Krystyna Lack - VP and Treasurer John Idol - Chairman and CEO Joe Parsons - CFO and COO

Kimberly Greenberger - Morgan Stanley Omar Saad - Evercore ISI Erinn Murphy - Piper Jaffray Oliver Chen - Cowen and Company Matthew Bobs - JPMorgan Paul Lejuez - Wells Fargo Lindsay Drucker Mann - Goldman Sachs Simeon Siegel - Nomura Securities

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, who is calling in from London; 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 Web site. Investors should not assume that the statements made during the call will remain operative at a later time, and the company undertakes no obligation to update any information discussed on the call.

I will now turn the call over to Michael Kors' Chairman and Chief Executive Officer, Mr. John Idol.

Thank you, Krystyna. Good morning, and welcome to Michael Kors third quarter fiscal 2015 earnings call.

On this call today is Joe Parsons, our Chief Financial and Chief Operating Officer. I will begin with an overview of our third quarter performance and provide an update on our long-term growth strategies.

Then I will turn it over to Joe for a discussion of our financial results and our outlook for the fourth quarter and full year. Our solid financial results in the third quarter speak to the strength of the Michael Kors brand.

We delivered our 35th consecutive quarter of positive comparable store sales growth and drove approximately 30% growth in both retail -- both revenue and net income with a strong holiday season. During the quarter, we continued to see strong momentum across our operating segments and geographies led by a double-digit comps sales increase in our accessories category in both retail and wholesale.

In North America, sales increased more than 20%, and we delivered solid comp gains on top of significant increases last year. Notably, we saw exceptional performance from our U.S.

e-commerce site, which generated a sales increase of 73%, as compared to the sales of the previous outsourced site, exceeding our expectations. In addition, sales in both Europe and Japan increased 72% for the quarter.

We are also pleased to report that we repurchased approximately 5 million shares during the quarter, reflecting the confidence we have in our future growth potential and our commitment to enhancing shareholder value. Importantly, we continue to execute on our long-term strategies during the quarter which are focused on; first, growing our retail presence through our new store openings and store expansions in key locations throughout the world.

Second, developing a global best-in-class e-commerce strategy with omni-channel capabilities beginning with the launch of our enhanced company-owned U.S. e-commerce Web site in September 2014, followed by the upcoming launch in Canada this year, and Europe and Japan in 2016.

Third, driving increased comparable store sales in our retail locations and our wholesale shop-in-shops by great fashion products and a unique in-store experience that embodies the Michael Kors luxury brand. Fourth, continuing to convert department store doors globally into branded shop-in-shops creating a jet set experience within each door.

Fifth, expanding our business internationally through company-owned subsidiaries and regional partnerships; and sixth, expanding our market share across a number of categories including, women's ready-to-wear, footwear, jewelry, and men's wear. Turning to our segment performance for the quarter, we saw exceptional growth in our retail business with net sales increasing 37% driven by a 114 new store openings since the third quarter of last year, e-commerce sales from our recently launched U.S.

e-commerce site, and an 8.6% increase in global comparable store sales, which was led by a double-digit comp growth in our accessories category. We believe that the shopping behavior of certain customers in North America is changing, and they are migrating their purchases to our e-commerce site at a greater rate than we had initially anticipated, which is impacting traffic and comps in our North American retail stores.

Given this shift in buying patterns, we believe the comparable store sales including our e-commerce business is a more accurate reflection of our performance and the strength of our brands. Including e-commerce, comparable store sales for North America would have increased 380 basis points higher.

In addition, we expanded 30 highly productive stores this fiscal year, and excluded these locations from the comp store base as well. These stores have historically comped at a rate higher than our company average, and we believe that the exclusion of these stores impacted our comparable store sales results by approximately 70 basis points.

At the end of the quarter, we operated 509 company-owned retail stores and see potential for 700 stores worldwide long-term, not including men's locations. In addition, our licensing partners operated a 194 Michael Kor' stores around the world, bringing our overall presence to 703 locations worldwide.

Momentum in our wholesale segment continued with 24% revenue growth driven by accessories and footwear. During the quarter, we converted an additional 60 wholesale doors into shop-in-shops globally ending the quarter with approximately 2030 accessories, footwear, women's wear, and men's wear shops worldwide.

We are pleased that the new shop-in-shops continued to generate a significant sales lift contributing to the increased penetration in this channel. We expect to convert approximately 700 department store doors globally across all categories in fiscal 2015.

In our licensing segment, revenue grew 9% driven by jewelry as well as winter outerwear and watches. During the quarter, we opened 40 new watch and jewelry shop-in-shops and ended the quarter with 230 shops.

We continued to see opportunity for 500 watch and jewelry shops worldwide over the long-term as we expand our offering with our wholesale partners as well as in our own retail stores. Additionally, our fragrance business also performed well in the quarter, as we see continued sales increases of our sporty, sexy, glam fragrance collection.

Turning to our operations by region, in North America revenue grew 23% to $1 billion driven by strong performance in our retail and wholesale segments led by our accessories business. We increased our total square footage through store and shop-in-shop expansions in addition to new store openings.

