Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Michael Kors First Quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. As a reminder, today's conference is being recorded. And now I would like to turn the conference over to Krystyna Lack, Vice-President and Treasurer. You may begin. Krystyna Lack - Co-Treasurer, VP & Head-Investor Relations: Good morning, and thank you for joining us for our first quarter earnings call. Presenting on today's call are John Idol, Chairman and Chief Executive Officer, and Joe Parsons, Chief Financial and Chief Operating Officer. Before we begin, let me remind you that certain statements made on this call may constitute forward-looking statements which are subject to risks and uncertainties that could cause actual results to differ from those that we expect. Those risks and uncertainties are described in today's press release and in the company's SEC filings, which are available on the company's website. Investors should not assume that the statements made during the call will remain operative at a later time and the company undertakes no obligation to update any information discussed on the call. I will now turn the call over to Michael Kors Chairman and Chief Executive Officer, Mr. John Idol.

Thank you, Krystyna. Good morning, and welcome to Michael Kors' First Quarter Fiscal 2016 Earnings Call. I'll begin with a quick review of the quarter and then provide an update on some of our growth initiatives. I am pleased to report that our luxury brand continues to achieve global growth. Total revenue increased 7% or 13% on a constant currency basis for the first quarter of fiscal 2016. In constant currency, we saw revenue growth of approximately 2% in North America, 42% in Europe and 57% in Japan. Although we are at different stages of development in each of our regions, we continue to drive top line growth and believe consumers view Michael Kors as a leading luxury fashion brand. Our first quarter financial results exceeded expectations, driven by better-than-anticipated performance in both our retail and wholesale segments. The increase in retail net sales was attributable to new stores and accelerated growth in our North American digital flagships, which experienced 102% year-over-year increase. Global comparable store sales declined 9.5% or 5% on a constant currency basis, slightly better than we had expected. We saw continued momentum in our international markets with mid-single-digit comp growth in Europe and strong double-digit increase in Japan in constant currency. In North America, we experienced a high-single-digit comp decline, reflecting a channel shift to online purchases and the continuation of reduced mall traffic. In addition, the continued decline in watch sales had a meaningful impact in the quarter as expected, and we saw a continued shift towards smaller-sized handbags along with increased demand for crossbodies and small leather goods, which is resulting in an overall lower average unit retail. If we include our U.S. digital flagship sales in our comp base, our North American comparable store sales would have decreased in the mid-single-digit range. Global…

Thank you, John, and good morning, everyone. Our financial results exceeded our guidance for the first quarter of fiscal 2016. Total revenue grew 7.3% to $986.0 million as compared to $919.2 million last year. As expected, foreign currency headwinds continued to impact our results this quarter. On a constant-currency basis, total revenue grew 13.4%. By region, North American revenue increased 1.9%, Europe revenue increased 42.2%, and Japan revenue increased 57.4%. In our Retail segment, net sales increased 9.0% to $523.3 million on a reported basis and increased 16.0% on a constant-currency basis. Sales were driven by the opening of 107 net new stores since the first quarter of last year and a 101.6% increase in our North American digital flagship sales. Comp store sales declined 9.5% on a reported basis and decreased 5.0% on a constant currency basis due to lower comp sales in North America, partially offset by an increase in comp sales in both Europe and Japan. Our U.S. digital sales would have increased our global comp store sales by a low single digit percentage on a constant-currency basis. We opened 24 new stores in the first quarter, 11 in North America, 10 in Europe, and three in Japan. In addition, we expanded or relocated 11 stores. We ended the quarter with 550 company-owned retail stores including concessions and 774 stores overall including our licensed locations. Wholesale net sales grew 4.2% to $424.0 million for the first quarter. On a constant-currency basis, wholesale sales increased 9.7%. The increase was driven by our accessories and women's wear categories, partially offset by lower footwear sales. Wholesale growth was also attributed to the expansion of our European operations. During the first quarter, we converted an additional 128 wholesale doors into shop-in-shops globally. In our licensing segment, revenue grew 20.5% to $38.7…

In summary, the top-line growth we've achieved in the quarter demonstrates the continued strength of our brand and the successful execution of our strategic initiatives. We continue to see multiple growth opportunities ahead of us and our commitment to unlocking these opportunities remains unchanged. We will continue to drive top- and bottom-line performance through the expansion of our global presence in our retail, wholesale, and licensing channels. We will capitalize on growing brand awareness in the international markets to capture the potential in these regions. And we will maximize the growth opportunities in our accessories categories and further develop our men's, women's wear, footwear, and licensed businesses, delivering exceptional fashion product and maintaining our leadership position with the global luxury market. I will now open up the call for questions.

