 improvement versus our prior guidance.

We continue to anticipate capital expenditures for Michael Kors Holdings Limited of approximately $250 million, which reflects the opening of approximately 60 Michael Kors stores and approximately 30 Jimmy Choo stores, with a focus on Asia. This also includes renovations to our Retail fleet as part of our Michael Kors initiative to move 200 stores to our new luxury format over the next two years.

For the second quarter, we expect total revenue of approximately $1.26 billion, including between $110 million and $115 million of incremental revenue from Jimmy Choo. Jimmy Choo Q2 revenue continues to reflect robust pro forma growth versus prior year. Q2 Retail revenue for Michael Kors is expected to grow in the low-single digits. We expect comparable store sales to decline in the low-single digits. Comparable store sales growth is expected to remain positive in the Americas and Asia, offset by anticipated declines in Europe.

We expect Wholesale revenue to decrease in the low-single digits and Licensing revenue to decline in the high-single digits. We anticipate an operating margin of approximately 16%, including 240 basis points of dilution from Jimmy Choo. Our expected tax rate is approximately 16.5%. We forecast weighted average shares outstanding of 152 million resulting in diluted earnings per share in the range of $1.03 to $1.08, including anticipated Jimmy Choo dilution of approximately $0.09 to $0.11.

Q2 EPS guidance reflects earlier wholesale shipments of approximately $35 million in revenues into our first quarter and operating expenses of approximately $15 million that have shifted from the first quarter into the second quarter.

With that, I will now open the line for questions.

[Operator]

Thank you. And we'll take our first question from Michael Binetti with Credit Suisse.

[Michael Binetti, Credit Suisse Securities (USA) LLC]

Hey, guys. Thanks for taking our questions here this morning. I just want to ask, in general, is there any way you could help us think about how much Easter impacted the Americas comps in the quarter? I think the comp trajectory from here in the U.S. is – is good to see you guys get back to positive and point that way going forward, just kind of trying to think about how to model the cadence going forward from here.

[Thomas J. Edwards, Jr., Michael Kors Holdings Ltd.]

Thanks, Michael, it's Tom. So, in the first quarter, we did see a little headwind from Easter moving into the fourth quarter of last year. Even despite that, our first quarter Americas comp was positive and our overall comp was in line with our expectations, so we feel great about where we're at in America even with that occurring.

[Operator]

And we'll take our next question from Paul Trussell with Deutsche Bank.

[Paul Trussell, Deutsche Bank Securities, Inc.]

Good morning. Wanted to discuss the Wholesale channel, if you can just provide some detail on what's taking place in the Americas given the very meaningful improvement happening on the revenue and margin front, and if you can just contrast that with what's taking place in Europe and in particular help us understand the list of challenges in the Wholesale division in Europe and the timetable and opportunity you have to improve that business.

[John D. Idol, Michael Kors Holdings Ltd.]

Thank you, and good morning, Paul. This is John Idol. The Wholesale channel in North America feels good to us. The American consumer is healthy and our fashion innovation, which is led by Michael and our design team, is resonating with customers, and we're seeing that across our Accessories business, we're seeing that across our Footwear business, and our Women's Ready-to-Wear business. And even though our Watch business is still challenged, as Tom mentioned, we're seeing things like slim watches really starting to perform. So there are actually some – two 32:00 nice trends happening in Watches: one being the smartwatch trend and particularly the new watch that we delivered, Sofie, and now you see the slim-watch trend happen.

In Accessories, we're seeing very strong results, as I've said before in the earlier prepared remarks, in some of the new collections that we've delivered. So that's really happening both in our Retail stores and it's also happening in our department store channel. Our full-price sell-throughs continued to get better. We've now anniversaried the promotional cadence inside both our own Retail channel and the department store channel and the trend feels good. I think that you can see by the performance of certain department stores that have reported, their trend is good as well, so we're seeing traffic inside the stores.

The declines that we had seen previously are beginning to become mitigated, and we're getting growth on the e-commerce side. So, I would tell you, inside the U.S. market, we feel good. We're seeing very nice reorders. That's a large part of what you saw in terms of the shift between Q2 and Q1 and also, we're a little light in inventory in some of our department store channels, so we actually needed to ship some merchandise a little earlier. We have, as you know, planned our inventory down and sales up slightly in most channels, and we're getting that through conversion and AUR, et cetera. So all that seems to be playing out in an environment that feels healthy to us in North America. We also commented that there was reduced allowance expectation, and that's really just a result of better full-price sell-throughs.

