Capri Holdings Limited (CPRI) Q3 2016 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Michael Kors Holdings Limited Third Quarter 2016 Conference Call. Today's conference is being recorded. For opening remarks and introductions, I'll turn the conference over to Krystyna Lack, Vice President, Treasurer. Krystyna, Please go ahead. Krystyna Lack - Vice President & Treasurer: Thank you. Good morning and thank you for joining us for our third quarter earnings call. Presenting on today's call are John Idol, Chairman and Chief Executive Officer; and Joe Parsons, Chief Financial and Chief Operating Officer. Before we begin, let me remind you that certain statements made on this call may constitute forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those that we expect. Those risks and uncertainties are described in today's press release and in the company's SEC filings, which are available on the company's website. Investors should not assume that the statements made during the call will remain operative at a later time and the company undertakes no obligation to update any information discussed on the call. I will now turn the call over to Michael Kors' Chairman and Chief Executive Officer, Mr. John Idol. John D. Idol - Chairman, Chief Executive Officer & Director: Thank you, Krystyna. Good morning and welcome to Michael Kors' third quarter fiscal 2016 earnings call. I'm pleased to report that our revenues, comparable store sales and earnings per share results for the third quarter exceeded our expectation, which speaks to the enduring strength of the Michael Kors luxury brand, in particular during the all-important holiday season. We know that consumers have a lot of choices when it comes to what brands they purchase, and the fact that they chose Michael Kors is a great testament to our world-class design team, strong product offering and the lasting connection that we have fostered with our customers. For the quarter, total revenue increased 6% on a reported basis. In constant currency, total revenue increased 10%, driven by growth across segments and geographies. Earnings per share increased 7% to $1.59 on a reported basis. And on a constant currency basis, earnings per share grew 11%. Our Retail business delivered solid results across all geographies, driven by strong double-digit sales growth in our digital flagship business and new store openings. On a constant currency basis, global comparable store sales increased 2%, which was ahead of our expectations and marked another quarter of sequential improvement. Importantly, while mall traffic in North America declined, we saw a significant increase in conversion rates in our own retail stores, which further illustrates the strength of the Michael Kors brand. On a constant currency basis, comp store sales rose in the low single digits in North America and Europe, and in the high double digits in Japan. While our Wholesale business was roughly flat for the quarter on a reported basis, we delivered results above our expectations, despite the challenging and highly promotional retail environment. In fact, while the North American department store channel was challenged, we believe our results continued to outpace the overall channel performance, which enabled us to further strengthen our leadership position in this channel. Internationally, European Wholesale sales grew 4% on a reported basis and almost 20% on a constant currency basis, and we saw 26% growth in our Asian Wholesale business. We also achieved solid growth in our Licensing business. While the overall watch category remained challenged during the third quarter, we were excited to see favorable response to the newness that we introduced into our watch offering, as well as our jewelry assortment. In watches, navy, sable and black platings, as well as colored leather straps, proved to be sought-after additions in our collection. Customers also responded well to our updated jewelry offering, with particular strength in the padlock, hearts and disc motifs. And our watch and bracelet gift sets were strong sellers during the season. Our fragrance collections for women as well as men's fragrance also proved to be great gifts, whether customers were shopping for family and friends or looking to treat themselves to something special. We were also pleased to see strong growth of our fragrance offering in the travel retail channel worldwide. In addition, we continue to see very positive response to our eyewear collections and are happy that our new partnership in this category has been such a strong success. Turning to our product categories, we were pleased with the performance of our Accessories business, where we injected new styles that contributed to strong growth and market share gains in the quarter. Total Accessory sales on a retail basis grew at a high single digit rate globally and a mid-single digit rate in North America, demonstrating our leadership in this category, especially against a difficult retail backdrop. The demand for smaller sized bags, crossbodies and small leather goods continued to impact AUR in the quarter; however, we again saw a high double-digit increase in units sold, proving that customers continue to seek out Michael Kors luxury accessories. Footwear sales were also strong during the quarter, driven by our fashion active category. Unfortunately, the unseasonably warm weather hurt boot sales, which negatively impacted our footwear margins and AUR. Overall, our new merchandise assortment for holiday reflected the latest designs from Michael and our design team and spotlighted modern glamour, easy elegance and sport luxe essentials. The updated silhouettes, as well as our gifting assortment, resonated well with customers globally, and our #JustBecause marketing campaign proved very successful in connecting our customers with just the right gift for everyone on their shopping list. Looking ahead, we remain focused on executing our key strategic initiatives that will drive us towards our long-term growth targets. First and foremost, we remain committed to delivering luxury products that embody fashion, design innovation and the Michael Kors luxury brand DNA. As we look to the spring season, we will be introducing our largest assortment of new handbag groups created to inspire our customers with exciting new trends. Our collections will underscore Michael's fashion leadership with an offering that reflects new color palettes, innovative materials, embellishment, mixed-media in leather, luxurious textures, and elegant silhouettes across product categories. In footwear, the fashion active category remains one of our highest growing areas. And we expect to leverage this trend in the spring. We are also capturing the denim trend in our accessories and apparel assortments, which are featured in our new national advertising ad campaigns. We have begun to evolve our advertising campaigns to reflect the glamorous destinations and inspirational moments of the modern Michael Kors customer. Our integrated marketing programs, with compelling digital and social media campaigns delivered through desktop and mobile devices, as well as traditional print, billboard and target marketing, are designed to extend our reach, allowing us to engage consumers with our brand, immerse them in the Michael Kors lifestyle and encourage them to shop our sites and stores. In our Retail business, we continue to develop our digital flagship strategy globally at a rapid pace, and build upon our omni-channel capabilities. We have digital platforms in place in the U.S. and Canada. And we are on track to launch in six European countries this fall and an additional 16 countries in Europe thereafter. Importantly, we are working to seamlessly integrate the consumer shopping experience across all touch points. We are taking steps to enhance our mobile shopping experience and expect to see the benefits of these measures over the coming months. We will also begin to leverage our analytic and CRM capabilities to share Michael's message with consumers through various communication vehicles and to present and tailor our styling to the individual customer. Overall, our digital flagship strategy is enabling us to engage consumers with our luxury lifestyle brand and provide a best-in-class shopping experience. As you know, we have a strong and influential online presence as consumers turn to Michael Kors for fashion insights, and we continue to see our fan base grow across all social media platforms, further demonstrating the power of our brand. In addition, we remain focused on expanding our global retail footprint, and we will continue to open flagship locations in key cities around the world to drive revenues and brand recognition. Our latest flagship opened this past November in the Ginza district in Tokyo, and we will be opening new flagships in London, Seoul and Singapore this coming year. These locations not only enable us to present the most expansive collection of our fashion product, including both our collection and lifestyle offerings, as well as men's product in select locations, but also showcase the Michael Kors luxury DNA for consumers worldwide. Internationally, we completed the integration of our Korean business in January and are excited about the retail growth potential in this market. Lastly, we continue to extend our men's presence at retail, both with standalone stores as well as through the addition of our men's offering in our existing lifestyle stores in North America, Europe and Asia. We opened four men's locations this quarter in Scottsdale Fashion Square in Arizona, Memorial City in Houston, Garden State Plaza in New Jersey and the San Francisco Centre in California. And we are pleased with the initial consumer response. By the end of this fiscal year, we expect our full men's assortment to be available in 11 locations, and we continue to believe there's a potential for up to 500 locations worldwide. In our wholesale channel, we expect moderately lower sales growth. As we have stated previously, we will be managing our North American wholesale inventory to ensure that we maintain the integrity of our brand. We see continued sales growth internationally from the expansion of our Accessories, Women's Wear and Footwear business and the development of our Men's category. We remain particularly excited about the expansion of our Men's business in wholesale and are on track to open 75 men's shop-in-shops globally this year. Importantly, we continue to believe that this is a significant new category for the company and I am confident that we can develop this business and become a leading men's luxury brand. In Licensing, we are excited about the continued growth opportunity of our fragrance and eyewear categories and the newness in the