Thank you. And we'll take our first question from Kimberly Greenberger with Morgan Stanley. Kimberly Conroy Greenberger - Morgan Stanley & Co. LLC: Great. Thank you. Good morning, John. I'm wondering if you can talk about the handbag business. It sounded like, if you aggregated in North America your wholesale and your retail business, you mentioned that the handbag category in general would have grown for Kors. I want to make sure I heard that correctly. But I think you indicated that it's declining in your own stores. Maybe you could share with us your observations on what's going on in the wholesale channel versus the retail channel and if there are any opportunities to perhaps drive some of that business back to your own stores. Thanks.

Sure, Kimberly. First off, good morning. What we said was that if you take our retail sales in our own stores and our department stores, we had growth in North America and that was high single digits in North America. So we believe that we are in fact growing market share in North America. We grew at a higher rate than we believe that the category did. And then I would also add that internationally, when you add both domestic and international together, we grew at double digit rate. So again, we believe that the category in North America is growing in low single digit rate today, and we think that we are outpacing that growth by a fairly significant amount, again showing the health of our brand. And most importantly, really it's kudos to our design teams. We also mentioned to you that we are really excited about the fact that we are going to introduce the largest amount of new handbag groups this company has ever introduced, and we're doing that purposely. We think that there's an excitement level that we can generate with our customers. We've got probably one of the finest store fleets in the world in terms of locations. We have got such a great customer engagement going on today. We grew our social media channels by over 25% in the quarter. So she's responding. She's engaging. Newness is without a question what is driving her interest, and I just might add, on that point, if you look at what's happening, there's some really good things starting to happen in the handbag business. Backpacks are starting to trend, and I think we're a leader in that category. I think we've caught it pretty early on. There's a very big shift towards smaller handbags and then crossbodies and small leather goods, particularly the millennial customer. It's the way that she's shopping. It's the way that she's wearing the product. You're going to see some very significant presentations from us on those categories. Little negative in the fact that, when you're selling a smaller handbag or crossbody, it drives a little bit of your AUR down, and I think that's one of the things that you're seeing show up a little bit in some of the comp. But otherwise than that, the handbag business appears to be robust, although not at the same level as it grew at the past few years and we like where we're positioned and the amount of market share that we continue to gain. So thank you very much, Kimberly. Kimberly Conroy Greenberger - Morgan Stanley & Co. LLC: Thanks.

Our next question comes from Omar Saad with Evercore ISI.

Thanks. Good morning. I appreciate all the updates. Hoping you can give us some detail, some color, around the comp trends and the visibility based around your guidance going forward. It looks like you're expecting ex-currency comp trends to improve a little bit in the second quarter and continue to improve over the course of the year. Are you seeing – I know the eCommerce piece comes into play later in the year, but are you seeing something in the business today quarter-to-date? Any color around how you're thinking about that unfolding throughout the rest of the year would be really helpful. Thank you.

Sure. Thank you, Omar, and good morning. I would say the following. We certainly see mall traffic continue to remain challenged, and our point of view on that is that there is absolutely a channel shift going on. Because when you look at our acceleration of our digital business growing at over 100% last quarter, and that's quite frankly with still some issues with inside the distribution center, I might add that we, by the way, have moved our Ohio distribution center into our California distribution center in Whittier as of last week. So we've done that to consolidate so that we can really take and have much better grasp on the demand that's happening there, and the further acceleration we think that's going to continue out of that facility. And what you have is, you have a customer who is able to shop no matter where they are, just from a mobile device or from a desktop, and we think as that continues, traffic inside the shopping centers are going to remain challenged. That being said, one of the categories that really impacted our comp store sales was watches, and that's we think a cyclical issue, although there's some product challenges there that we think we can really go after that you'll start to see a little bit in our third quarter but mostly in our fourth quarter. So we're encouraged by the concept that this new product is going to be flowing into our stores starting third quarter and then heavily in the fourth quarter first. Secondly, we're going to start to go up against the initial declines in the watch business, so that'll become a little easier for us to comp against. If you remember, Q1 and Q2 were huge comps that we're up against from last…