In Europe, there's a different picture, and I'll first talk about our own Retail channel. If you look at the overall Michael Kors inventories, which Tom discussed in his prepared remarks, it's down about 10%. And in Europe, that decline is actually high-double digits, which is really a very, very aggressive place to be in terms of inventory reduction. We've told you in the past that we take very seriously our desire to have some more scarcity of product which we believe creates more desirability. And we know that takes about a year, sometimes as long as a year-and-a-half to kind of really get foothold, and you saw us go through that process in North America. We got there a little quicker quite frankly in North America than we had anticipated. And so in Europe, we anticipate that we're going to see declines in our own stores through the balance of the year. And really, if you look at the delta between the low-single digit declines that we had in Europe versus the double-digit decline that we have in inventory, that's just better sell-throughs, and we like what we're seeing.

We're going through the exact same process in the department store channel where we are reducing the amount of sell-in, and we are starting to see some reorder happen. And the same thing, and we've got a little lean on inventory, so we moved some shipments up a little bit to freshen up the stores a little earlier than we had initially anticipated. So, again, we're on track, but I would tell you that it'll take through the balance of our fiscal year until you see the Retail business for us in Europe return to positive growth.

Thank you, Paul.

[Operator]

And we'll take our next question from Alexandra Walvis with Goldman Sachs.

[Alexandra Walvis, Goldman Sachs & Co. LLC]

Good morning. Thank you for the question. I wonder if you could help us to understand within your Retail business whether there was any material discrepancy in performance between your full-line stores and the outlet stores? And a related question, have you seen a material change in tourist trends through the quarter versus the prior quarter, and what are your expectations for this? Thank you.

[John D. Idol, Michael Kors Holdings Ltd.]

Well, good morning, Alexandra, and thank you. Alexandra, we're really pleased with what happened for the Michael Kors brand and the Jimmy Choo brand in the first quarter. And while some of that was attributable to a shift, which I think we indicated of about $35 million in Wholesale shipments – while that's a number, it's not a gigantic material number. And really what you saw during the quarter is, you saw better performance in our Retail stores both in Michael Kors and in Jimmy Choo, and that creates leverage for us, so we're very pleased with that.

We saw similar kinds of performance in both full-price and in outlet. We performed a little bit better in full-price than where we've been in the past, which was encouraging for us, and that was really led by, in particular, the arrival of some of the new Accessories collections. And again, we're starting to get more visits from customers because of our Ready-to-Wear and our Footwear business where the purchase cycles are more frequent. So we're really pleased with what's happening there, with strong double-digit growth in our online business, which I think is a real tribute to everything that we talked about in the call – from Kors Style to improvements that we're making in terms of the ability to customize products on our website.

And, of course, we're very pleased with our KORSVIP numbers. We didn't ever think that we would be this far along with our VIP program, so that's really helped accelerate some of our full-price business, and we feel very, very good about that.

In terms of tourist, I would tell you the inflections for us were as follows. The business in Europe was softer than we had anticipated and had seen last year. We're seeing a shift, in particular in some of the Chinese tourists, where more of that shopping is happening actually in Asia; so whether it's Japan, we talked about improvement in Korea, and our business in Southeast Asia is also performing very nicely.

We also saw some very, very strong performance in our airport and duty-free business during the quarter. So, we think that it's the geography of the mix of where, in particular, the Chinese consumer is shopping. And we anticipate some recovery in the European markets, in particular as oil prices rise with the Middle East customers, and some of other consumers who come into the marketplace. So we feel that we're in a good position to really capture that tourist, whether it's in their local markets, traveling through airports, or duty-free locations in both cases.

Thank you very much, Alexandra.

[Operator]

And we'll take our next question from Kimberly Greenberger with Morgan Stanley.

[Kimberly Conroy Greenberger, Morgan Stanley & Co. LLC]

Great. Thank you. Great quarter, guys. I wanted to ask if you could give us the constant currency comps by geography. And then, John, your comments around the store remodels and that those stores that have been remodeled are outperforming, I'm wondering if you can just discuss that a little bit more and if you have any kind of magnitude of outperformance just to help us understand what's happening there, that would be great.

[Thomas J. Edwards, Jr., Michael Kors Holdings Ltd.]

Hi, Kimberly. It's Tom here. Regarding the constant currency comps, as we noted at the beginning of our scripted comments, we'll provide our revenue and comparable sales on a reported basis, so we won't be providing the constant. However, if there are material changes or any implications, we'll certainly highlight them as we move forward.

