Capri Holdings Limited

Good day and welcome to the fourth quarter and fiscal year. Today's conference is being recorded. At this time, I would like to turn the conference over to Jennifer Davis, Vice President of Investor Relations at Capri. Please go ahead.

Good morning, everyone, and thank you for joining us on Capri Holding Limited fourth quarter and full year fiscal 2020 conference call. With me this morning are Chairman and Chief Executive Officer John Idle and Chief Financial Officer and Chief Operating Officer Tom Edwards. Before we begin, let me remind you that certain statements made on today's conference, 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 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 include COVID-19-related charges, long-lived asset impairments, ERP implementation costs, the pre-transformation costs, restructuring Noted, all financial information on today's call will be presented on a non-GAAP basis. To view the corresponding GAAP measures and related reconciliation, please view the earnings 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, everyone. I recently reopened New York offices. I hope you and your families are healthy and safe. that are impacting all today. These are truly unprecedented times. Our heartfelt condolences go out to the families, individuals, and communities affected by the unjust and tragic deaths of George Floyd and Rayshard Brooks. as well as the countless victims that have come before them. The systematic discrimination against the black community that has led us to this point is deplorable and untenable. At Capri Holdings, we stand against racism, discrimination, and violence of any kind. We cannot change the past, but as an organization and as individuals, we have an opportunity to positively impact the future. At Capri Holdings, our Diversity and Inclusion Council is diligently working on initiatives to foster greater equality in the communities that we serve. Learning and taking the necessary actions to support long-term positive change for the Black community. While we foster an inclusive environment where employees of diverse backgrounds are welcomed, valued, and celebrated, There is more that we can do to increase diversity at all levels inside our company. We are working on significant initiatives to create change within Capri Holdings and look forward to sharing our plans in the near future. If we want to see change in our industry, we need to be the change in our industry. The COVID-19 pandemic entire world. My thoughts and prayers go out to all those who have been affected by the virus. Our hearts are with those who are working on the front lines to help the world combat this pandemic. We thank them for their remarkable dedication and courage. Our companies, its founders, and I donated more than $3 million in support of COVID-19 relief efforts globally, demonstrating Capri Holdings' commitment to supporting the frontline workers who are risking their health to keep our communities safe. Additionally, earlier this week, Michael Kors made a $35 million product donation to help provide relief to people in need. Philanthropy has long been a core value of the Michael Kors brand. Our ongoing support of various organizations that provide relief to those who need it most is a fundamental value for Capri Holdings. This is clear because we are all stronger in our united resolve. I also want to thank our teams around the globe for the hard work we demonstrate every day during the pandemic. It has been inspiring to see the entire Capri Holdings organization rally together. Our distribution center employees kept e-commerce facilities up and running while stores were closed. Our retail employees are eager to get back to work and have begun to reopen their stores. And lastly, corporate employees have begun returning to our offices across the globe. Now turning briefly to our full year financial results. Entering fiscal 2020, we expected this to be an investment year to fund strategic initiatives and position our luxury houses for revenue and operating margin growth. Prior to the impact of COVID-19, our earnings per share Our expectations were largely on track with our initial guidance for fiscal 2020. For the full year, our results were significantly impacted by the corona pandemic. Revenue of $5.6 billion increased 6% year-over-year. Earnings per share decreased 22 cents and was further impacted by an unanticipated valuation allowance of 44 cents per share. Despite the pandemic, we were pleased with our progress as we executed many of our strategic growth initiatives. We continue to believe in the power of our three fashion luxury houses and the resilience these extraordinary times. We remain confident and optimistic about the future of Capri Holdings. Looking at fiscal 2021, As we manage through these unprecedented times, we are focused on five key areas. First, protecting the health and safety of our employees, customers, and communities. Second, reopening our business globally. Third, deepening customer engagement. Fourth, maintaining financial strength. And fifth, preparing for future growth in fiscal 2022 and beyond. Starting with protecting the health and safety of our employees, customers, and communities. Across the globe, we have implemented procedures for our stores, distribution centers, and corporate offices. These include conducting health screenings and temperature checks, providing employees with personal protective equipment, implementing increased cleaning and sanitizing procedures throughout our stores distribution centers, and offices, practicing social distancing, including re-spacing floor plans to maintain a safe six feet, limiting store capacity to allow for physical distancing, adding distancing markers inside and outside our stores as necessary, posting signage encouraging customers to observe social distance guidelines, and encouraging consumers to wear a face covering while shopping. Stores will have masks available for consumers who do not have their own. In terms of reopening our business, we have made the decision to begin a phased reopening on a location by location basis. While our stores are accommodating for new health and safety standards, we will not let that take away from our luxury aesthetic and exceptional in-store experience. We are maintaining the highest standards of service our customers have come to expect from our luxury houses. We are pleased with the performance of reopening thus far. We have made the most progress in mainland China, where stores have been open for several months now and volumes have been steadily increasing. We expect revenue in our fiscal first quarter to be approximately at Versace and Jimmy Choo in this region. Of course, we expect revenue to be below prior year levels. Revenue in Hong Kong and Macau remained significantly below last year. In the remainder of Asia, outside of Greater China, the recovery is progressing at a slower pace. This is due to two factors. First, in Japan, the retail store closure and reopening process occurred several months later than in China. Therefore, Japan is early in the recovery phase. The second factor impacting Asia outside of China is the decline in tourism. Air traffic in the region is down significantly since the outbreak of COVID-19, due to travel restrictions. Chinese tourism and travel retail comprise a meaningful portion of our luxury sales in the region. In the Americas and EMEA, where we began reopening our fleet in May, we are encouraged by the performance thus far. Revenue has ranged from 50% to 75% of prior year levels since stores have reopened. Results have improved since initial reopening with a gradual build in sales trends. Overall, we are pleased with our progress with all regions tracking above our internal expectations. While traffic at reopened stores is trending slightly better than we had originally anticipated, conversion is meaningfully higher than expected. Additionally, we saw a significant acceleration in our e-commerce revenue growth in the first quarter. Now turning to our next area of focus, engaging customers. We are fortunate to have three brands with loyal and passionate consumers. Through our e-commerce sites, social media channels, and other