And our next question comes from Simeon Siegel with Nomura Securities.

Thanks. Good morning, guys. John, can you talk about your view on the promotional environment ex-FX? You guys only saw, it was like 45 basis points of gross margin pressure. So what's the right way to think about margins for the rest of the year and then maybe longer-term sustainable rates? And then just if you can, can you help quantify the negative comp impact from watches? Maybe any update on the timing of the wearables, and then just how large do you think the jewelry opportunity could be? Thanks.

Okay. The gross margin impact, we have said consistently that we really haven't changed our promotional cadence almost since we started the company. We did say that last quarter we did get a little more promotional, and really that's just clearing some merchandise through our stores as we had normalization and our comps slowed down a little quicker than we had anticipated. I think we've got a fairly good grasp on that. We're anticipating the gross margin on a year-on-year basis to be down about 1 point for the company. And I think we still feel that that's really where it is. Part of that is going to be impacted by foreign currency and part of that is going to be impacted by the addition of some markdowns and some additional allowances in the wholesale channel. So I think we feel pretty good about the vision on that. In terms of the watch, we really don't quantify the breakdowns of that. I want to mention that the watch issues for us are a North American issue, and we have not seen that same deceleration in Europe or in Asia in the category. So if you saw in our actual licensing, we said that one of the reasons why our licensing revenues were up was because of watches. So we're getting positive growth outside the United States. Now, that is being impacted by constant currency though, unfortunately, or FX headwinds. So in Fossil, we're achieving some very nice gains in Europe. Some of that is just being counteracted by the currency translation. And in jewelry, jewelry continues to be a category that we believe in, that we think can offer great success long-term for the company. We've got some pretty interesting initiatives that we're going to, I think, talk to you about on the next call where we think we could accelerate that category with a few things that we're working on there. So all in all, again, the bigger piece of our comp decline was caused, though, by watches.

Great. Thanks a lot, and best of luck for the rest of the year.

Thank you.

And our next question comes from Dana Telsey with Telsey Advisory Group.

Good morning, everyone. Can you expand a little bit about on the expense shift that's going on perhaps from Q1 to Q2 and how bucketing the expense is what we should see through the balance of the year? And then just lastly, any commentary, John, on outlet performance versus what you're seeing in full-line stores? Thank you.

So you're basically seeing a continuation in the second quarter, what you're seeing in first quarter, so that's both initiatives that we started last fiscal year and then the initiatives we're starting in the current fiscal year. And as we mentioned in the call, we will have some moderation of that then later in the second half of the year as these initiatives begin to anniversary.

And, Dana, I would add to that, that the expense, if you really look at one of the things that is impacting our current operating profit is our SG&A. And we made a decision a little over two years ago to build out a very significant and sustainable infrastructure to support our growth in terms of warehouse and distribution. We'll be finished with those projects mid of calendar next year. So that really will be up and running, and we think we're going to start to see benefits from those initiatives that we put in place. We're already beginning, after extensive renovation of our Whittier facility; we're starting to see our ability to drive costs down in that facility as well. And then both of these facilities, the one in Europe, Venlo, and then Whittier, what we're excited about is they'll be fully integrated facilities that will handle our retail, wholesale and our growing eCommerce business. And really, it's going to give us the ability to access inventory very, very quickly, in particular for this eCommerce business, which is just growing at breakneck speed. So we think that those investments, while some of them might look a bit painful right now, are actually great investments for this company in the long term. Secondly, we're building out our corporate offices here. We've had to add a lot of square footage because while I know there's a lot of commentary about how Michael Kors is struggling, in fact, we grew 30% last year. This year, we're going to do close to $4.7 billion, $4.8 billion. We've had to add a lot of people, we've had to put some office space to add those people, and we're proud of that, and we're building a world-class facility for those people to work in because…

Thank you.

