Capri Holdings Limited

Thank you for standing by. This is the conference operator. Welcome to the Capri Holdings Limited second 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'll 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 second quarter fiscal 2021 conference call. With me this morning are Chairman and Chief Executive John Idol and Chief Financial Officer 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 these statements made today 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 the corresponding GAAP 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 accompanying slides posted to our website. 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. The COVID-19 pandemic continues to profoundly impact the entire world. My thoughts and prayers go out to all of those who have been affected by the virus and to everyone on the front lines who are tirelessly helping to combat this pandemic. At Capri Holdings, we are prioritizing the health and safety of our employees, consumers, and communities. I want to thank our teams around the world for the hard work and dedication they demonstrate every day to support each other and their communities during this unprecedented time. As we look forward, we are increasingly optimistic about the outlook for the fashion luxury industry. Luxury is enduring as it creates an emotional connection with consumers inspiring excitement and passion in those who value design, innovation, as well as exceptional quality. The industry has proven resilient with sales historically recovering rapidly following economic downturns and global health crises. Current trends indicate that, once again, luxury sales are quickly rebounding. Additionally, we believe consumers are spending at higher rates on luxury products as there has been reduced spending on experiences due to travel restrictions. While there are many unknowns in front of us, we believe the luxury market will resume a steady growth trajectory and that Capri Holdings is uniquely positioned to expand its revenue and earnings with Versace, Jimmy Choo, and Michael Kors. Now I would like to turn to our second quarter results. Revenue and earnings per share significantly exceeded our expectations. While second quarter revenue declined 23%, that was a substantial improvement compared to the first quarter. Sales in our retail channel decreased approximately 17%. We were particularly pleased with our robust e-commerce growth, which accelerated sequentially and grew approximately 60% compared to prior year. Door performance also improved sequentially, driven by local clienteling initiatives. In the wholesale channel, Performance at the point of sale also continued to improve, but tracked lower than our own store performance. By geography, we are seeing the fastest recovery in Asia. This is being led by mainland China with positive sales in our retail channel across all three of our luxury houses. Revenue in the Americas is also recovering faster than we anticipated, with sales in our retail channel increasing double digits at Versace, low single digits at Jimmy Choo, and at a slower recovery at Michael Kors. EMEA improved sequentially, but sales across all three brands trailed other regions, given the impact of lower tourism and its importance in this geography. Earnings per share of 90 cents also surpassed our expectations, driven by better than anticipated revenue, continued gross margin expansion, and expense reduction initiatives. Now turning to second quarter performance by brand. Starting with Versace, we are pleased with the results and trends which are significantly ahead of our expectations. Sales in our retail channel increased in the mid single digits globally, demonstrating the strength of the brand and favorable response to our product innovation. Global e-commerce sales increased triple digits, while sales in our retail channel in mainland China increased in the high single digits and in the America increased by robust double digits. Revenue in EMEA and the balance of Asia improved sequentially, though trends remained below prior year. We saw strength across the brand, particularly in menswear and fashion athletic footwear. We also continued to see strong consumer response to the Barocco V logo, which performed well across all classifications, including accessories, footwear, belts, and jewelry. Within women's ready-to-wear, consumers responded to Donatello's fall-winter collection that channeled power and strength by featuring broad shoulders and cinched waists. Another key indicator of strength of the Versace brand is our very successful fragrance collection, which is one of the largest designer fragrance businesses in the world. In September, we launched Dylan Turquoise, the latest addition to the Dylan family of fragrances, with a dedicated campaign starring Hailey Bieber. We also launched a refresh of our successful Dylan Blue featuring Bella Hadid. Our fragrance sales have shown a strong sequential improvement during the quarter. In terms of brand awareness and consumer engagement, in July we revealed our capsule flask collection in a live stream video featuring a performance by British musician A.J. Tracy, debuting his new song, Step On, in a world exclusive. The campaign gave viewers backstage access to A.J. Tracy, who was also joined by models wearing designs from the Versace collection. On September 25th, we held our Spring Summer 2021 fashion show in Milan. Donatella created Versaceopolis, an underwater fantasy world ruled by Medusa. The collection is optimistic, dreamy, and positive. The show generated over a million total views through our own channels, and Versace was the number one engaged brand on social media during Milan Fashion Week. These initiatives helped to drive a 20% year-over-year increase in Versace's global database, which grew to 3 million consumers. Overall, Versace's results speak to the strength of the brand and reinforces our confidence in the luxury house's long-term growth potential. Versace continues to represent the largest growth opportunity for Capri Holdings, where we believe revenue will increase by over a billion dollars in the coming years. Moving to Jimmy Choo. We are pleased with the sequential revenue improvement in the second quarter. E-commerce sales increased triple digits. Retail sales in mainland China grew strong double digits, and in the Americas grew low single digits. Trends in the EMEA and the rest of Asia improved sequentially but remained below