watch category as we continue to introduce updated watch styles and launch our new connected fashion line later this year. As we look at consumer trends, we believe that connected accessories will reshape the fashion watch business globally. Michael Kors is known for being at the forefront of the fashion watch category, and we expect to quickly emerge as a leader in connected fashion as well. Turning to our regional licenses, we remain focused on expanding our presence across Asia, which represents a significant growth opportunity for our company. In Greater China, we continued to see an increase in brand acceptance, as evidenced by another quarter of double-digit comp store sales growth. As the Chinese consumers' desire for our brand builds, we are capturing this demand both in the region and as they travel globally through our airport locations worldwide and in areas such as Japan, Korea and Europe. We look forward to our continued global expansion through our strong regional partnerships and growing demand for our luxury brand. In summary, we are pleased with the success we achieved in the third quarter, with an excellent holiday season driven by a luxury fashion product assortment, strength of our digital flagships and sequential improvement in our comparable store sales, as well as continued success of our Wholesale business. Our results demonstrate the sustained demand for our luxury fashion products globally and the market leadership of the Michael Kors brand. Now, let me turn it over to Joe for a detailed review of our third quarter financial results and our outlook. Joseph B. Parsons - Executive Vice President, Chief Financial Officer, Chief Operating Officer & Treasurer: Thank you, John, and good morning, everyone. We are pleased to report financial results above our guidance for the third quarter. Total revenue grew 6.3% to $1.4 billion. On a constant currency basis, total revenue grew 9.9%, driven by increases across the Americas, Europe and Japan of 1.4%, 29.1% and 68%, respectively. In our Retail segment, net sales increased 11.1%. In constant currency, Retail net sales increased 15.7%, driven by the opening of 114 net new stores since the third quarter of last year, and strong performance of our digital flagships. We saw a marginal decline in comps of 0.9% on a reported basis. On a constant currency basis, comp store sales increased 2.0%, reflecting a sequential improvement from the second quarter of our total comp as well as our retail store comp and outperformance versus our guidance. The increase is attributable to positive comp store sales in North America, Europe and Japan, as consumers respond favorably to our luxury product offering. Our U.S. digital flagship sales contributed 360 basis points to our overall comp performance in the quarter on a constant currency basis. In our Wholesale segment, net sales grew 0.3%. On a constant currency basis, wholesale sales increased 3.0%, driven primarily by our footwear category and strong growth in international markets. In our Licensing segment, revenue increased 8.4%, driven primarily by higher licensing revenues related to sales of jewelry and eyewear as well as higher international licensing revenue. We opened 52 new watch and jewelry shop-in-shops during the quarter and ended the quarter with 362 shop-in-shops globally. Gross margin declined 140 basis points to 59.5%, which includes a 95 basis point foreign currency translation and transaction impact. The decline in gross margin reflects: a 310 basis point decline in Retail gross margins, primarily due to additional markdowns; a 50 basis point decline in Wholesale gross margin, primarily due to additional wholesale allowances, partially offset by higher licensing gross margin dollars. Total operating expenses grew 10.7%. The increase in SG&A was due to higher retail occupancy and salary costs related to new store openings and included higher e-commerce expenses and an increase in corporate-related expenses. The increase in depreciation expense was primarily due to the opening of retail stores, new shop-in-shops, an increase in lease rates related to our new European stores and investments in our corporate facilities and IT infrastructure. As a percent of total revenue, total operating expenses increased 120 basis points to 30.2%. This was below the 200 to 240 basis points of deleverage in our guidance, primarily due to better-than-expected sales in the quarter. Income from operations was $409.3 million, or 29.3% of total revenue as compared to 31.8% of total revenue in the same period last year. Retail operating margin declined 340 basis points, due to the decline of Retail gross margins as discussed earlier and a 30 basis point increase in operating expenses attributed to higher store-related costs and depreciation expense, largely offset by lower distribution and general expenses. Wholesale operating margin declined 180 basis points, due to the decline in Wholesale gross margin as discussed earlier and a 130 basis point increase in operating expenses attributed to increased distribution costs, selling costs and depreciation expense, partially offset by lower general expenses. Licensing margin increased 60 basis points, due to lower operating expenses, including advertising costs, partially offset by higher costs associated with intellectual property protection as we take action against counterfeit activity globally. Income taxes were $114.4 million in the quarter and our effective tax rate was 28.0% as compared to 27.2% in the same period last year. The increase in our effective tax rate was primarily due to the absence of the prior-year favorable settlement of certain instruments in connection with our international structuring, partly offset by the increase in taxable income in certain non-U.S. subsidiaries which are subject to lower tax rates. Net income was $294.6 million for the third quarter and diluted earnings per share were $1.59. The unfavorable currency impact on EPS was $0.06 per share. Turning to the balance sheet, at the end of the quarter, cash and cash equivalents were $696.8 million. During the quarter we repurchased approximately 4.7 million shares totaling $200 million under our share repurchase program, and we have another $558.1 million of availability remaining. There are no outstanding borrowings under our credit facility at the end of the quarter in either year. Inventory increased 9.5% versus last year, slightly ahead of revenue growth and in line with our expectation. As discussed on our last call, the change in foreign exchange rates continue to impact our European inventory and we are now recording incremental inventory related to the consolidation of MK Panama. We expect our growth in inventory to continue to outpace our growth in sales as we open new retail stores and shop-in-shops, expand our digital flagships and further develop our Men's business. We also expect the exchange rate differential and the MK Panama consolidation, in addition to the transition of the Korean business in-house, to continue to impact inventory levels until we anniversary these events. Capital expenditures for the quarter totaled $96.8 million and were related to the buildout of new retail stores and shop-in-shops as well as investments in our distribution facilities, our corporate offices and other infrastructure improvements. We added 34 new stores in the third quarter: 15 in the Americas; 16 in Europe; and three in Japan. In addition, we expanded or relocated eight stores and converted 79 wholesale doors into shop-in-shops globally. Turning to our outlook for the fourth quarter, we expect total revenue to be between $1.13 billion and $1.15 billion, which includes approximately $36 million of additional sales due to our 53rd week. On a constant currency basis, total revenue is expected to increase in the high single-digit range, assuming an impact of approximately $20 million from the change in foreign currency rates. We expect comp store sales to be flat on a reported basis and to increase in the low single digits in constant currency, driven by growth of our U.S. digital sales, the introduction of new innovative product offerings for spring 2016 and diminishing FX headwinds. However, we anticipate lower revenues in our Licensing business during the quarter, due to lower watch sales and a decrease in revenue related to eyewear as we anniversary our launch with Luxottica and the final quarter of shipments from Marchon last year. We expect international gross margin to remain under pressure in the fourth quarter, as favorable hedging contracts we entered into last year expire. Operating expense as a percentage of total revenue is expected to increase 190 basis points to 220 basis points. We expect diluted earnings per share to be in the range of $0.93 to $0.97, assuming a tax rate of approximately 27.5% and 182.5 million shares outstanding. We expect foreign currency to impact net income by approximately $3 million and EPS by approximately $0.02 for the fourth quarter. For the full fiscal year, our outlook for revenue and EPS remains unchanged. We expect revenue of approximately $4.65 billion on a reported basis. On a constant currency basis, total revenue is expected to increase in the low double-digit range, assuming an impact of approximately $180 million from the change in foreign currency rates. We expect a mid-single-digit comp store decrease on a reported basis, and a low single-digit decrease in constant currency. Operating expense as a percentage of total revenue is expected to increase by approximately 230 basis points for the year. We expect diluted earnings per share to be in the range of $4.38 to $4.42 for the year, assuming a tax rate of approximately 28.5% and 190 million shares outstanding. We expect foreign currency to impact net income by approximately $38 million and EPS by approximately $0.20 for the year. I will now turn the call back to John for closing remarks. John D. Idol - Chairman, Chief Executive Officer & Director: Thank you, Joe. We are pleased to have exceeded our third quarter sales and earnings per share expectations. Our results demonstrate the sustained strength of the Michael Kors brand as our luxury product continues to resonate with consumers around the world. We are on track to deliver solid financial performance in the fourth quarter, as comp store sales continue to show sequential improvement and we capture additional market share in the luxury fashion accessories category globally. Looking beyond fiscal 2016, we will continue to leverage our market leadership position and strong management team as we move forward with multiple strategic initiatives we have in place to drive sales and earnings per share growth for the long-term. I will now open up the call for questions.