Our next question comes from Oliver Chen with Cowen & Co. Oliver Chen - Cowen & Co. LLC: Hi. Thank you. On the innovation front in terms of the new handbags, what are your thoughts on how you'll pursue like SKU breadth versus depth? I mean, it does look like we're seeing a lot of new platforms, and I wonder about that relationship – between that relationship and merchandise margins and promotions just as you continue to try new innovative things there. And then the free cash flow profile of your company is very impressive. I was just curious about on a longer term basis, thoughts on how we should think about modeling that line item in the cash flow statement. Thanks a lot.

Sure. On the innovative product, we're going to take a very aggressive point of view on newness for the spring season in particular. Our design teams have just come up with some fabulous new product, and I might say in handbags, it's in our women's ready-to-wear and in our footwear categories. And when you're the size of company that we are and you have the position in the marketplace that we do, we believe in America, Michael is the number one leading American designer in the world. And taking that position, we have to offer exciting new products, and we want to take a little bit further stab at making sure the customer understands that's what we stand for. And the great news is that some of the things that we've been doing are really getting some good traction. Our newness sell-throughs are really performing at probably the best levels that we've had in three years. So we're terribly excited about that. And in the watch category, I would tell you that we believe that we've probably not had enough newness in that category, and so as we talked about earlier, the platforms that you're going to see introduce there in terms of new metal materials, in terms of new acetates, and we're going to continue on this leather band program which we think is a very important initiative for us, we think it's going to drive a lot of interest and a lot of engagement with our customer to continue to look at Michael Kors as their fashion wardrobing resource. The last thing I'll just add to you is wearables is something as you know our company and Fossil are really dedicated to, and we've been cautious, and we've taken our time to make sure that when we introduce…

So thank you all for those comments. We indeed are positive cash flow. We are generating a lot of cash. Management believes that we should have a very strong balance sheet, so our first priority will be to invest in the company. Our second priority, as John just mentioned, will be to repurchase shares, and our third priority will be to have dry powder should we be able to opportunistically do something in the future. So again, we are going to be very conservative and have a strong balance sheet, and we are very pleased with our cash flows today, and those will be our objectives.

And I'm going to end and we'll take the next question, but I mean, when you look at not only our strong cash flows, please continue to look at our operating margins. While they are down from where they were previously and we've always said since we took the company public that the original 30%-plus operating margins were not sustainable, we think we have best-in-class operating margins in terms of our competitive set, and that's not only the companies here in the U.S., but it's also our European luxury goods competitors. So I think when you look at the strength of Michael Kors, the brand, the balance sheet and our operating margins, it really bodes well for our future and our ability to invest and to maintain growth both top and bottom line. Thank you, Omar (sic) [Oliver]. Oliver Chen - Cowen & Co. LLC: Thank you, and best regards.

I mean, Oliver. Sorry, Oliver.

Our next question comes from Randy Konik with Jefferies.

Yeah, great. Thanks a lot. So I guess I want to follow up on the cash flow again. I guess I asked this last quarter. When I look at two quarters ago, you bought back $400 million of stock. This quarter you bought back $350 million, which is great, but when you look at the cash flow prospects and the leverage ratios in the business, only a few quarters ago you were buying the stock at $80, you're buying it now at $40 on average. Why not pursue an alternative capital structure if the company is under-levered? And I guess two other questions related to that is, from a cash use perspective, what about thinking about a dividend? And how should we be thinking about it? It sounds like you said something about you brought in Panama. How should we be thinking about the Far East Holdings Limited business? How should we be thinking about that part? Thanks.

