Good day, and welcome to the Michael Kors Holdings Ltd. Second Quarter Fiscal 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Joe Parsons. Please go ahead, sir.

Good afternoon, and thank you for joining us for our fiscal second quarter earnings call. Presenting on today's call are John Idol, Chairman and Chief Executive Officer; and myself, 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 would 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 date, 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, Joe. Good afternoon, everyone, and welcome to Michael Kors' second quarter 2017 earnings call. I'm joining you today from Tokyo, which is a market that we believe has great opportunity for the growth of the Michael Kors brand. Now turning to a review of our second quarter performance; our results exceeded our expectations in the second quarter. We continued to deliver innovative luxury fashion product, and expanded our brand footprint worldwide. We were extremely pleased with the successful launch of our Michael Kors ACCESS wearable technology line of watches and fitness trackers, as well as the debut of our Wonderlust fragrance. In addition, we were pleased with the great response to our new fall handbag collections, which exceeded our expectations. Our new iconic Mercer collection emerged as a global best-seller, and our Brooklyn collection set the fashion tone for the season with the introduction of grommet hardware detailing. We also achieved strong sales growth in our menswear business during the quarter. And we continued to see this category as an area of future growth for the company. In North America, our digital flagships continued to deliver double-digit sales increases. And we were pleased with the successful launch of our European digital flagships. In addition, we've seamlessly completed the integration of our recently acquired business in Greater China; this region represents a strong growth opportunity for the company. I'm very proud of the work our team has done to deliver on these strategies. I believe these accomplishments set the stage for future growth. Let me now turn to a review of our quarterly results; for the second quarter, total revenue reached $1.1 billion and earnings per share was $0.95, both of which came in ahead of our expectations. And comparable store sales decreased 5.4%. While our comps in North…

Thank you, John. We are pleased to report that revenue and earnings per share results came in above our guidance. Total revenue was $1.09 billion, compared to $1.13 billion in the prior-year quarter. In our Retail segment, net sales increased 12.1%, driven primarily by the addition of 198 net new stores since the second quarter of last year, including 137 stores associated with our recent acquisitions of Greater China and South Korea. Comp sales decreased 5.4%, reflecting a mid-single-digit comp decrease in North America and a low double-digit decline in Europe, partially offset by a mid-single-digit comp increase in Asia and strong performance of our digital flagships. Our North American digital flagship sales contributed 270 basis points to our North American comp performance in the quarter. In our Wholesale segment, net sales declined 18.4% due to lower sales in our accessories, womenswear, and footwear businesses, partially offset by an increase in our men's business. We saw a 22% decline in our Wholesale business in the Americas region, as we remain disciplined with the amount of inventory we have shipped into that channel. We also saw a single-digit increase in our European sales. In addition, we had a decrease in Asia, which primarily reflects the shift of our Greater China and South Korean businesses to the Retail segment during the quarter. In our Licensing segment, revenue decreased 10.2%. This was primarily due to the continued softness of the fashion watch and jewelry categories, as well as lower revenues from our geographic licensing arrangement in Asia as a result of our recent acquisitions of our licensee operations. Gross margin expanded 40 basis points to 59.2% due to a favorable channel mix shift towards the Retail segment. Gross margin increased 80 basis points in our Wholesale segment, primarily due to a change in…

Thank you, Joe. We continue to see meaningful long-term growth opportunity as we further expand our luxury brand internationally, grow our digital flagships and develop our men's business. We are also excited about our holiday season as we expect to continue to benefit from the recent new handbag collection launches, the Michael Kors ACCESS wearable technology line and our new Wonderlust fragrance. In addition, we have strong holiday gifting programs including the Michael Kors-Fuji Instax collaboration, and our launch of the Custom Kors Experience on our digital flagship, where customers can create their own personalized handbags and small leather goods with monograms, stickers, charms, keychains and interchangeable flaps. We plan to drive brand engagement with exciting new marketing programs, positioning Michael Kors as the gifting destination this holiday season. Our #GiveKors campaign featuring model Taylor Hill will be comprised of a robust gifting experience across our digital flagships and catalogs as well as social, e-mail and print marketing campaigns. We will also be focused on helping our customers find the perfect gift for everyone in their lives through a number of jet-set in-store personal shopping events. Our Michael Kors stores will certainly be the place to be this holiday season. Despite the expected impact on our near-term results from the previously mentioned macro challenges, we remain confident in our ability to drive long-term growth and increase shareholder value. With that, I will now open the call to 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 so much for taking my question. John, I wanted to ask, obviously there are a lot of external pressures that are certainly hurting your business, or are causing a headwind in your ability to grow. Maybe if you could turn for a second at some of the internal strategies. What are the things that Kors is putting into place to try to combat some of these external pressures and drive growth? And then Joe, I just wanted to follow-up on the margin commentary. I'm wondering if you can talk to us about how we should think about retail segment margins over the medium-term? Where do you expect them to land? And Wholesale margins over the medium term, where do you think they end-up normalizing? Thank you so much.