Thank you. We'll go first today to Kimberly Greenberger with Morgan Stanley. Kimberly Conroy Greenberger - Morgan Stanley & Co. LLC: Great. Thank you so much. Good morning. And a very nice print today, congratulations on that. John, I'm wondering if you can talk about e-commerce. I guess the surprise here is that as you've anniversaried ownership of that business, it sounds like it's still having a very outsized positive impact on your sales growth rate. I just expected we would actually see a little bit of more deceleration at this point. So maybe you can just talk about some of the drivers there. And then Europe also I think a little bit of a positive surprise, just given what we've heard from others and the fact that it's still running positive on a constant currency basis. Are you seeing disparate results across various countries in Europe? And maybe you can talk in particular about the wholesale piece, which was a real source, I think, of upside surprise. Thank you. John D. Idol - Chairman, Chief Executive Officer & Director: Sure. Thank you, and good morning, Kimberly. First, starting with e-commerce, we were very pleased in the quarter with the results that we saw for e-commerce and those were driven by, first, traffic and, second, conversion. Again what we see happening is customers are starting their shopping experience, as you all know, digitally, or mobily, first, and so the mobile traffic that we're getting to the site, it just keeps accelerating every single month. And we think we've got some real opportunities to even take that to another level. So we're extremely pleased with the traffic that we saw there. And we're also just pleased with the fact that certain categories – and I might add, footwear in particular, is seeing a huge lift on e-commerce. Again, we're able to represent a much greater assortment of product than we are actually in many of our own stores, which has been a really interesting finding for us and is leading us to look at our stores today currently. And we're going to be expanding the footwear areas inside of our own stores to capitalize on what the consumer is really telling us, given what she's seeing online. So again, we like what's happening there and we think that's just going to continue to grow. And again, sequentially, that will not grow as fast as you've seen over the past year or so, but the sheer dollar number is quite impressive. I might also add that even with the lift in e-commerce, we actually saw sequential improvement in comp stores in just the stores themselves in sales, and, again, that was driven, as I said earlier, by conversion. The conversion rates are getting very, very high inside the stores. And I want to give a very big New York shout-out to our thousands of sales associates all over the world who I think did an amazing job. We had great holiday season, first and foremost because of Michael's design teams and the product that they put together, but we've got thousands and thousands of people who have jet-set training and continue, even with declining traffic in shopping malls, to really deliver for us and for the consumers that they serve, so real kudos to them. In terms of Europe, we were generally pleased with the quarter. I have to be honest with you. There was a couple of areas of softness, as you can be well aware, and France with a very difficult market for us after the events that happened there. And again, it wasn't just Paris that was affected. Remember, we're a very strong brand across many of the areas, and people were really not in the mood to shop. We were affected in Belgium as well. And then the other place that we've felt some softness is in the UK and we've been feeling that, we've been talking about that really since last year. And that's been the euro dollar exchange and also the Russian's not coming there as much as they did and some of the Middle Easterners as well as. So that market's been a little more challenged for us. That all being said, we're seeing an actual acceleration in the business as we kick off the fourth quarter, which we're very excited about and we think that's some of the new product reads. We told you that in the last quarter. As we saw some of the new products hitting the stores, the reaction was quite strong. And again, the other thing that we're seeing happen in Europe, like we saw in America three years ago, some of the e-commerce penetrations with our partners, whether that's Harrods or Selfridges or other accounts in the marketplaces, is really accelerating very quickly. And so we're very pleased with what's happening in the European market and continue to see lots of growth there. Thank you, Kimberly. Kimberly Conroy Greenberger - Morgan Stanley & Co. LLC: Great. Thanks.