Sure. Randy, I think the first thing is is we think our capital structure is excellent inside the company, so I don't think we said that we were under-levered. We believe that having a company that operates with a strong balance sheet is the right way to build a luxury company. Other companies don't run their businesses that way, but we think a luxury company should be run with a strong balance sheet, of which we've done from the date that we really went public. And in terms of our priorities, as Joe said, number one, we're going to continue to invest in the company. The good news is, as we've made these big investments, the build-out of Venlo, the build-out of our corporate offices, we've built a lot of retail stores and shop-in-shops over the last five years, and many of those initiatives are going to start to burn down over the next 24 months, which will give us even more free cash flow as we move forward. So our second priority, then, is going to be to continue to buy back stock, and at these levels we find it incredibly attractive and we'll continue to be aggressive about doing that. And thirdly, we've said before that when certain licenses become available to us, and we're doing two right now, we're doing Korea and we are doing a majority ownership of our Panama/South America, and as they're either strategically correct for us to look at or they're going to create positive earnings for us, we will look at buying those. So as Joe said before, we want dry powder to be able to do that, and there might be other things that we would look at as an organization as well, but we'll take a look at that as we get further down the road. We have great infrastructure and we could leverage other things off of this infrastructure. So we think we've got a very clear vision, but we don't think adding a lot of debt to the company would be something that would be of interest to running a luxury goods company at this point in time. And before we would entertain a dividend, we'd want to make sure we had looked at all the other initiatives which would generate profitability and be accretive for the company. So Joe, do you have anything to add to that?

No. That's well said.

Okay. Thank you.

Our next question comes from Joan Payson with Barclays.

Good morning. Thank you for taking my question. I was wondering if you could talk a little bit about the wholesale business and the North American wholesale business in particular. It looks like that channel slowed a little bit versus what we saw last year in particular and maybe you could talk about if there's any change to how you think about the size of that business or change in strategy at all.

Sure. Joan, first thing just so you know, we mentioned it in our fourth quarter call, there's about $100 million on an annual basis that will move out of North American wholesale into our international Asia category because we are shipping and servicing certain of our retail accounts out of that facility now. We have a warehouse, we have an operation in Hong Kong led by Stephane Lafay who was formerly the Senior Vice President of Tiffany-Asia. And so that's DFS and some of our licensed businesses are serviced out of there. So you just know that for the future. Secondly, if you look at our wholesale business in North America, as I said before, our accessories business was up high single digit. Our footwear business was actually up very strong double digit, but as Joe mentioned before, the footwear shipments were flat to slightly down. And the reason for that is remember we're going up against, in footwear as an example, installing a lot of shops last year. So a lot of that gets into the pipeline filling. And then secondly, as we see the department store channel in North America slowing down because you know that, you know the department stores here are not posting robust results. We've decided to reduce the amount of inventory that we're starting to put into that channel because we don't want to have a lot of markdowns showing up inside the channel. So I would say we still believe obviously in growth in the North American wholesale channel, and it will be in the kind of single digit type range for us because, A, the channel is not quite robust right now; and, B, we have dominant market share in many of those channels. And it's no secret in handbags, we're the number one in that channel, in watches we're the number one in that channel, in footwear today in most accounts, we're the number one in that channel. So as that channel goes a little bit is how we're going to go. I might add though on the flip side, the eCommerce portion of the department store business in North America is really robust. You're talking very, very strong double digit growth at all of our department store partners. So while you'll see us begin to end the shop-in-shop installation in the United States over the next 12 months to 18 months and that's again just as planned as when we went public and we had talked about with the inclusion of men's which will still be a robust rollout, we're going to still get growth in the department stores and most of that's going to come from the eCommerce portion and then obviously some comp store growth inside of our shop-in-shops that we've put in as well. So hopefully that gives you an answer to the North American wholesale business.

And our next question comes from Matthew Boss from JPMorgan.

Hey. Good morning, guys. So on the margin side, EBIT margin this year on our math has guided just below 26% at the midpoint. It's about 200 basis points below the prior guide. I guess as we look ahead, John, what's your confidence in this level as the multi-year floor? And then on a regional basis, is it fair to think about Europe at mid-single similar to what we saw this quarter? Is that the best way to think about a normalized growth rate on a go-forward basis?

Matt, the last part of the question you were talking about comp for Europe? Sorry.

Yeah. Yes, yes, Europe comp.