digital communications, we are creating messaging that is exciting to our followers as we focus on keeping them highly engaged. Donatella Versace, Sandra Choi, and Michael Kors have powerful voices to communicate with fans as they remain connected with our customers. At Versace, Donatella provided followers with memories as she shared personal memories of time she spent with other iconic models, actors, Versace shared content through social media to help support, motivate, and inspire followers, generating overwhelmingly positive sentiments and results. These initiatives resulted in a significant increase in engagement and helped contribute to nearly 30% increase in Versace's Instagram followers during the quarter, which grew to almost 22 million followers. At Jimmy Choo, we launched the Choo Sketch Competition. We invited followers to join Sandra Choi and share sketches of their ultimate fantasy shoe. From the over 10,000 entries received, and from there, our Instagram followers voted for their top five. They will see their sketches brought to life as part of an upcoming capsule collection. The success of the competition helped contribute to a 13% increase in Jimmy Choo's Instagram followers to 11 million. At Michael Kors, Michael connected with fans as he embodied the brand's attitude of energy and optimism. Michael released 18 videos on Facebook, Twitter, and Kakao sharing stories and showing how he spent his time during quarantine. He urged followers to stay safe, strong, patient, and positive through these difficult times. Additionally, Michael invited clients to join him and personalize virtually with the participants. Michael also interacted with fans in China, where we experienced a very successful Superbrand Day on T-Mall in April. A collection of customizable bags. bags sold exclusively on Tmall. The launch was combined with an interactive digital quiz that allowed customers to engage with Michael. We were thrilled with the results, which far exceeded our expectations. On that one day alone, we had 1.3 million visitors to our site and generated over 2 million in revenue. During the quarter, Michael Kors' global social media presence increased by 8% to nearly 49 million followers. Now I'd like to take a moment to acknowledge one of the most powerful assets in the company, our incredible group of nearly 13,000 Versace, Jimmy Choo, and Michael Kors store associates worldwide. While our stores were closed, many associates focused on clienteling and engaging with customers at home. They were able to interact with clients through alternative channels such as Zoom, FaceTime, WhatsApp, WeChat, and Line. Now turning to our next area of focus, financial strength. Capri Holdings' liquidity remains strong. We currently have approximately $1.1 billion in cash and availability under our revolving credit facility. As the pandemic spread, we took decisive actions to preserve our cash and maintain our financial space by $500 million to emerge a strong company. And finally, preparing for future growth in fiscal 2022 and beyond. I am proud of the progress we are making executing against our strategic initiatives. The results we are seeing reinforces our confidence in the future growth of Capri Holdings. We have a portfolio of three exceptional luxury houses, Versace Heritage, Michael Kors, which is with its 39 years, and Jimmy Choo with its 24-year heritage. These brands have enduring value and a long history of successfully navigating challenging periods. Given the history of our luxury houses, I am confident that we will successfully navigate these unprecedented times and emerge in a strong position. Looking at each of our luxury houses, starting with Versace, we are confident in our ability to increase revenue to $2 billion at a mid-teens operating margin over time. First, we plan to build on the luxury runway momentum driven by Donatello's fashion vision. Second, we will enhance the brand's powerful and iconic marketing to expand engagement and build upon our large social media following. Third, we expect to continue increasing the luxury house's global retail footprint from approximately 200 stores today to 300 over time. We believe physical stores will always play a vital role in a consumer's experience with luxury brands. As a reminder, Versace under-penetrated relative to its luxury peers. Fourth, we intend to accelerate channel development. And fifth, we will continue to expand Versace's accessories and footwear business from approximately 35% of revenues today to 60%. We made significant progress in fiscal 2020 with the launch of our new iconic Barocco V logo on the Virtuous Accessories line. This logo is a key foundation for future growth opportunities across multiple product categories. Similarly, at Jimmy Choo, our confidence in the luxury house's long-term growth potential has not changed. We believe there is a revenue to $1 billion and achieve a mid-teens operating margin over time. First, Jimmy Choo will continue to to expand its luxury footwear collection with an emphasis on building the rapidly growing fashion active classification. We plan to build on the successful introductions over the past year. Second, our strategy to increase the penetration of accessories remains on track with the successful launch of our new Madeline and Varon handbag collections in fiscal 2020. we will continue to expand the breadth of our offerings and grow the category to approximately 50% of revenue. Third, we still believe we have the opportunity to grow the store base to approximately 300 stores compared to 226 today. As a reminder, Jimmy Choo's store base is also under-penetrated relative to its luxury peers. Turning to Michael Kors. We were pleased with the traction of our strategic initiatives in fiscal 2020. Our global customer database expanded by approximately 20%, reaching 44 million customers, demonstrating the continued strength and desirability of the Michael Kors brand. We attracted a younger customer, expanded our signature assortments, and continued to grow apparel, footwear, and men's. In fiscal 2021, we plan to continue to build on our success. First, we are focusing on product innovation, delivering fashion and newness across all our successful signature offerings. Second, we are planning to expand our men's business as we remain strategically focused on this high growth category. Prior to the pandemic, we were seeing strong performance, which we Third, Michael Kors has tremendous growth opportunity in Asia, primarily in China, where we believe we can double our revenue over time. Given the increased wealth in the region, as well as our expanded brand recognition, we believe we have significant opportunity to grow our digital business, open new stores, and to increase productivity of existing stores. Finally, the brand is increasing engagement by leveraging Michael's powerful voice and leading social media presence while enhancing our 360-degree marketing efforts. In conclusion, we are confident and optimistic about the long-term opportunities for Capri Holdings for the following reasons. First, we have a portfolio of three iconic founder-led fashion luxury houses with powerful global recognition. Our incredible brands inspire passion and excitement in customers who value imagination, exceptional quality, and design innovation. Fashion and luxury speak to deep-seated desires for self-expression and creativity, and we have no doubt they will remain long after the global shutdown is behind us. Second, we are driving increased customer engagement and deepening our relationship with existing and new customers through many communication channels. Third, our leading distribution network combines a world-class digital experience with luxury retail locations in the most fashionable, sought-after shopping destinations around the world. Fourth, we continue to execute on our strategic initiatives, which position us to resume revenue, growth, and expanded operating margins. And finally, we have a strong balance sheet and a history of robust free cash flow generation. Therefore, we remain confident in the long-term opportunities for our company and believe we are poised to resume our growth trajectory in fiscal 2022. Now, let me turn the call over to Tom.