prior year. We are encouraged with the performance of our expanded accessories assortment. with particular strength in totes and mini bags. Our signature JC Varenne remains the best-selling collection in accessories. In footwear, trainers continue to outperform and increase in penetration. We have a significant opportunity to expand Jimmy Choo's casual footwear assortment beyond sneakers as demonstrated by our recent collaboration with Timberland that resulted in almost a 100% sell-through. The $5,000-plus all-over Swarovski crystal embellished version, which fused Timberland's outdoor utility with Jimmy Choo's signature off-duty glamour, sold out immediately. The success of this collaboration demonstrates the power of the Jimmy Choo brand and the vision of Sandra Choi in the casual footwear arena. Additionally, we have seen strong sales results in booties, including the cruise boots, particular in styles adorned with crystal or pearl detailing that add a touch of elegance to casual styles. We also recently launched the Seduction Collection, Jimmy Choo's first luxury beauty line that includes lipstick, nail polishes, as well as fragrances. The collection launched exclusively at Harrods. Sales have exceeded our expectation, and we are planning to expand distribution. In terms of brand awareness, the consumer engagement we launched in our fall 2020 campaign featuring British actress Daisy Edgar Jones, who is the star of the hit Hulu show, Normal People. In September, Daisy was featured in the latest installment of the 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. Daisy Edgar Jones personifies the off-duty glamour and femininity of the Autumn Winter Collection. Our collaboration with Timberland drove energy and excitement and helped introduce new consumers to Jimmy Choo. The marketing campaign shot by Riverdale actor and photographer Cole Sprouse brought the product to life with authentic storytelling that resonated with both new and existing consumers. Our luxurious product and engaging marketing campaigns helped contribute to a 22% year-over-year increase in our global consumer database, which grew to 3.4 million consumers. Overall, we believe our strategy to build accessories as a cornerstone of Jimmy Choo's already solid luxury foundation along with the additional emphasis on off-duty footwear, will enable us to grow revenue by approximately $500 million in the coming years. Turning to Michael Kors. We are pleased with the pace of the recovery. In the second quarter, revenue improved sequentially and we generated higher gross margins. E-commerce sales increased strong double digits and retail sales in mainland China increased high single digits. In all our other regions, trends improved sequentially but remained below prior year. We are encouraged with the initial performance of our fall collection, inspired by Marrakesh in the 70s, reflecting rock and roll glamour and bohemian bliss. We are increasing signature penetration across all categories by expanding the offering and developing new techniques as well as executions. In accessories, signature continues to perform well as consumers respond to newness. Signature penetration increased to nearly 40% compared to almost 30% last year, resulting in higher AURs and gross margins. We continue to see strength in large handbags, totes, and backpacks, which are also contributing to AUR increases. Within footwear, we saw strong performance in fashion active driven by our luxe logo and signature styles. Additionally, the men's business continues to perform well driven by accessories and outerwear. With respect to brand awareness and consumer engagement, Michael Kors Fashion Innovation was highlighted in the Spring Summer 2021 Collection Runway Show, which drew inspiration from Michael's enduring love for New York City. The collection debuted through a multi-layered digital experience accessible at michaelkors.com and featured a documentary style film that immersed viewers in the mood and inspiration of the season, in addition to the runway show. The fashion show was filmed in a New York Restoration Project community garden, featuring performance by American Idol winner Samantha Diaz. Additionally, in September, we announced award-winning Chinese actress Gao Yunyun as our newest brand ambassador. She is one of the most celebrated and beloved actresses in China, with nearly 50 million followers on Weibo. In her first role as brand ambassador, Gao is featured in our fall campaign in Asia. In the Americas and EMEA, Bella Hadid, who has approximately 36 million social media followers, embodies Michael Kors' jet-set vision with a sense of rock and roll glamour in our fall campaign. Over social media, fans followed Bella throughout a series of classic rock and roll vignettes that engaged consumers in our fall campaign. Our marketing initiatives continue to underpin our brand pillars of speed, energy, and optimism. This helped contribute to a 16% year-over-year increase in our global database, which reached over 46 million consumers. Overall, we are pleased with the sequential improvement in sales trends and gross margin expansion at MicroCores. we remain confident in our ability to grow revenue while generating operating margins above historical levels. Looking ahead, we plan to grow Capri Holdings revenue and earnings by executing on the following five strategic pillars. First, designing the most innovative and exciting fashion luxury product from all our three founder-led houses. Second, Inspiring, engaging, and delighting our consumers through compelling marketing campaigns. Third, developing a more consumer-centric approach by leveraging our expanding global database. Fourth, accelerating revenue growth at all three fashion luxury houses through industry-leading e-commerce and omnichannel capabilities. And fifth, being an exceptional corporate citizen with a comprehensive environmental and social responsibility strategy emphasizing diversity and inclusion as well as philanthropy. In conclusion, Capri Holdings' second quarter results significantly exceeded our expectations with better than anticipated performance across all our luxury houses. The sequential improvement in revenue demonstrates the strength of our brands and resiliency of our teams across the globe. We will continue to execute on our strategic growth initiatives and remain confident in the long-term opportunities for each of our unique global luxury houses. Now, let me turn the call over to Tom.

