Christina Coronios - Michael Kors Holdings Ltd. John D. Idol - Michael Kors Holdings Ltd. Thomas J. Edwards, Jr. - Michael Kors Holdings Ltd..

Lindsay Drucker Mann - Goldman Sachs & Co. LLC Omar Saad - Evercore ISI Oliver Chen - Cowen and Company, LLC Simeon Avram Siegel - Nomura / Instinet Kimberly Conroy Greenberger - Morgan Stanley & Co. LLC Randal J. Konik - Jefferies LLC Brian Jay Tunick - RBC Capital Markets LLC.

Good day, everyone, and welcome to the Michael Kors second quarter 2018 earnings conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Christina Coronios, Director of Investor Relations. Christina, please go ahead..

Good morning and thank you for joining us for our second quarter fiscal 2018 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 and the acquisition of the Greater China licensee.

You may identify these non-GAAP measures by the terms adjusted and non-GAAP. 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 Michael Kors Chairman and Chief Executive Officer, Mr. John Idol..

the Lori boot and Sherry studded cage sandal. Additionally, our new Alice ballet flat which features our iconic lock charm was among our top sellers in the quarter. Lastly, our elevated active assortments continue to resonate with consumers.

The Allie sneaker with its glamorous metallic accents and mixed materials was a strong seller during the quarter. Turning to women's ready-to-wear, we continued to make strides in growing this category as we leverage Michael's fashion leadership and runway heritage.

Global comparative sales increased double digits in this category during the quarter as consumers continued to respond to our elevated and expanded offerings, including romantic details such as florals, ruffles and lace. Embellishments such as iconic studding details were also well received.

In addition, we capitalized on the strong sweater dress trend, offering expanded array in the variety of seasonal styles and colors. In our men's business, sportswear and luxury leather goods continued to exhibit strength in the quarter. New and unique design elements drove the largest increase in our men's sportswear category.

The injection of elevated product across categories, particularly in our knitwear, lightweight sweaters and fine gauge yarns and layering pieces such as jackets and Napa leathers, were some of our best sellers. In leather goods, backpacks remained the number one selling silhouette.

Our iconic Bryant, Harrison and Odin leather collections continued to be top performers. Men's sportswear and leather goods are an important and growing category for us, and we will continue to build on the positive momentum with a goal of reaching $1 billion in sales over time.

In the Watch category, we continued to drive innovation with the introduction of our new Sofie Access smartwatches during the quarter. Lightweight and feminine with a pavé bezel and a full round display, Sofie generated excitement among consumers and is now the top-selling watch in our stores.

We believe that the Michael Kors brand is well positioned to be a leader in the fashion smartwatch category as we excite and engage consumers who are interested in incorporating both fashion and technology into their lives.

Looking ahead to the 2017 holiday season, we will build on the positive momentum in our Bancroft collection, introducing new colors and textures. Additional innovation and fashion layering will be injected into the MICHAEL Michael Kors accessories assortments where we expect to increase the level of new offerings for holiday to approximately 50%.

We will introduce the Bristol Group, a top-handled bag crafted from rich pebbled leather and embellished with grommeted side ties and a removable lock and key detail. Bristol will be featured in our national ad campaign. In addition, we will debut our new tote group, the Voyager, which is an evolution of the iconic Jet Set tote.

In footwear, holiday offerings will emphasize feminine detail and embellishments including glitter, ruffles, sequined bows and stars. Finally, in ready-to-wear, we are excited about the opportunity to build our significant momentum in this category.

We broadened our holiday assortments with a mix of feminine and flirty party options as well as a focus on novelty embellishments and shine as our customers dress to celebrate the holiday season. Turning to brand engagement, we continue to deepen our connection with consumers and create excitement for our brand globally.

In September, Michael debuted his Spring 2018 Collection at New York Fashion Week to overwhelmingly positive reviews. Our front row featured a high wattage array of global celebrities including Nicole Kidman, Naomi Watts and Catherine Zeta-Jones, as well as our newly-appointed brand ambassador, Chinese actress Yang Mi.

As our first ever Michael Kors brand ambassador, Yang Mi is a great fit for our luxury house. She epitomizes effortless glamour. Additionally, she is one of the most influential trendsetters in China right now with more than 70 million followers on Weibo.