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

Thanks. Good morning. Really nice quarter, guys. Wanted to ask my first question on – dive a little bit more on conversion, John. I think it's something new that you're calling out. I know you touched on it in response to Kimberly's question and the prepared remarks, but is it a new phenomenon, this is kind of accelerating conversion? And do you feel like it's firmly tied to the development of the digital platform, in-store training? Are there other factors driving this? Because you've got exposure to these channels that a lot of other companies, retailers are struggling, tourist markets, mall channel outlets, et cetera. Maybe we can dive in a little bit deeper and understand what's driving that conversion and how much more opportunity there is to use conversion to drive the comps. John D. Idol - Chairman, Chief Executive Officer & Director: Well, Omar, and I'm going to focus this on North America for the moment. We believe that mall traffic in North America is going to continue to decline. And the reason for that is, is again we think that people in North America are a bit more savvy when it comes to digital shopping, and it's just been more cultural here for a longer period of time. And you have big companies who are quite strong at it. And we've seen that both in our own stores and you can see that through our wholesale partners as well, where digital is just becoming a bigger piece of the business. We haven't seen that yet in Asia, where mall traffic continues to be still pretty good. And Europe, I'd say mall traffic is kind of average. We haven't seen the deceleration that we saw in the United States. And in the United States, again, we attributed primarily to digital shopping for people. The reason why the conversion is climbing I think is twofold. Number one, just as a percent to total, obviously if your traffic is down and your sales are trending up, it's going to come usually through conversion, not necessarily through ticket climbing so high. But the second thing is we've really worked hard with our teams inside the stores. We told you in our prepared remarks that the smaller bags and the AURs, that's a reality of fashion. We were one of the first people that jumped on that, and we believe that the global market for luxury handbags is approximately flat. But in unit sales, we're up in very strong double digits. So what does that tell you? That tells you that there are more customers actually buying Michael Kors product than what you look at in the comp store sales. You're comparing comp store sales in dollars, which is obviously how we all earn EPS, but in actual units, there's a lot more people buying Michael Kors product, and probably some of our other competitors, than you're actually seeing. So the category in dollars is roughly flat, but actually in units is quite strong. So how do you go after that? Well, we believe that when somebody is coming in and interested in a crossbody, they need a new wallet because the wallet size is smaller in a crossbody versus a mid-size handbag, where it might be as a zip-around continental or things like that. So the market is changing very, very rapidly as the consumers' fashion taste is changing and we see our opportunity really being in upsell with the customer or in trying to take advantage of trend. That's the second thing I think we've done a very good job on, again, whether it was backpacks, whether it was crossbodies, saddlebags. We also did a great job with our active footwear. I mean, it's no secret some of the big athletic companies are doing very, very well. And we've been on that trend for the last two years, and that category is growing significantly for us. So I think what our customer is responding to is we've got the right fashion for them at the right time. We've got really well-trained associates and these associates, quite frankly, know how to upsell in terms of multiple items to get that transaction value up, which is helping in our total conversion rate inside the store. Thank you, Omar.

That's super helpful, John. Can I ask another question, maybe a little bit more detail on the decision to continue to destock the wholesale channel? The channel's down, that's what the market's worried about, what you're seeing there? It's obviously a channel you're also committed to. How should we think about that and the thought process behind it and the evolution of it? John D. Idol - Chairman, Chief Executive Officer & Director: Sure. First off, we love our partners, whether it's Macy's or Dillard's or Lord & Taylor or Bloomingdale's or Saks or Neiman's or Harrods or Selfridges or Takashimaya or whatever, the wholesale channel is phenomenal. Department stores are phenomenal. They carry amazing brands inside these channels and I think that the theory that this channel is a channel that's going away is not a very well thought out theory. That channel is, like every channel in retail today, is being challenged because the consumer is shopping differently. And as they shop differently, quite frankly, they're smarter. They have the ability to see things online, a lot more assortment, a lot more selection. They can compare side-by-side. They can compare pricing online. So what we just believe is that that channel is going to figure out how to manage its growth over the next 12 to 24 months, as many of us are. And we think it's better to have less inventory in there, to have less promotions, which will keep the brand integrity at a higher level. And our partners are very supportive of this. We also want to turn our inventories faster for them and for us. And we think the better we look to our end consumer and not confusing them with different promotional activities at different levels, the better it is for the brand long term. So as I said in our prepared remarks, we believe that channel is going to be down on a go-forward basis for us. And we'll make that up more so in our own retail stores, our e-commerce expansions in certain marketplaces. And then ultimately long-term, as we've said in the past, we're looking at certain other licenses that we may or may not bring in house, our Men's business growth. So we have plenty of opportunity for us to grow. It doesn't all have to be pushed. And that's what we're afraid of. We don't want to push too hard, because we think that could damage the brand long-term. Thank you.

Thank you, great job. Thanks.

We'll take our next question from Matthew Boss with JPMorgan.