Thank you, John, and good morning, everyone. I hope you're all staying healthy and safe. I'd like to start by discussing our fourth quarter and year-end results. In the fourth quarter, revenue of $1.2 billion decreased 11% compared to last year, reflecting the significant negative impact of the COVID-19 pandemic. Net income of $16 million and diluted earnings per share of 11 cents were negatively impacted by the lower revenue, resulting expense deleverage, and a higher than anticipated tax rate. We started the quarter with strong momentum prior to the outbreak of coronavirus. However, as the virus spread around the globe, our results materially weakened. January retail revenue was positive at Michael Kors and Versace. In mainland China, we experienced double-digit increases across all luxury houses. Trends in the Americas and EMEA were also strong, especially at Versace. In February, the vast majority of stores were closed in China, and revenue declined 80 to 90% as a result. Trends also weakened in other Asia countries, as Chinese tourism in the region halted. Throughout the month of February, revenue in the Americas and EMEA was in line with our expectations. In mid-February, stores began to reopen in China, and by the end of the quarter, nearly all stores were back online. As retail locations resumed operations, we saw weekly improvements, though from extremely low initial levels. In contrast, in mid-March, we closed all of our stores in the Americas and EMEA. At the end of the quarter, approximately 70% of our global fleet was closed. Throughout the quarter, our e-commerce sites remained largely open, and we were pleased with the growth we experienced in the channel. Now, turning to total company margin performance. Gross margin was 60.7%, an increase of 130 basis points over prior year. This primarily reflected gross margin expansion at Versace and Michael Kors. Operating expense as a percent of revenue was 52.3%, a 230 basis point increase over last year, largely due to deleverage from lower revenues. Total company operating expense decreased 48 million due primarily to a reduction of 90 million in expenses predominantly at Michael Kors. The lower expenses include the benefits from cost reduction efforts initiated early in the year as we have been rigorously managing our expense base prior to the pandemic. Additionally, we realized positive contributions from our Michael Kors Retail Fleet Optimization Program. As a result, total company operating margin was 8.3% compared to 9.3% last year. Our tax rate for the quarter was 84% compared to 11% in the prior year. This increase reflects unanticipated non-cash valuation allowances related to the use of net operating losses at Versace and Jimmy Choo. These NOLs were reevaluated due to the impact of the coronavirus on results at the brands. The allowances amounted to $67 million and negatively impacted earnings per share by 44 cents. Now that we have completed the review of Capri Holdings adjusted non-GAAP P&L results, I would like to provide a brief overview of the charges not included in our fourth quarter adjusted results. The vast majority of these items were directly related to the impact of the COVID-19 pandemic. First, we recorded $351 million in brand intangible and goodwill impairment charges associated with Jimmy Choo. These charges are a result of the expected near-term reduction in revenue and earnings related to COVID-19, which will postpone the achievement of our longer-term revenue and margin targets for the brand. Second, we realized $137 million charge for store impairments, including $94 million for a reduction in right-of-use lease assets and $43 million for fixed assets. Third was a $92 million increase in inventory reserves related to the impact of the coronavirus pandemic. Fourth, we recorded an additional $25 million in reserves against receivables. These reserves were primarily taken against certain wholesale partners that have been challenged by the current environment, including those that have filed for bankruptcy. Finally, we recorded $30 million in expenses primarily related to the winding down of our ERP implementation and transformation efforts. Turning to the balance sheet, total inventory was $827 million, a decrease of 13% compared to the last year. We ended the quarter with approximately $900 million in liquidity. Total borrowings outstanding at the end of the quarter were approximately $2.2 billion. Now, moving to actions we have taken to reduce operating expenses and maintain a strong liquidity position. we are lowering our operating expenses by approximately $500 million for the fiscal year. We anticipate at least half of these savings will carry forward into future years. After rigorously evaluating all expenditures, the following actions have been implemented. We significantly reduced all non-essential discretionary spending, including decreasing marketing spending, delaying or canceling select new store openings, reducing external third-party services, and pausing non-critical systems implementations. We also implemented compensation reductions for our board and employees. Additionally, John Idle, Michael Kors, Donatella Versace, and Sandra Choi each voluntarily collected to forego their salary for fiscal 2021. We streamlined our organization and have reduced our corporate workforce globally to better align our expense base with anticipated revenue. Additionally, we are in the process of reviewing all retail locations and assessing store profitability in order to further streamline our operations and improve the overall profitability of our retail fleet. As a result of this assessment, we may decide to close up to 170 stores over the next two years, most of which would be Michael Kors. We could incur up to $75 million in restructuring charges over that same period. Final details will be provided as we complete the plan. Turning to working capital. We expect to realize the cash flow benefit of approximately $400 million through rigorous inventory management. In light of the global store closures and anticipated lower demand in fiscal 2021, we diligently manage inventory purchases by reducing or canceling commitments, redeploying inventory, and