Social media is a cornerstone of our communications efforts and remains a principal focus in deepening our connection with consumers. We are pleased with the continued growth in both our total followers and engagements across all social media channels. We now have over 38 million followers across all our social channels.

Looking ahead, we have an exciting collaboration planned with Google for a 360-degree marketing campaign to support Access smartwatches. The campaign will feature television advertising that will run during the holiday season. This will be amplified by marketing in print, outdoor and digital channels globally.

We expect this exciting global marketing campaign will further heighten the demand for our Access smartwatches and ensure they are top of mind during the holiday gifting period. Moving to customer experience, we continued to elevate our digital flagships and our store fleet.

We are seeing strong momentum in our digital flagships, particularly as we add additional features and capabilities. Earlier this year, we launched our online dress shop, with favorable results. In the second quarter, we continued to build on that positive momentum, driving incremental growth of ready-to-wear sales on our digital flagships.

In our stores, we are in the initial stages of renovating approximately 100 locations globally as part of our Runway 2020 initiatives. Our new retail concept reflects a refined take on glamour in a modern and engaging environment.

This new concept will feature salons that showcase our accessories, footwear, womenswear, and menswear collections, while enhancing our sales associates' ability to provide consumers with a unique and elevated styling experience. While we have a limited number of stores that reflect this new design concept, we are pleased with the initial response.

I look forward to sharing more details about our fleet renovation plans with you in the coming quarters. Now turning to the financial highlights from the second quarter, our results exceeded our expectations. Total revenue was $1.15 billion, an increase of 5.4% over last year.

Retail comparable sales decreased 1.8% and adjusted earnings per share increased approximately 37% to $1.33. In the Americas, total revenue increased approximately 1% in the quarter. Retail net sales in the region were flat, with comparable sales declining in the mid-single digits.

The momentum in our digital flagships continued, with a double-digit increase in comparable sales in the quarter. Our strategy to reduce promotional activity resulted in 40% fewer days on promotion, which negatively impacted our comparable sales.

However, we benefited from increased AURs in our digital flagships and lifestyle stores, driven by mid-single-digit growth in accessories and double-digit growth in our ready-to-wear. We attribute the higher AUR to strong consumer response to the elevated product newness and innovation as well as reduced promotional activity.

Wholesale net sales in the Americas increased 2.3%. We saw increases in AUR across women's accessories, footwear, and ready-to-wear, driven by positive consumer response to our more elevated and layered fashion offerings as well as 46 fewer days brand-wide promotionally as compared to last year. Moving to Europe, total revenue increased 9.2%.

In the retail channel, net sales grew 17.5%. Comparable sales were approximately flat on a reported basis and declined in the mid-single digits on a constant currency basis. Including e-commerce sales, comparable sales would have increased in the low single digits on a constant currency basis.

This performance exceeded our expectations, as our elevated fashion offerings generated even greater excitement among consumers than we anticipated. Ready-to-wear and footwear offerings were also well received in the quarter, with comparable sales growing in the double-digit and high single-digit ranges respectively.

Europe wholesale net sales were essentially flat in the quarter, as the continued strategic reduction in shipments related to elevating our brand positioning was offset by favorable foreign exchange rates.

Turning to Asia, net sales grew 30.4% in the quarter with retail net sales up 31%, driven by new store openings and positive comparable sales growth. Comparable sales, which now include China, grew in the mid-single-digit range on a reported basis and in the high single-digit range on a constant currency basis.

The accessories category performed well in Asia during the quarter. We continued to deepen the level of fashion and luxury layering in our accessories assortments, including the introduction of our Bancroft group from the Michael Kors collection as well as Sadie from the MICHAEL Michael Kors line.

Additionally, Mercer, Selma, and Sloan collections continued to be among the most popular styles. In China, our structured cross-bodies, including our Sloan Editor and Mott collections were particularly popular among millennial consumers. Asia wholesale net sales increased 27.2%. We continue to see strong performance in Mainland China and Japan.

Hong Kong and Macau remain challenged, but began to show signs of improvements in the quarter, while South Korea continued to be impacted by the decline in Mainland Chinese tourists.

Overall, we are pleased with the performance of our Asia business and continue to invest in our retail network as we build on the positive momentum in this growing region. Finally, in our licensing business, revenue decreased approximately 2% in the quarter.