Okay. On the operating margin, I'll let Joe speak to that. The comps in Europe I think are going to be in that – on a constant-currency basis similar to the high single to mid-single-digits. It's just going to depend on what different things happen over there. You know, it's so funny because while Greece doesn't mean anything, while that was going on, all of a sudden business softened up. And the minute that that kind of got past whatever was in the consumer's mind, our business in this quarter has really accelerated. So there's some funny stuff going on over there. We also are being a little bit hurt by – we have a very big business in the U.K. and the strength of the pound to the euro is hurting a little bit, some of the business in that marketplace. So as that normalizes as well, we're feeling good about Europe for Q2 and for the back half of the year. Still see good strength there, we still see an opportunity to expand the marketplace. And again, we grew on a reported constant currency basis 47% in that marketplace. That is a lot of growth, and we still have a long way to go in terms of increasing the brand awareness, so we feel pretty good about Europe. And just on the international note, Asia is really strong for the company. What we're seeing happening for us in China and in Southeast Asia and in Japan is really breathtaking, and the same thing we said on this call many years ago and told you that we were going to invest in Japan and lost money there for years, we're now making money, the comps look great, the business growth is great. We did the same thing in Europe, it took us years to invest and build there. South America is going to be a similar thing, we're going to invest for the long term. So I think these things are going to continue to pay off. So I will turn it over to Joe on the operating part.

So, we don't provide guidance other than the year that we're in. In terms of how you should think about this, clearly this current fiscal year was difficult for a number of reasons. We lost, as you know, almost $200 million of top line purely due to FX. It is a tough market today, and as you know, as we've already talked, we over the last – this year and the prior year have done a lot of innovations that have impacted SG&A and D&A. So again, we don't guide, but we are feeling good that this is a year that is difficult, and we should be seeing improvements in the second half of this fiscal year and are comfortable that, that will continue into the future.

And our last question comes from Anne-Charlotte Windal with Bernstein. Anne-Charlotte Windal - Sanford C. Bernstein & Co. LLC: Yes. Good morning. Thank you for taking my question. A question on your target number of stores. You talked a lot about decreasing mall traffic, the power of your digital flagship. Does it make you reconsider in any way the target number of stores that you're looking at in North America?

Good morning, Anne. Yeah, Anne, we've talked about this on the calls. We've said that in North America we're going to open 400 stores and we're going to have 200 stores in Europe and 100 stores in Japan, et cetera. And we've – when we set those targets, we're way below what other competitors are in terms of their distribution, and I also might add that we also set those targets with a very clear eye to how many full-price and how many outlet stores we've had, and we've had a very clear target about how many department stores we've had. So, all of that has been really deeply thought out by city, by location, et cetera. And then of course over the last two years, we've seen eCommerce take on a much bigger role in, I think, everyone's projection in terms of what that will be of their total retail business, and we believe that that's going to be approximately 20% of our sales over the next few years. That all being said, we make a lot of money in our retail stores. We have a handful of stores that we don't make money on. Some of those are flagships that we want from an impression standpoint in a city, some of those are just stores that maybe aren't producing at the level that we want to. But we don't open stores unless they're profitable, so even if eCommerce becomes 20% of our overall revenues, 80% still – I'm sorry, retail revenues, I apologize. Retail revenues, 80% is still going to come from freestanding stores. So we still believe that if you live in Arkansas or you live in Omaha or you live in New York, you should have the ability to be able to go into a store and shop that store with Michael Kors product. And I think we're very careful about where we distribute our product, and I think we're very proud of the shopping centers that we're in, the street locations, and where we've positioned the brand up against our luxury or with our luxury competitors, and/or with some of our U.S. neighbors as well. So we're still feeling good about our rollout. And again, that rollout's going to come to an end here pretty shortly, in particular in North America. It will be over within the next 24 months, and then we'll really be looking at all of our growth coming out of comp from a retail standpoint.

I'd like to say thank you to everyone for joining us today, and look forward to keeping you updated on the growth and the progress that we're making on our growth initiatives in our next call. Have a great day.

That concludes today's conference. Thank you for your participation.