Thank you, Kimberly. There's two separate things that are going on for us we believe in the total retail environment. First, there's no question in North America we probably suffered worse than many of our competitors because we had a very large international business that we had some very nice growth with in particular European tourists coming to United States and South American tourists coming to the United States, to a degree people from Mexico as well. So most of that business has declined dramatically and we have not seen any return and it's getting probably closer to the bottom, but there's still more headwinds in there, obviously not as volatile as it was 12 months ago. So we're really looking at that as one issue that we have to deal with. And the second issue is in North America there has been a very, very strong amount of promotional activities generated from competitors and from certain other channels of distribution. So, we – and I'm going to address the second one first. We've, as you know, announced that starting on February 1, we're really focused on reducing the amount of promotional activity that we are going to be involved with as a brand. We think that's the right thing to do for the health of the business. Once again, this past quarter we saw mid-single-digit increases in our overall accessories business in units, so once again, customers buying Michael Kors, that's not the issue. The issue is that the price of our sale has been denigrated and it's been denigrated because of promotional activity. We believe that if we focus on average transaction value and get that up and less on the unit, amount of unit transactions, we're going to have a healthier business. So to that end, our…

Hi, Kimberly. So, thank you for the question. I think we were pretty explicit in the script regarding the Retail operating margin. So in the second half, we're anticipating the Retail margin to be approximately 20%. Obviously, for the full-year, it will not be at that level. And then the reason I wasn't explicit about the Wholesale margins was because we're going to be pretty consistent with where we're trending now. And so I think when you put those pieces together you'll see that the operating margin we gave guidance on of 20.7% makes sense. Kimberly Conroy Greenberger - Morgan Stanley & Co. LLC: And Joe, does that hold for the out-years as well?

So, we have really not updated the discussion about out-years. As you know John and I believe that the company should be operating in the low-20s% but – and we continue to think, despite the headwinds that we're facing now, that that's where we should be, although, Kimberly, we have not officially updated that number. Kimberly Conroy Greenberger - Morgan Stanley & Co. LLC: Thank you so much.

We will now move on to Omar Saad with Evercore ISI.

Thanks. Good afternoon.

Hey, Omar.

Quick question on the smartwatches. It's great – sounds great, like they're doing really well. Are the gains you're getting in the smartwatch side of the business enough to offset, are they big enough yet to offset the declines in the fashion watch business?

Good afternoon, Omar. So, they are not yet big enough to offset the declines that we're having in the fashion watch business, but they are making a significant dent in the decline. And we're just – I think we are in a situation where we can't fill all the demand right now, so we don't really know how high is high. We also will have to wait until we get through, again, calendar fourth quarter, which will be a very big gifting opportunity for us to see how this really impacts the sales. We also have other products that are going to be launched right behind the smartwatch. And so we think that there's going to be more technology and innovation coming into this category. And I think you've heard me say before that we think long-term the fashion watch category will be revolutionized and may even ultimately eat into the whole tracker market as you know it today where watches will have the same capabilities as trackers. So you can have a smartwatch and then you can have watches that will just have less functionality and not be quite as expensive. So we're very excited. I want to thank our partners, both Fossil and Google, for everything that they've done to make this such a successful launch for the company. And not just domestically, but worldwide. These watches are selling all over the world. And so I think we're just at the very beginning of something that's exciting. And the last thing I would say is, you know, we're bringing – people are coming into the store who we've never seen before, who have been reading about this either from bloggers or seeing it through our social campaigns. And it is absolutely drawing a new and different customer into our stores. So we're terribly excited about that. And it even kind of leads into this fun little collaboration that we're doing with Fuji on the Instax cameras. They just hit the stores, and they're really doing extremely well, as well. So again, we always have been, Michael's always been focused on being a company that leads from a modernity standpoint, and we think this just further adds credence to what we're doing with the customer with these products. Thanks, Omar.