In our North American retail segment, we delivered strong net sales growth of 30% driven by 17 new store openings, e-commerce sales, and a comparable store sales increase of 6%, led by double-digit comp growth in our accessories category. We're very excited about the opening of our SoHo flagship location on January 29th, which is our largest store to-date, expanding three retail floors and approximately 21,000 square feet.

This flagship stores offers the largest assortment of women's ready-to-wear and shoes globally, and is the first Michael Kors store in North America to provide a complete offering of our men's collection. We will apply the insights we gain from this new store for future expanded locations and for our men's retail business.

We operated 337 stores at the end of the quarter and remain on track to open approximately 50 stores in the region during fiscal 2015, and continue to believe there is opportunity for 400 locations in North America not including potential men's locations. As I said earlier, our e-commerce launch was highly successful and represents an exciting opportunity for us.

E-commerce sales exceeded our expectations with growth of 73% in the third quarter as compared to retail e-commerce sales at the previously outsourced site. And this channel now represents 7% of our retail sales in North America.

As I mentioned earlier, we believe the migration of customer purchases to online channels impacted our retail store traffic and comp performance in North America. We saw strong year-over-year increases in e-commerce traffic and conversion during the quarter.

Importantly, the new site provides customers with an enhanced online shopping experience, a larger product selection, and enables us to more fully engage her on our site. Customer engagement continues to increase year-over-year across all our social media channels.

During the quarter, our Facebook fans grew 55% to over 16 million, our Instagram followers increased a 109% over 3 million, our Twitter followers increased 50% to over 2 million, and our emerging base of Weibo followers has grown 142% to almost half a million. We also continued to make progress on our omni-channel strategy and are very excited about the enhanced experience that we're providing to our customers.

We're developing omni-channel capabilities that will enable our customers to seamlessly access our luxury product across all our regional channels. These capabilities will provide our customers with a truly best-in-class experience wherever she shops.

We look forward to launching our e-commerce business in Canada within the next several months followed by Europe and Japan in calendar 2016. Our North American wholesale business remains strong with net sales of approximate -- increase of approximately 20% in the quarter.

In addition, comparable store sales grew at a greater rate than increase in our retail stores. The growth is driven by strength in our accessories and footwear categories in addition to the continued success of our shop-in-shop conversion.

We continued to see multiple growth opportunities in our North American region across categories and channels. As the overall accessories market continues to grow, we believe we're well-positioned to capitalize on this growth in our handbags and small leather goods business.

In addition, women's apparel and footwear continue to perform well and we see further growth potential as we extend our offerings in these categories. We're also remaining excited about our men's opportunity, which is currently in the early stages of development, and we look forward to providing more insight as our strategy evolves.

We're committed to growing our e-commerce business which we believe ultimately reached 20% of our North American retail sales. We'll also continue to expand our retail footprint with new store openings and store expansions.

And we'll drive sales in our wholesale channel through shop-in–shop conversion and do a penetration. Taking together, we believe that we can continue to generate double-digit sales growth in the North American region.

Outside of North America, we further expanded our international presence and saw exceptional growth across Europe and the Far East. In Europe, revenue increased 72% to $241 million and comparable store sales grew 21.2%.

We opened 14 stores during the quarter and remain on track to open approximately 50 Europeans locations this fiscal 2015. We ended the quarter with 125 stores across Europe, and continue to believe that this region can support 200 Michael Kors retail locations in total.

As we stated previously, we plan to launch our e-commerce strategy in Europe in calendar 2016, and we're very excited about the growth potential as we develop this channel. The strong momentum in our European wholesale business continued in both department and specialty stores with revenue growth of 53%, led by our accessories and footwear categories.

Comparable stores sales in Europe were greater than our retail half during the quarter. We continue to see great potential in Europe and view the region as an exciting part of our long-term growth strategy, ultimately generating approximately $1.5 billion in revenue.

Turning to Japan, we saw outstanding performance during the quarter, and we continued making great progress creating the same framework to support our ongoing growth in this market. Revenue increased 72% to $60 million driven by comparable store sales growth of 35.4%.

We opened five stored during the quarter with 47 locations, and believe this market can ultimately have 100 stores. We were pleased to announce last month the planned opening of our new flagship store in Tokyo, this fall in the renowned Ginza district.

This 7800 square foot store will be first in the world to offer all our categories and collections. We believe this store in addition to the base in Japan together with our 5000 square foot flagship duplex in Kobe, scheduled to open midyear, and our recently opened flagship in Fukuoka served to heighten our presence and enhance our brand image in this market.

We also look forward to expanding our e-commerce business in Japan and plan to launch the site in calendar 2016. Long-term, we continue to believe that we can achieve revenue of $300 million in this region.

The remainder of the Far East also experienced strong growth in the third quarter. Comparable stores sales at retail stores operated by our licensed partners continued to increase at a double-digit rate, and we're pleased with the traction we're gaining in the Far East.

We believe that the increase in tourism was an important contributing factor to our growth, as evidenced by the performance of our airport and duty-free shops in this region. Looking ahead, we expect this trend to continue and we're positioned to benefit from the increase in tourists and shoppers in the Far East.