[John D. Idol, Michael Kors Holdings Ltd.]

Kimberly, the store renovations have been very encouraging for us, and I think we've talked about two things: Number one, if you've been out to whether it's our store in New Jersey or in Short Hills Mall or some of the new – or Roosevelt Field or some of the new stores on the West Coast in Century City of Beverly Center, what you'll find is a much more robust presentation of Footwear and Women's Ready-to-Wear and, in some cases, these stores now have menswear. So, what we're seeing for us, two things. Number one, we're actually seeing a more affluent customer shopping our store. That was so encouraging for us because these are obviously affluent markets that these remodels have occurred in, and we can see the demographics of that customer improving, number one.

Number two is, we're seeing more consistent visits to the store by the same customers than we've seen in the past. And the third thing we're seeing is higher conversions. So these stores are performing, in many cases, anywhere from high-single digit comp to double-digit comp where the chain is, as you know, in North America is in the low-single digit comps. So we're very, very pleased with that. And part of that is also the excitement of seeing the whole Kors Style pull together.

As you know, many of our stores in the past were more predominantly focused on our Accessories categories. And we have two very strong categories that we reported on to you being our Footwear category and our Ready-to-Wear categories, which are outperforming quite frankly the chain in terms of comp performance, and that's being offset, unfortunately, by our Watch business. But we think long term, as we continue to build those categories out and our growing men's business, we're going to give another reason for the customer to come to our store more frequently.

So we'll report to you further as we get more stores opened. We'll start to open some stores in some B and C markets. We're starting to open some of these stores internationally as well, so it's not just North America. And we're seeing similar results in those marketplaces. And so, overall, we feel very good that over the next two years, this will be one of the few things that we'll be talking about that will really help to move the needle for us on comp store sales improvement.

Thank you, Kimberly.

[Operator]

And our next question comes from Lorraine Hutchinson with Bank of America Merrill Lynch.

[Lorraine Corrine Hutchinson, Bank of America Merrill Lynch]

Thank you. Good morning. I wanted to follow up on the Americas Wholesale business. When you were guiding the year, you talked about a sharper decline in 3Q as you continue to improve the quality of sales. Given the better performance, are you still expecting that, or do you think that you can grow the Wholesale business over the holiday period in spite of removing some of the promotional activity?

[John D. Idol, Michael Kors Holdings Ltd.]

Good morning, Lorraine. Lorraine, I'll take this in two parts. I'll answer it from a sell-through perspective, and I'll let Tom talk about the actual performance in terms of our revenues. What we said on our previous calls was that we were so encouraged by what happened last holiday season that we actually thought we could turn the inventories even faster at Wholesale by having reduced inventories and going after better sell-throughs at full-price. We continue to see that happen. So the plan is, we are planned up with almost every one of our Retail partners up at Retail in terms of Retail sales performance and we're planned down in Wholesale. So we want to turn the inventories faster, we want to have also higher full-price sell-throughs. So our position has not changed on that.

You did see in retailer Q1 and retailer Q2 better reorder performance that delivered higher Retail sales for them and higher Wholesale sales for us. We certainly are encouraged that that could potentially happen again for the third -- Q3 and Q4, but we're just not prepared to say that that would end up making the performance on a positive comp basis for the year, but I'll let Tom talk to the magnitude.

[Thomas J. Edwards, Jr., Michael Kors Holdings Ltd.]

Sure. And, Lorraine, when we look at the full year, we come into the year with guidance of Wholesale down mid-single digits for Michael Kors. We've now improved that to down low-single digits and, as John mentioned, it's really due to the improved sell-through in Q1 and flowing through to the year. There was some shift in timing from Q2 into Q1 of about $35 million, but even beyond that, we're comfortable enough that we were raising our outlook for the year for Wholesale.

[John D. Idol, Michael Kors Holdings Ltd.]

Thank you, Lorraine.

[Operator]

And our next question comes from Brian Tunick with Royal Bank of Canada.

[Brian Jay Tunick, RBC Capital Markets LLC]

Thanks. Good morning, guys. I guess two questions. One, John, maybe curious on your views on where you are on AUR recovery. I know that's been a big selling point, curious your vision between the U.S. and Europe, where you are in AURs. And then maybe you guys are significantly ahead of what you laid out for your Runway 2020 plan regarding the Michael Kors brand margin. So just curious what the puts and takes are regarding the Michael Kors brand margins maybe getting back into the 20s sooner than you guys expected. Thank you very much.