Thank you, John, and good morning, everyone. Starting with second quarter results, revenue of $1.1 billion decreased 23% compared to last year. These results were significantly ahead of our expectations. Retail and e-commerce performed considerably better than anticipated, while wholesale was slightly ahead of our expectations. Net income was $137 million, resulting in diluted earnings per share of 90 cents. This was also meaningfully above our expectations, reflecting better than anticipated revenue, continued gross margin expansion, and the benefits of cost reduction initiatives. Looking at revenue performance by brand, Versace revenue was $195 million, a 14% decrease compared to prior year. As a reminder, because Versace's results are reported on a one-month lag, The second quarter included June, a month that was still impacted by store closures. For the July through September period, global sales in our retail channel increased mid-single digits, turning positive well ahead of our expectations. As John mentioned, e-commerce sales increased in the triple digits. Sales in mainland China increased high single digits, while North America was the strongest region with sales up strong double digits. Versace ended September with a global luxury fleet of 206 retail stores, a net increase of eight from prior year. For Jimmy Choo, revenue during the quarter was $122 million, a 2% decrease compared to prior year. Retail performance was better than expected and declined in the low double digits, including a triple-digit increase in e-commerce sales. Retail sales in mainland China increased in the high double digits, and in the Americas increased low single digits. Wholesale revenue was also slightly above our expectations. Jimmy Choo ended the quarter with a global fleet of 227 retail stores, a net increase of 11 from prior year. Turning to Michael Kors, total revenue of $793 million declined 27% compared to last year. retail sales improved sequentially and decreased in the high teens. E-commerce sales increased strong double digits, and revenue in mainland China grew low double digits. All other regions sequentially improved relative to the first quarter, but still declined double digits. In wholesale, we saw performance at point of sale improve sequentially, but at a lower rate than our own retail stores. Wholesale shipments are also improving, but as expected, recovering at a slower pace than point-of-sale results. Michael Kors ended the quarter with a global fleet of 828 retail stores, a net decrease of 22 from prior year. Now, looking at total company margin performance, we were pleased with the 220 basis point improvement in gross margins. This improvement primarily 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 versus wholesale revenue. Operating expense as a percent of revenue was 46.8%, compared to 46.9% last year. Total company operating expenses decreased approximately $160 million or 23%, primarily due to the decisive actions we have taken to reduce our expense base. As a result, total company operating margin expanded 240 basis points to 16.4% and was well ahead of our expectations. Looking at operating margin by brand, Versace's operating margin of 10.3% expanded 420 basis points reflecting gross margin expansion partially offset by expense steel leverage. Jimmy Choo's operating margin of break-even expanded 800 basis points compared to prior year, as strategic investments made over the past two years have normalized. Michael Coors' operating margin of 24% expanded 360 basis points, primarily reflecting higher gross margin and lower expenses. Turning to our balance sheet, we ended the quarter with cash of 238 million and debt of 1.78 billion, resulting in net debt of 1.54 billion. Total liquidity at the end of the quarter was 1.17 billion. We are pleased with the strength of our business as we maintain our liquidity position throughout the first half of the year, despite the impact of the pandemic. Looking at inventory, we ended the quarter with 930 million, down 13% compared to prior year. This reflects the aggressive inventory reduction we implemented at the beginning of the pandemic, including inventory repurpose for upcoming seasons. Inventory is expected to sequentially decline over the next two quarters given the cancellation of holiday receipts and the repurposing of spring-summer 2020 product. We continue to expect inventory approximately in line with revenue by the end of the year. Now turning to guidance. Due to the lack of visibility surrounding the progression of the pandemic, macroeconomic fundamentals, and tourism flows, we are unable to provide annual earnings guidance. However, I would like to share some thoughts around how we see the back half of the year progressing. While encouraged by the recovery so far, we are taking a measured approach to the balance of our fiscal year due to the ongoing uncertainty. Given the better-than-expected sales results in the second quarter, we now anticipate a revenue decline of approximately 30% for the year, an improvement versus our prior expectation. In the third quarter, we anticipate a modest sequential improvement in total company revenue, with sales declining double digits compared to prior year. This represents an improvement relative to our prior outlook driven by better results in our own retail channel. In the fourth quarter, we anticipate a more pronounced improvement in trends, though we continue to expect sales to remain below prior year. Our second half outlook currently includes the impact of the recently announced short-term store closures and restrictions in Europe. However, our outlook does not include any additional store closures that may result from future government restrictions. Turning to gross profits. we continue to anticipate gross margin expansion of approximately 150 basis points for the year, with improvements across all quarters. This performance primarily reflects the benefit of greater full-price sell-throughs, selective price increases, and manufacturing cost efficiencies. Moving to operating expenses. Given the faster-than-anticipated recovery in sales trends, We have increased confidence in our growth trajectory and are reinvesting in our business. We now anticipate operating expenses will decline approximately $350 million in fiscal 2021. This is less than our prior outlook due to approximately $50 million related to the impact of a weaker dollar, additional variable expenses associated with better than expected sales, additional spending to support increased marketing initiatives, and reinstating a portion of compensation reductions implemented earlier in the year, along with the addition of a one-time performance-based bonus program for the second half of fiscal 2021. Compensation increases included returning base salaries to 90% of prior year levels for our employees and executive management team, with the exception of John Idle, Michael Kors, Donatella Versace, and Sandra Choi, who will continue to forego their base salaries for fiscal 2021. Our Board of Directors annual retainer was also reinstated at 90%. Now, turning to our expectations around certain non-operating items. For the full year, we anticipate interest expense of approximately $50 million. Our effective tax rate is expected to be approximately 20%. and we forecast weighted average shares outstanding of approximately 152 million. In conclusion, we are extremely pleased with the progress of the recovery thus far, which is well ahead of our internal projections. The luxury industry has proven resilient, and we believe it is poised for years of above-average growth. As we emerge from the pandemic, we are confident that Capri Holdings is well-positioned to drive multiple years of strong revenue and earnings growth as well as increase shareholder value. Now, I will open up the line for questions.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. We ask that you please limit yourself to one question. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. To join the question queue, please press star, then one now. Our first question comes from Oliver Chen of Cohen. Please go ahead.

