Capri Holdings Limited

Thank you for standing by. This is the conference operator. Welcome to the Capri Holdings Limited First Quarter Fiscal 2021 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Jennifer Davis, Vice President, Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us on Capri Holding Limited's first quarter fiscal 2021 conference call. With me this morning are Chairman and Chief Executive Officer John Eidel and 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 costs associated with COVID-19 related charges, long-lived asset impairments, ERP implementation costs, CAPRI transformation costs, restructuring, and other charges. Unless otherwise noted, all financial information on today's call will be presented on a non-GAAP basis. To view corresponding gap measures and related reconciliation, please view the earnings release posted on our website earlier today at capriholdings.com. Before we begin, I would like to note that we have posted on our website slides that provide highlights for the quarter. 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. Today, once again, we are joining you from our New York offices. I am sorry, but there may be some light background noise due to construction in the building. Before reviewing our first quarter results, I would like to share some thoughts around the evolving COVID-19 pandemic. The situation remains very serious and dynamic as it continues to profoundly impact the entire world. My thoughts and prayers go out to all those who have been affected by the virus, and everyone on the front lines who are tirelessly helping combat this pandemic. As we continue to reopen our stores around the globe, the health and safety of our employees, customers, and communities remains a top priority. I want to thank our teams around the world for the hard work and dedication they continue to demonstrate every day to support each other and their communities during this unprecedented time. Now turning to our first quarter results. While our performance was significantly impacted by the COVID-19 pandemic. Revenue and earnings exceeded our initial expectations. We were particularly pleased with our robust e-commerce growth as revenue increased approximately 30% compared to the prior year. And as our stores reopened, revenue exceeded our original expectations. Similarly, our wholesale partners e-commerce sites and reopened stores are performing above our expectations. However, our wholesale partners placed limited orders during the quarter due to the store closures. Overall, first quarter revenue in our retail channel declined approximately 60%, while wholesale sales decreased approximately 85%. Total revenue declined 66%, with trends improving progressively each month. Looking at gross profit, We were pleased with our performance as margin expanded 480 basis points. This improvement, in part, reflects our corporate initiatives to increase full-price sell-throughs and selectively raise prices, generating higher AURs. Additionally, gross margins benefited from a higher mix of retail sales versus wholesale sales. Moving to operating expenses, we have taken decisive actions to reduce our expense base in fiscal 2021. However, due to the deleverage on lower revenue, we generated a net loss of $156 million, a loss per share of $1.04 in the first quarter. Now turning to a review of our sales trends by region. First quarter revenue in Asia declined 41%. We have made the most progress in this region, driven by the strength in mainland China, where stores have been open the longest and sales are benefiting from domestic consumption. First quarter revenue at Versace and Jimmy Choo was approximately flat to last year in mainland China, where Michael Kors was below prior year. 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 as the virus impacted these areas later. Wholesale shipments in the region declined 80%. In EMEA, first quarter revenue declined 66%. Our stores in the region were closed on average approximately 60 percent of the quarter. We began reopening the fleet in May, and 98 percent of stores were opened by the end of the quarter. Wholesale shipments in the region declined 70 percent. In the Americas, first quarter revenue declined 76 percent. Our stores in the region were closed on average approximately 80 percent of the quarter. We began reopening our fleet in May and ended the first quarter with approximately 70% of stores open. Wholesale shipments declined approximately 90%. Additionally, all of our regions have been impacted as international travel has virtually come to a standstill since the outbreak of COVID-19. Tourism and travel-related sales comprise a meaningful part of our business. Tourist activity impacts our travel retail channel as well as many important flagship locations in major tourist destinations. Now turning to first quarter performance by brand. Starting with Versace, sales of our new Virtuos accessories collection with the Barocco V logo are encouraging. The Virtuos group remains a top performing collection in accessories. and we have expanded the Barocco V across additional categories, including belts, backpacks, footwear, as well as fashion jewelry. Within ready-to-wear, we saw a strong customer response to spring-summer collection, which celebrated the 20th anniversary of the jungle dress worn by Jennifer Lopez. The collection featured statement jungle prints complemented by innovative tie-dye designs. Within footwear, we saw outperformance in our new virtuous styles, including sandals and fashion active. Overall, we are pleased with the pace of the recovery at Versace. In terms of brand awareness, the customer engagement, we launched the Very Versace Challenge in May, promoting our new iconic Barocco V logo. The brand invited followers to share pictures of V-shaped objects, landscapes, spaces, or scenes from their everyday lives with the potential to have their submissions featured across our social platforms and websites. The challenge encouraged the social community to have fun and inspired creativity. In mid-July, we launched part two of the Very Versace Challenge across our digital channels to drive further awareness of our Barroco V logo. The second installment featured imagery