Access smartwatches continued to perform well, particularly the introduction of our new style, Sofie. However, the fashion watch category continues to be challenging, and we expect continued sales declines through the fiscal year in our total watch category.

In fragrance, we expanded our successful business with the global launch of our new fragrance pillar, Sexy Ruby. Finally, in eyewear, we continued to focus on developing our optical collection with a fashion point of view. Sleek metal designs and fresh modern shapes continued to generate excitement among consumers.

In sunglasses, mirrored lenses continued to be top performers across a variety of shapes, including our iconic aviators. We also saw a positive response to an expanded array of shapes, including glamorous oversized squares and cat eyes. In conclusion, our second quarter results reflect the traction we are gaining on our Runway 2020 strategic plan.

However, fiscal 2018 remains a year of transition for the Michael Kors brand, as we are still in the early stages of executing our initiatives. And we look forward to providing you with updates on our progress in the coming quarters. With that, I will turn the call over to Tom..

total revenue of approximately $4.59 billion including between $215 million and $225 million of revenue from Jimmy Choo; comparable sales for the Michael Kors brand to decline in the mid-single digits; gross margin of approximately 60.0%; operating expense of roughly 44.0% of total revenue including the impact of a shift in timing of expenses from the second quarter into the second half of the year; an operating margin of approximately 16.0%; a tax rate of approximately 17.0%; and weighted average shares outstanding of 156 million; and finally, diluted earnings per share in the range of $3.85 to $3.95 including anticipated dilution from Jimmy Choo of approximately $0.08.

We anticipate capital expenditures for Michael Kors Holdings Limited of approximately $200 million including Jimmy Choo, which will be focused on select new store openings, renovations to our retail store fleet and investment in information systems enhancements.

For the full fiscal year 2018, we now expect to close between 40 and 50 stores with a total expense of $40 million to $60 million. We expect transaction costs related to the acquisition of Jimmy Choo to be approximately $50 million and transition cost to be between $15 million and $20 million as we integrate Jimmy Choo into the broader group.

Overall, we were pleased with our second quarter performance and believe we are on track with our Runway 2020 strategic plan. We remain excited about our long-term prospects and also look forward to working with the Jimmy Choo team as we grow our global fashion luxury group. Now, I will turn the call back over to John for closing remarks..

Thank you, Tom. In conclusion, we are pleased to have established our global fashion luxury group, Michael Kors Holdings Limited, with our recently completed acquisition of Jimmy Choo.

We look forward to capitalizing on the great opportunities that lie ahead for our brands as we begin partnering with the talented Jimmy Choo team and continue to execute on our strategic growth plans with the Michael Kors brand.

We are pleased with the positive signs that we are seeing in the Michael Kors business, which illustrate progress on our Runway 2020 plan. Overall, we believe that the Michael Kors Holdings Limited is well positioned to drive long-term growth as we expand our global luxury fashion group. With that, I would like to open up the call for questions..

Thank you. We'll go first today to Lindsay Drucker Mann with Goldman Sachs..

Thanks. Good morning, everyone. I wanted to ask just if you could give any more details on the Jimmy Choo sort of timeline integration, synergies, revenue opportunities, anything more specific you could give us on what you hope to do with this new asset..

Great, thank you, Lindsay, and good morning. Needless to say, we're really excited about the acquisition of Jimmy Choo.

We've had an opportunity to spend a fair amount of time with the management team, led by Pierre Denis, who is the CEO; and Sandra Choi, who is the Creative Director, and as you may know, Sandra has actually been with the company and found the company 20 years ago.

So we've got a great team in place as well as their entire executive team around the world, so we go into this feeling very, very strong about the management. We feel very strong about the brand. As you know, they are one of the leaders in luxury footwear in the world and really hold an iconic positioning there.

So we believe we have a few different areas of opportunity. We've stated that we are going to grow that business to over $1 billion and we think we've got a relatively clear vision on that. Number one, there is an opportunity to open additional stores and those will be predominantly in Europe and in Asia.

Along with that, the e-commerce platform in the business is growing very rapidly and we see a great opportunity to further enhance that with the team. So, that's the first opportunity for us. The second opportunity is to take advantage of the accessories momentum that they already have and really build that out to a much greater degree.