Thanks very much. Good morning, and nice results in a tough environment. John, regarding the Michael Kors brand, what are your thoughts on wholesale versus retail execution? And as you look forward, the inventory snapshots and merchandise margins, Will retail continue to lead wholesale in terms of performance and would love color on thoughts around how that's evolving. Thank you.

Thank you and good morning, Oliver. As we've said in the past two quarters, our own retail channel performance at Michael Kors, and really this is true for Versace and Jimmy Choo, is better. than what we're seeing with our wholesale partners. As I've said on many of these calls before, we very much believe in the wholesale channel. That channel will become a smaller business for us over time. It was approximately 30% of the overall group's revenues last year. We anticipate that that, over the next couple of years, will go down to approximately 20%. Because we are continuing to open stores, particularly in the Versace and the Jimmy Choo brand, also e-commerce is growing very rapidly in our own retail omni distribution channel. And then some of our department store partners are obviously reducing stores, both in North America and to some degree in Europe. And we also believe there will be a prolonged recovery in the travel retail business, which, as I said to you before and everyone on this call, many times people think of our wholesale business in the group as only being a North American and certain. department stores that are channeled, and that's actually not 100% accurate. We do a significant wholesale business in Europe and with the travel retail channel, and some limited licensed partners are in there as well, but they're quite sizable in terms of their overall revenue. So we believe that the actual department store partners, both here in North America and in the U.S., will continue to trail behind our own retail channel, and that's really for two reasons. Number one, we've been more aggressive in our inventory positions in our own retail channel, whereas our department store partners have been more conservative, and I can completely understand why there's grave concern not knowing what's happening on any given week with certain government restrictions coming into place. As you know, we see a approximately 30-day closure in Europe of many of our department store partners as well as our own retail stores, so that will impact that trend. But I will tell you that you can see from the chart that we sent out with our earnings release, October we've seen quite a substantial inflection in our own retail revenue performance, and also our partners' performance was really quite strong in October. In both channels, we're down only in the high single digits. And that's, by the way, predominantly in the accessories, footwear, and also we've seen a very strong recovery, as I've mentioned in some other calls, in our watch business, continuing to perform at a very high level relative to the total performance. And we see the greatest softness in women's ready-to-wear and men's ready-to-wear, and that's really across the group. We see kind of the same trends with the exception of the Versace brand, which has shown strong growth in both men's and women's ready-to-wear in the retail channel as well as the wholesale channels. So I think in conclusion, we are going to have a little bit lighter inventories going into our Q3 than maybe we would have planned at this point in time because we reduced our inventory positions when the first indications of the pandemic came to bear on a more global basis. And we're going to probably miss a little bit of business, in particular in the footwear area, where we pulled back across the group on boots and booties. So we'll have to see how that turns out. But I would continue to believe that the wholesale channel will trail our own retail. And again, you will definitely see that because of now the impact of the closures in Europe and the continued impact of travel retail, which again, we do not believe that part of our business will see any kind of a significant recovery until calendar 2022. Thank you, Oliver.

Our next question comes from Kimberly Greenberger of Morgan Stanley. Please go ahead.

Great. Thank you so much. Really nice momentum in the business. It's obviously great to see. I'm wondering if you can, it sounded, John, like you were saying here in October, certainly you're seeing sequential improvement in your own retail business, but it sounded like you were talking about also seeing sequential improvement in the wholesale channel. I'm wondering if I heard that correctly. And then as we look out to, you know, understanding there's no fiscal 22 guidance out there, but how would you expect your revenue mix to be balanced in a more normal world between wholesale and retail? In other words, what ultimately do you expect the wholesale business to represent as a percentage of total when we return to normal? And then I just had a quick clarification for Tom, if I could. The 150 basis point gross margin expansion this current year that you're seeing, Tom, is a piece of that, I would think a piece of that benefit is likely permanent in terms of some of the manufacturing efficiencies, higher prices, better full price sell through to the extent you can maintain that. But maybe there's a piece of that 150 that would be more temporary based on the mix shift between wholesale and retail. So I don't know if you have a way to help us think about what the sustainable improvement in the gross margin rate is might be for this year. Thanks so much.

Good morning, Kimberly, and I hope this call finds you and your family healthy and safe. Yes, you heard that correctly. We saw the same inflection in the wholesale channel and actually slightly even greater inflection. Again, I don't know if that's just a month. I don't know. We're all obviously cautious about what really December is going to bring. As you know, in our own retail channel, Both here in North America and in Europe and in Asia, we have restrictions on the amount of people that we can have inside of our stores given the social distancing requirements. So that will absolutely have an impact on what our overall revenues will be, especially, you know, as we move from Black Friday through the holiday period when we typically will have lines outside many of our stores around the world. So across the group, we're cautious, and we'll have to see how that works out. But we were very encouraged about what we saw in our wholesale channel. And, again, it's just only one month, but it was quite powerful. And I would also, again, highlight that in our own retail channel and what we're seeing now in our – department store channel, in particular in North America, is the e-commerce business is really ramping up. And you saw the sequential jump we had for the group where we were up 60%. We're seeing very strong increases at all of our department store partners, both in luxury and in the more accessible luxury category as well. So that, I think, bodes well. Really going back to what we started the call with, which is the luxury category is As you know, as we go through these cycles of economic change and where we've seen historical pandemics or medical crises, the luxury business has really rebounded quite successfully. And if I look at Versace in particular, where we were up in our own retail channel globally, I would say that puts us right there with our other luxury competitors in terms of our performance. Jimmy Choo also saw a very strong performance in China and in the Americas. EMEA, we were more impacted. But when I look at how we're performing and I look at Michael Kors in China and the really rapid kind of acceleration we're seeing in North America, I think that bodes well for what will hopefully be a strong holiday season. In terms of the long-term wholesale retail revenue for the group, I think you could probably think about it as maybe about 25% next year and maybe declining. to 20% in the following year from that. And again, these are not hard numbers. These are just directional things for you to think about. And again, you know, I don't want to leave an impression that we don't think that the wholesale channel is a good channel for us because we actually think it's a very good channel. It's highly profitable for the company. But some of that will be shrinking naturally because of those partners' store closures. As you know, we've had a number of bankruptcies. And again, I think we have a very, very cautious approach to the travel retail industry and what will that look like even when it does recover. We think the tourist business will recover in major cities, but we have a question mark around what will travel retail really look like. And one last thing, and I'm going to turn it over to Tom. On the margin side, I think that the 150 basis points, we absolutely think we're going to hold that. And I'll let Tom talk about the growth that we actually see in that area of the business, too, in future.

