Capri Holdings Limited
Q1 2019 Earnings Call Transcript

Published: 8 Aug 2018

[Operator:]

Good day, and welcome to the Michael Kors Holdings Limited First Quarter 2019 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Katina Metzidakis. Please go ahead.

[Katina E. Metzidakis:]

Good morning, and thank you for joining us for our first quarter fiscal 2019 earnings call. Presenting on today's call are John Idol, Chairman and Chief Executive Officer; and Tom Edwards, Chief Financial and Operating Officer. Before we begin, let me remind you that certain statements made on this call may constitute forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those that we expect. Those risks and uncertainties are described in today's press release and in the company's SEC filings, which are available on the company's website. Investors should not assume that the statements made during the call will remain operative at a later time, and the company undertakes no obligation to update any information discussed on the call. In addition, certain financial information discussed today will be presented on a non-GAAP basis. These non-GAAP measures exclude certain items related to the company's acquisition of Jimmy Choo, restructuring and non-cash impairment charges, primarily associated with underperforming retail stores. Unless otherwise noted, all information on today's call will be presented on a non-GAAP basis. In addition, all revenue and comparable store sales will be quoted on a reported basis. To view the corresponding GAAP measures and related reconciliations, please view the earnings release posted to our website earlier today at investors.michaelkors.com. I will now turn the call over to the Chairman and Chief Executive Officer of Michael Kors Holdings Limited, Mr. John Idol.

[John D. Idol:]

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

[Thomas J. Edwards, Jr.:]