Jimmy Choo has a very, very engaged customer who finds a place in her wardrobe for that product and for the vision of the brand. So you can look to us really over the next 24 months to make a major commitment to the accessories business with Jimmy Choo, as we expand that category with them.

And third, the men's business is also growing very rapidly inside the Jimmy Choo company and we see that as a great opportunity to accelerate. They are already doing an outstanding job with that and we're just going to work together to continue to build on that.

So those are the three key areas for us that we feel very comfortable and I would say that the management team in Jimmy Choo feels very comfortable in executing.

With our new formed alliance, they'll be able to move a little quicker on some of these initiatives than they were previously able to, so that's really one of the major advantages to being strategically aligned with us and of course we have a pretty deep history in the accessories business, so we think we can bring some knowledge there..

Is the....

Let me just finish on what I said. There really will be very little synergies as we've stated previously. The Jimmy Choo business is a very different business in terms of where the product is manufactured and how they are structured internally, so I would expect little to no synergies on that situation..

Great.

And just to clarify, the reasons why the team will be able to move more quickly as you mentioned, is that just because they'll be able to leverage the capabilities you already have or is there something else that will allow them to be more agile?.

It's really financial. And what we've said when we bought the company is Jimmy Choo will be dilutive for the next couple of years and really that's a twofold basis. Number one, part of that's because of the debt that we took on which we intend on paying back very, very rapidly.

And secondly, we're going to invest, so we've had that dialog with the management team, we've had that dialog internally, and so we're going to take advantage of this opportunity to really set some incredible roots in the ground for what we think is going to be a major strategic addition to the company, and that is driven off of the accessories and then deeper commitments to the men's business as well.

Thank you very much, Lindsay..

Thank you..

We'll go next to Omar Saad with Evercore ISI..

Thanks. Good morning. Nice quarter. John, I was wondering if you could give us a little bit more detail on what you're seeing around the product trends more broadly speaking, kind of especially the handbags categories versus some of the other ones. I noticed you guys are doing really well in footwear and ready-to-wear.

What you're seeing in terms of the evolution of the handbag category? Obviously, there's been strength at certain high-end brands, and you guys have momentum in certain pockets there, but a broader perspective, I think, would be helpful for us. Thanks..

Sure. Thank you, and good morning, Omar. As you noted, our women's ready-to-wear business is absolutely – it's really, really strong right now, so we're very pleased.

And that's led by product innovation, which is – you clearly see it in – if you're following us on Instagram or if you're looking at our e-mails on a daily basis, I think you've seen a marked difference in the way that the company is communicating to consumers. And I want to say we're leading a little bit more with what we call Kors Style.

Michael is a runway designer. Michael has got many, many years of leading the consumer in terms of a fashion statement, and we're taking advantage of that positioning in our company. And so Kors Style is really the cornerstone of our communication to the customers.

And then of course, we've got a very large footwear business that we don't talk a lot about, but it's growing very nicely, and we see that as a way to really head-to-toe dress our customer. And that's giving a lot of additional opportunity for our sales associates inside the stores to reach out and talk to our consumers.

And of course, you're going to see that in some of the new stores that we're building out where we're taking a much more lifestyle approach to the brand and really highlighting those other strengths inside of our company. In terms of the handbag – or accessories business, I don't think there's any secret. In Asia, the business is very, very strong.

So I'm going to start from the East and go to the West. And that's not only in the Michael Kors business, but that's in obviously the luxury players that are in the marketplace.

So very strong reception to the category in that marketplace, driven by, I would say, younger – millennials and slightly older who are really continuing to find luxury and aspirational luxury from many different companies. So we're extremely pleased with how the category is developing in that marketplace.

I would say Europe got a little more solid over the last quarter, driven again by, I would say, tourists. We saw a significant return or elevation, I would say, in the Chinese tourist traveling to Europe. And there has been a return in certain categories of tourists who had declined who are starting to come back to Europe.

So we're feeling more confident, and you can see that in our results in Europe. I would say the American marketplace remains relatively muted in the category, if not slightly down. And we've taken the position that the American market we actually want to shrink in terms of accessories, and we've done that through two ways.