Our license partners opened 12 new stores in the third quarter, and we now have 128 locations in Greater China, Korea, Southeast Asia, and Australia. We continue to see opportunities for 200 locations in the Far East.

Finally, our travel business continues to perform well and we believe this is the highly effective way to raise the visibility of Michael Kors luxury brand, given the increased number of tourists travel in the world. We ended the quarter with 79 locations at some of the finest travel destinations in the world and believe there is potential for approximately 100 travel retail shops globally.

In summary, we exceeded our overall financial objectives in the third quarter, including the better-than-expected performance in our e-commerce business. We believe that our results demonstrate the strength of the Michael Kors brand and the successful execution of our growth strategies.

We remain confident in our long-term outlook and committed to enhancing value for our shareholders. I'll now turn the call over to Joe for a detailed discussion of our financial results.

Thank you, John. Good morning.

I will begin with a review of our fiscal 2015 third quarter financial results followed by our outlook for the fourth quarter and full year. We saw strong financial performance in our third quarter and delivered our 13th consecutive quarter of revenue growth, earnings growth, and positive comp stores sales since our IPO in 2011.

Total revenue grew 29.9% to $1.3 billion as compared to $1.0 billion last year. We saw a significant foreign currency impact during the quarter on total revenues and comp stores sales.

On a constant currency basis, total revenues grew 32.6%. In North America, revenue increased 22.6% and on a constant currency basis rose 23.1%.

In Europe, revenue grew 72.1% and in on a constant currency basis increased 86.3%. In Japan revenue growth 72.1% and in on a constant currency basis increased 96.3%.

Retail net sales increased 37.0% to $689.4 million as compared to $503.4 million in the third quarter of last year resulting from the opening of a 114 net new stores since the third quarter of last year. E-commerce sales from a recently launched U.S.

site and a comp store increase of 8.6%. On a constant currency basis, retail net sales increased 40.5% and comp stores sales increased 10.6%.

By region, comp store sales on a constant currency basis grew 6.8% in North America, 29.8% in Europe, and 54.4% in Japan. As John mentioned earlier, comp stores sales do not include the e-commerce business with the retail stores that were expanded.

Given the shift in consumer purchasing to online channels we believe that the comp store sales including our e-commerce business is a more accurate reflection of our performance in the strength of our brand. Including the e-commerce, comp store sales for North America would have been 380 basis points higher.

As John mentioned, our 30 expanded stores typically comped higher than our company average, and therefore excluding these stores negatively impacted our comp stores sales results for the quarter by approximately 70 basis points. As we remained focused on building our e-commerce business, we expect sales to continue to migrate from our retail stores to the e-commerce channel and impact our comp performance.

Looking at our stores and e-commerce business combined, we expect sales to continue to grow at a healthy pace in our retail segment. Wholesale sales grew 24.4% to $573.8 million in the third quarter compared to 461.4 million in the same period last year.

On a constant currency basis, wholesale sales grew 26.4%. The increase was led by the accessories and foot wear categories as well as our continued conversion of wholesale doors to shop-in-shop and the expansion of our European operations.

In our licensing segment revenue grew 8.6% to $51.5 million for the quarter, as compared to $47.4 million last year primarily driven by jewelry as well as winter outerwear and watches. As expected our revenues in the third quarter were impacted by the transition of our eyewear license and we anticipate a similar impact on the fourth quarter.

Gross profit grew 29.2% to $800.1 million as compared to $619.5 million last year's third quarter. Gross margin was 60.9% ahead of our expectations versus 61.2% the same period last year.

Total operating expense grew 38.2% to $381.7 million in the third quarter of fiscal 2015 as compared to $276.3 million last year. As percent of total revenue, total operating expenses increased to 29.0% from 27.3%.

Selling, general and administrative expenses increased 35.2% to $344.2 million as compared to $254.6 million for the third quarter of last year. The increase in selling, general and administrative expenses is primarily due to the higher retail occupancy and salary cost related to new store openings, cost related to corporate management additions as we continued to build the Michael Kors team to support global growth higher fees related to our new customer call center and the relocation of our principle executive offices and an increase in advertising and marketing expense primarily offset partially offset by lower distribution cost.

t the percent of total revenue, selling, general and administrative expenses were 26.2% compared to 25.2% to the third quarter of last year. Depreciation and amortization expense was $37.5 million for the third quarter as compared to $ 21.7 million last year primarily due to the build off of new retail locations and the expansion of the existing locations, new shop-in-shops and increase in lease rights purchased for our New York pay-in stores, investments in infrastructure to support our growth and accelerated depreciation related to expansion and relocation of retail stores and the renovation of our corporate offices.

Depreciation and amortization increased 2.9% of total revenue during the third quarter compared to 2.1% the same quarter last year. As we continued to strategically invest in our business you should expect to see year-over-year increases in depreciation as a percentage of total revenue going forward.

As a result of these factors income from operations came in better than we anticipated at $418.5 million or 31.8% of total revenue as compared to $343.2 million was 33.9% of total revenue in a same period last year. In the retail segment, operating margin declined 280 basis points.

240 basis points of the decline was due to an increase in general corporate operating cost and higher depreciation and amortization expense related to new stores, lease rights and including accelerated appreciation related to the expansion of retail stores. The remainder was viewed to as 40 basis points decline in gross margin.