[John D. Idol, Michael Kors Holdings Ltd.]

Brian, AURs continue to be a positive for us, in particular, in our own Retail stores. We've always had the capability of selling higher price-points, and we're seeing that continue to be a driver for us. While traffic still remains down in the Retail store channel in North America in particular, that is being made up traffic-wise per se online. So our traffic is growing dramatically online, double-digit, and you can see that also in our customer base, you can see that in our social media followings. And so, we're getting it on conversion in our own stores, we're getting it on AUR, so there's a lot of just really good things positive and response, and I think that's also part of the fashion cycle.

The customer wants more fashion. The days when you could only have basic products in your store are, I would say, somewhat behind us. She wants novelty, she wants innovation, she wants differentiation, and what we're so proud of is that Michael and the design teams are really, really delivering that for us.

I also have to give a shout-out for our Jimmy Choo brand as well, which is same thing. We're seeing great sell-through on our products and improved sell-throughs, and that's really related to Sandra's design leadership and what we're seeing there. I mean, we comped up high-single digits. That's a pretty impressive number, at least in my assessment for a luxury brand today. Obviously, there are some that are comping much higher than that, but we feel like we're really in a leadership position in our luxury Footwear business and then, of course, we're excited about what's going to happen there in our Accessories as well.

In terms of the Runway 2020 brand, I'm just going to talk a little bit about where we are in the process, and I'll let Tom talk about the margin expectations. We are absolutely ahead of where we thought we'd be at this point in time, and you're seeing that on kind of all metrics. You're seeing that on Retail sell-throughs. You're seeing that on the way the consumer is responding to us. You're seeing that on margins because that's a reflection of what's happening at Retail, and there's definitely a movement that customers are looking at us for fashion and style leadership. So, I'm really pleased with what's happening there.

I also want to mention that our designer part of our business, our collection piece of our business, has also been getting some improved traction. Michael is very focused on that. We're going to be talking about some innovative store openings around our collection business where we think there's opportunity for us on that as well globally. So I would tell you that where we sit today with Michael Kors and Runway 2020, we're very pleased with how we've executed and the results and the consumer response to the product categories. And as we said, we're seeing that in Accessories, Footwear, Women's Ready-to-Wear and brand strength of men's is – while it's still small to the total company, it continues to grow.

I'll turn it over to Tom about the margins.

[Thomas J. Edwards, Jr., Michael Kors Holdings Ltd.]

Brian, just a little perspective. Right now, we're nearly 400 basis points ahead of where we had expected to be when we first rolled out Runway 2020 just a little over a year ago, and we're right on that 20% margin level. We've noted that we're going to be holding that for this year for Michael Kors with a little perspective on gross margins slightly stronger, SG&A costs a little higher as we expand the Retail business. But just in this quarter, we felt comfortable enough about performance to increase this year's guidance on operating margin from 17.7% to 18% for the year. So feeling good about the progress we've made.

Of course, as we move forward, sales growth or more improved sell-through could provide upside, but overall feel great about the position that we're at and where we're at in relationship to Runway 2020 in our expectations.

[John D. Idol, Michael Kors Holdings Ltd.]

Thank you, Brian.

[Operator]

And we'll take our next question from Omar Saad with Evercore ISI.

[Omar Saad, Evercore ISI]

Thanks for taking my question. Great job on margins, guys. John, I wanted to ask you about – we've seen a lot of strength in the European luxury brands the last few quarters, especially around innovation and newness. And it doesn't seem like it's translating quite as much as maybe we would have expected into the more of the aspirational segment where you and others compete. And a lot of that – and I know you guys have been focused on newness as well, so two questions in one here. Do you have any thoughts on why maybe it's not trickling down the way it has in the past? And then also, I think you guys were 65% newness for the quarter or for the season rather. How are you thinking about newness? How is newness performing, and how are you thinking about that kind of ratio in the future seasons? Thanks.

[John D. Idol, Michael Kors Holdings Ltd.]

Good morning, Omar. Omar, I'd like to start out by reminding you and everyone on this call, we do compete in the luxury sector with Jimmy Choo in particular. And as I mentioned just a minute ago, our performance, we think, is very solidly at the top-end of the range. Clearly, there are a few competitors who are putting on some incredible comp store increases, and that's because of great product innovation, consumer desirability, and so we take our hats off to those companies because they're doing a terrific job. That being said, there are a handful. We believe our Jimmy Choo brand is quite frankly ranking in the upper-tier of performance of luxury companies globally which we're very, very proud of.