Number one, we are shipping less product into our department store partners as well as our own stores in the accessories category. And as a result, we're also less promotional, significantly as you can see by the amount of days. And again, in Q3, it's going to be a very, very dramatic reduction, even beyond what we've done so far.

And we think that's the right thing for the brand. So again, the customer is going to – it's going to be a little more difficult for them to find Michael Kors product on sale in the accessories category, and we think that will mute the trend in that marketplace.

Again, small bags continue to drive the business – smaller bags, also smaller wallets, which affect the AURs. So we're particularly pleased to see the AUR increase we have in the continued light of smaller bags and smaller wallets driving the business. And by the way, that trend is not a North American trend. That trend is a global trend.

So that's still a headwind for us as the consumer continues to see that as the fashion quotient and not necessarily about price. Thank you, Omar..

Thanks for all the color..

We'll go next to Oliver Chen with Cowen and Company..

Hi. Thank you. John, what are your thoughts regarding partnerships in the industry with Amazon and Google and how these will evolve as you continue to develop a foundation for a larger platform? Just curious on your thoughts about distribution and what modern luxury should pursue in terms of customer relationship management and digital in reach.

And, Tom, just a modeling question, the merchandise margins, how were they in the U.S., and what should we think about in terms of the forecast there? Thank you..

Thank you and good morning, Oliver. Oliver, I think we've been using this terminology in our calls, digital flagships. And I remembered when we first started that, there were a few people who were a little confused by why we were referring to it as a flagship.

And we believe that today the number one place that a consumer engages with your brand usually initially is online and usually through your own website.

And they may not ultimately transact there because certainly brick-and-mortar stores are very important, and we believe in brick-and-mortar and we believe that the consumer will shop in multiple places for their merchandise.

But what we need to remain committed to as a company is our own digital flagships and that being the cornerstone of how we're engaging with the customer and how we are going to move the brand continually forward. It's too early to ascertain what the future is with Amazon or any other platform.

Right now, our position is that we're focused on our own digital communications with the consumer. And we think that's the right place for us to be, and certainly we're showing strong double-digit growth by doing that.

And we've got a long way to go till we consider ourselves to be best in class, but you can see by some of the ratings that have come out from L2 about our brand that we are committed. And we believe that we will continue to move forward and ultimately become one of the best-in-class luxury companies really operating our own digital flagships.

And I'll turn it over to Tom for the second part of the question..

Thanks, John. Oliver, with regard to margins in the U.S., maybe just take a little step back here and talk about our Q2 margin overall which we're really pleased with that margin is up for the quarter and we continue to forecast growth in margin for the full year.

As we noted, retail margin overall is benefiting by mix, and wholesale margin while flat for the quarter, as we noted, we'd expect to be lower in Q3 along the lines of Q1 activity with lower volume..

Okay. Thank you. And, John, just a quick one on the handbag at large.

The larger totes and the pricing that you're achieving there, could you just brief us on the strategy and what we should monitor? It looks like there's a lot of elevation, and I'm just curious about how that will manifest in light of different things happening and what you're thinking about where you want to take your higher priced larger handbag assortment..

Sure. And that's a very good and relevant question, Oliver. Number one, we haven't really talked about it on this call at all, but just is a macro trend issue kind of related back to what Omar was asking. As you probably are aware from walking the streets, et cetera, backpacks are very, very strong, and it's one of our fastest growing classifications.

And we're really pleased about that because the AUR in backpacks is high, which is good for us.

So there's actually a little decline in the tote business because it's really shifting to backpacks because of the fashion trend, but that being said, what we're doing is we're really elevating and you're going to see a whole elevation of totes from us over the next kind of six months where we think there is a fashion statement to be made there.

It was a bit more utilitarian previously and now that you've got a lot of people or women coming to work in sneakers and/or trainers, there's just a little less utilitarian use for the totes, so we're trying to make it much more about fashion and I think you're going to see a lot of that coming in the coming quarters.

And again, what we're seeing is the more innovation that we're delivering on our accessories, on our ready-to-wear, and on our footwear, the more the customer is responding.

Again, Michael has got 30 years of leading with fashion runway design and we are going to use that as a real cornerstone of how we're communicating with the customer, in particular through Kors Style. So, thank you very much. Oliver..

We'll go next to Simeon Siegel with Nomura/Instinet..