Wholesale operating margin declined 80 basis points primarily as a result of a 74 basis point decrease in gross profit margin primarily due to higher discounts and allowances. Finally, the licensing segment operating margin declined to a 170 basis points due to an increase in operating expense primarily higher advertising costs and professional fees.

We anticipate lower operating margins for the year as the expense will be higher relative to the revenue increases in the licensing segment due to the eyewear license transition. Income taxes were a $113.3 million in the third quarter as compared to a $113.5 million last year.

Our effective tax rate was 27.2% as compared to 33.1% in the same period last year. The decrease in our effective tax rate was primarily due to the settlement of certain of the instruments in connection with the Company's international income tax structure.

Net income increased 32.2% to $303.7 million for the third quarter and diluted earnings per share were $1.48, based upon $205.6 million in weighed average diluted shares outstanding. Net income for the third quarter of last year was $229.6 million or $1.11 per diluted share based upon $206.1 million in weighed average diluted shares outstanding.

Turning to the balance sheet, at the end of the quarter cash and cash equivalents were $949.8 million as compared to $828.3 million at the end of the third quarter last year; there were no outstanding borrowings under our credit facilities in either years. We are pleased to report that we've repurchased approximately 5.1 million shares totaling $399.9 million under our $1 billion share repurchase program.

This action reflects the Board and management's confidence in a long term growth outlook and free cash flow generation and reinforces our commitment to returning value to our shareholders. For the quarter, inventory increased $105.9 million or 24.5% versus last year.

Our inventory growth reflects -- fluctuates from quarter-to-quarter, but we generally expect our inventory increase to outpace sale growth as we open and expand our retail stores, expand replenishment stock, convert shop-in-shops, and rollout our e-commerce business. Capital expenditures for the quarter totaled a $125.3 million.

These expenditures were related to global resale store expansions and renovations, construction and renovation of shop-in-shops investment in our distribution facilities and enhancements of our information system infrastructure. We opened 36 new stores in the quarter, 17 in North America, 14 in Europe, and five in Japan, and ended the quarter with 509 retail stores including concessions.

In addition, we converted 60 department store doors into shop-in-shops. Turning to our outlook for the fourth quarter of fiscal 2015, we expect total revenue to be between $1.05 billion and $1.08 billion assuming a mid-single digit comp store increase.

On a constant currency basis, we expect a high single digit increase in comp store sales. We expect diluted earnings per share to be in the range of $0.89 to $0.92, assuming a tax rate of approximately 30% and 203 million shares outstanding.

On a constant currency basis we anticipate diluted EPS to be $0.05 to $0.07 higher than the reported number. We expect gross profit margin to be approximately 59.5% and operating margin to be approximately 24.8%.

Our consolidated operations are impacted by the relationship between our reporting currency, the U.S. dollar and those of our non U.S.

subsidiaries whose functional currencies are other than the U.S. dollar.

We expect to continuance of foreign currency headwinds in our fourth quarter and into fiscal 2016 to impact our consolidated results and have included the estimated impact in our guidance. I would also note that the port congestion on the west coast continues to pose a risk to incoming shipments, while we have not seen a material financial impact thus far.

We have experienced an increase in delays, which are resulting in additional air freight costs and other transportation fees. While we have factored these increased expenses into our fourth quarter guidance, there is some risk of additional delays that could result in lower revenues and higher cost than what we have anticipated.

For the first year 2015, we now expect total revenue to be approximately $4.4 billion, assuming a comp store increase in the low double-digits. On a constant currency basis, we expect comps to be up in the low to mid-teens range.

We now expect diluted earnings per share to be in the range of $4.27 to $4.30. The expected diluted earnings per share range assumes a tax rate of approximately 30% and 205.8 million shares outstanding.

For the full year, we expect gross margins of approximately 61.0% and operating margins of approximately 29.0%. Capital expenditures are expected to total approximately $400 million for fiscal year 2015.

The majority of these expected expenditures are related to new retail store openings planned for the year with the remainder being used for investments and connection with developing new shop-in-shops, build out of our corporate offices and distribution centers and enhancing our information system infrastructure. We're on track to open approximately 50 stores in North America, 50 stores in Europe, and 10 stores in Japan; expand approximately 40 retail stores globally in select locations in key cities and convert approximately 700 shop-in-shops.

In summary, we are very pleased with our strong top and bottom line performance in the third quarter and feel confident that we will deliver on our full year outlook. We will continue to invest strategically in our business to ensure that we maintain our leadership position within the global luxury market and drive shareholder value for the long-term.

I'll now turn the call back to John Idol.

Thank you, Joe. We remain excited about the multiple growth opportunities for our company.

We continue to capitalize on the strength of the Michael Kors brand with the rollout of our global e-commerce business, the expansion of our footprint in North America, Europe, and Asia; and increased penetration in our wholesale sales globally as we further expand our accessories, footwear, women's apparel, and men's categories. Our focus remains unchanged.

We will continue to successfully execute on our strategic growth initiatives. And even with currency headwinds, we believe we can continue to draw double-digit sales in earnings growth.

