Capri Holdings Limited

Good day and welcome to the Capri Holdings Limited Third Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jennifer Davis, VP of Investment Relations at Capri. Please go ahead.

Good morning, everyone, and thank you for joining us on Capri Holdings Third Quarter Fiscal 2020 Conference Call. With me this morning are Chairman and Chief Executive Officer John Idle, Chief Financial and Chief Operating Officer Tom Edwards. Before we begin, let me remind you that certain statements made on today's call may constitute forward-looking statements which are subject to risks and uncertainties that could cause actual results to differ from those 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 this 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 one-time costs associated with the Jimmy Choo and Versace acquisitions, restructuring and non-cash impairment charges, transformation costs, and ERP implementation costs. Unless otherwise noted, all financial information on today's call will be presented on a non-GAAP basis, and all comparable store sales numbers will be presented on a constant currency basis. To view the corresponding gap measures and related reconciliation, please view the earnings release posted on our website earlier today at CapriHoldings.com. Now I would like to turn the call over to Mr. John Idle, Chairman and Chief Executive Officer.

Thank you, Jennifer, and good morning. We continue to be encouraged by the ongoing progress of Capri Holdings as we execute the strategic initiatives for each of our founder-led fashion luxury houses. While each brand is distinct with its own heritage, they all have consistent philosophies on fashion leadership and luxury. Our company is led by design visions of Donatello Versace, Sandra Choi, and Michael Kors. With the resources and investments of our group, we have made tremendous progress in expanding accessories at both Versace and Jimmy Choo. In fact, in the third quarter, handbags inflected positively at both houses for the first time since the repositioning of the category. At Michael Kors, our focus remains on rebalancing the brand to position it for growth. Taken together, we remain confident that our three luxury houses position Capri Holdings to deliver multiple years of revenue and earnings growth. Now, Looking at our third quarter results, we were pleased that revenue and earnings per share exceeded our expectations. Revenue of $1.57 billion increased 9% year over year. This increase reflects the addition of Versace and growth from Jimmy Choo. Partially offset by anticipated revenue declines at Michael Kors. Earnings per share were $1.66. Before reviewing brand highlights for the third quarter, I would like to share some of our thoughts on the coronavirus global health emergency and its impact on our outlook for the fourth quarter. This situation is very serious and dynamic. Our thoughts and prayers go out to the people of China, and all those affected by this virus globally. The health and safety of our employees is a priority and we continue to take the necessary precautions to ensure their well-being. We can only hope for a speedy and positive resolution to this crisis. Given the extraordinary and appropriate efforts taken to contain the virus, our trading results in greater China and certain other parts of the Asia region have been materially impacted. Currently, approximately 150 of our 225 stores in mainland China are closed. Additionally, for those stores remaining open, both traffic and sales have been severely reduced. Based on our current visibility into the situation in China, we are reducing revenue by approximately $100 million and earnings per share by 40 to 45 cents for the fourth quarter and full year. This estimate could materially change if the severity of the virus worsens, including potential broader impact on our business outside of China. if outbound travel and tourist traffic is further restricted from China into other countries. In addition, we will not be providing brand comparable store sales guidance ranges for the fourth quarter due to the lower than normal forecast visibility. Now, I would like to summarize our outlook for the year. Prior to the situation in China, our earnings per share expectations were largely on track with our initial guidance for fiscal 2020. We now anticipate fiscal 2020 revenue of approximately 5.64 billion and earnings per share of approximately $4.45 to $4.50. As previously stated, Fiscal 2020 is an investment year to fund strategic initiatives in Versace and Jimmy Choo. We are confident that the investments the company is making this year and synergies that we are now realizing will provide accelerated revenue and operating margin expansion. Now turning to third quarter performance by brand. Starting with Versace. We were pleased with our third quarter results. Revenue of 195 million was ahead of our expectations, reflecting better than expected comparable