Secondly, as it relates to Michael Kors, we both compete in the accessible luxury area and we compete in the luxury area with our Michael Kors Collection brand. I think with us, we were very candid and said that we didn't think that our product innovation and some of our new launches were quite frankly compelling enough for the consumer so that it created desirability. I think we feel much better about where we are on that. I wouldn't sit here and tell you that we can reach the levels of the two or three or four competitors in the luxury space who are running high-double digit comp store growth. We just don't think that's a level that we'll be able to achieve.

We do believe that in fiscal year 2020, we will return on a global basis to positive comp store sales in all regions. And so I think that if we can get our business turned around in Europe, which we are very focused on, I think that our performance, again, would rank probably in the middle of the pack of the real luxury players on a global basis. So, that's what our aspiration is.

And I would also tell you that when you look at our company and look at our operating margin performance, we're very much at the top of the pyramid in terms of where our operating margins are, and I'm very proud of our revenue growth. We had an extraordinary high-double digit growth rate for the company. And so when you look at all those metrics, we're starting to perform as a group, not exactly at the level of some of our very, very key competitors, but we're in a good place.

We believe, for the year, based on the high-end of our guidance that we'll be high-single digit comp revenue growth and we believe that we will potentially have double-digit earnings per share growth. So I think that that is an indicator of how the group is performing and how consumers are responding to our products globally.

Thank you, Omar.

[Operator]

And we'll take our next question from Simeon Siegel with Nomura Instinet.

[Simeon Avram Siegel, Nomura Instinet]

Thanks. Hi, guys. Good morning, and congrats on the strong start to the year. John, so to your point about being light and clean on inventory, with the $35 million of Wholesale shipment timing, was that in a specific product category or was it broad-based? And do you have a view whether that was just a pure timing shipment or whether it was more a function of just shipping earlier due to the strong customer demand? And if so, is it something you could potentially chase if that sell-through continues? Thanks.

[John D. Idol, Michael Kors Holdings Ltd.]

Yeah. Simeon, there's two things. On the inventory, the inventory reduction is something, as we've said before, it's planned, and it was planned predominantly – Europe is the biggest piece of the inventory reduction for the company – although there is some inventory reduction, yeah, here in North America. As I said earlier, part of that "timing shift" is reorders that we just got earlier than we had anticipated. And the second piece is some shipments that we moved up because we wanted to get some additional early deliveries into the stores, which we're very pleased about because they're performing for us.

So while it's a timing shift between Q2 and Q1, when you put the two quarters together, I think you'll see that we're really outperforming in the front half of the year to a pretty significant level, and that's why we're carrying forward our $0.25 increase in earnings per share guidance for the year, which we feel really sets us up nicely. And hopefully the performance on the back half of the year will possibly do better than we have anticipated, but we obviously won't know that until we get into the holiday season. As I said earlier, I don't think the magnitude of this is all that great.

And in terms of being able to chase things, we're going to try and do some of that because we clearly are – probably a little light on inventory as a company. You will see us also with fairly significantly reduced inventories in Q2 also. So we've already kind of course-corrected a little bit and we'll be in a better position for Q3 and Q4 with our inventories. As I said, some of the sell-throughs just happened a little quicker than we had planned.

Thank you, Simeon.

[Operator]

And our next question comes from Camilo Lyon with Canaccord Genuity.

[Camilo Lyon, Canaccord Genuity, Inc.]

Thanks. Good morning. Also, my congrats on a good start to the year. John, two questions. First, on the watches category, it sounds like there's a modest improvement although – albeit still a drag from the fashion component. Could you just maybe detail how you think the ACCESS mix will end up by the year because I think in the past two years, the watch decline has accounted for about half of the comp declines, so I'm just trying to get some color on how that should unfold as that ACCESS mix improves?

And then just secondly, on the capsule collections, sounds like you're seeing some nice traffic in conversion increases from this effort. How should we think about the frequency of these capsule collections that you expect to launch throughout the year?

[John D. Idol, Michael Kors Holdings Ltd.]

Thank you, Camilo. A couple there, the watches – obviously, Fossil reported yesterday – so, watches, it's kind of similar. We're running about 25%, 30% of our business in smartwatches. I can't sit here and tell you, but maybe one day it'll be 50% of the Watch business because remember, there's a lot of different things that we can do to the watches that qualify them for smartwatches.