Thank you, John, and good morning, everyone. We're pleased to begin the year with first quarter performance above expectations, delivering net income of $201 million and diluted earnings per share of $1.32, a 65% increase over prior year. We also achieved better-than-expected operating margin for the fifth consecutive quarter, driven by revenue growth and gross margin expansion. Total revenue of $1.2 billion increased 26% compared to last year. This increase reflects $173 million of incremental revenue from Jimmy Choo and an 8% increase in Michael Kors revenue compared to last year. Michael Kors Retail revenue increased 3%, reflecting nine net new store openings and higher sales from stores not in the comparable store base. Comparable sales were in line with expectations and flat to prior year, with global e-commerce benefiting comparable sales by 250 basis points. From a regional perspective, we were extremely pleased to see a return to comparable sales growth in the Americas. In Europe, we continued to take steps to decrease inventory and drive higher full-price sell-through, which, as expected, resulted in lower comparable sales performance. In Asia, we continue to drive positive comparable sales as we execute on our growth strategy in the region. For the Michael Kors Wholesale business, revenue increased 20%. While we expected Q1 growth in Wholesale, first quarter results were above our expectations due to better sell-through and a shift in shipment timing from Q2 that benefited Q1. In the Americas, the Wholesale revenue increase was driven by better sell-through across multiple categories, in addition to the shift in shipment timing. In Europe, revenues increased in line with our expectations, and we are early in the process of resetting the Wholesale base in this region. Michael Kors Licensing revenue decreased 5% versus the prior year. In Watches, we were very encouraged by the favorable response to our new-fashion slim-line offering, as well as the continued growth in Michael Kors ACCESS smartwatches. However, these results were not enough to offset the continued decline of fashion watches and the transition from our fashion jewelry line to a new elevated fine jewelry collection. We believe our watch initiative, combined with the elevated fine jewelry collection that will be fully in place in the fall season, will position licensing for growth in fiscal 2020. Now, I would like to turn to Jimmy Choo. As John noted, we're extremely pleased with the performance of the brand. Revenue of $173 million was above our expectations, representing a low-double digit increase on a pro forma basis compared to last year. These results were driven by a high-single digit comparable sales growth, as well as the addition of nine net new stores since last quarter, bringing our total global fleet to 191 Retail stores. In addition, Jimmy Choo also benefited from a shift in shipment timing of Wholesale from Q2 that benefited Q1. From a product perspective, we continued to see strong momentum in the Footwear business globally, led by exceptional product innovation and resonance of core offerings. In Accessories, we continued our transition to new collections as we begin to significantly expand this business as a key pillar of reaching our long-term revenue target of $1 billion. Given this strong start to the year, we are improving our full year EPS outlook for Jimmy Choo to a dilution of $0.05 to flat. Now, turning to total company margin performance, gross margin was 62.6%, an increase of 230 basis points over prior year. This increase was attributable to a 170-basis-point improvement in gross margins for Michael Kors, combined with a 60-basis-point benefit from the inclusion of Jimmy Choo. Michael Kors Retail gross margin increased 110 basis points. Michael Kors Wholesale gross margin increased 530 basis points compared to the prior year, reflecting lower costs and reduced allowances. Total operating expense increased $95 million, including $90 million from Jimmy Choo. As a percentage of revenue, operating expense decreased 150 basis points to 43.2%, reflecting an improvement for Michael Kors, partially offset by a 140-basis-point impact from the inclusion of Jimmy Choo. Michael Kors' operating expense as a percent of revenue was 41.8%, down 290 basis points versus prior year, driven by leverage on higher sales and timing of expenses. Total operating margin was 19.4% compared to 15.7% last year. Michael Kors' operating margin was 20.2%, an increase of 450 basis points compared to the prior year. Michael Kors Retail operating margin was 15.9%, a 100-basis-point increase versus prior year, primarily driven by higher gross margin. Wholesale operating margin for the Michael Kors brand was 27%, reflecting gross margin expansion and leverage on lower costs. Licensing operating margin for Michael Kors was 33.5% compared to 47.4% last year, primarily reflecting deleverage. Jimmy Choo's operating margin of 14.3% was above expectations due to higher sales and better gross margin, and was dilutive to the consolidated operating margin by 80 basis points. Our tax rate for the quarter was 10.2% compared to 16.4% in the prior year, reflecting the expected benefit of the lower U.S. tax rate from the new U.S. tax reform legislation, as well as a tax benefit related to employee equity compensation. Turning now to our balance sheet, we ended the quarter with $170 million in cash and cash equivalents and $821 million of debt. During the quarter, we repurchased approximately 1.7 million shares for $100 million and have an additional $542 million of availability remaining on our share repurchase authorization. Capital expenditures for the quarter were approximately $41 million and were related to new store development, renovations and information technology and e-commerce enhancements. Inventory was $697 million, including $147 million associated with the acquisition of Jimmy Choo, compared to inventory of $616 million in the same quarter last year. Inventory for the Michael Kors brand of $550 million was down 11% compared to the prior year. Now, I'd like to turn to guidance. We are raising our full year EPS guidance by $0.25 to reflect the better-than-anticipated first quarter performance for both the Michael Kors and Jimmy Choo brands. For the full year, we expect total revenues of approximately $5.125 billion, including between $580 million and $590 million of incremental revenue from Jimmy Choo. We expect Retail revenue for Michael Kors to grow in the mid-single digits with flat comparable store sales, Wholesale revenue to decline in the low-single digits, which is an improvement from our prior forecast, and Licensing revenue to decrease in the high-single digits. We raised our operating margin expectation to approximately 18%. We continue to assume a Michael Kors operating margin in line with the prior year reflecting modest gross margin expansion and slightly higher operating expense as a percentage of sales as we grow the Retail business, as well as approximately 170 basis points of dilution from Jimmy Choo. Our assumed tax rate is approximately 15.5%. We forecast weighted average shares outstanding of 152 million resulting in a diluted earnings per share range of $4.90 to $5.00. For Jimmy Choo, we now forecast improved full year results and expect lower EPS dilution of $0.05 to flat, which is a $0.05 improvement versus our prior guidance. We continue to anticipate capital expenditures for Michael Kors Holdings Limited of approximately $250 million, which reflects the opening of approximately 60 Michael Kors stores and approximately 30 Jimmy Choo stores, with a focus on Asia. This also includes renovations to our Retail fleet as part of our Michael Kors initiative to move 200 stores to our new luxury format over the next two years. For the second quarter, we expect total revenue of approximately $1.26 billion, including between $110 million and $115 million of incremental revenue from Jimmy Choo. Jimmy Choo Q2 revenue continues to reflect robust pro forma growth versus prior year. Q2 Retail revenue for Michael Kors is expected to grow in the low-single digits. We expect comparable store sales to decline in the low-single digits. Comparable store sales growth is expected to remain positive in the Americas and Asia, offset by anticipated declines in Europe. We expect Wholesale revenue to decrease in the low-single digits and Licensing revenue to decline in the high-single digits. We anticipate an operating margin of approximately 16%, including 240 basis points of dilution from Jimmy Choo. Our expected tax rate is approximately 16.5%. We forecast weighted average shares outstanding of 152 million resulting in diluted earnings per share in the range of $1.03 to $1.08, including anticipated Jimmy Choo dilution of approximately $0.09 to $0.11. Q2 EPS guidance reflects earlier wholesale shipments of approximately $35 million in revenues into our first quarter and operating expenses of approximately $15 million that have shifted from the first quarter into the second quarter. With that, I will now open the line for questions.