And if I could switch gears for a second, back to the conversation around kind of reducing the promotional cadence, as you continue to amp up the fashion and innovation, fashion innovation quotient in your products, are there things you can do in the supply-chain side, or the design side, to improve that speed-to-market, so you can capture more of the sales of the handbags that are really hot, like you said the Mercer, and maybe reduce some of the inventory risk with certain lines or whatever that aren't doing as well?

Yeah, Omar, I think our speed-to-market has not been an issue for us as a company. We have two products right now that we are a little light on, and that's both Mercer and our smartwatches. But in both cases we'll be back into those in the next 30 days to 45 days in quantities that will be, I think, substantial enough for us to drive sales. I think what is important for us in terms – again, I think you've seen the way we've managed the inventory from the days that we were growing at double-digit to now where we've got slower growth. I think we've been very good as a company in terms of managing inventory. I think the biggest issue for us is we want to continue to introduce newness. That's what's going to keep the customer engaged and excited with our brand and we've always done that. The issue for us is really more about getting the transaction value back up because when the customer sees our product and not just our product, even with our competitors, that things are constantly being put on sale, you lose a credibility with that customer that they should see something new and want to buy it and not just wait until an event happens. So I think that's going to be our major focus next year. It won't be an easy task, I don't want to mislead you, it's not something that happens overnight, but if you really care about your brand long-term and you believe that having less units in the marketplace and a higher transaction value is a long-term strategy, then we believe we'll be successful.

So along those lines, John, how long are we thinking about these kind of declines in the Wholesale business, to get it to that right size, where you feel comfortable the brand is more protected.

Sure. And this will be the last question, Omar. I think that we'll see some further declines, probably, next year in wholesale. Not to the degree that you see right now. We worked with all of our partners around North America. And by the way, they've all – it couldn't have been more positive and embraced the strategy as one that they believe will actually help their business also. So I think we'll see some modest declines next year and then, we'll start to see growth from that point forward. Thanks, Omar.

We'll now go to Randy Konik with Jefferies.

Yeah. Thanks a lot. I guess, John, when you think about, give us some perspective on that cycle of AUR destruction from promotion versus mix of a crossbody bag versus like a tote, where are we in that promotional cycle, and any perspective you could give us on percent of the units that were sold on sale currently, and how much of those units you expect to be on sale, let's say, four quarters from now, along with this strategy to drive more fuller price sales?

Okay, Randy, first off, good afternoon. It's going to be a little hard to answer that question because there was, I think, three or four in there. Let me take a stab at it though. We are looking to have AUR increase somewhere in the 10% to 15% range, so I think that's the first place to start. And that's been about the degradation that has taken place over the past, let's call it 12 months, and I think I've commented to you all before too, not only are unit sales up in our own stores and in our department store partners, but our actual consumers who – new consumers coming to the brand is up as well. So again, between that, between our brand awareness studies, et cetera, we don't see an issue that there's a health of the brand issue. More people are buying it. More people are engaged. More people are actually coming to our company through our own websites and our partners' websites. So that's not the issue. The issue is that when you look at all of that and then you've got, let's say, on the high side 15% AUR decline, that really – you can't make up that difference. So that would be our goal. So that would kind of put the units down to that kind of number. Somewhere between the 10% and 15% and then we hope we make that up with AUR. And we're going to do that as – in my earlier answer to Kimberly, not just through the fact that we're going to limit – exit the friends and family sales and all of those types of things, but also really creating a different sense of excitement around the value of the product. Again, we know she is buying crossbodies and totes, et cetera from us and she believes that's a handbag when she buys it. She didn't say, "well, I only bought a small bag because I had less money." That's what fashion is today. We believe that we can create some excitement with her, especially in medium-sized bags at a higher AUR than what we're currently selling, but still with great value for her and very, very consistent with where we've been as a brand overall. That $300 handbag price point for us has been a very strong price point and we'd like to see a greater amount of our mix shift go into that area. And so that's why I said we'll have these five groups in the Spring season that we're terribly excited about and should really generate some significant volume for us, if the Mercer collection particularly is any indication of what we've seen happening.

Great. Can I just ask a quick follow-up? The market, this company generates a lot of cash flow and free cash flow, you've done a good job of buying back your stock. It seems as if there's been a lot of heavy lifting on both the SG&A dollars side as well as the capital expenditure side, to get the infrastructure where it needs to be long-term. Where do you think – how should we be thinking about normalized expense rate in the business, as a percent of sales, since it's gone from 30% of sales to 40% of sales? And then how do we think about long-term CapEx or medium-term normalized CapEx levels, since there seems to be a very big opportunity here to drive explosive free cash flow in the business, in the not so distant future. So just want to get your thoughts on where we sit with those things. Thanks.