Thanks, guys. Good morning, and congrats. So among other things, really nice growth in net Americas wholesale.

As you lap the last year's double-digit declines, just can you talk to where you think you are in maybe what winning or however you want to frame it in terms of that wholesale reset? How much further top line deceleration do you think you see before we start returning to growth there? Thanks..

Sure. Thanks, Simeon. So, Simeon, I want to first point out that we mentioned a few calls ago that we had taken a point of view to be less promotional. We thought that was the right thing to do for the image of our brand, number one.

Number two, we also focused on some iconic groups where we really made sure that they were very, very key in terms of their price points and that was our Mercer, our Selma, our Hamilton, our Cynthia, and our Savannah.

They were the five core groups for us that we really – we wanted to make sure that when the customer came in the store, whether they were on sale or not, it didn't matter. The value was tremendous not only in terms of the design but also the price-value relationship. And that's really turned out to be a very good strategy for us.

And in fact, that's one of the reasons why you saw the wholesale business deliver better than we had anticipated and that was just based upon our replenishment and what we saw happening there. And then you layer on top of that what's happening with some of the new groups that we've added into the category.

And so, what I would say to you is that our partners in the department store community are, I think, very pleased with how our strategy has turned out.

I must say to you that in our second quarter, we saw some nice trends happening in the department store environment, so we were very pleased, and I think they were pleased, also, to see we can sell product at a higher price, we can sell product that isn't on sale, and the customers are excited about newness and elevation.

So, that's working well for us. We're very cautious about Q3. I know everyone is concerned about the deceleration between Q2 and Q3 in the way that we're guiding for comparable store sales growth. We're being very cautious because, as Tom pointed out, in our own stores it's about 66% less promotional activity. That's a tremendous amount.

So I can't say to you which inning we're in, but what I can say to you is that the initial indications from both product and from our reduction in promotional cadence is going well. So I would tell you that we're pleased. This is going to carry on all the way through Q4.

Even though we will "lap" in the second half of Q4, there's still going to be settlement that has to happen in terms of where the inventories end up arriving.

And I remember I mentioned this in one of the other calls, we will still have a decline as you look forward, it will flatten out somewhat in 2019 fiscal, but there'll still be some declines heading into the first part of that because as we sell at a higher AUR, you need less inventory in there to mark down, and again that's all good, that's all very healthy for the business.

So we view – I think we'll be able to have a better assessment on where we are coming out of Q3/sort of midway through Q4, and hopefully we'll be reporting to you that we're continuing to make progress..

Great, thank you. And then if I can, just a quick follow-up, so on the retail side, so in your own business there, we can see the strength there. We can see the recovery on the margin.

Any thought there in terms of the long-term EBIT opportunity?.

The biggest challenge in retail for us remains the shift between e-commerce and the brick-and-mortar part of the business. We're working really, really hard – again cornerstone of Kors Style and some additional styling tools that we'll be adding to the stores for our sales associates.

We are committed to turning around our brick-and-mortar comp, and we know that's challenged to some degree by e-commerce, to some degree by traffic. But until we can get some turnaround on that, which again will not be this year. We're obviously hoping to see that to be in a better place for next year.

That will be when we can create more of that EBIT leverage in the retail business. Thank you, Simeon..

Okay. Thanks. Best of luck for the holiday..

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

Great. Thank you so much. Good morning. The numbers here in the second quarter were better on a number of fronts than we had been looking for, and the area in particular I wanted to dig into is wholesale. That looked to be the largest departure, John, I think, from what you had expected.

You talked about better full price sell-through in wholesale, but I think you also mentioned that wholesale gross margin was flat.

Were there any changes in wholesale partners, or maybe you can just help us understand a little bit better the material beat on the wholesale line? And then we're just, in your discussion with Simeon, struggling with somewhat the same thing, understanding what happened in the second quarter and very strong results in the second quarter and how that leads to such a conservative third quarter guide.

Maybe you can just touch on the reduction in promotional days both in wholesale and retail in the second quarter, and how that compares to the third quarter. It sounded like there would be a greater reduction in Q3, but not materially enough for such a differential in the sales results.

Is it just that during the holiday season when you're less promotional there's a greater negative impact on sales because everybody else is so promotional? Maybe you could just help us understand a little bit better. Thanks..