[Operator:]

Thank you. And we'll take our first question from Michael Binetti with Credit Suisse. Michael Binetti - Credit Suisse Securities (USA) LLC Hey, guys. Thanks for taking our questions here this morning. I just want to ask, in general, is there any way you could help us think about how much Easter impacted the Americas comps in the quarter? I think the comp trajectory from here in the U.S. is – is good to see you guys get back to positive and point that way going forward, just kind of trying to think about how to model the cadence going forward from here.

[Thomas J. Edwards, Jr.:]

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

[Operator:]

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

[Paul Trussell:]

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

[John D. Idol:]

Thank you, and good morning, Paul. This is John Idol. The Wholesale channel in North America feels good to us. The American consumer is healthy and our fashion innovation, which is led by Michael and our design team, is resonating with customers, and we're seeing that across our Accessories business, we're seeing that across our Footwear business, and our Women's Ready-to-Wear business. And even though our Watch business is still challenged, as Tom mentioned, we're seeing things like slim watches really starting to perform. So there are actually some – two 32

[Operator:]

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

[Alexandra Walvis:]

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

[John D. Idol:]

Well, good morning, Alexandra, and thank you. Alexandra, we're really pleased with what happened for the Michael Kors brand and the Jimmy Choo brand in the first quarter. And while some of that was attributable to a shift, which I think we indicated of about $35 million in Wholesale shipments – while that's a number, it's not a gigantic material number. And really what you saw during the quarter is, you saw better performance in our Retail stores both in Michael Kors and in Jimmy Choo, and that creates leverage for us, so we're very pleased with that. We saw similar kinds of performance in both full-price and in outlet. We performed a little bit better in full-price than where we've been in the past, which was encouraging for us, and that was really led by, in particular, the arrival of some of the new Accessories collections. And again, we're starting to get more visits from customers because of our Ready-to-Wear and our Footwear business where the purchase cycles are more frequent. So we're really pleased with what's happening there, with strong double-digit growth in our online business, which I think is a real tribute to everything that we talked about in the call – from Kors Style to improvements that we're making in terms of the ability to customize products on our website. And, of course, we're very pleased with our KORSVIP numbers. We didn't ever think that we would be this far along with our VIP program, so that's really helped accelerate some of our full-price business, and we feel very, very good about that. In terms of tourist, I would tell you the inflections for us were as follows. The business in Europe was softer than we had anticipated and had seen last year. We're seeing a shift, in particular in some of the Chinese tourists, where more of that shopping is happening actually in Asia; so whether it's Japan, we talked about improvement in Korea, and our business in Southeast Asia is also performing very nicely. We also saw some very, very strong performance in our airport and duty-free business during the quarter. So, we think that it's the geography of the mix of where, in particular, the Chinese consumer is shopping. And we anticipate some recovery in the European markets, in particular as oil prices rise with the Middle East customers, and some of other consumers who come into the marketplace. So we feel that we're in a good position to really capture that tourist, whether it's in their local markets, traveling through airports, or duty-free locations in both cases. Thank you very much, Alexandra.