Hey, good morning. Congrats on a nice quarter. So as we think about the handbag category, do you see this AUR pressure as entirely fashion-related? Is any of this promotionally-driven? And when did you really see the AUR pressure start? I guess my question is do you think we've seen the peak? And what's the right stable state balance between the unit growth that you're seeing and the right level of AUR? John D. Idol - Chairman, Chief Executive Officer & Director: Yeah, first off, good morning, Matt. It's a great question. I don't have the exact percentage in here for you, but it's definitively much more driven by bag size than it is by promotional activity. And I think I said in the last quarterly call that we are hoping, believe, think, wish, whatever you want to say, that we start to lap this in June, July, August of next year. We saw the small bag trend happening. It really started happening two years ago. We think we're a bit more up against that or there will be less of a headwind for us. There's no guarantees on that. Again, it's just going to depend on the trends that are happening. You even see in money pieces now are getting smaller because, again, as more things end up on your phone, you need less things in your wallet. So that's just a fact. So actually our much smaller money pieces are accelerating even faster than our larger money pieces. So we're seeing it across the board. In terms of the promotional activity, look, there's no question that our third quarter or the retailer fourth quarter had more promotional activity inside of it. I wouldn't say there was more events. I would just say there was a lot more markdowns related to clearing inventories, as everyone wanted to be clean to start the year. We had terribly unseasonably warm weather, which really affected everyone in the business, and not just things like boots and coats, which everybody talks about. But when people aren't going to the stores because it's 60 degrees outside on the day before Christmas, it's just got a psychological halo that we really think affected the business in North America. So I think people got healthy with inventories. And I think that was a very good thing for us to start out the spring season. So, thanks, Matt.

Great. And then just a follow-up, what was the run rate of watches in the quarter? And when do you anticipate a level of stabilization here and potential return to growth in that segment? John D. Idol - Chairman, Chief Executive Officer & Director: Yeah, first off, we don't disclose the various categories in detail like that. The Watch business remained difficult during the quarter. I would say that, as in the prepared remarks, we really saw something very interesting. We saw when we put newness on the table, the customer responded very, very positively. So, you're going to see something from us in spring. We have one of the largest new assortments of watches coming in our history. And that's going to be led by slim watches. We think there's a very, very big fashion trend toward slim, so Michael Kors will be pushing that in a very significant way. And we think that's one of the key issues is we probably didn't have enough newness out there. I told you that in previous calls. We think we've addressed that for the spring season. And secondly, clearly, consumers are just wearing less watches because of what a smartphone will do for you and the fact that people are glued to their phone and they use that for more of a timepiece. I think and I believe Kosta Kartsotis at Fossil thinks as well, that the smartwatch technology is actually going to revolutionize the fashion watch business. I think over the next five to 10 years, most fashion watches will be sold with some type of smartwatch technology in it. So we're super excited. We'll be announcing our whole program at Basel in March with a launch in-store in August. And watch out. We're a very competitive group, Fossil and Michael Kors. And we see big opportunity in a category that is today in the billions of dollars, that being not only smartwatches but other connected accessories as well. And we intend on competing and competing at a very high-level. Thank you, Matt.

That's great. Good luck.

We'll take our next question from Oliver Chen with Cowen & Company. Oliver Chen - Cowen & Co. LLC: Thanks. Congrats on the solid product and execution. John, we had a question on the longer-term margin profile. As you look ahead, what are your thoughts as it interplays with product mix or AUR and your opportunities? It's a question we get from investors. Also you had such strong performance in earnings growth ahead of your expectations this quarter, just why wasn't there necessarily an opportunity to raise your full year? I'm just curious about that. Thank you. John D. Idol - Chairman, Chief Executive Officer & Director: Oliver, I'll let Joe answer those questions. Joseph B. Parsons - Executive Vice President, Chief Financial Officer, Chief Operating Officer & Treasurer: Thanks, Oliver. So in terms of margin, obviously, we've talked some time about normalization of gross margin. We are not giving guidance further than the current year until our next quarter call. That being said, we are thinking that gross margins have approximately normalized, and that we can continue forward with the margins in the zone where we're at. In terms of EPS, we think that we can continue to grow EPS into the future. And in terms of operating margin, we discussed recently what we thought operating margins could be on a sustainable basis and we continue with that. In terms of the full year, we're actually very pleased that we're sustaining the projections for the full year for both revenue and EPS. We're obviously in a difficult market. We talked about that on the conference call. We are reflecting what we are seeing, plus some timing differences in the fourth quarter. And that's why, at the end of the day, we did not increase the full year, but again, we're feeling very good about the full year and very pleased that we held the previous guidance. Oliver Chen - Cowen & Co. LLC: On the largest assortment ahead, could you just characterize the mix of price points, if there's major distinctions we should be aware of as we evaluate and look at that product? And the assortment size, does it also get some space growth in terms of how it will be shown? And any details we should know about as you launch it across your channels? Thank you so much. John D. Idol - Chairman, Chief Executive Officer & Director: Yeah, Oliver, it's a very good question, the AUR is going to move up a bit in product, because as we add materialization and as we add embellishment and as we do different things to the product to enhance it, we actually want to move the AUR up a little bit. Michael and I were talking last night, it's so funny, that when a customer sees amazing design and understands that that is something that's different, we don't have any problem with selling the pricing of it. And I think as an industry, we probably got a little too focused on the $300 handbag price point, so again, it's not that we're jumping into saying that our business is now going to be $700, which by the way, we have that category today in our stores because we have our Michael Kors collection bags in the stores. But we think that the customer is looking, just like we said in watches, they're looking for something that's more exciting and that's why we've invited you all to come up to the showrooms in the next couple of weeks to see the product because, Oliver, if I may say when I read a lot of the reports, everyone has said that Michael Kors is ubiquitous. Michael Kors is over distributed. Michael Kors is this, that, and the other thing. And the truth is, is that we keep growing and the customer keeps responding and the customer is voting not only yes in dollars, but she is voting yes in units. So what we're going to stay committed to is great design. There is going to be some elevation in the AUR. In terms of additional space in the store, no, what we're probably going to do is take a little less of our basics and probably pull those back a little bit and increase fashion a little bit more, which again, the customer is saying yes. She wants something new, not only from us. It's from our competitors as well. I'm talking from the luxury European competitors are seeing the exact same thing. So it's right for trend. It's right for the business and it's right for inspiring our customer. Thanks, Oliver. Oliver Chen - Cowen & Co. LLC: Thanks, John and Joe.