of the Paris Cheer Royal Squad dressed in a uniform of barroco print pieces from the pre-fall collection of 2020. The squad showcased our new virtuous accessories line, symbolizing the virtuous values of strength, courage, and virtue. Additionally, in June, we launched DVTV, a series that follows Donatella, as she handpicked outfits for a few of her famous friends. These initiatives resulted in a significant increase in engagement and helped contribute to a 13% increase in Versace's total social media following during the quarter, which grew to 39 million. Moving to Jimmy Choo. We are pleased by the performance of our expanded assortment of accessories with our JC signature Varenne remaining our best-selling collection. In footwear, as fashion preferences are shifting towards more relaxed styles, we saw strong performance in sandals flat and active. In fashion active, customer response to our expanded assortment resulted in penetration nearly doubling for the quarter. In terms of brand awareness and customer engagement, we launched our new pre-fall 2020 ad campaign featuring fashion icon Kate Moss. In June, Kate was featured in the latest installment of 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. Kate Moss epitomizes this season's bohemian glamour-inspired collection, as well as the modern and stylish Jimmy Choo customer. Additionally, Sandra Choi held virtual shopping events with some of our top clients. These activities helped contribute to a 6% increase in Jimmy Choo's global social media followers, which grew to over 17 million. Turning to Michael Kors, we are pleased with the performance of our accessories classification. This quarter, signature penetration increased to over 35% compared to approximately 25% last year. and generated higher AURs as well as gross margins. In addition, we saw strong performance in large bags such as totes and backpacks, which are also contributing to AUR increases. Within footwear, we are seeing better performance in versatile styles such as chic sandals and fashion active. In watches and jewelry, we saw an inflection over the past several months. Watch sales are being driven by traditional styles that are true to our DNA with bold, sophisticated, and distinctive designs. Finally, the men's business continues to grow as we focus on timeless essentials with a modern edge. Within men's accessories, within men's accessories continues to outperform our expectations. Turning to brand engagement. Michael reinforced the theme of the modern traveler as he continued to connect with fans on social media, taking them on a virtual journey to some of his favorite travel destinations. He shared photos and memories from his trips around the world. Before the coronavirus pandemic, Michael inspired Bella Hadid to visit the city of New Orleans. And last month, Bella took our Instagram followers on a virtual tour of her first trip to the city where Michael sent her to his favorite spots. Michael's and Bella's videos drove a significant increase in engagement. Our marketing initiatives continue to underpin our brand pillars of speed, energy, and optimism. This helped contribute to a 6% increase in the brand's global social media presence, which grew to nearly 49 million followers. Our global database also continues to expand, reaching nearly 45 million customers, an increase of 17% compared to last year, demonstrating the continued strength and desirability of the Michael Kors brand. Despite the impact of the global pandemic, we are encouraged by the ongoing progress of Capri Holdings as we execute against the strategic initiatives for each of our founder-led fashion luxury houses. Looking ahead, we remain focused on the initiatives that position our global luxury group to achieve meaningful long-term revenue and earnings growth. Starting with Versace. We remain confident in our ability to increase revenue to $2 billion at a mid-teens operating margin over time by building on the luxury momentum driven by Donatello's fashion vision, enhancing our powerful and iconic marketing, expanding accessories and footwear penetration to 60% of revenue, accelerating our e-commerce and omnichannel development, and increasing our global retail footprint to approximately 300 stores. Similarly, at Jimmy Choo, our confidence in the luxury house's long-term growth potential has not changed. We believe there is significant opportunity to grow revenue to $1 billion and achieve a mid-teens operating margin over time. By increasing penetration of our accessories collection to 50% of revenue, expanding our luxury footwear collection, leveraging our e-commerce and omnichannel capabilities, and increasing our global retail footprint to approximately 300 stores. Turning to Michael Kors, our goal is to return to revenue growth while also improving profitability. To increase revenue, we plan to increase customer engagement, building on Michael's global brand awareness, expand our signature offerings across all classifications, continue our strong e-commerce growth, double our revenue in Asia, and expand our growing men's business. Turning to profitability, we are beginning to realize the benefits of certain initiatives designed to improve our operating margin over the next several years. We expect to drive gross margin expansion through higher full price sell-throughs, strategic price increases, and lower manufacturing costs. We also will continue to reduce our cost structure as we streamline our organization to better align our expense base with anticipated revenue. Additionally, we expect our fleet optimization program to improve overall profitability by closing underperforming stores. In conclusion, during these unprecedented times, we plan to continue to execute on our strategic growth initiatives and remain confident in the long-term opportunities for each of our unique global luxury houses. Capri Holdings has a portfolio of three iconic founder-led fashion luxury brands that have enduring value and a long history of successfully navigating challenging periods. We will continue to carefully guide our business through the current retail environment while positioning the company to resume growth in fiscal 2020. Now I'd like to turn the call over to Tom.