[Operator:]

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

[Kimberly Conroy Greenberger:]

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

[Thomas J. Edwards, Jr.:]

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

[John D. Idol:]

Kimberly, the store renovations have been very encouraging for us, and I think we've talked about two things

[Operator:]

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

[Lorraine Corrine Hutchinson:]

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

[John D. Idol:]

Good morning, Lorraine. Lorraine, I'll take this in two parts. I'll answer it from a sell-through perspective, and I'll let Tom talk about the actual performance in terms of our revenues. What we said on our previous calls was that we were so encouraged by what happened last holiday season that we actually thought we could turn the inventories even faster at Wholesale by having reduced inventories and going after better sell-throughs at full-price. We continue to see that happen. So the plan is, we are planned up with almost every one of our Retail partners up at Retail in terms of Retail sales performance and we're planned down in Wholesale. So we want to turn the inventories faster, we want to have also higher full-price sell-throughs. So our position has not changed on that. You did see in retailer Q1 and retailer Q2 better reorder performance that delivered higher Retail sales for them and higher Wholesale sales for us. We certainly are encouraged that that could potentially happen again for the third -- Q3 and Q4, but we're just not prepared to say that that would end up making the performance on a positive comp basis for the year, but I'll let Tom talk to the magnitude.

[Thomas J. Edwards, Jr.:]

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

[John D. Idol:]

Thank you, Lorraine.

[Operator:]

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

[Brian Jay Tunick:]

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

[John D. Idol:]

Brian, AURs continue to be a positive for us, in particular, in our own Retail stores. We've always had the capability of selling higher price-points, and we're seeing that continue to be a driver for us. While traffic still remains down in the Retail store channel in North America in particular, that is being made up traffic-wise per se online. So our traffic is growing dramatically online, double-digit, and you can see that also in our customer base, you can see that in our social media followings. And so, we're getting it on conversion in our own stores, we're getting it on AUR, so there's a lot of just really good things positive and response, and I think that's also part of the fashion cycle. The customer wants more fashion. The days when you could only have basic products in your store are, I would say, somewhat behind us. She wants novelty, she wants innovation, she wants differentiation, and what we're so proud of is that Michael and the design teams are really, really delivering that for us. I also have to give a shout-out for our Jimmy Choo brand as well, which is same thing. We're seeing great sell-through on our products and improved sell-throughs, and that's really related to Sandra's design leadership and what we're seeing there. I mean, we comped up high-single digits. That's a pretty impressive number, at least in my assessment for a luxury brand today. Obviously, there are some that are comping much higher than that, but we feel like we're really in a leadership position in our luxury Footwear business and then, of course, we're excited about what's going to happen there in our Accessories as well. In terms of the Runway 2020 brand, I'm just going to talk a little bit about where we are in the process, and I'll let Tom talk about the margin expectations. We are absolutely ahead of where we thought we'd be at this point in time, and you're seeing that on kind of all metrics. You're seeing that on Retail sell-throughs. You're seeing that on the way the consumer is responding to us. You're seeing that on margins because that's a reflection of what's happening at Retail, and there's definitely a movement that customers are looking at us for fashion and style leadership. So, I'm really pleased with what's happening there. I also want to mention that our designer part of our business, our collection piece of our business, has also been getting some improved traction. Michael is very focused on that. We're going to be talking about some innovative store openings around our collection business where we think there's opportunity for us on that as well globally. So I would tell you that where we sit today with Michael Kors and Runway 2020, we're very pleased with how we've executed and the results and the consumer response to the product categories. And as we said, we're seeing that in Accessories, Footwear, Women's Ready-to-Wear and brand strength of men's is – while it's still small to the total company, it continues to grow. I'll turn it over to Tom about the margins.