We'll go next to Joan Payson with Barclays.

Hi. Good morning, everyone. Could you talk a little bit, John, about how you've been investing in the business, maybe what inning you're in with some of the recent investments, whether it's supply chain, marketing, e-commerce, flagships and which of those are driving the most OpEx growth? And then, Joe, could you just quickly touch on – I think you mentioned some of the favorable hedges that are rolling off soon, maybe how those will potentially impact fiscal 2017? John D. Idol - Chairman, Chief Executive Officer & Director: Sure. Good morning, Joan, and a very good question. As you can see when you really look at our income statement, the revenues continue to grow inside the company. We're making sequential improvement in comp store sales. So hopefully a bit of the naysayers who say that our brand is ubiquitous, over distributed, et cetera, some of that hopefully you'll get comfortable with the fact the Michael Kors brand is still very strong, growing and developing, both in North America and globally. That being said, our SG&A is actually rising slightly quicker than our sales, which is something that we're working on, and that's being driven by a number of different projects, as you know, that we were investing in. And also we had anticipated a much higher top-line in particular because of the FX change. We're about halfway through the development of our Venlo project, which is a very, very expensive endeavor for us, a 1 million square foot facility in the Netherlands to support our $1 billion-plus business in Europe and the fact that we're going to be launching ultimately in 22 countries our online. And we want to really have the best-in-class facility to be able to handle that and not have to keep upsizing the way that we did in Los Angeles, which was a bit painful for us. So that project will be finished somewhere around August, September, October, and we really won't get leverage from that in the first year. Actually that will go against us as we learn to operate the facility, et cetera, but again as we've told you, we're a luxury business investing for the future. So if we don't make these investments, we're not going to have a company that's going to be sustainable long-term, so that's the first big investment. Secondly, as we bring up e-commerce around the world, and, quite frankly, move sales from brick-and-mortar to e-commerce, we have the expense of bringing up e-commerce, all the systemic issues. We're hiring staff well in advance of having any revenues. So all these are going as negative headwinds and then unfortunately today, e-commerce generates a lower operating profit for us than four-wall brick-and-mortar. We think over time, that will reverse itself, but, as you know, when the consumer requires free delivery, free return, wonderful packaging, plus there's a new trend that people are buying multiple sizes of things to try them out at home and then return them, that all is a negative headwind for us. So I would say that we're again about halfway through our investment to be able to have our entire network built out in terms of global e-commerce. And then, we're here finishing out our corporate headquarters, which, again, you'll see in a couple of weeks, which was a significant project for us. We said that we wanted to look, feel and act like a digital company. I think you're going to be very impressed when you see what we've done here. It's great for recruiting the best in the industry. It's great for employee retention. And I think we did it in a way that was very reasonable, given where we are in our building and how we were able to execute that. So those are the three big projects. We've got some minor things, as you know, that are headwinds for us. We brought Korea in-house. That's going to be negative for the first couple of years. We've got our joint venture in South America that, unfortunately, will be negative for us as we deal with some of the headwinds down there. And Men's will be negative for us for the next couple of years. Again, if we don't make these investments, we're not going to build a long-term company and have it sustainable. So we believe that going forward, SG&A still will slightly outpace sales. And we hope to get that probably turned around in our fiscal 2018, but it will not be in fiscal 2017 at this point. So hopefully that gives you some color on that question. Joseph B. Parsons - Executive Vice President, Chief Financial Officer, Chief Operating Officer & Treasurer: And then again, I would add to John's comments, and we didn't discuss this in this call and we're not giving guidance for next year, however, when you think about CapEx, our $400 million CapEx for the current fiscal year is a peak CapEx and we will be thinking in terms of decreasing that CapEx spend significantly going forward. In terms of the hedges, I can't give you any definitive answer to that. Our hedges are typically nine months to a year out. They relate to operations that we operate in non-U.S. currencies, where our purchasing inventory in U.S. dollars, and we talked about that in prior quarters. As those hedges roll off, we, of course, are entering new hedges, but they'll be more at the spot rate when they roll off. That will increase inventory costs and, therefore, have a headwind in terms of gross margin.

Great. Thank you both.

We'll go next to Erinn Murphy with Piper Jaffray. Erinn E. Murphy - Piper Jaffray & Co (Broker): Great. Thanks for taking my question. Good morning. I was hoping, John, you could talk a little bit more about the Men's opportunity in the wholesale channel. I think you talked about 75 shop-in-shops being rolled out. Where do you see the longer-term opportunity at wholesale, in particular, for Men's? And then during the quarter, I do believe Mark Brashear, he left to go to John Varvatos. Can you just talk about where the leadership team is now at Men's and did that departure change any of your near-term rollout plans? Thanks. John D. Idol - Chairman, Chief Executive Officer & Director: Sure. Mark Brashear, by the way, was terrific. We really enjoyed his leadership here, so I guess we did a switch with John Varvatos. Mark went to John Varvatos and Don Witkowski came from John Varvatos to come over here to run Men's. You may not know this, but actually Don ran Men's here many, many years ago when we first started it. Don was with me at Donna Karan as well. So Don is somebody who walks in the door, hits the ground running, doesn't miss a beat, has great leadership and merchant qualities. And so, as far as we're concerned, really nothing has changed at all. And as you know, we are really excited about Marcel Ostwald joining the company. And I can't tell you how thrilled you're going to be to see the Men's product when you walk in the door. And I'm very excited for when you all come visit because for the first time – normally, it's always that the female analysts who are oohing and aahing. This time, we're going to have hopefully a few men oohing and aahing at our walk-through. The Men's business, we've said before is a $1 billion opportunity for the company. We've said about a third of that roughly will come from men's sportswear. About a third of that will come from men's leather. And about a third of that will come from watches, maybe a little less from watches, but we kind of broke that down in that area. And the watches, we obviously won't report the revenue inside of our company, but we'll report the royalties that that generates. We are well on track with all of our North American partners in constructing shops, so we'll be in all the best stores, again, whether that's Saks, Bloomingdale's, Macy's, Dillard's, Lord & Taylor, they are either up or under construction or going forward. I have to say that some of the new product has just hit retail in the last week. Marcel was just barely able to touch some of that and the sell-throughs have been terrific. And where we are really going to see the big impact is come fall season. We're also in 150-plus stores today already in Europe, so the distribution is there. We have beautiful shops in Harrods and Selfridges and at Peek & Cloppenburg and in El Corte Inglés, et cetera. And the European community is really supportive of that. I just came back from Asia two weeks ago. We have some very significant plans about rolling that business out. Again, that will be a department store-driven business, but with shop-in-shops that we'll count those as stores. Remember, we count concessions in our store count, so when I give you that 500 store count globally, that includes concessions as well inside that number. So internally inside the company, we're really excited about it, big opportunity. And there really hasn't been a major new menswear business launched in 20 years in terms of significant across all categories that I think our wholesale partners can get behind in a big way. So we're excited to be a part of that. And then we have the freestanding store opportunity/stores that will be connected to our existing stores, and we think that's going to be a big opportunity. One last call-out, I will tell you that in our stores over the holiday season, what really surprised us is leather accounted for close to 40% of the sales inside the stores that opened. And again, they've only been open for a couple of months and it was during the holiday season, but we were really shocked by the strength of our business in leather and really bodes well for the development of that category. Erinn E. Murphy - Piper Jaffray & Co (Broker): Great. Thanks for all the color and best of luck. John D. Idol - Chairman, Chief Executive Officer & Director: Thanks, Erinn.