consolidating upcoming seasons. Additionally, by spending payment terms with our vendors and suppliers, we are further managing our working capital. Next, we are reducing capital expenditures by approximately $150 million in fiscal 2021. This includes deferring certain investments, such as non-critical systems implementations, as well as select store openings and renovations. We expect fiscal 2021 capital expenditures to be approximately $130 million. Finally, to improve our financial flexibility and liquidity position, we amended our revolving credit and term loan facility to waive compliance with the leverage ratio covenant through our first quarter of fiscal 2022. The amendment also adds security to the facility and applies a minimum liquidity covenant for the duration of the waiver period. Thereafter, the leverage ratio covenant under the facility will again apply, but the ratio will increase from 3.75 to 4.0. We also entered into a new 230,364-day revolving credit facility. With this additional funding, the company currently has approximately $1.1 billion of liquidity. We expect to end the first quarter with total borrowings outstanding of approximately $1.8 billion compared to approximately $2.2 billion at the end of the fourth quarter. Given the actions we have implemented, we believe Capri Holdings is well positioned to manage through this period of uncertainty with ample financial flexibility. Now turning to guidance. We're not providing full year 2021 guidance at this time due to the lack of visibility surrounding the pandemic, macroeconomic fundamentals, and tourism. However, I would like to share some thoughts around our expectations for the fiscal first quarter and the progression of the expected recovery through the year. As we have begun to open stores across all regions, the recovery is slow but steady. The weekly improvements in traffic and revenue are promising. But we were encouraged by the progression of the recovery so far. We are planning our business, assuming that revenue will build gradually. We expect the recovery to take longer in the Americas and EMEA relative to China, where luxury sales are benefiting from domestic demand due to travel restrictions. We also anticipate a slower recovery in travel retail due to the longer timeframe for tourist activity to rebound. We anticipate the first quarter of fiscal 2021 will be the low point in terms of revenue and earnings. During the first quarter, our stores were closed on average for nearly 55% of the quarter. That compares to the fourth quarter when our fleet was closed for an average of approximately 10% of the quarter. While our store revenue was down substantially to prior year given the closures, we were pleased with our robust e-commerce trends. where first quarter revenue growth accelerated to a strong double-digit increase compared to prior year. Similar to the company's directly operated stores, the majority of our department store partners' locations in the Americas and EMEA closed in mid-March. Stores began to gradually reopen in mid-May, and the majority are currently open. Reopen store performance at the point of sale is in line with our company-owned stores. However, our partners have placed limited replenishment orders during the quarter. Therefore, the company has not had a meaningful level of wholesale shipment. Additionally, travel retail, which is included in the company's wholesale channel, continues to be impacted by the significant decline in tourism. Given the impact of store closures through the quarter, the gradual recovery in revenue as stores reopen, and low wholesale shipments, we expect first quarter fiscal 2021 revenues to decline approximately 70%. Due to the lower revenue and resulting deleverage, we anticipate a significant loss per share in the first quarter. Looking at the second quarter of fiscal 2021, we anticipate nearly all of our stores will be open by the end of the quarter. Today, almost 90% of our global retail fleet is open. In the Americas, 70% of stores are open. while in EMEA and Asia, approximately 98% of stores are currently open. We expect to see gradual, sequential improvements in revenue performance in the Americas and EMEA, but anticipate both regions will remain well below prior year. We also expect revenue in the Asia region will continue to improve, but remain below the second quarter last year. In the wholesale channel, we anticipate shipments will begin to improve during the second quarter. In the third quarter of fiscal 2021, we anticipate all regions will continue to gradually improve as consumer confidence and the economy begins to recover, but remain below the same period of last year. We expect a slower recovery in tourist activity, which impacts our travel retail channel, as well as many important flagship locations in major tourist destinations. In the fourth quarter of fiscal 2021, we expect revenue to remain below the same period of last year in the Americas, EMEA, and Asia, excluding Greater China, largely due to a slower recovery in tourist activity. In Greater China, we believe revenue could increase year over year, supported by growing domestic demand. Summing up our outlook for the full fiscal year 2021, we expect a gradual recovery as stores reopen and consumers' shopping patterns return to normal. We anticipate an earnings per share loss in the first half of fiscal 2021, given the reduction in revenue and resulting deleverage. While we have made significant cost reductions, we do not expect they will be enough to offset the considerable decline in first half revenue. In the second half of fiscal 2021, we expect the company will return to generating positive earnings per share as revenue trends gradually improve. In conclusion, We have taken strong actions to reduce costs, manage cash, and streamline our organization. We have ample liquidity and flexibility and believe we will emerge from the COVID-19 pandemic a strong company. With the combined power of our three iconic founder-led fashion brands Versace, Jimmy Choo, and Michael Kors, we remain confident in our ability to return to revenue and earnings growth in the future. And now I would like to open up the line for Q&A.

Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing star 1 on your telephone keypad. Please make sure the function is switched off to allow your signal to reach our equipment. If you wish to cancel your request, please press star 2. It is star 1 to ask a question. The first question comes from Matthew Boss from J.P. Morgan, please go ahead.

Great, thanks. John, maybe as we think about as a result of the crisis or following the crisis, any material changes that you're planning for across your U.S. wholesale distribution, or maybe how do you see the brand's ability to remap distribution as we think about expansion opportunities that could possibly offset the impact of the accelerating department store closures that we're seeing?

Good morning, Matt. Thank you for that question, and I hope you and your family are safe. You know, Matt, an interesting thing during the pandemic, the U.S. department stores have a very large percentage of their business in e-commerce, and we actually have probably even a larger percentage of our business at each one of the retailers in North America. in e-commerce. So if you look at Marcus or Saks or Macy's and Dillard's, et cetera, we're a very large player on that part of the distribution. And the good news is we saw significant acceleration. And at a couple of our department store partners, we were actually, if not the best performing brand, one of the best performing brands across all the families' businesses that we were part of. So that was very encouraging to me in terms of how our brand responded during when stores were actually closed. And let me kind of identify something for you. Tom said that we anticipate that our revenues will be down approximately 70% in the first quarter. Our store performance is actually better than that, just so you're aware. Both our stores and the department stores The greater percentage of that decline is because there were really very little or no wholesale shipments. So that kind of impacted us. So just to give you some color, we're actually doing better than that in terms of actual retail performance. And then, of course, our online component is seeing very, very strong double-digit growth across all channels, whether that's department store channel or our own channel. You know, the stores that are going to close that have been announced, Once again, these are not going to be significant volume doors for us. So we will lose some of that volume and it's really, it will have a minor impact on our overall velocity. But I don't think that's going to be a significant number for us. And so we view our opportunity to resume growth in 2022. with our department store partners, not only in North America, but obviously in Europe. We have a sizable business, and the Harrods and the Gallery Lafayettes and all are reopening as we speak. They tend to not have as large of an e-commerce penetration, but it's growing. So I think we will lose some in-store closures. We'll make up some in our e-commerce growth with them. And I think we're also one of the best companies in the industry at that both our own platforms in particular in Michael Kors and in Jimmy Choo. And we're working very hard in Versace and I think we're starting to make some pretty significant progress there as well. So we've always believed in the e-commerce platform and channel and as part of our omni-channel experience. And as you know, over the last really seven years, we've spent heavily on platform, on a lot of distribution centers, on our store fulfillment capabilities. And so we think that we can continue to capitalize on that even when we lose stores in markets. So while, yes, there's going to be some impact, I don't think we feel it at the moment to be a severe number for us. And I really have to talk about fiscal 2022 because 2021, we just don't know when we'll be back to a more normalized rate. We're assuming, as Tom indicated before, really in fiscal 2022. Thank you, Matt.

That's great. That's great color. Maybe just as a follow-up, what's your comfort with the composition of channel inventory for the Michael Kors brand today? And how would you characterize the current promotional landscape across handbags, maybe relative to the backdrop that we saw pre-pandemic?

Sure. Matt, I'd like to talk about all three of our businesses because I think they're all important. So when the pandemic started to become apparent and actually COVID in China, we made a very significant move quickly. We actually either canceled production going into that region of the world and or reshifted it to other parts of the world. And to some degree, that's actually holding us back a little bit right now in China because we're, oddly enough, we're slightly low on inventory there because of how quickly we moved. So in terms of the balance of the world, we took the same approach across all three businesses. We really reduced our inventories in fall and in holiday. Our summer inventories, because we didn't ship a lot of that to our own stores and to our department store partners, we're repurposing that for spring season next year. And I think that's going to be fine because it's great fashion and there's some really amazing product in there. And so we'll get the benefit of not having to buy the merchandise and then mark it down which really leads to the third part, which is markdowns are actually surprisingly much lower at this point. And I think we're seeing that across the industry. Many of the fashion companies, including ourselves, really decided that the worst thing we could have possibly done is to have giant promotions during this period of time. Of course, now promotional activity is fairly heavy because it's July when some when it was historically more typical to be in this time. So I really applaud the industry for being a little bit more consistent about how to view what inventories we do have. Because again, we're planned down pretty significantly in inventory in the back half of the year, because we did not want to have, you know, loads of inventory to mark down. So we really feel that the quality of what we have is quite good, and we think that we'll be able to keep an appropriate pacing. I'll just add one other thing for color for everyone on the call. Again, interestingly enough, the handbag business has been the strongest business through COVID. And that's really across all three of our companies. It's quite interesting. In particular, larger bags, we're seeing a tote business, backpacks, larger handbags coming back, and even some money pieces. So really quite an interesting shift. AURs are going up. So there is definitely a shift in consumer behavior. It's a good one for us, quite frankly. Second most strongest business was watches online, and that's obviously more of a Michael Kors issue for us and less Versace and Jimmy Choo. So we were very pleased with that. And then, of course, our footwear, in particular, our active business, active has been very strong. There's no secret to that. And some of our casual footwear business, whether that's flip-flops or flats or some more casual items. And in particular, there is absolute stress on the dress component of the business. There's not a lot of occasion wear, et cetera. And then in the women's ready-to-wear business, it's been more light dressing that It's really been active. But I would say ready-to-wear has been probably the weakest performing of the businesses for us in the company through the period of end of quarter four and pretty much through first quarter. Thank you, Matt.