We have an exciting journey ahead of us. And we look forward to sharing our success with you along the way.

We will now open the call for questions.

Okay, thank you. Good morning and congratulations on the really nice earnings result this morning.

John, you mentioned that store comps could be hurt by e-commerce purchases that get return to stores, you've seen a full quarter of in-house e-commerce operations; are you able to quantity -- first of all, did you see that during the quarter, and do you have any idea what the comp impact might have been from e-commerce returns to stores?

First up, good morning, and thank you, Kimberly. We did absolutely see returns that you would not normally have seen in our previous quarters, because those returns went to the Neiman Marcus Web site, so you could not return merchandize to our stores previously.

There is a number that we haven't exactly quantified what that is. On the flipside, we look forward to long-term, especially when we have our omni-channel capabilities of being able to convert that customer to a future sale, but it did impact our comp stores.

Okay, great. And then, Joe, it looks like new store productivity picked up in the quarter; I'm wondering if you have any additional color you can share on that?

And lastly, does licensing revenue come through the P&L at 100% gross margin or close to that? I know there are SG&A expenses associated with licensing, but I'm wondering if there was any impact to your gross margin lines from the very, very slow growth in your licensing sales this particular quarter?

Thanks.

So the new store productivity, there is no particular color that we can add on that. Clearly, we -- as you know, as brand awareness has increased, our new stores have been very productive.

So we are pleased with that, but again there is no particular color that I can add. Certainly the slower growth in the licensing did impact gross margin.

We knew -- we had anticipated that would happen. Clearly we've talked before about the transition of the eyewear license.

So we knew that was going to slow down, and we had provided for that previously.

Okay.

And Kimberly, it does come through with the 100% in terms of revenues and in terms of customers.

Okay.

Yes. It clearly comes through for gross margin a 100%, for operating margin it's diluted by direct cost, and then advertising cost.

Okay, great. John, I'm wondering if you can just step back from the quarter for a second and reflect back on 2014.

There were obviously a number of things about the business that changed, some things accelerate, some things decelerate; reflecting on the year, what were the things that you felt particularly good about, were there any surprises, and are there any changes to strategy going forward that you think might be needed or required? Thanks.

Sure. The first thing that we were really pleased about is the strong double-digit growth we had in accessories every single quarter, both in wholesale, retail, domestic and international.

And as you know, we commented a number of times during the script, even in our own retail stores during Q4; calendar Q4, but our Q3, we had double-digit comp store increase in the accessories business. So clearly, the brand is resonating with the consumer.

The consumer feels great about Michael Kors and our new styling. We introduced a new bag called Greenwich, which was exclusive in our owned lifestyle stores, which had excellent sales results.

So reflecting back, we feel very good about that. We also feel excellent about our footwear business.

We had amazing results in our department store distribution as you know we rolled out a lot of shop-in-shops. We're quickly becoming one of the most important footwear brands in all of the -- not only domestic wholesale partners, but internationally the shoe shops are going in as well and seeing the same type of results.

So we see the consumer responding in an incredibly positive way to the brand and the brand continuing to grow, and continuing to look at North American growth of over 20% in the quarter. I don't think there is many companies who are putting on that kind of growth in this environment and doing it the way that we did, which I think was really pristine in terms of how we produced inside the quarter.

So thank you very much, Kimberly. Take the next call.

Thanks, John.

Thanks, bye.

Thank you. Great quarter.

I wanted to ask about the gross margin guidance; and the gross margin continues to be really steady and stable and consistent in an environment where a lot of other consumer discretionary stocks are seeing gross margin moves a little bit more wildly. But you are talking about the fourth quarter sounds like you're expect almost like a re-acceleration there.

Help us understand the dynamic behind that, what gives you confidence that gross margins can take a little bit of a step-up? And then, I have a follow-up.

Thanks.

I'll speak to it first, and then I will turn it over to Joe. There is a couple of things that are impacting the gross margin; first off, as our international subsidiaries come on and create more of a larger base to the business, that obviously impacts our gross margins.

And as retail in total becomes a bigger piece of our business; that impacts our gross margins as well. And even though we did have a -- we were a little bit more promotional during the third quarter, you can see our margins came out very, very strong, and when you look at this, this even includes the FX headwinds as well.

So once again I think that's just all pointing to the fact that consumer feels really good about our product, she is voting yes, we're getting great sell-throughs continuously on most of our products. There are certain products that didn't perform as well for us.

You look at something like the bucket bag which from a fashion standpoint you have to be a part of, but unfortunately from a retail standpoint it is not getting the same type of resonation as we have liked and had our ownership had represented. So you have to be little bit more aggressive when those things don't work, but we're in the fashion business and we have to be a leader, and Michael has always taken our position with some great strategies for spring and summer, and quite frankly, even into fall on our leadership role.

Michael has really said, "You know we have to excite the customer, that's the business that we're in." And Michael and our design teams are just doing an outstanding job with that.

And we're going to get it right hopefully most of the time, but every now and then you're going to get involved. And we feel really good about how the customer is responding to our products and those categories.

So Joe, I'll turn it up to you.