store sales, which increased mid-single digits. Versace delivered double-digit comparable store sales growth in Americas and EMEA, but continued to experience declines in Asia, primarily due to the ongoing challenges related to Hong Kong. Versace's continued momentum was driven by new collections that were infused with signature brand codes, such as our new Barocco V, Medusa hardware, and iconic prints. Taking from our extensive archives, we recently introduced a new house code, Gianni Versace's original handwritten signature. This motif was incorporated across several women's and men's ready-to-wear styles. It is interpreted through embroidery, all-over prints, and crystal embellishments. Both women's and men's ready-to-wear were key drivers of growth for the quarter. Turning to accessories, a key component of our growth strategy. Sales increased significantly in the third quarter, driven by the performance of our new Virtus collection with the Barocco V logo. The Virtus handbag group remains the top-performing collection in accessories, and we have expanded the Barocco V across new categories, including belts, backpacks, footwear, and fashion jewelry, as well as new handbag styles. We are particularly encouraged that Virtus is driving increased client acquisition with more than 60% of purchases coming from new customers. In terms of brand awareness and customer engagement, our holiday marketing campaign reflected a rich narrative reminiscent of a Jackie Collins novel. The brand employed a 360-degree marketing program across social media and email, to drive traffic to a dedicated holiday section on Versace.com. This helped contribute to a 30% increase in Versace's Instagram followers during the quarter, which grew to 21 million. Once again, a number of high-profile celebrities were dressed in Versace throughout the quarter, including Jennifer Lopez, Angelina Jolie, Kim Kardashian, Selena Gomez, Chadwick Boseman, and Michael Jordan. Additionally, numerous celebrities like Miley Cyrus, Gigi Hadid, Priyanka Chopra were spotted out and about carrying the Virtues bag. Reflecting the power of the Versace brand, Donatella created a worldwide sensation by dressing Jennifer Lopez in Versace Atelier during her first Super Bowl performance Sunday night. With over 100 million viewers, this event showcased Versace at the forefront of its rock and roll heritage. Overall, we are excited about our continued progress executing against Versace's growth initiatives and remain confident in our ability to grow Versace to $2 billion in revenue. Moving to Jimmy Choo, revenue increased 2% on both a reported and constant currency basis, in line with our expectations. Comparable store sales were flat, which was also in line with our expectations. We were pleased to see positive comparable store sales performance in the Americas, which increased high single digits, and EMEA, which grew low single digits. Similar to last quarter, trends in Asia were impacted by Hong Kong, while mainland China continued to grow double digits. In footwear, Jimmy Choo continued to deliver strong comparable store sales growth in fashion active classification, driven by the introduction of Hawaii, an exciting new seeker, which builds on the existing strength of diamond and ring. In women's accessories, the continued expansion of our new collections led to positive global comparable store sales growth for the first time since we repositioned the category. Sales were driven by our JC signature Verin Group, and the continued positive performance of Madeline. In November, we continued our In My Choose interview series, which highlights strong, prominent women who not only dare to stand out, but also empower others by sharing their insights, learnings, and experiences. Rosie Huntington-Whiteley was featured in the second installment of the series, wearing designs from our Cruise 2020 collection. In conjunction with the campaign, we launched Instagram shopping tags for the first time and saw above-average sell-throughs on the shoes Rosie wore in her posts. Jimmy Choo continued to dominate the red carpet with celebrities such as the Duchess of Cambridge, Beyonce, Rihanna, Constance Wu, Dua Lipa, Hailey Bieber, Gemma Khan, and Billy Porter. During the quarter, Jimmy Choo's Instagram followers grew to 11 million, an increase of nearly 20% over last year. Finally, I'd like to take a moment to congratulate Sandra Choi for her induction into the illustrious Footwear News Hall of Fame, in recognition of her outstanding achievements building Jimmy Choo into one of the most prominent luxury brands in the world. Overall, we are pleased with the progress transforming Jimmy Choo from a predominantly fashion luxury footwear brand into a more balanced luxury house with accessories becoming a significant part of the company's revenue. Our goal is to grow accessories from approximately 20% to 50% of Jimmy Choo's revenue over time. We remain confident in