Sure. And Kimberly, I'm going to answer half of that, and then I'm going to turn it over to Tom. Let me start out by reiterating to everyone that we have raised our guidance for the year. So I want to compliment our company that we are flowing through a significant part of the beat in Q2 for the year.

The second thing is – and Tom will talk about this in a little bit, but part of what you're seeing in the Q2 guidance is expenses that have shifted – that Tom spoke about in his prepared remarks – from Q2 to Q3. So, that's impacting some of the EPS, but overall for the year, as you can see, we're still taking the year up for the company.

We always knew internally that we would be at a higher comp store decline in Q3 than any other quarter. I know that some of the models that are out there didn't indicate that, but we knew, because again as you can see for the year, we're guiding for overall mid-single-digit comp store decline for the year.

And so we'll have a little worse in Q3, and we'll have a little better in Q4 if you look at the model. And by the way, our stores are not trending a whole lot different from what we're seeing in the department store environment.

The reason why you're seeing the delta so high in Q3 is, number one, it was the most amount of days we were on promotion of any of the four quarters. And secondly, it is the largest dollar volume quarter.

So because when you have those two things happening at retail, you're going to have the largest impact to all of the factors that are happening around in the business.

So as I said to you before, we actually had a very nice Q2 with our department store partners here in North America, and I think we were all pleased, they were and we were, by the performance that we saw relative to our sales plans and relative to the fact that we were ahead of our mutually-agreed-to sales plans.

Again, we are trying to take the business down at retail in our Q3, and that's because we want less product out there to be, not only on promotion with less promotional days but then mark down at the end of the season because we're dealing with that situation in Europe which we've talked about.

We want to end the season with less promotional product for the customer when we begin our final sale periods of time. So again, we think this is all going exactly according to plan and maybe slightly better.

We hope that we'll have a good holiday season, and if we do, again we might do better than what we have guided to if we do have a better than anticipated holiday season. But that being the case, I think we're taking a very prudent view of the environment and in particular our promotional policies.

So remember, it's the largest amount of days of all the quarters, and secondly, it is the biggest of the four quarters that we have in terms of retail sales. But let me turn it over to Tom, so he can talk to you a little bit about the expense movement which affects the modeling..

Sure. And looking at, as John mentioned, the full year, we've raised guidance and, on a Michael Kors brand basis, really flowed through all of the upside and beat in Q2 from a revenue perspective. So we see that coming through as a full-year increase in our overall guidance.

On the expense side, we will see some expenses moving into the second half across various items and areas, so that part we did not flow through to the full year. The other addition was the expected dilution from Jimmy Choo around $0.08. So that in total is how we were looking at it.

And as John mentioned, Q3 a little more conservative based on the reduction in promotional days, but overall this is very much in line with our prior guidance of mid-single-digit declines in comp sales across the year and in line with that thinking..

Kimberly, I want to add one last thing too. Please take note of the higher AURs. I think that's a very strong indicator. The customer is buying product from us at a higher price than what she was paying for it before, and that's really being driven by the design and the innovation that we are creating in the design.

So we think that's a very strong lead indicator that we're heading in the right direction with the strategy that we put in place around Runway 2020. Thank you, Kimberly..

Great, thanks for the color..

We'll go next to Randy Konik with Jefferies..

A), small bag sizes stabilizing or prices going up within that category; B), less promotions; or C), mix from higher average unit retail offerings like the Bancroft collection? So I'm just curious there.

And then, Tom, could you give us some perspective on putting the gross margin for the third quarter and beyond given the less promotionality, simply the gross margin pullback a little bit, even though it's going to be up, is that from the inclusion of Jimmy Choo in the model on the gross margin side? So I was just curious there. Thanks..

Thanks, Randy, and good morning. Randy, on the AUR side, we don't report how much it has gone down from its peak, but it is down for sure.

Part of that was self-inflicted a couple of years ago when we were looking for higher units per transaction, and therefore we went after categories like jewelry et cetera to bring up that, and that started to lower some of the AUR, and then we saw originally some of the bag sizing shift, which wasn't something that we had anticipated.

To be honest with you, we've set an internal goal. I don't know whether we'll achieve it or not, but we've used the number 10%. That's what we're just shooting for as a benchmark, and again we're not going to report on that on a quarterly basis.