And honestly, there's not a whole lot I can add to that. We are feeling very good about our inventory position, and so we're not anticipating significant levels of markdowns allowances in the quarter.

And the only other thing that I'll add, Omar, is that we do hedge our positions. So despite the fact that we do have currency headwinds and we freely admit that, there will be a portion that's in un-hedged, but we typically hedge purchases into the future.

So we do have most of our inventory positions locked-in in terms of pricing.

Thanks. That's very helpful.

Okay.

And just one follow-up on -- your partnerships with some -- your wholesale partnership with some of the retailers, third-party retailers, especially in North America, there was some concern that there was a mismatch in the market place during the holiday. Some of those retailers may have using promotions on Michael Kors products to drive traffic and it's been such a great brand for them.

Just help us understand that dynamic, is that accurate or is that a fallacy ad how you think about managing that long-term in the North American market place becomes more mature for the brand?

Yes, Omar, we actually had a terrific third quarter with our retail partners, whether with Macy's or Dillard's or -- all of our partners I think had amazing fourth quarters with Michael Kors. They were slightly more promotional I think this year versus last year in some of their storewide events; most of which we were not a part of.

And we really didn't see any tremendous acceleration from ourselves promotionally in that category. Now that being said, you take something like boots, which did not -- I think the industry in general had a rugged times, so yes, we were more aggressive in that category to clear that inventory.

So I think you have to take a perspective we look at our comp store performance and our department store challenge as we said in our prepared remarks. That actually was much stronger for us than it would have been even in our own stores, but again, our own stores you don't see the full picture reflected unless you add back the e-commerce part of it.

So our partnerships are great, the shop-in-shops are working terrific, and I think our retail partners are seeing the results of really great product design my Michael and our designers. Thank you very much, Omar.

Thanks. Nice job.

Great, thank you. Good morning, and let me add my congratulations.

I was hoping you could talk a little bit more about your accessory business. You continue to be very strong double-digit growth there.

Could you maybe just unpack which categories during the quarter really fueled that growth when we think about handbags versus watches and jewelry in particular?

Sure. Erinn, first off, good morning and thank you for your comments on the quarter.

Erinn, couple of things, we are very impressed by what happened during the quarter because what was interesting is our -- not only was our dollar sale up double-digits, but our units were up even slightly higher than that. As you know, the large handbag trend has slowed down and it's more about medium-sized handbags today.

So for us to achieve our results, given the fact that there could up to a $50 move in pricing just because of the way that the consumer is responding and this is global. This is not just domestically.

And then secondly, you have swing packs, cross bodies which are a very, very hot fashion category today. And that's sort of slightly lower average price points.

We look at those categories and say, given the fact that some of the average in terms of the purchase went down for us to be able to deliver the result that we did was just outstanding performance. We think we're leaders in both of those.

If you look at our Selma or Hamilton travel or some of these bags that are in the more medium size and then you look at some of our cross body businesses, we think we're market leaders in those categories. And again, led by Michael and the design team and they have it right for the fashion for the third quarter.

The watch business did not perform at the same level for us in our own stores, and Errin, that issue was one impacted by our sales. Last year at this time, we had an enormous success with watch -- exclusive watch in our own stores around watch comes to stop.

If you remember that's when we launched the charity program which by the way was hugely successful. And we ended up donating a lot of money up to the world food program which I'm very proud of that in terms of what we're able to raise for them.

It was just shocking in terms of performance and how excited they were and the good that we did for people who are hungry today. And as you know, Michael says, "There is a lot and lot of things we can cure in the world, but one thing we can't stop in life is hunger."

And that watch did so much business for us last year. We were not able to anniversary that.

So actually department stores performed better than we did in our own stores, and that was one of the drives in our comp store performance with how exciting and the performance we generated of that watch for -- still that holiday season.

Great, that's very helpful. Thank you for those insights.

And just on the guidance for the fourth quarter, could you maybe just help us break out how to think about that mid single-digit reported comp by region? What would we expect to see the contribution in North America versus Europe principally?

Yes, Errin, we're not going to get into that on today's call because as you know the setback thing is moving daily. And we're hoping that the euro has found some stability.

We're not exactly sure about. So we're not really 100% prepared to go to that by region.

But what I will tell you is that again, we're anticipating when we report our fourth quarter, you're going to see a significant number that will belong to this comp for e-commerce, and we see her shifting and shifting dramatically. One of the other things that happened in e-commerce and I know some people are counting style on the Web site and whatnot; you need to be careful because last year, Neiman Marcus did not have the size and assortments that we have today.

We have huge increase as in assortments on our online which we know is driving the customer there. We also have affected theme of free shipping at all times basically on the site which also is driving a lot of people to quite frankly purchase from the site.

It's just easier and more convenient. So bigger assortments, convenience in terms of the way that we're offering shipping, and the service, is all going to we think continue to drive more business to e-commerce and that will impact our comp store reporting for us.

Extraordinary growth; I just wanted to ask you regarding your merchandise margins across various channels. It looks like you manage it quite prudently and your product assortments impressively expanded, but could you characterize how you perform relative to your expectations across outlet versus wholesale and own stores with promos and discounts and allowances?