Paul from Citi. Please go ahead.

Hey, thanks, guys. You took a $137 million store impairment charge this quarter. Wondering if you could break that down by banner and or geography and just maybe, I think you said there was a potential $175 million in potential. restructurings tied to future store closings. Maybe you could just talk about that. And then just second, on the $500 million of operating expense savings, where do you find that? How much came from each brand, if you could break that down?

Thanks. Hi, Paul. Thanks for your question. On the store impairment charges, it was across all three brands, and really due to COVID, as we assess the profitability of those stores over the next few years, obviously they're impacted. And I just say, in looking at the brands, take a normal distribution across the brands. I don't think we'll share the specifics on that. But as we look forward to the retail fleet optimization program, we just completed one where Michael Kors closed approximately 140 stores, generating savings that we've seen run through the SG&A line in the business throughout this year. And we are now taking a broader look across all businesses to really optimize the fleet. and Versace, but we'll come back with a little more detail as we finalize that plan. And what I had mentioned in the prepared remarks was approximately a $75 million charge over that timeframe for exiting those stores, which on a net basis, of course, will pay back as we reduce expenses over time. In terms of the savings you had mentioned, for the $500 million It's across all the businesses and corporate. Our largest cost base, of course, is in Michael Kors and corporate, so the largest amount would be there. But we've looked, again, across all the businesses and taken action to really reset our cost base for this timeframe, and at least 50% of these savings will continue to flow going forward. We'll re-look at some of the other areas of savings that will continue to invest back in the business as the business comes back, for instance, in areas of marketing.

And, Paul, good morning. Again, I hope you and your family are safe. I would add further to that. We believe that in, Michael, because of the size and the rapid growth of our e-commerce platform, we're really servicing our customers. from an Omni standpoint, but also he and she are deaf before COVID. You can also increase in our customer database. And we keep giving that relevant point because that's really showing we're building, you know, more customers. And obviously we're getting that information and we're doing business with them. And it's becoming quite an ecosystem for us, which we really like. And so I think you can kind of think about 650 stores to 700 stores from microcores over the long term. And there's no question that those bottom stores, they're no longer profitable for us. So therefore, we're closing stores that are less profitable. And if you unfortunately would have seen and sort of did see. But in Q4, we were really starting to see benefits of that fleet optimization program, which we had been talking about some two years ago. And so that's, you know, our mindset hasn't changed. And, you know, COVID may have accelerated that a little bit, but not a lot. I mean, it's really our mindset is to have a smaller store fleet for microcores, be more focused on digital growth for the brand, and also increase operating margins. Even with COVID, we ended up with north of a 20% operating margin in Michael Kors. And quite frankly, we think we can grow that relatively decently because we're going to get rid of a lot of these lower, smaller stores that are actually creating a loss for us, number one. And number two, we are starting to generate better profitability in our e-commerce business. While it's still below our store business, it is definitely improving. And I also might add that at Versace and at Jimmy Choo, e-commerce is actually equal in profitability to our store network. So we see kind of a little bit of a turning point for us in terms of that profitability metrics. And I think we've talked to you in the past saying that that has actually gone against us. And again, we're not fully where we want to be, but we're definitely making some significant progress. And we think that will impact our profitability long term. Our course is to actually improve profitability. The last thing I just want to point out about margin during the quarter, I think we told you we were going to be raising prices, which we did do. We told you we were going to be reducing some of them. We also mentioned that we would be slightly less promotional, which we did do. And all that's starting to come into the gross margin in the company, and it's been a long time since we've seen that directionally happen for us. So, again, you know, in my prepared remarks, I said to you that we're feeling quite encouraged about a number of the strategic initiatives that we were putting in place And we're seeing that happen. So a lot of what you heard me talk about wasn't wholly different than what you heard us talk about in previous calls. And that's because we believe we're still on the right path. We think that the customer journey will be slightly different because obviously she's going to probably be less in stores over the vaccine until people feel more comfortable shopping outdoors, et cetera. So we're going to be ready for that. We're also taking a very deep and thorough approach to clienteling. which we think is going to become a sizable business for our company. We're already seeing the initial results of that, and we think we can take that a lot further. So retail is going to look different and change, and we're going to be agile and be able to be there to be able to fulfill the goals. I think we've got three incredible brands to be able to do that with. Thank you, Paul.

In order to allow, we kindly ask you to limit the number of questions to one. Thank you. Kimberly Greenberger from Morgan Stanley, please go ahead.

Great. Thank you so much. Good morning. John, I'm wondering if you can just reflect upon the strategies you shared with us here over the past year. And as we consider life during COVID and post-COVID, are any of the strategies or several of the strategies that you are putting in place, does this COVID experience sort of sharpen your focus on any particular strategies? And does it cause you, by contrast, to maybe ease up on pursuing, at least in the short term, some of the initiatives that you've talked about. I'm just wondering how you think about where to focus the organization's energy given the changed environment that we find ourselves in. Thanks so much.