Sure, thank you. Kimberly, when we look at it, gross margin, we're really pleased with how things have gone in Q1 and Q2 with continued expansion. As John mentioned, we're keeping the 150 expectation for the year, and that does include an improvement in both Q3 and Q4. You're correct in that there are some what I would call fundamental drivers of margin expansion that are benefiting us through this year, and we expect it to continue well beyond this year. And that includes better full-price sell-throughs. We're taking selective price increases across our brands. We're seeing manufacturing efficiencies. And then longer term, increasing the penetration of accessories at Versace and Jimmy Choo and growth in Asia are certainly supporters of gross margins. Now, this year, we did have favorable mix from lower wholesale revenues versus our retail. And we saw that about 50-50% of the gross margin driver in Q1. But in Q2, the fundamental drivers were greater. And we would expect this mix benefit to be less of a tailwind in the second half and, of course, normalize as we get into FY22 and beyond. But what we're really, really enthused about the growth and opportunities to expand gross margin longer term for the business.

Our next question comes from Matthew Boss of JP Morgan. Please go ahead.

Great, and congrats on the improvement. So, John, maybe can you help quantify and walk through the driver of the higher AURs more specifically and maybe larger picture Do you see this as a cycle inflection for the accessories category as a whole? And then for Capri, how would you rank the multi-year AUR opportunity if we were thinking by brand across the portfolio, just in terms of magnitude?

Good morning, Matt. Thank you. I'll start with Capri first. And so, as Tom said before, we see a number of things that are going to impact our gross margin across the company. And probably one of the larger drivers will be our mix shift, where retail will become more important than wholesale. So that will be, as I mentioned to Kimberly a moment ago, as you see wholesale become a smaller part of our mix, that will have an impact. Secondly, you're going to see, one of the interesting things that has happened during the pandemic, and I don't think we're the only company you know, we're reducing our SKU count dramatically across all three of the houses. And that is, what that's, you know, leading to is better full-price sell-throughs, less need for markdown. We're shipping a lot less product inside of each of the deliveries. And in certain cases, we're maybe dropping a whole, you know, delivery from each of the quarters, which really has not, we've not seen any impact to the consumer engagement And then price increases. So the biggest impact from a price increase standpoint will be the microcores house. And that's, you know, a position that we've taken that, quite frankly, I think we have underpriced our product over the past probably three years. And we've seen no resistance. We've been quietly taking price increases. This happens, this all started well before the the pandemic. And so we will consistently continue to take price increases over the next three, four quarters. And we think that the consumer is remaining completely engaged with us. And I want to highlight the fact that in the MicroCores brand, our database grew by 16%. on a year-on-year basis, that's 6 million people. I want to say that again. That's 6 million consumers we've added to our database on a quarter-over-quarter basis. That's extraordinary, and especially doing this in light of a pandemic. And, of course, we're gaining a lot more traction with the digital engagement with our consumer, and we're finding that that consumer and the customer journey that we're creating for them is really turning into – excellent sales results, and also, again, less need for discounting because what she wants is fashion, and she wants it delivered to her quickly. And then the last piece of that, Matthew, is the fact that we've, as I said in the prepared remarks, our signature business is now representing in accessories 40% of the business, and it's quite high also in our footwear business. And that gives us an ability to have a lot more customers items that we can keep on basic and replenishment. And again, our luxury competitors in Europe have a very similar strategy, and that's really boding well for us. And in terms of Jimmy Choo, you will also see very significant price increases over the next probably 12 months. Again, that brand has been clearly underpriced versus our luxury competitors. and one or two of the shoe-only competitors. And, again, in the initial price increases we've taken, we have not seen any consumer negative reaction to that. So that would be kind of the way it would tear out. And then Versace, really there's not going to be any need for that in that business. We took some limited ones on a handful of items. They happen to be high-velocity items, but I think that will stay as you currently see it today. Thank you.

Our next question comes from Bob Gerbel of Guggenheim Securities. Please go ahead.

Hi, Em. Good morning. Just a couple questions. I think on the inventory improvement that you've had, you know, in terms of the changes in the product by the brands, has a lot of it just sort of been sold through, sold in? I just wondered if you could maybe give us some commentary around, you know, where the inventory stands and sort of the progress that you've made by channel and what you think is the status in the channel, really, on your categories. Thanks.