Yes, thank you, Oliver. First of -- I think we pretty much came in more or less where we thought we would be, just little slightly better, quite frankly.

In our wholesale, our gross margin was a little more impacted at some of the allowances. As the business gets bigger and you know this, we've talked about this before.

There is some normalization in some of the sales. And the second thing in the wholesale again, you're going to have to be careful as you look at this going forward is as huge and women's ready-to-wear and ultimately men's wear become bigger pieces of the business that will reduce our gross margin in the North American market in particular.

It comes just below our margin businesses. So it will absolutely impact us on a go forward basis.

We'll give you some flavor around that when we talk to you in our fourth quarter guidance, but I will tell you overall we felt really good about the way that the margins came out to the quarter, the way that it performed in each of the channels and how we managed ourselves through the holiday season.

Okay. And just from a bigger picture perspective, John, could you speak for you the evolution of handbag as the percentage of mix over time, and you've had some really interesting initial items with wearables and technology.

I just want to get your thoughts there as it's on people's minds as an interesting, important potential category going forward?

Sure, so accessories will continue to be the dominant part of our business and growing, and we classify accessories today including watches and footwear et cetera. We will probably start to look at that differently on a go-forward basis because footwear business is slowly starting to become a large significant factor in the business.

So we would probably start talking about that a little bit more going forward with some percentages. The wearables category is something that we're working very diligent on.

Fossil announced a few quarters ago, they're in multiple partnerships with different companies, Intel and Google et cetera. We're obviously if I might say the lead on that with Fossil, and we expect to have some announcements toward the marketplace in the next few months about what our strategy is.

We will be in wearables. So I would tell you that that is coming from Michael Kors, and we have a whole strategy around it.

But what we're going to do is we're not interested in being the first one to rush to the race. What we want to make sure is that we have an ecosystem that our customer really believes in and thinks is a viable addition to not only to their fashion wardrobe, but also to how they live their lives.

We think luxury -- and you heard me talk about this before, is not just about products, it's about a lifestyle. And Michael said this a number of times, "It's how you feel, it's the way that you look, it's the way that you express yourself," and we think that technology is obviously going to continue to play a part in that, and we will be a part of that as well.

Thank you, Oliver.

Hey, guys. So your total aggregate top line is up 30% gross margins are down 30, both better than your guidance.

John, when you take a step back, do you think 15-20% top line CAGR the next three years? Is that still achievable and more importantly within that the high single to low double-digit sustainable comp that you spoke to --just to your level of confidence that's still the core underline?

Matt, I'd tell you that certainly more or less of what you're talking about is kind of our goals. Obviously, we're studying those numbers, and we will give you further visibility on that when we report in our quarter fourth.

You heard me say at the end of that post comments that even with FX, we believe that we will continue to have double-digit revenue and double-digit earnings growth. So we won't apply to -- we have that exactly is at this point obviously that is going to be impacted by FX from where it was before, but we think we have a tremendous amount of initiatives everything from our continued store opening program to e-commerce and what that's going t generate for us for the expansion of classifications, women's footwear and menswear and then I might add the brands are still organically growing very, very nicely.

You heard me talk about Facebook fans being up, twitter fans, Instagram -- this is customers coming to look for the Michael Kors brand and how she can embrace the lifestyle. We're also extremely pleased our fragrance business is doing really incredibly well.

We were one of the top performers in fragrance during the holiday season in the U.S. We're seeing similar types of results happening in Europe.

And as matter of fact I spend Monday with 150 people from Estee Lauder who are really driving this business in Europe et cetera. So we think our international growth in fragrance also holds well for us.

And the last thing I just wanted to say is Asia is starting to really come on. Asia is working.

So you heard me be a little bit more cautious in our previous calls about that. Our results in China are really starting to catch hold.

That's becoming a sizable business. Our business in Japan is you can see the numbers and tractions there.

And we're going to open some amazing flagship stores. So watch out, we're going t be a real competitor in that marketplace.

And then Southeast Asia is also performing at very high levels for us. So we see that as a market place if you remember the water fall, North America will eventually float.

We won't talk about that. Europe is going to continue to grow very nicely, and Asia is the next big front for us, we were underdeveloped and then lastly menswear will come on.

So same strategy did we talk with you about since the IPO and I think we're executing on and firing on all cylinders on developing that strategy. So thanks very much, Matt.

Hey, good morning, guys. Just give in your comments about your customers buying patterns shifting to e-com a little bit faster than you thought.

I'm just wondering if that changes at all. How you're thinking about the piece of growth from a store perspective particularly here in the U.S.

and then as you think about that e-com business becoming 20%, I believe is the number you gave of the overall business longer term. How do you think about the profitability of e-com versus your retail channel?

Thanks.

Thank you, Paul. Paul, couple of things; number one, I wanted to add that not only is the shift in e-commerce happening more rapidly than we had anticipated in our comp stores, but I'm sure you're all hearing the same thing from our department store partners.

We've already at depending on certain regions over 20% of certainly for in our penetration with e-commerce with people, and it's not only hearing the U.S. we're seeing very similar types of rates, anywhere between 10 and 20% in the U.K in particularly, the balance of Europe is really not there yet.