Thank you. Good morning, Kimberly, and again, I hope you and your family are safe. Yeah, that's an excellent question, Kimberly, and as you can only imagine, ourselves and every other company that's in the consumer products world is going through that same kind of strategic review. So I would say the following. Number one, right at the top of the list, you have to reset your cost base because the world has changed. And I think Tom indicated the number of things that we're doing to restructure the cost base in the company. That's had some unfortunate consequences in terms of layoffs and salary reductions and other done it and we think it's the right thing because we have to get through this very difficult period of time. Secondly, we've slowed down initiatives that might have been nice to have and might have shown benefits for the company over a longer period of time, but right now probably don't have to happen tomorrow. And one of those was SAP. We certainly slowed that down. We're going to resume the implementation of that hopefully beginning next year. But that can take time, and we certainly are a company that is able to operate quite efficiently without having that entire structure in place. We are not holding back, and this is where I would say to you where our focus is on any consumer-facing initiatives where that's anything related to our e-commerce platform, to our clienteling platforms, to our Omni. that that is going to continue to be critical. You know, I think the shopping window is going to be shortened. They're going to want it extremely quickly, even quicker than they wanted it before. So we have to be prepared to meet initiatives going on. One of them is something that's happening right now in the Hamptons where Jimmy Choo is going to bring a store to you. And we're testing that as a concept for us. interesting for us to be able to expand. And there is the entire assortment for you, obviously not the entire, but a more limited version. And we can service you inside the house with one of our very talented sales associates and more one-on-one clientele. So I think we've got to be flexible. We've got to be able to allocate resources to some of the new initiatives that we're taking place. The second thing is in terms of the value of the brand and looking at Versace where we think it's the largest dollar volume growth proposition for this company, we still firmly believe in our $2 billion growth objective. And again, heavily driven off of our accessories business. You look at our four or five big competitors in that business, and I won't name them, but you can figure out who they are. they're all either at 10 billion or north of it and then there's another swath of them that are in the two billion dollar category so we're very comfortable that given the strength and the power of versace and all the cleanup work that we've we've just gone through which is what we were planning on doing anyway now we have a brand that's very very clean we have a brand that's got something that's really going to be quite desirable in the new v logo we're going to continue to push that we have our already have our medusa logo which is quite popular in particular in Asia and in Europe. And then we've made some merchandising changes there that we think are going to really drive that business. So I think we're very comfortable with that. In terms of a change or an issue or a concern, we're definitely concerned about the dress shoe business at Jimmy Choo. You heard me speak about it just a minute ago. And that's really the dress shoe business in general is under pressure. So we're going to have to move a little faster on our casual initiatives. We've headed down that path before, but now we're going to have to go faster. And then lastly, I think we feel really good about where we've got the brand position right now. From the communication with the customer, from the way our product is looking right now, from how the consumer is responding to us, I think the area there where we're going to obviously – Trimback is on our store fleet program where we think that that's, frankly, a drag on the profitability today. So I think that, you know, focused areas on capital are really going to be more about the front-facing initiatives to our consumer. We're going to continue to do business, as you heard. It's our best. We're going to probably have to be a little bit more nimble in terms of how that's going to look going forward. And then the last thing is we'll just take our bigger internal corporate initiatives and probably have to slow those down just a little bit to be able to make sure that we maintain our cash flow. Thank you, Kimberly.

Omar Saad of Evercore ISI. Please go ahead.

Thanks for taking my question. Hope you all are well. Just one really quick question to follow up on Versace. The numbers are obviously great. I know, you know, there's some non-combatable factors. Last year, I don't think it closed until partway through the quarter. Then this year, obviously, the shutdown in China where Versace has higher exposure. And then North America, you know, in 1Q at least, 4Q at least, what the underlying growth rate has been. what was for the Versace brand. And then John comments around handbags, larger handbags, higher AURs. What do you think is the trend given the opposite has been more of a factor the last few years? Thanks.

In terms of Versace, actually, we started out the quarter quite strong. In January, Just as a note in comp, Versace was up 8.5%. So we were, you know, the business was actually trending quite well. And we had been trending actually nicely in China. China is a development. We opened the doors there. So very pleased with that. I'm also pleased with the fact that over the last three or four weeks in North America, Versace, our business is very strong here. So I think the work that we've done, again, remember when I, we had 150 million plus of business at Versace. It had four lines previously, one called Versace Collection and one called and we've been cleaning out all that merchandise and getting rid of it. So this is really where we're starting to be clean. It was really at the beginning of this spring season. So I think to see the kind of results that we were getting was very encouraging. And also the logo that we have on our Virtus bag and some of our footwear and some of the belts we were selling, et cetera, is also trending extremely well for us. And you can watch what we're doing on Instagram and our email pacing. So we feel that what we put in place for Versace is definitely taking hold. We're also in the middle of renovating all the stores, as you know, globally, and we're going to continue to do that. That's back to Kimberly's question. One of the things we did not stop during this situation is really the renovation of Versace stores. We kept that as a very high priority for us. We'll be opening Paris in the spring. We're going to open London in the spring, new stores there. And so we've continued on. We believe in the future and making investment. You know, luxury takes time. You don't all of a sudden just, you know, flip a switch and it just runs up. But the initial results from the direction that we've taken seems to be working at Versace. even with the pandemic, is margin expansion. Doing in terms of really restructuring, and this is not doing anything to the quality of the product, just the way we're operating and really much more efficient in our manufacturing capabilities there. I also want to give a tiny shout out before I go to Michael Kors for it. for what's going to happen also at Jimmy Choo. Even though we've got some challenges with the dress shoe business, we know that. We are going to make some margin advances there as well. We purchased our new factory in Florence. That's up and running under our direction now. That's going to definitely add some benefit there. And as we are growing out the sneaker slash trainer business and some of the casual, we're getting a lot better at the manufacturing of those products there. And the group has also seen some very nice leverage over leather purchases, et cetera, where Versace, Jimmy Choo, and Michael Kors, quite frankly, are collaborating together. So I think you're going to continue to see us make progress on cost of goods. In terms of the accessories business at Michael Kors, as I said before, AURs are up. Again, I can't tell you that's going to stay forever, but for sure they're up right now. And it's been driven by totes, backpacks, and some larger handbags, which is quite interesting for us. Out on last year, which was to grow our signature business to a higher percentage than it had previously been, has been an absolute home run for the company. Our signature business continues to be the best performing sales outpace stock. And, again, you know, if this right now, which is above our internal, a little bit of an issue of not having enough stock, and get that filled in. So I think we're seeing that as a true benefit. And interestingly enough, while we've been less promotional, the customer didn't react as negatively. She's coming in, she's shopping. I'm not saying she's not still looking for value, but it's just been a little bit less of the tone of the consumer experience that we've been having inside of our stores and online. Thank you, Omar.