[Thomas J. Edwards, Jr.:]

Brian, just a little perspective. Right now, we're nearly 400 basis points ahead of where we had expected to be when we first rolled out Runway 2020 just a little over a year ago, and we're right on that 20% margin level. We've noted that we're going to be holding that for this year for Michael Kors with a little perspective on gross margins slightly stronger, SG&A costs a little higher as we expand the Retail business. But just in this quarter, we felt comfortable enough about performance to increase this year's guidance on operating margin from 17.7% to 18% for the year. So feeling good about the progress we've made. Of course, as we move forward, sales growth or more improved sell-through could provide upside, but overall feel great about the position that we're at and where we're at in relationship to Runway 2020 in our expectations.

[John D. Idol:]

Thank you, Brian.

[Operator:]

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

[Omar Saad:]

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

[John D. Idol:]

Good morning, Omar. Omar, I'd like to start out by reminding you and everyone on this call, we do compete in the luxury sector with Jimmy Choo in particular. And as I mentioned just a minute ago, our performance, we think, is very solidly at the top-end of the range. Clearly, there are a few competitors who are putting on some incredible comp store increases, and that's because of great product innovation, consumer desirability, and so we take our hats off to those companies because they're doing a terrific job. That being said, there are a handful. We believe our Jimmy Choo brand is quite frankly ranking in the upper-tier of performance of luxury companies globally which we're very, very proud of. Secondly, as it relates to Michael Kors, we both compete in the accessible luxury area and we compete in the luxury area with our Michael Kors Collection brand. I think with us, we were very candid and said that we didn't think that our product innovation and some of our new launches were quite frankly compelling enough for the consumer so that it created desirability. I think we feel much better about where we are on that. I wouldn't sit here and tell you that we can reach the levels of the two or three or four competitors in the luxury space who are running high-double digit comp store growth. We just don't think that's a level that we'll be able to achieve. We do believe that in fiscal year 2020, we will return on a global basis to positive comp store sales in all regions. And so I think that if we can get our business turned around in Europe, which we are very focused on, I think that our performance, again, would rank probably in the middle of the pack of the real luxury players on a global basis. So, that's what our aspiration is. And I would also tell you that when you look at our company and look at our operating margin performance, we're very much at the top of the pyramid in terms of where our operating margins are, and I'm very proud of our revenue growth. We had an extraordinary high-double digit growth rate for the company. And so when you look at all those metrics, we're starting to perform as a group, not exactly at the level of some of our very, very key competitors, but we're in a good place. We believe, for the year, based on the high-end of our guidance that we'll be high-single digit comp revenue growth and we believe that we will potentially have double-digit earnings per share growth. So I think that that is an indicator of how the group is performing and how consumers are responding to our products globally. Thank you, Omar.

[Operator:]

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

[Simeon Avram Siegel:]

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

[John D. Idol:]

Yeah. Simeon, there's two things. On the inventory, the inventory reduction is something, as we've said before, it's planned, and it was planned predominantly – Europe is the biggest piece of the inventory reduction for the company – although there is some inventory reduction, yeah, here in North America. As I said earlier, part of that "timing shift" is reorders that we just got earlier than we had anticipated. And the second piece is some shipments that we moved up because we wanted to get some additional early deliveries into the stores, which we're very pleased about because they're performing for us. So while it's a timing shift between Q2 and Q1, when you put the two quarters together, I think you'll see that we're really outperforming in the front half of the year to a pretty significant level, and that's why we're carrying forward our $0.25 increase in earnings per share guidance for the year, which we feel really sets us up nicely. And hopefully the performance on the back half of the year will possibly do better than we have anticipated, but we obviously won't know that until we get into the holiday season. As I said earlier, I don't think the magnitude of this is all that great. And in terms of being able to chase things, we're going to try and do some of that because we clearly are – probably a little light on inventory as a company. You will see us also with fairly significantly reduced inventories in Q2 also. So we've already kind of course-corrected a little bit and we'll be in a better position for Q3 and Q4 with our inventories. As I said, some of the sell-throughs just happened a little quicker than we had planned. Thank you, Simeon.