Sure, Randy, I'll take a piece of it, then I'll turn it over to Joe. Obviously, the company generates a tremendous amount of free cash flow and our number one focus on that today is to use our free cash flow for share repurchase. We think that's going to really show up significantly in next year where we do believe we will resume top-line growth. And I think also we believe that our SG&A growth will kind of level off next year. We will have all the websites up around the globe. I'm going to let, Joe, talk about infrastructure, et cetera. So a lot of the heavy lifting that was done in the last two years is really going to be behind us starting in Q1 of next year. And so the focus will be more on, as Kimberly asked earlier, resuming that top-line growth. We think we've got some pretty good opportunities both internationally with Asia, with our men's business. And we do think that in North America we're starting to see some signs of, I won't call it the bottom, but some signs of the precipitous declines starting to level off slightly, that's obviously being tempered by what we're seeing in Europe, which has been very difficult over the last two quarters. So we've got to get that straightened out. But I think you've asked a very good question and I think that you can see us looking at our operating expenses being on a more leveled basis, but I'll let, Joe, talk about some of the bigger projects.

Sure, Randy, as you know, our big projects have been our warehouse that we own in Venlo, our corporate headquarters, building the e-commerce sites, updating the e-commerce sites. So we've been through obviously a lot of that. Our CapEx for the current year will be $250 million, which we feel very comfortable is an appropriate amount to be spending to continue to invest in the things that we need, but certainly lower than our run rate over the last several years. So we think – we have not, obviously, put out official long-term projections, but when you think about our CapEx, you should be thinking in the zone of our run rate for fiscal 2017.

We will now move on to Oliver Chen with Cowen and Company.

Hi, this is Cecile Origenes (49:29) on behalf of Oliver Chen. Thanks for taking my question. You talked about the opportunity to improve the average transaction size given the pressures on AUR. And so on this topic, could you perhaps talk more about the Kors Concierge App. We had a chance to preview it, the new technology at your stores this week, and were very impressed. So could you just give us an update, perhaps on the rollout of that technology?

Sure. Kors Concierge is in a limited amount of stores right now.

Okay.

And literally, it's only been up for about, I think, three weeks or four weeks. You may have seen it in there about 60 days ago or so, but the full capabilities of it were really not available for the sales associates until just a few weeks ago. So it's too early to tell what and how that's going to impact the transactions inside of the stores, but very clearly it will give the selling associate the ability to see the full breadth of the product that's available through not only our e-commerce capabilities, but it will also give them a view of all the product that's inside the chain in stores. And most importantly, it gives them the capability, as you probably have seen, of really being a styling consultant, and wardrobing the customer in multiple different ways, that are all selected from Michael himself personally and our design teams, and how they see people being put together. So we think it's an incredible tool that sales associates are going to be able to really engage with their customers with. And you combine that with some of the geo targeting technology that's available from some of our partners. And we're able to have much more targeted communication with the local customer, when I'm talking local, it might be within five blocks of a store if you're in New York City or it might be within two miles or three miles or four miles of a store, if you're out in Manhasset, Long Island. So we think that given the technology capabilities, the clienteling capabilities, and now the styling capabilities, it's going to give our sales associates a lot more to work with with the customer. And today, that's really what it's all about. You heard us talk earlier our conversion rates in the stores continue to rise. So again, customers, when they come through the door, are engaging with us. That's not the problem. The problem is how do we get them in. And again, we're hoping this technology, as well as some things that we're coupling with that, are going to be helpful for us. We're also piloting click-and-collect, which is in a limited amount of stores that just went live a few days ago, so that capability will be in place also, which is another reason to have our customers come into our stores and engage with our sales associates. So, all this heavy lifting that we've been doing from a technology standpoint, the great news is we're really going to be in place to start to reap the benefits of those investments. Thank you.

We will now move on to Lindsay Drucker Mann with Goldman Sachs. Lindsay Drucker Mann - Goldman Sachs & Co.: Thanks, good afternoon. I wanted to ask about the Wholesale business, understanding that your revenue to that channel is impacted by the decision to destock the channel and clean out inventories. But could you give us some perspective on what sell-through has been like, especially in North America?