I have to say, the partnership with Fossil is spectacular. They are a leader, clearly, in this area as a company. I have to also say that our relationship with Google is incredible. They're an amazing partner, working with us on new technology, on expanding existing technology that they have that we can bring to the watch. I think you're going to continue to see this device be used by people for a number of different activities. And this payment with the near-field communications, this is not a small issue. As you know, many people run out of offices today, they go out to dinner and they may not want to take a wallet with them or other devices, and so therefore, by having more functionality in the watches, we believe that we're going to continue to grow that business.

And we think – we all know who the big leader in this is. But we think we're right up there. We think we're possibly number three in the world in terms of a singular brand in this area. So it is a very, very serious commitment on our part and by Fossil's part. And that being said, we are not backing away one iota from the fashion watch business. I encourage you to go and see our stores come fall season. We will have really, really changed – I think it's almost 90% of the entire watch assortment will be changed out for fall season. And we've made a major, major push to take old styles out of the assortment, discontinue them, and really deliver the customer a new fashion presentation.

So we're kind of excited about that. And, as I said, the declines are moderating. And we have seen weeks, in particular, in the department store channel where we're comping up. So, again, I don't want to call a line in the sand. We are in our minds – we have a goal and we'd like to be positive comp in watches for next year. Again, I can't sit here and definitively tell you that's going to be the case, but that is our internal thinking. And also, from a category standpoint, we're also being hurt by the discontinuation of our fashion jewelry line inside the stores. We know that's the right thing for us to do. The new fine jewelry line has arrived, and again it's only a few weeks in the store, but the initial results – sell-throughs are quite encouraging both in the United States and in Europe.

So we're hopeful that that will between the new fashion deliveries in the fashion watches, and the jewelry, as well as – obviously, we've got a pretty strong trend going in smartwatches, we have a chance next year getting this category turned around for the company.

Lastly, on the capsule collections, really excited about what happened. We've put it in to our stores a couple of weeks ago and 25%-types of sell-throughs on certain items in the store. Certain items are sold out already. So what we like about the capsule collection is it's almost like a limited-edition type of situation. You need to get in. You need to get the pieces. If you don't get the pieces, they're not going to be there for you.

Now, this first capsule collection was launched exclusively in our stores, and then we will start to broaden that slightly as we go forward. But again, it's going to be about limited edition, in and out. And the current capsule collections are based more around the sport fashion trend which you know is super-hot right now. And we've always kind of been there with our active footwear, but now we've got Ready-to-Wear and certain bags to go along with that.

So, thank you very much, Camilo.

[Operator]

And we'll take our last question from Randy Konik with Jefferies.

[Randal J. Konik, Jefferies LLC]

Yeah, thanks a lot. So, you guys are doing a great job of controlling that inventory, the newness, leading to more full-price selling. And it looks like the gross margin picture for the company is going to be very strong and solid and predictable over a sustainable time period. Tom, you mentioned that there's going to be slight SG&A deleverage or SG&A as a percent of sales go up a little bit for the year. How should we be thinking about the medium-term SG&A rate in terms of long-term structural trend line for that part of the business, because it holds back the operating margin somewhat, but it seems to be an opportunity where you're starting to kind of turn the corner over time on SG&A in terms of lowering that as a percent of sales? So just give us some – since we have a really good picture of where the gross margin can be sustained at, just want to get some color on where we can start thinking about penciling in over the next couple of years of SG&A and as that would look as a percent of sales. Thanks.

[Thomas J. Edwards, Jr., Michael Kors Holdings Ltd.]

Well, thanks, Randy. So I'd just start with overall, our margin, we're really pleased with it. It's in a great spot. And as you mentioned, we expect modest gross margin expansion this year and a little bit higher SG&A as we roll out Retail. As we said before, we look to move from a mix of about 60% Retail, 40% Wholesale for Michael Kors to 70% Retail and 30% Wholesale over time, so I'd let you model that out. But we believe that we're in a good spot to be able to lever as we grow sales and lever that SG&A.

[John D. Idol, Michael Kors Holdings Ltd.]

Thank you, Randy.

[John D. Idol, Michael Kors Holdings Ltd.]

In conclusion, we were very pleased with our strong first quarter performance and encouraging start to fiscal 2019. We remain excited about the progress we are making across our strategic growth initiatives at both Michael Kors and Jimmy Choo. Additionally, we will continue to use our strong balance sheet and cash flow to repurchase outstanding shares as well as look at potential strategic luxury acquisitions.

I look forward to giving you further updates on our next earnings call. Thank you very much.

[Operator]

And that does conclude today's conference. Thank you for your participation. You may now disconnect.