We'll go next to Simeon Siegel with Nomura Securities.

Thanks, guys. Good morning and congrats on the quarter. John, any thoughts on the jewelry opportunity and how large you can see that category reaching? And then, Joe, just given your commentary on advertising earlier in the call, is there a targeted marketing as a percent of sales to keep in mind? Thanks. John D. Idol - Chairman, Chief Executive Officer & Director: Good morning, Simeon. The jewelry category again has been continuing to expand and grow, so while unfortunately we've seen the watch category decline, we're seeing the jewelry category increase. One of the things that we're going to do in our own stores for the spring of 2017, and you've heard me talk about this kind of last year more, that while we loved introducing the jewelry category, unfortunately that drove the AUR of the total jewelry and watch category down for us because we were selling a $150 bracelet or an $85 pair of earrings versus a $225 watch. So that really hurt us. And again, I think sometimes when people are looking at the business, they think it's all handbags that's driving the comp up and down, but in a lot of cases, that's not really actually the issue. So we kind of hurt ourselves a little bit with that. So what we're going to do is we will exit most of the fashion jewelry line in the spring of 2017 from our own stores. And we will introduce a more fine jewelry line inside of our own stores, really bringing it closer to the watch AUR, not completely but we'll have gold, we'll have silver, we'll have plated materials as well, 18-karat-plated et cetera. And we're going to really elevate that whole category inside of our store and there will be select retail partners that we will allow also to carry that. But it's going to be very limited distribution, and we think it's a big opportunity for us to trade up the AURs in the store. Going back to the original question that Kimberly and Omar, we were talking about, is as traffic declines in these stores, we all have to be focused on conversion. We're not going to raise our AURs by 25% and 30% and 40%, but if you can get your AUR up 5% or 10%, that's going to make a big difference. And we're going to be doing that not only in our own stores, but looking at the department store channel as well and the specialty store channel and really take advantage of that. The second question you asked, we don't break out the percentage for advertising. The only thing I can tell you is, is that we will continue to support that part of our business. As you know, we have, first off, the greatest voice in the fashion industry with Michael himself. We have the greatest PR marketing and digital team, we think, in the industry. And I said in the prepared remarks, every single channel, social channel, we increased, whether it's fans, followers, et cetera, and that really speaks volumes to what's happening with our advertising and marketing and the way that our teams are handling that. And again, we're going to be very proactive, not only on existing channels, but as we've done in the past, we've been really a leader in looking at new channels as they emerge and how we can have a voice in there.

Great. Thanks a lot, guys. Best of luck. Thank you.

We'll go next to Lindsay Drucker Mann with Goldman Sachs. Lindsay Drucker Mann - Goldman Sachs & Co.: Thanks. Good morning, everyone. I wanted to ask a question about your plans for stores in calendar 2016. Can you give us a sense on what you're planning to do as far as in North America your store expansions, your full-price store openings, your outlet store openings? Any detail on how you're planning to grow that distribution be would be great. Thanks. John D. Idol - Chairman, Chief Executive Officer & Director: Sure. Lindsay, we don't give guidance on that yet. We'll do that in June. But we have between our licensed partners and ourselves, we have about 860 stores worldwide. And out of that 860 stores, in the Americas we have about 400 stores. That includes Canada, Latin America, the United States, et cetera. So we're kind of getting built and finished with our store rollout. In North America, in particular, it's going to be very few stores. We told you many years ago, and I know many people have not loved the fact that I've held very steadfast to the number. We told you we were going to build 400 stores in North America. And many people have asked me over and over again why you doing that. And we said we're going to keep building 400 stores in North America and we will finish that buildout. The Americas got a little bit larger as a number because it now includes Latin America, so maybe it will be 425 or 430 or something like that. Whatever it is, we're pretty much done with our buildout in this region of the world. Europe will continue to accelerate. In that marketplace, we had 171 of our own stores and then we have a number in Russia, et cetera. And again, we believe that that marketplace will have in excess of 200 stores. We've said that in the past. And then Asia is a place where we think we have a lot of opportunity. So all in all, we've said about 1,000 stores is where we think we'll be as a company. That includes our licensed partners. So we have 150 or so to go. That does not include men's. We've said that men's will be something that will be a plus for us. And the last thing I just want to say is, again, we make a lot of money in four-wall, in stores. We also believe that while e-commerce one day will end up being 20% or 30% of our business, it's not going to be 100%. So stores aren't going away. They're not dying and we need stores to service communities and people. And that also I think as you become omni, you really have a distinct advantage in having stores. So I'll give you good example. Our return rates on e-commerce are running very low. But a number of those returns are coming back to stores. And it actually gives us an opportunity to interact with the customer. And we have seen evidence where we're actually not only taking the return, but trading the customer up and creating even a better experience with the customer. So again, we embrace omni. We embrace our retail flagships and our retail fleet that we have today. And we will finish the buildout and get ourselves to the approximately 1,000 stores. Lindsay Drucker Mann - Goldman Sachs & Co.: Will you be expanding stores in North America? I know a number of them are pretty small in full-price and in outlet. John D. Idol - Chairman, Chief Executive Officer & Director: Lindsay, if you asked me that question two years ago, I would've said yes. I think that's a little bit off the table. We've got a handful of stores that we did expand already. I don't have the exact number in front of me, but it's probably in the 30-plus or 40-plus range. Those, we're pleased with what happened with those stores. What we need to see is we're going to reconfigure a number of existing stores, as I mentioned earlier, to increase the footwear space inside those stores. We're really happy with what's happening with footwear. And we think it's another reason for the customer to come in and shop with us, et cetera. So we've got to see how that plays out. I want to remind everyone that as we increase our women's ready-to-wear and our women's footwear business, both in wholesale and in retail, that has an impact on our margin for two reasons. Number one, we have lower margins going in. And number two, they're size businesses. And when you have size businesses, you have markdowns that are greater than what you run in – you know, handbags aren't really sized and watches aren't really sized. So it'll help us grow the top-line. And ultimately, we think it'll help us grow the consumer experience, but, as Joe indicated before, gross margins are going to kind of be flattish in the zone of where they are today looking out going forward, impacted a little bit by what's going happen with shoes and bags. And even menswear has lower gross margins as well. Lindsay Drucker Mann - Goldman Sachs & Co.: Great. Thanks so much. John D. Idol - Chairman, Chief Executive Officer & Director: Thanks.