Good morning, Bob. Thank you. Bob, I'll take part of it and then I'll turn it over to Tom. You know, again, what I said earlier, one of the things that's, if there can be a bright light out of this discussion, We're all, and I think as an industry, we're seeing we need less product to do the same amount of business, and clearly many times, whether that's Versace, Jimmy Choo, or Michael Kors, we're shipping too broad of assortments in. That creates markdowns at the end of the season, which takes time to move through, creates unnecessary inventory buildup, and it's a margin drain. So as we continue to really focus our inventory, and once again, I'll talk about how data really helps us do that, because obviously we're getting much quicker reads on product sell-through. We are also able to more agilely be able to target our consumers with the products that we think are that they have a great interest in, or that we might think that they, if they bought a handbag from us, we might serve them up a shoe afterwards. And we're seeing terrific engagement. And I'll talk about Versace. I mentioned that the Barocco V has been doing extremely well for us. We're seeing bags sell. We're seeing shoes sell. We're seeing belts sell. And many of those are the same customer, repeat customer. So that really is giving us a lot of courage to operate on lower-sized inventories. And I would say that's right across all the channels, but I'll let Tom talk to the flow of that.

Sure. When you look at the overall inventory, as John mentioned and we talked about in the call, we took aggressive action early to align inventory with demand. So for the quarter, we were down 13% in inventory compared to revenue down 23. But at the same time, we had repurposed some spring-summer 2020 for later seasons, and that's being held in the quarter. So if you'd excluded this, our inventory and sales trends would even be more aligned closely in Q2. But broadly speaking, we believe our inventory is well-positioned for the year. There may be some select areas for products that are performing well that we may not have as much inventory into the holiday season, but overall believe we're well-positioned. And as John said, we'll be working at a lower overall inventory level in the future based on the SKE reduction approach. Thank you.

Our next question comes from Simon Siegel of BMO Capital Markets. Please go ahead.

Thanks. Good morning, everyone. Really nice results. The AUR was great to see. Did you or could you quantify what the AUR lift was this quarter? And then, John, anything you could elaborate on the larger handbag strength? That was great. And anything on the licensing business? Thanks.

Sure, good morning, Simeon, and again, I hope you and everyone else who's on this call are remaining healthy and safe during these unique times that we're all facing. You know, Simeon, we're not going to give the actual AUR overall leverage increase because it's in a lot of different places. So, but the greatest AUR increase we've seen is in accessories. And I'd say that's driven probably half and half, Simeon, half by the trend of totes. We are starting to see certain satchel sales pick up. We have our new our new Hamilton group that's been wildly successful. And, again, it's really nice to see big handbags selling again. And we've seen backpacks, as we've talked about. And we're seeing a similar thing at Jimmy Choo, as you heard me talk about, and at Versace as well. So it's definitely a trend across the industry. Again, small bags are still very, very strong, and we have some incredibly strong new sellers that we've delivered for the holiday season that are – probably some of the strongest sell-throughs that we've had in some time. And so I think you're going to also see some additional AUR lift in our footwear. I think across all Versace, Jimmy Choo, and Michael Kors, in particular Jimmy Choo, you know, Jimmy Choo I talked about the that sells through on Timberland, the $5,000 boot with all of our Swarovski crystals literally sold out almost to the piece. And so we've seen that. We've seen a number of shoes in Jimmy Choo at the $1,200 to kind of $1,500 price range that have been very strong sellers. So we're encouraged and emboldened, in a sense, to sell more fashion product at higher price points Again, some of the quantities are limited, but it's definitely what the customer is reacting to. And, again, we don't have to put that product into a whole swath of our stores because with our digital prowess and our ability to use the data and to really reflect on who the customer is, we're able to do these things and really get high sell-throughs. So I think we're going to continue to use more of that. And, again, I also want to point out one of the other AUR benefits for us is also in Asia, where our Asia business has been very strong, in particular mainland China, and the price points are considerably higher there versus North America and EMEA. Thank you, Simeon.

Our next question comes from Mark Altschwager of Baird. Please go ahead.

Good morning. Thanks for taking my question and congrats on the progress so far. I was hoping you could give us a sense of where you are in terms of digital penetration by brand, where you think that this will normalize given some of the structural changes in the wholesale channel and changes you're making to the store fleet. And then separately, you know, nice to see the continued sequential improvement in retail. I was hoping you could give us a sense of the current run rate of store productivity versus where you were last year at each brand. Thank you.