Sure, Lindsay. The destock that's happening is really starting to happen now because the retailers need to reduce their inventories in light of what our new policy is going to be. They, obviously, are lowering their sales plans because their current model is to do more business with promotional activity. So that's in conflict or contrast to what we think is the right thing to do going forward. And again, there's been nothing but complete cooperation from every one of our retail partners in the United States, but we're a significant part of many of their businesses. So they need to right-size their inventories accordingly. And we're in complete support of that. So, sell-throughs are pretty similar to where they've been historically, but remember, all the promotional activity is going on as we speak. So none of that's changed and none of that will change until the end of January. So we're expecting a fairly promotional holiday season, but once we get beyond that, we're feeling that – we've got a different way of looking at how the business can be built. And we're hoping that that's going to be looked upon in a very positive way by our end consumer. Lindsay Drucker Mann - Goldman Sachs & Co.: Great. And in U.S. retail, could you give us some color on trends in outlets versus your full price stores?

Sure. What I'll just talk about is traffic. The traffic in outlets is relatively stable, down a few points. It's not hugely down. But the full price traffic continues to be significantly down. And again, part of that is driven back through our e-commerce business. Joe indicated that we've got a 270 basis point increase driven by the e-commerce. So our e-commerce traffic is up strong double-digits. We're seeing the same thing happen in Europe. The minute you turn on e-commerce, and as I said to you before, we're very pleased with what's happening so far, it impacts the full price business. So we think that part of this is a shift to our own e-commerce sites, and part of it is obviously people in general, shopping less in the mall channel just because of all the activity that goes on e-commerce sites around North America. And now you're starting to see the same thing happen in many large European countries as well.

We'll now move on to Matthew Boss with JPMorgan.

Hey. So John, as we think about your Retail comps versus industry growth, I guess multi-year how would you like us to think about Michael Kors same-store sales in handbags and also for watches, versus where do you see the underlying industry growth in each of those two categories over the next couple of years?

Well, I'll just comment to what we think about industry growth in the two categories and then secondly, I'll comment about us. So, we believe that the North American handbag business is roughly flat, maybe up a couple of points in total, and we don't see that trend changing much. So I think that as it relates to us, we obviously have a fairly large market share in that category. And our growth rate in handbags in North America will be low-single-digit if we do our job right. And that will be more in dollars than in units. So that's how we view that. And then the watch category, we do believe that the decline is going to lessen. As I said earlier, we've already seen that when you add the combined smartwatch and fashion watch categories together. And we don't know how much that will stop declining, but there are some very good indications there. We, clearly, need to have other categories working inside of our store. If you take those two categories and say one, we may still be in the – let's pretend, it's high single-digit decline and one is flattish-to-up a few points, we need other categories to work. And you're going to be seeing that happen. We're, certainly, taking the shoe areas inside of our stores and making them significantly larger. Also, by the way, the shoe business has been positively impacted by our e-commerce because we're able to have wider assortments online and sales associates are able to do sends (58:55) to customers' homes by virtue of the breadth that we have online. And some of that category could be a very nice increase for us. We'll be making some announcements about some jewelry in the next call, some strategies that we have around jewelry for our own free-standing stores. And that, we think, is also going to be a very nice additional category of business for us. So we're going to be looking at other things. And then, of course, men's has great opportunity for us. So we're taking certain stores, and that will be the next round of tests for us that currently have, we believe, space to add the menswear to in its full capacity, so that would be Tysons Corner, an Aventura, Toronto. There's going to be a handful of stores that we believe we can add menswear to in their existing footprint and that could be additional volume for us. So our goal would be for next year to see our North American comps kind of flatten out, and then have comp store increases in our International business. And so we do see growth, and that will be driven by, in certain cases, in our international markets more in the handbag where we can grow market share and in our North American markets where it will come from some other categories. So I hope that's helpful.

We'll now go to Ike Boruchow with Wells Fargo.

Linda, I believe this should be our last question. It's – I think it's close to 5:34 PM.

Hi. Thanks for squeezing me in. Joe, just a quick clarification on the Retail margin outlook you gave for the back half of the year, I think you said 20%. Just given what you're lapping from last year, and the margin compares you have, could you just help us how to think about Q3 and Q4, because it seems like that embeds a lot of expansion in Q4. Just trying to – if you could piece out how we get there, that would be helpful. Thank you.

Sure. Obviously Q3 is our biggest retail quarter. So, as you can tell from history, that will be our biggest increase. However, year-over-year we are anticipating that Q4 will be up several hundred basis points from our performance in fiscal 2016.

This does conclude today's question-and-answer session. I will now turn the call back over to Mr. John Idol, for any additional or closing remarks.

I'd like to thank you all for joining us this afternoon on our conference call and we look forward to updating you on our progress on our next call. Thank you, have a great day.

Thanks, everybody.

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