I'm just telling you – giving you some color that that's a number that we've picked out and said we want to try and achieve that over time.

And that's, for us, when we look at that, remember, that's aggregated between accessories and women's ready-to-wear and footwear, so we're looking at that as an overall – I would almost say it's to our average transaction and AUR as well.

So that will drift up and down in categories depending on different things that we're doing at different times in the various categories. So as a good example, in the bootie category in footwear, we sharpened our price points in booties, and that's really helped our business tremendously.

It's affected our average AUR at this point in time during the year because booties obviously are fairly significant, but it's helped our sell-throughs dramatically.

So there are going to be different things we're going to do during the quarters, but overall we know that from the pullback in promotional activity we're going to sell less units and therefore we're going to need to take our AUR up. And obviously, that's a very important part of our long-term success for returning to comp store sales.

I'll turn it over to Tom for the second part of the question..

Randy, with regard to gross margin in Q3 and beyond, the first thing I'd say is overall we expect it to grow, as we've indicated in our guidance. And that's consistent with our full-year outlook and unchanged from how we've been looking at it over the course of the last couple of quarters.

From first half to second half, directionally I'd say that will be consistent with – we've seen growth on the retail side, and as we mentioned in the prepared remarks, we'd expect wholesale gross margin to be a little lower than what we've seen in the first half, really just due to the lower volume that we've discussed.

With regard to Jimmy Choo, Jimmy Choo runs a slightly higher gross margin, but within our guidance that is included. And for the portion of the year that they're with us, that is a slight benefit to the gross margin.

As we get into our full-year guidance next year, when we provide it and talk about Jimmy Choo results more directly as we move forward, we'll look forward to talking more about their margins and their great growth prospects..

Thank you..

We will take our next question from Brian Tunick with Royal Bank of Canada..

Thanks. Good morning, guys. Nice progress, I guess two questions.

When we think about the return I guess to growth in your profitability, what kind of sales growth would you need for OpEx leverage? And then on the fashion watch side of the business, what kind of impact did it have on the comp, either in this quarter or the first half of the year so far? And when would you expect the fashion watch impact to lessen as we go forward? Thanks very much..

Thanks, Brian, and good morning..

Good morning..

Brian, as Tom presented in our Investor Day, we have said and we continue to believe that 2019 fiscal will be year of growth in revenue and in earnings per share. I think we further view that our operating income is going to be returning to growth as well.

So I think that's a very important inflection point for the company because we know that over the last couple years our operating income has declined and we're vigorous about our opportunity to turn that around, both from the Michael Kors brand standpoint and also don't forget that that's going to be impacted by Jimmy Choo at least on the operating income, which will be very nicely positive for the company.

So we are also looking at all the different levers inside the company as we are kind of rebalancing the organization.

We have a fleet optimization program that's going on and we look to, as we close these approximately 100 stores over the next two years, but that will have an impact on our operating margin as well and create some leverage on the OpEx side. So again, we're very encouraged about what the future lies ahead for us. Good indications for Runway 2020.

We kind of believe that we're seeing the initial results that we had hoped, and if those continue to flow through, we think our objectives for 2019 will be very much in our sights and on our ability to deliver on that. Secondly, in terms of the fashion watch business, it was a fairly sizable impact to our comp store sales.

We don't break that out, but it was very sizable. So we do not see that turning around, as we said in the prepared remarks, for the balance of the year. The smartwatch business is mitigating that to some degree, but not enough to offset the decline in the fashion watch business.

So therefore, that's one of the reasons – and we said that to you some months ago at the Investor Day – we are very focused on our footwear business and our women's ready-to-wear business as categories to offset that decline.

And as the accessories business stabilizes, that will really be the balance that will begin to return us to positive comp store sales. Thank you, Brian..

Thanks, John..

Ladies and gentlemen, that concludes our question-and-answer portion of today's call. I'll turn the conference back over to John Idol for closing remarks..

Again, we want to tell you how excited we are about concluding our acquisition of Jimmy Choo and how that really is positioning us for the long term for our luxury group and gives us the platform also to look at future acquisitions.

Secondly, we're very pleased with the progress that we've made on Runway 2020 with the Michael Kors brand, and we look forward to reporting to you our future progress in upcoming calls. Thank you very much..

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now disconnect..