But we're seeing absolute penetration. Whilst we're still achieving constant growth at the same time, so similar to what you're seeing in our North American business.

So you also have to remember that when we open a lifestyle store, those stores are highly profitable for us. And Joe mentioned that before.

So even with comp stores coming down from where they headed store we've been, we are still incredibly profitable inside of our own storage. And the last thing I just wanted to say is from the day we went public, we told everyone that we would open 400 stores.

That doesn't change. When you're opening a store and you don't have a store for example, in Omaha, Nebraska today, we want to have store in Omaha, Nebraska.

We think that's a great market place that the customer will enjoy having them at a hot spot from us. And that's going to generate a lot of revenue.

Going to make lot of customers happy and we think that the continued strategy. But we'll stop at 400.

So there won't be any more, and the same thing in certain other market places where we're getting some guidelines. The one market place where we do think there's probably little more potential and we're still analyzing that is possibly Europe.

But again, these are floors that are going to service marketplaces where the consumer today can't get Michael Kors. I'll get you a good example that in Europe, in Romania, we intend on opening in that marketplace where the customer -- she doesn't travel quite frequently as maybe as the customer who lives in France or customer who lives in Spain et cetera, but these are beautiful locations for us to open in those marketplace, and we just think that just adds more dynamic engagement with our customer.

So thank you very much, Paul.

Thanks, good morning, everyone. It sounds like based on your March quarter guidance, that you're actually feeling okay about the gross margin story.

Talked about how you're not -- you're comfortable with your inventory positioning. You're not looking for big step up in allowances.

You gave explicit gross margin guidance. I'm just curious if you could give a little bit more detail then on the 200 basis points of operating margin compression that you're guiding to.

What are the big drivers that you're thinking about for the fourth quarter? And then as we think longer term how should we be thinking about that -- not the gross margin area, but the opportunity to leverage operating expense over longer terms?

Thanks.

Lindsay, I'm going to just talk to this long-term thing and then I'm going to let Joe speak to the components of it. We said from the day we went public that we don't believe that 30 plus percent operating margins were ever sustainable, and quite frankly, we don't think it was the right thing when you have to invest to build our type of the business.

We're building beautiful new distribution centers to support the growth of our business. As you know, in e-commerce technology is very expensive to keep up with what's needed to develop the right platforms to operate off of, whether it's -- other needs that we have to invest the businesses stores et cetera.

So we in investing and certainly have the balance sheet and cash flow to do that. And we think that's the right thing to do for a company.

So that will impact the operating margin, Joe will talk about that. We don't think there is going to be leveraged in the next couple of years.

That's not something actually we are trying to plan for. We think that -- and we had guided all year along; we've been telling people 200 basis points is what we think is for this year the right operating margin decline, and you can see we delivered the results more or less as we has guided and we continue thinking that's the right thing for the business, for the balance of this year and then we'll give you guidance when we sit down on our next call, about the out years.

I will turn it over to Joe.

So I'm in full agreement with what John said; not a whole lot to add, other than to say, I mean thank goodness we've got SoHo stores opened now. So the pre-opening costs were no longer in occurring those, however, do keep in mind that as we open more European stores, they tend to be more street stores as opposed to the North Americas stores, which are more mall-based stores.

And they will have additional -- or they tend to have more pre-opening costs and a little bit more expensive to start.

Yes, and Lindsay if you used to look at the kind of profile, right off, about 1% is coming from D&A. And that's just building more stores and our investments we are making in our warehouse distribution facility et cetera.

Margins are coming down little bit, and so that's affecting operating margin and then the balance is SG&A. So that's kind of the way that we view it.

I would also like to add to what Joe just said, even though SoHo just opened, which we're very about getting rid of that track, you just heard us announced to begin the store. We have a couple of other big stores that are coming on stream, and we will sit six, seven, eight months without any revenue.

So that will impact us also next year. There is going to be an impact from start-up of the European and Japanese e-commerce businesses.

So we don't get leverage from that, because again, you hire staff for six, seven, eight, nine months with no revenues against it. You have all the systems cost.

But at the end, I do believe that in the out years you're going to see some positive results from all this, because they are all excellent investments and they will hopefully in the future create leverage for us. Thank you, Lindsay.

Great, thanks. Good morning, guys.

Just two quick ones; given the new repurchases, can you update us on the desired cash cushion that you have? And then just a quick clarification, when is e-com actually included in the reported comp?

So we think that we're generating enough cash to keep our cash position approximately where it is. John and I are both conservative, we both want to have strong balance sheet, we've always said that, again we have no debt.

So I can't guide you specifically where that is going to be, but we're comfortable as we said in this script that we're generating enough free cash flow to service that commitment that the Board and the senior management has made. In terms of the e-commerce comp, remembering that it's the U.S-only, but the U.S.

e-commerce comp will come in after September.

Great, thanks a lot.

You're welcome. I would like to thank everyone for joining us this morning, and we look forward to updating you on our additional progress in our next conference call, and I would like to add again, Michael Kors brand continues to demonstrate we believe best-in-class results in the luxury, designer arena, and accessories in particular.

And we look forward to continuing that strong growth. Thank you very much.