[Operator:]

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

[Camilo Lyon:]

Thanks. Good morning. Also, my congrats on a good start to the year. John, two questions. First, on the watches category, it sounds like there's a modest improvement although – albeit still a drag from the fashion component. Could you just maybe detail how you think the ACCESS mix will end up by the year because I think in the past two years, the watch decline has accounted for about half of the comp declines, so I'm just trying to get some color on how that should unfold as that ACCESS mix improves? And then just secondly, on the capsule collections, sounds like you're seeing some nice traffic in conversion increases from this effort. How should we think about the frequency of these capsule collections that you expect to launch throughout the year?

[John D. Idol:]

Thank you, Camilo. A couple there, the watches – obviously, Fossil reported yesterday – so, watches, it's kind of similar. We're running about 25%, 30% of our business in smartwatches. I can't sit here and tell you, but maybe one day it'll be 50% of the Watch business because remember, there's a lot of different things that we can do to the watches that qualify them for smartwatches. I have to say, the partnership with Fossil is spectacular. They are a leader, clearly, in this area as a company. I have to also say that our relationship with Google is incredible. They're an amazing partner, working with us on new technology, on expanding existing technology that they have that we can bring to the watch. I think you're going to continue to see this device be used by people for a number of different activities. And this payment with the near-field communications, this is not a small issue. As you know, many people run out of offices today, they go out to dinner and they may not want to take a wallet with them or other devices, and so therefore, by having more functionality in the watches, we believe that we're going to continue to grow that business. And we think – we all know who the big leader in this is. But we think we're right up there. We think we're possibly number three in the world in terms of a singular brand in this area. So it is a very, very serious commitment on our part and by Fossil's part. And that being said, we are not backing away one iota from the fashion watch business. I encourage you to go and see our stores come fall season. We will have really, really changed – I think it's almost 90% of the entire watch assortment will be changed out for fall season. And we've made a major, major push to take old styles out of the assortment, discontinue them, and really deliver the customer a new fashion presentation. So we're kind of excited about that. And, as I said, the declines are moderating. And we have seen weeks, in particular, in the department store channel where we're comping up. So, again, I don't want to call a line in the sand. We are in our minds – we have a goal and we'd like to be positive comp in watches for next year. Again, I can't sit here and definitively tell you that's going to be the case, but that is our internal thinking. And also, from a category standpoint, we're also being hurt by the discontinuation of our fashion jewelry line inside the stores. We know that's the right thing for us to do. The new fine jewelry line has arrived, and again it's only a few weeks in the store, but the initial results – sell-throughs are quite encouraging both in the United States and in Europe. So we're hopeful that that will between the new fashion deliveries in the fashion watches, and the jewelry, as well as – obviously, we've got a pretty strong trend going in smartwatches, we have a chance next year getting this category turned around for the company. Lastly, on the capsule collections, really excited about what happened. We've put it in to our stores a couple of weeks ago and 25%-types of sell-throughs on certain items in the store. Certain items are sold out already. So what we like about the capsule collection is it's almost like a limited-edition type of situation. You need to get in. You need to get the pieces. If you don't get the pieces, they're not going to be there for you. Now, this first capsule collection was launched exclusively in our stores, and then we will start to broaden that slightly as we go forward. But again, it's going to be about limited edition, in and out. And the current capsule collections are based more around the sport fashion trend which you know is super-hot right now. And we've always kind of been there with our active footwear, but now we've got Ready-to-Wear and certain bags to go along with that. So, thank you very much, Camilo.

[Operator:]

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

[Randal J. Konik:]

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

[Thomas J. Edwards, Jr.:]

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

[John D. Idol:]

Thank you, Randy.

[John D. Idol:]

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

[Operator:]

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