Good morning, Mark. Mark, as you know, we don't break out the actual digital performance for the company or by brand. But what I can tell you is the following. You saw our digital business grow 60% for the group. You saw it grow triple digit at Versace and at Jimmy Choo and very, very strong double digit growth at Michael Kors. What I would say is the following. As we've talked about in the past, in North America, all three brands are really at our full capacity in terms of store development. There will be a handful of stores additionally that will open at Jimmy Choo and at Versace. And in Michael Kors, we're going to close a significant amount of stores. Our feeling is that in North America, digital – will represent, at a point in time over the next couple of years, between 40% and 50% of the overall revenues for the brands in North America. We can see ourselves getting to that point. And again, it's going to take a few years to get there, but the trends are definitely leaning in that direction. Europe, we don't see that type of trajectory. We see something that will probably get us to a 30% level over the next few years. And in Asia, as you know, it's a much smaller piece of the business today, low single digits. But we do think that that will kind of be in that 10% to 15% range again over the next few years. We are extremely pleased with our development of the digital business. I'll first start in Japan, which is, for the group, an excellent across all three of our luxury houses. And as you know or may know, we've gone on to a T-Mall about a year ago with the MicroCores brand and with – with the Jimmy Choo and Versace brands only just recently. Michael Kors was the number one brand in the 1111 promotion, which we were very excited about. And again, I might add that the consumer engagement and the database increases we're making are extraordinary. You know, when I look at the fact that across the group we added approximately 7 million names, about 6 million for Michael Kors, 5 million for for 500,000 for Versace and about the same at Jimmy Choo. This gives us the ability to really engage with our customer on both current and lapsed on a more regular basis than when we just see them inside the store. I will also say that the majority of the growth that came from our business online came from new customers. And again, that's just really an extraordinary data point for us. And if we continue, you know, Donatella and Sandra and Michael, I mean, these are very powerful voices in terms of marketing. And Michael's done just an extraordinary job, as you know, during this pandemic of personal appearances, and different messages around staying healthy. He was very vocal during the elections around voting, which had tremendous engagement with our customers, and actually brought us new customers as well. So we have very prominent fashion icons who are leading our design direction, and their vision for how to build these brands, our ability to communicate that vision, and then our tactical initiatives around our databases is really obviously becoming a strength. And the good news is that Versace and Jimmy Choo, the e-commerce business, is actually more profitable than the four-wall store business. And at Michael Kors, while it's not quite there yet, we're seeing market improvement, our profitability in the e-commerce channel, which really bodes well for us because, as you know, we are going to restructure our total store fleet. And as we've talked about before, at Michael Kors, that's going to have operating margin benefit for us. And, you know, we gave you the guidance in the previous call that we will be north of that 20% historical level in the future years for our operating profit for Michael Kors. And that bodes well really for our long-term profitability where we think that, you know, post this situation and we're going to actually be a more profitable company than we were going into the pandemic. Thank you, Mark.

Our next question comes from Paul Trestel of Deutsche Bank. Please go ahead.

Good morning and congrats on the successful and improving quarter. I wanted to ask a question on margins. Tom, maybe just a little bit more detail about the full-year view and the puts and takes as we think about the 150 basis point guidance for gross margins and on OPEX, how we should think about kind of the reinvestment into the business and support for marketing opportunities. versus the cost savings that's flowing to the bottom line. And then quickly, John, also, if you can just maybe chime in a little bit more about where you stand today in terms of your kind of medium-term outlook for growth at both Versace and CHU. Thank you.

Paul, thanks for the question. And I'll start with gross margin and then move to the cost piece. But overall, you know, we're excited about the gross margin opportunities, and we continue to expect to see gross margin expansion, 150 basis points for the year. And in the second half, in Q3 and Q4, again, a little less of a tailwind from the wholesale channel mix, but still expect the fundamental drivers of better full-price sell-through, selective price increases, and and manufacturing efficiencies to continue to drive growth margin expansion across the company and really across brands. So that piece we would then expect to continue into the next year. When we look at the cost savings, we updated our guidance on that, and we are excited about doing better, and we're spending back as the business is recovering at a quicker rate. The first half did benefit from a few factors that weren't really applicable to the second half, like savings from furloughed and store closures and some other activities around rent and significant reductions in support for the business while it was closed. But now, as we're building back up, we have a lot more confidence in the growth trajectory, and we're spending, of course, to support the brand on marketing. As sales are increasing, we're spending on higher costs on a variable basis. We noted the compensation reductions. And, of course, it wasn't anticipated at the time, but the dollar has weakened, and that's impacted us by about $50 million. So that's a little bit of the back half, second half. If you look at the longer term, the $500 million that we had initially indicated we were saving, we expected about half of that to flow through to the future. And we're still seeing underlying savings, but there are just a few considerations for you on that for the ultimate flow through. The first is better than expected revenue recovery. And as revenue is higher than what we initially anticipated at that 500 level, of course, would be higher variable expenses. And the second is the weaker dollar we expect to continue into next year. So, there will be some, a bit of a headwind there. But overall, we expect robustly or rigorously controlled costs going into the year and still expect savings in that area.

Thank you. Good morning, Paul. So, Paul, as we've talked about before, Versace we think is one of the most important acquisitions that this company has made. There are not many luxury houses that first off come to the market and secondly have this type of global brand recognition And, you know, again, a lot of the initiatives that we started with Donatella and with Jonathan Ackroyd, our CEO, who I've commented about on previous calls as a terrific leader for this luxury house, we put these in place before the pandemic started. And we're really seeing, we're starting to bear a lot of the fruit from that. We've shut down multiple lines. We've closed stores. We've continuing to renovate the fleet because we know this will be hopefully behind us in the next 12 to 24 months. So we continue to invest in repositioning of this brand for what we firmly believe is a billion-dollar opportunity. And to see this brand and this luxury house perform in this environment increasing at our own retail stores in mid-single digits is really extraordinary. And I put that right in, as I said earlier, in the competitive mode with our other luxury peers around the world. And as you know, the luxury category is really performing quite strongly during the pandemic, and you've seen that through some of the other reports that have come out. So in the medium term, we continue to believe that Versace is going to grow at the kind of levels that you've seen in the previous earnings calls. So, again, we're well on our way, and we know once we get through these difficult times, this acquisition we've made is going to really turn on. And, again, we've said we believe we'll have mid-teens operating margins for this luxury house, and I think you're going to see us well on our way to getting there. In terms of Jimmy Choo, you know, we talked beforehand. Again, we're very proud of this acquisition. We've got a brand-new CEO in there who has been with the company. I believe she was the third or fourth employee to start with the company in Hannah Coleman. She knows this company inside and out. She's got a very clear vision of where she wants to take it. We're moving rapidly to reposition because some of the dress footwear category was suffering before the pandemic, and obviously the pandemic has put even further stress on that. But Jimmy Choo can be more than just a dress footwear company. We've proven that with our trainer business, our sneaker business. which is really penetrating, and we're off to an incredible start. We've got some new design talent we've brought in. We've also talked about the fact that we can do these collaborations, which we have a few more on the way that are going to be, we think, also equally as successful as the Timberland. And then lastly is we're very pleased with the accessory development in the company. and how we're going to build that out. And we have some other things in the pipeline that I think will be very interesting for you to see. So for us, again, we think this is a half-a-billion-dollar opportunity. Versace, a billion, and this is a half-a-billion. And, again, I think both of these luxury houses have the names to do that. We have the talent and leadership in place. And I think we've got the strategies that will also lead us there. And the last thing I just want to say is that with Michael Kors, you know, we were already on a trajectory to kind of reshape the business. We want to do a little less business. We want to be more profitable. And we think we have a clear path to do that. And quite frankly, the digital strategies that we put in place, and in particular, the data analytics strategies that we put in place, are really helping to lead the way for our overall businesses. Again, as I said to you, new customers had the highest AURs also during the quarter. So not only were they the largest part of our growth, but they also had the highest AURs. So, again, in the midst of what is obviously a very difficult environment, I think we see so many positives across the group right now, and you hear the enthusiasm in my voice and Tom's voice, because we see a lot of good things happening. Thank you, Paul.