Lorraine Hutchinson from Bank of America. Please go ahead.

Thanks. Good morning. I just wanted to focus on Jimmy Choo for a minute. You mentioned that the dress shoe business is obviously under pressure near term, but as you look out over the longer term, do you think the casual plus accessories will be able to offset any pressure you may see over an extended period of time for dress shoes?

Good morning, Lorraine, and thank you. That's an excellent question, and also I want to wish that you and your family are safe. So, Lorraine, we saw this coming a little bit beforehand, to be quite transparent. you know that the casualization and particularly the sneaker business has been growing and even more so at the luxury level. So we had been probably behind the eight ball. We introduced a new sneaker called Hawaii, and it's rapidly become either the second or third best-selling shoe in the company. You can see it online. We have many iterations of it coming. We have other new sneakers that are coming behind this. We probably were also behind on the slide category, and so we're building that up. We needed to do that regardless. Where we think we're going to be able to pick up some of the decline in the pump business is really in items like we have something called the Kayaboot. And so you can see that in plain leather, but you can also see it with diamonds on it, which is very Jimmy Choo. You can see a new collaboration. operation that we're doing with Timberland on an overall Swarovski, you know, close to $3,000 or $3,500 set of things in Jimmy Choo. We found that that we, our customer, the diamond sneaker, as you know, was a very big success for us. Our customer actually wants that from us. So I think you're going to see AURs go up in Jimmy Choo in footwear because we're going to be introducing more luxury fashion at higher prices and more unique things. And that will be everything, obviously, from our dress footwear, but really also targeted at a lot of fun things that are in the casual boot, booty, and in the flat area. If you look at our new mule that's in the recently, that's come out of the gates flying for us. And we're really proud of how that's happening. So, I think our first initiative has to be that we've got to shift what we're doing in our own footwear business, and I applaud the design teams and the merchant teams for what they're doing. And as I said in my prepared remarks, the handbag business is off to a good start, and I would say it's pretty much in line with what we had anticipated. I think we were more pleased that we have two groups. We have our Madeline, which is our C-encrusted crystal, and then we have the new JC logo in Varan, which also appears on footwear. And we're selling about 20% to 30% of our footwear styles where that is included on the style in the logo. So that means people are embracing it. People want it. So I think there's no question there's going to be a bit of a pause on the Jimmy Choo growth because of the impact of this. dress footwear business and hence the reason why we took the right down because we think that is going to take a little bit of a turn for us and then not going forward. But we still feel very, very our billion dollar goal for the company.

Thank you. We will now take our next question. Please go ahead.

Great. Thank you so much for taking my question. Tom, I just wanted to know if you could give us some color on how you see gross margin trending as we go through – as we've gone through Q1 and as we get into Q2.

Hi, Jay. Thank you for that and hope you – in terms of gross margin trending, I think I'd go back to our comments related to – So as John was discussing, we've really spent a lot of time replanning and repurposing inventory so that we have what we believe is the right amount throughout the year. So expect to see a little more consistent trends in that. And in Q4, of course, gross margin was up across the group and across to Michael Kors and Versace, which we were very pleased with.

Got it. And then maybe also given the change in the balance sheet over the last week, keep going forward and what the amounts are associated with those dates.

Jay, we do in October around $50 million. And then going beyond that, several years, really about three years out. And right now I feel with the changes we have, we have very, which has been consistent. We had all the way back in April. The changes to the credit agreement provide further flexibility for this situation. And we believe it positions us well to move through this year and emerge into a point where we will again begin paying down debt, as we have done in the past on a very regular and material basis.

And, Jay, at certain points that Tom just noted, you know, we ended the quarter with $1.8 billion in debt, paid down a little more during the year. We're not exactly sure about that. But we think in 2022 significant debt repayment and put this company into a financial position. So we are not going to be active in any acquisitions. We're going to continue to focus on the acquisitions that we did over the last few years. We think they provide enormous growth opportunity for us. We think we have the balance sheet to be able to do that. And I think we're going to come out of this as one of the strong companies, both from a brand and positioning standpoint, as well as from a balance sheet standpoint. I want to thank you all for taking the time for joining us today. Once again, I want to wish that you and your families stay healthy and safe during this very difficult moment in history. We all believe that this will eventually pass, but in the meantime, I think it is our most important responsibility to respect one another, to wear masks, to keep your social distancing, and to help us get through this very difficult crisis. We believe that we have three incredible founder-led brands that are going to position us for growth in the future, and we look forward to updating you on our first quarter results in a few weeks. Thank you very much, and have a good day.

Thank you. That will conclude today's conference call. Thank you for your participation. You may now disconnect.