our long-term ability to grow Jimmy Choo's revenues to $1 billion. Turning to Michael Kors. Third quarter revenues declined 5% on both a reported and constant currency basis. Total revenue was in line with our expectations. Retail revenue was below our expectations, with comparable store sales declining in the low single digits. Our third quarter comparable store sales reflect low single digit growth in Asia, Flat results in Europe and a low single digit decline in the Americas, where stores were impacted by lower than anticipated traffic during the month of December. Additionally, we saw a greater than expected decline in watches, which negatively impacted total comparable store sales by approximately 200 basis points, excluding the impact of watch declines comparable store sales would have been flat. In the wholesale channel, revenue was ahead of our expectations as we saw better product sell-throughs and our building inventory to prior year levels with our department store partners. Moving to our product performance, in accessories, Signature continues to drive sales around the globe. As customers responded positively to both our core assortment and new animation. Penetration of signature in the retail channel was approximately 30% in the third quarter, similar to the second quarter. In wholesale, penetration increased to nearly 30% as well. Long term, we anticipate signature will reach approximately 40% penetration, which will drive higher revenues and more consistent sell-throughs. Moving to footwear. Trends remained strong in the third quarter, with performance driven by booties and fashion active. Heritage booties with iconic charm and lock branding were customer favorites. Active remains one of our fastest growing categories in footwear. We continue to be leaders in design and innovation in this classification. In women's ready-to-wear, positive trends continued with particularly strong customer response to fashion outerwear. In men's, we also saw, we also continued to see positive comparable store sales and remain enthusiastic about our opportunity to expand the accessories collection. Growth in the third quarter was led by backpacks and small leather goods. Our signature collections are driving performance and now account for 40% of sales. Additionally, customers responded positively to our new introduction of a sneaker collection. In our watch category, trends further decelerated in the third quarter. Despite continued innovation, the decline was greater than anticipated. This reflects continued decreases in fashion watches and the greater impact of competition from tech-driven companies in the smartwatch market. This category will likely remain challenged and have a continued impact on North American retail comparable store sales, as well as future licensing income. We remain focused on accelerating the distribution of our fine jewelry line to help mitigate pressure from the continued decline in watches. During the third quarter, jewelry comparable store sales increased double digits. Turning to brand engagement, we continue to be pleased with our Bella Hadid campaigns. Our holiday marketing reflected the speed, energy, and optimism of our brand with Bella in our MKGO Sea and Ski Capsule and traveling in style with our Jet Set Girls signature accessories. Once again, Michael dressed a wide array of celebrities during the quarter, including Lupita Nyong'o, Olivia Wilde, Daisy Ridley, Reese Witherspoon, and Saoirse Ronan Gao Yunyun, and Chris Lee, among others. Moving to customer experience, our global database continues to expand, reaching approximately 42 million customers, an increase of over 20% compared to last year, demonstrating the continued strength and desirability of the Michael Kors brand. We're especially excited about the growth of our VIP database, which now has 2.7 million customers enrolled well above our expectations. During the quarter, Michael Kors' Instagram followers grew to 16 million, an increase of nearly 20% versus last year. We remain focused on deepening our connection with our customers and driving excitement and desire for the Michael Kors brand. Overall, we are committed to delivering improvement in the Michael Kors business and ultimately returning to longer-term growth with the continued execution against our three strategic pillars of product innovation, brand engagement, and customer experience. In conclusion, our results reflect continued progress at Capri Holdings. The growth initiatives for our recent acquisitions, Versace and Jimmy Choo, continue to gain traction. And we remain on the right path to stabilize trends at MicroCourse. While the situation in China is very concerning, we continue to believe that the long-term opportunity in the Asia region will be a pillar for our future growth. The power of our three fashion luxury houses position us to achieve meaningful long-term revenue and earnings growth. Now, let me turn the call over to Tom.