Our next question comes from Dana Telsey of Telsey Advisory Group.

Please go ahead. Good morning, everyone, and congratulations on the progress. It's very nice to see. John, as you think of the physical footprint, you've given out updated targets. How are you thinking about the closures? What are you thinking about regionally in terms of what the physical footprint should look like? And are rent reductions helping drive the SG&A long-term cost efficiencies going forward? Thank you.

Thank you, Dana. Good morning. Dana, first off, I want to thank all of our real estate partners around the globe. I would say 90-plus percent of them were absolute partners during the darkest moments of this pandemic. And really, our biggest partners came to the table. And, you know, it's not easy for them to do that. But I have to really give a big thanks to all of them. And we worked collaboratively together to do that. We're not necessarily at the moment seeing any long-term rent reductions. You know, we're going to honor our leases and be good partners. And if we've got term on those leases, we're going to pay those leases as stated. So I wouldn't say that's where we're going to see leverage. Maybe over time rents will come down. I don't know. It's like Most of our leases are in place for some duration, so I think it's too early to judge that. But what clearly we're doing is we are reducing our overall store count, and it's really a microcores initiative. And it's, I would say, probably 80%, 20%, 80% in North America and 20% in Europe. And those stores have fallen below profitability or actually are no longer profitable. So the more we shed those stores or close those stores, the more profitable the company will actually be. I'd say the short-term concern is that the major cities, again, this is not something that you're not aware of, whether it's New York, Chicago, San Francisco, certain parts of Los Angeles, Paris, London, Milan, Madrid, these are all high tourist level cities. And again, there's many more, some even in Asia, whether it's in Tokyo or in Korea. We need tourism to return to get these stores back up to a level. Traffic is still down dramatically across the group, but it's really impacted in the major cities. And so, again, we think that's going to take time to come back. But the good news is we're structuring the company. We've got a 100% clear vision, but we've got a relatively clear vision of how the consumer is behaving today. Again, another place that data really gives us an advantage. We may have had her shopping with us in our Rockefeller Center store or Versace Fifth Avenue store. Maybe she's not coming in or he's not coming in now, but we can reach out and communicate with them. Maybe I'll leave you with this last thing. We think there's three very important ways that we're going to really interact with the customer, and it's an omni experience. The first, we believe our business is being led by digital interaction. So whether that's our marketing initiatives, whether that's the way that we are developing the customer's interest in the product, that's the number one place she or he comes and views and sees the initial interaction with our product. Secondly is obviously the store experience, and given in light of the pandemic and the concerns people have about having a face-to-face interaction, that's going to be more limited and develop over time. It is recovering, so I want to be clear that I say that traffic is recovering, but it's still not at a level that's acceptable for us to really feel good about. The last thing is where we're also starting to see some real traction is clientele. So that can either be through a one-on-one Zoom call with a client, whether that can be actually bringing product to the client's house. I talked about it previously. We have a few very successful initiatives. Really the most important one was led by Jimmy Choo. or we have a program called Chew to You, and we are really engaging with customers. We might have small social gatherings at someone's house. We've actually brought the inventory there. So I think clienteling is something that people don't talk a lot about, but it's really working well for us. So a lot of our stores, even though traffic is down, revenues, especially in the non-major city stores, in some cases are maybe flat or slightly up at certain stores, client and having a personal interaction with them. And we've got some of the best sales associates around the globe who are really having those interactions. And I'd like to close by thanking all of our 11,000-plus, 12,000-plus sales associates around the globe. They get up every day of the week, and they're really – keeping the lights on and making an incredible effort to engage with our customers. So I want to thank all of them. And, of course, I want to thank the balance of our employees who have really done an extraordinary job of really driving our business during this very difficult time. I'd like to conclude today's call by saying we remain highly encouraged by the recent developments that we're seeing with all three of our luxury houses, Versace, Michael Kors, and Jimmy Choo. We think we've got outstanding leadership, and we think we have strategies and initiatives that will help lead us for further growth and revenue and earnings per share growth in the future. Thank you very much for joining us today.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.