We'll take our next question from Brian Tunick with the Royal Bank of Canada.

Thanks, all, and my congrats again to you guys in a pretty tough environment. I guess last quarter, you guys took on an additional line of credit. And I guess clients are asking about the potential of buying in maybe the China license, given the ongoing positive comments you've been making about China, despite some of the issues there, so maybe curious about your thoughts there, John. And then maybe secondarily on your beat to your guidance, can you talk about in North America, was there upside coming from the malls or was it coming from your outlet stores? Just trying to get an understanding of where the upside came from bricks-and-mortar. Thanks so much. John D. Idol - Chairman, Chief Executive Officer & Director: Sure. Sure. Brian, first off, and I'll let Joe speak at the end here, also, about our balance sheet, but as we've said in the past, we're a company that has an amazing operating model. We have, I think, the second or third highest operating margins in the world in luxury compared to the European luxury operators, et cetera. We're going to end this year somewhere around 25% operating margins, which really is extraordinary. And we generate a lot of cash. And we've been very aggressive about buying back stock, because we feel that the market, if I may say that, has misunderstood our story and our potential and our long-term vision and our success, quite frankly. So we are going to continue to be very aggressive, given what we think is a dislocation of where our multiple is versus the rest of the industry. And I might remind everyone that we will end the year with top-line growth and bottom-line growth, which is very unusual for many, many players in the luxury industry. Pardon me if I bang the drum for Michael Kors for a minute. The line of credit is there for a number of different reasons. First, it's there – again, if we continue to see dislocation, we may or may not decide to even get more aggressive with our buyback purchases. As Joe said before, we have $580 million (sic) [$558.1 million] (69:52) left on our authorization. But our board feels very strongly in making sure that we continue to return value to shareholders. Secondly, the line is there to look at potential licenses. We have a number of them that could be brought back in-house. And again, when we think that those are in a strategic place for us or are going to be accretive for us, we will act upon that. As you said before, we are very pleased with what's happening in China for us. And even though Hong Kong and Macau remain difficult, we had double-digit comp store increase, even with Hong Kong and Macau being difficult. I mean, what does that tell you about the brand? The brand is strong, resonating. Customers very, very excited about what's happening with our product in the marketplace. So, we like that. And as we said in the prepared comments, she's shopping around the world with us, not just in the Mainland China marketplace and, as you know, well over 50% of luxury goods purchased outside of the mainland. Then the third purpose for the line is, and we said it in our last call, is when and if a strategic acquisition is something that we think fits with our company's short-term and/or long-term objectives, we may very well act. So we have an incredible balance sheet. We have an incredible cash flow generation. And we have the ammunition to do a lot of different things to continue to generate revenue and earnings per share growth for the long-term. Joe, do you want to add anything about the balance sheet? Joseph B. Parsons - Executive Vice President, Chief Financial Officer, Chief Operating Officer & Treasurer: No. In general, our balance sheet is very strong. We talked about inventory. We're in a very good position to do the things that John talked about. So we're feeling very good about the balance sheet. John D. Idol - Chairman, Chief Executive Officer & Director: And then lastly, Brian, we really saw acceleration coming in the third quarter, fourth retailer quarter, our third quarter. November and December just got better for us as we went through the quarter. What we really were pleased about was our full-price stores. She came in. She shopped. She shopped for gifts. And I said to you earlier that we saw sequential improvement. She liked what product we were offering her. And she had a lot of choices out there in the marketplace. And not only did she have a lot of choices, she had a lot of prices. So we were particularly pleased with that. And, again, we spend so much time talking about North America, North America. We're doing 30% of our business now, approximately, internationally. We really liked what we saw happening in Europe, and Asia is continuing to just build momentum. John D. Idol - Chairman, Chief Executive Officer & Director: So as you think of this company long-term, and this will be my concluding remarks, look, we always knew that North America would be a marketplace that ultimately would reach a point where it would have lower growth. That's where we are today. We're still growing in the marketplace and we're still taking market share, which, again, I hope you recognize, given our results. So we think that that really resonates for the brand well. Europe, still good opportunity for us to develop stores, wholesale, shop-in-shops there and many marketplaces where we're still underpenetrated. Asia is wide open for us. We still are super-underpenetrated in Korea, Japan, China and in certain places in Southeast Asia. So when you think about Michael Kors, think about growth. It's not going to be double-digit growth. Those days are behind us, but we're going to have solid growth going forward. And in the luxury industry today, I think there's not a lot of companies that can stand up and say that and keep delivering on that quarter-after-quarter. I want to thank you all for taking the time to be with us today, look forward to updating you on our results in our next conference call. Thank you.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference.