Capri Holdings Limited

Greetings and welcome to the Capri Holdings Limited Third Quarter 2021 Earnings Conference Call.

At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jennifer Davis, Vice President of Investor Relations. Thank you. You may begin.

Good morning, everyone, and thank you for joining us on Capri Holding Limited's third quarter fiscal 2021 conference call. With me this morning are Chairman Chief Executive Officer John Idle 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 that are 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, and inventory step-up adjustment, 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 to our website earlier today at capriholdings.com. Before we begin, I would like to note that we have accompanying slides posted on 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. Before reviewing our third quarter results, I would like to once again take a moment to acknowledge the ongoing COVID-19 pandemic and its profound impact on the entire world. My thoughts go out to all those affected by the virus and to everyone on the front lines who are tirelessly helping combat this pandemic. I want to thank our 15,000 employees around the world for the hard work and dedication they demonstrate every day to support each other and their communities during this challenging time. It's been inspiring to see the entire organization rally together. I'm incredibly proud of the entire team and what Capri Holdings has been able to accomplish during these unprecedented times. Looking back over the last three quarters since the onset of the COVID-19 pandemic, we're encouraged by the performance of all three of our luxury houses. Revenue and earnings results have significantly exceeded our original expectations. Retail sales improved sequentially every quarter, while e-commerce sustained strong growth across all brands. Gross margin expanded nearly 400 basis points year to date through the third quarter. Additionally, we attracted new consumers to each of our luxury houses. as evidenced by the double-digit increases in our customer databases over the last three quarters. We achieved all this by executing against our strategic initiatives while also carefully managing expenses and liquidity. Our performance during this difficult period illustrates the strength of our brands as well as the resilience and agility of our business. We now believe that the near term will be more challenging. The resurgence of the virus has led to additional restrictions and store closures that impacted the third quarter and are expanding in some countries in the fourth quarter. However, we are encouraged that the vaccine rollouts provide some visibility to the end of this crisis. Looking forward, we remain optimistic about the outlook for the fashion luxury industry and our company. While there are still unknowns in front of us, we believe the luxury market will continue to resume a steady growth trajectory. And we are well positioned to participate in that recovery. As you know, a few years ago, we made the strategic decision to diversify the company and expand more significantly into the luxury space. With Versace and Jimmy Choo, we acquired two very powerful brands that have changed the future growth trajectory of the company. Over the next few years, these two luxury houses will account for approximately 40% of Capri Holdings revenue and approximately one-third of total company earnings. Now I would like to turn to our third quarter results. Revenue improved sequentially, declining 17 percent, and was above our expectations. This reflected better than anticipated results in the Americas and Asia regions, partially offset by a more challenged environment in the EMEA region due to additional restrictions and store closures. Given our strategic initiatives to increase full-price sell-throughs and selectively raised prices, gross margins and earnings were significantly above our expectations. Gross margin expanded 520 basis points, contributing to earnings per share of $1.65. Looking more closely at group revenue trends, total sales for our retail channel improved sequentially, declining 10%. compared to a 17 percent decline in the second quarter. The better results were driven by robust e-commerce sales, which increased 65 percent and, once again, accelerated relative to the prior quarter. Store performance also improved quarter over quarter, driven by local clientele initiatives. By geography, Asia remains the fastest recovering region, with retail sales turning positive in the quarter. Notably, revenue in the region increased across all three of our luxury houses, driven primarily by stronger growth in mainland China. Additionally, in the Americas, retail revenue improved sequentially, with sales down low double digits. On the other hand, In the EMEA region, revenue trends decelerated given the store closures and increased restrictions in the region. By the end of the quarter, approximately 40 percent of stores in the EMEA region were closed. Now turning to third quarter performance by brand. Starting with Versace, we were pleased with revenue results which were ahead of our expectations. demonstrating the strength of the brand and the success of our strategic growth initiatives. Sales in our retail channel increased in the low double digits globally. Positive double-digit trends in the Americas and Asia regions more than offset declines in the EMEA region. Similar to last quarter, e-commerce sales increased triple digits year over year. We saw strength across categories as the brand emphasized the ultimate Versace look by pairing the latest runway styles with luxurious handbags, footwear, and statement jewelry. Accessories performed well with strong consumer response to our virtuous collection, including new styles that are quilted in a V pattern and embellished with our Barroco V signature logo. We are pleased with the traction we have gained with the Barocco V across all classifications, including accessories, footwear, belts, and jewelry. Following the success of the Barocco V, Donatella has developed a unique signature pattern that will debut during our upcoming Milan fashion show. When the new signature pattern launches at retail in the fall, it will be accompanied by a major marketing campaign to attract and engage new consumers. We believe this will significantly change the trajectory of Versace's revenues as it expands the brand's portfolio of recognizable, iconic products. Turning to our store fleet, in the third quarter, we were pleased to open 13 spectacular new locations in premier luxury shopping destinations, including Rue Saint-Honoré in Paris, New Bond Street in London, and the Bahnhofstrasse in Zurich. All of these boutiques capture Versace's powerful vision of the future, often to the brand's instantly recognizable design aesthetic. We believe that physical retail will remain important for luxury fashion houses, giving consumers emotional connections with the brands. Therefore, we will continue to selectively open stores in the most important shopping destinations in the world. Additionally, we are elevating Versace's existing global retail network into our new store concept. The new format more prominently showcases accessories with enhanced positioning and increased space, which should drive significant increases in overall store productivity. To date, approximately 40% of Versace store base is in the new concept. And we expect to have the majority of the fleet in the new format over the next two years. In terms of brand awareness and consumer engagement, Versace embraced innovative ways to connect with new and younger customers. Donatella made her digital debut as an avatar in december at complex land an immersive internet experience featuring fashion art musical performances and cultural conversations there versace also had a digital storefront and introduced a limited edition tri greca sneaker the five-day digital event generated approximately six million impressions In China, Versace partnered with GQ to produce a CGI animated short film that encompassed a surreal space of Trigreca and described the creative concept and background story of the sneaker in ancient Greek visual style. The film featured celebrity key opinion leader Danny Lee and generated over 10 million impressions. These initiatives help to drive an 18% year-over-year increase in Versace's global database. Overall, Versace's results speak to the strength of the brand and reinforce our confidence in the luxury house's long-term growth potential. Versace represents the largest growth opportunity for Capri Holdings. as we continue to believe revenue will increase to $2 billion over time. We anticipate Versace will generate positive operating margins in fiscal 2022 and mid-teens operating margins by fiscal 2023. Moving to Jimmy Choo, revenues significantly decelerated relative to second quarter, given the absence of a holiday collection this year. During the onset of the pandemic, in an effort to rigorously manage inventory, we canceled Jimmy Choo's holiday delivery. As a result, we did not offer newness to customers in the third quarter, which meaningfully impacted sales. Despite the absence of a holiday collection, retail sales in mainland China again increased double digits, while trends also improved in Japan, resulting in double-digit sales growth in the Asia region overall. We were also pleased to see continued growth in e-commerce. We were encouraged with the performance of our expanded accessories assortment, with particular strength in totes. Our signature JC Varenne remains the best-selling collection in accessories. In footwear, trainers continue to outperform and increase in penetration. We believe Jimmy Choo has a significant opportunity to expand its casual footwear assortment beyond sneakers, as demonstrated by the strong sell-throughs of products such as the Ishe Youth and Cruise Boots which are the epitome of chic street style. Additionally, our soft shearling slippers embellished with delicate pearls and crystals were a holiday favorite. New casual collections featuring sneakers, flats, and wedges with novelty details and a Jimmy Choo twist are now arriving in stores and online. As a result, we have begun to see a significant improvement in sales trends. Additionally, we are excited to be introducing our new JC signature collection in fabrications and techniques that will help establish a more consistent product platform reinforcing Jimmy Choo's brand codes. This new collection will be arriving at retail during the second calendar quarter of this year. In terms of brand awareness and consumer engagement, Jimmy Choo partnered with digital influencers around the globe to share how they celebrate at home with their favorite Jimmy Choo accessories and shoes during the 2020 holiday season. Combined, these influencers have over 11 and a half million followers on Instagram. Additionally, Sandra Choi hosted Zoom cocktail in conversations with some of Jimmy Choo's very important consumers. In December, these consumers were surprised and delighted to also be joined by actress and star of the Autumn Winter Campaign, Daisy Edgar Jones, and her stylist, Nikki Yates. Participants in the Zoom event were sent a holiday sketch by Sandra and a custom chew cocktail kit to enjoy while Sandra, Daisy, and Nikki discuss fashion, style, and holiday traditions. Our luxurious product and engaging marketing helped contribute to a 15% year-over-year increase in Jimmy Choo's global consumer database. Overall, we believe our strategy to build accessories and expand the casual footwear assortment will enable Jimmy Choo to grow revenue to approximately $1 billion over time. we anticipate Jimmy Choo's operating margins will significantly improve in fiscal 2022, leading to low double-digit operating margins by fiscal 2023. Now turning to Michael Kors. We remain pleased with the continued progress of the recovery. Revenue, again, improved sequentially in the third quarter, driven by better retail sales in the Americas, and Asia regions, partially offset by the slowdown in the EMEA region. E-commerce trends also accelerated relative to the prior quarter and increased 70%. In mainland China, retail revenue increased low double digits, which led to growth in the Asia region. Helping drive these results were strong sales on Tmall during Singles Day, where Michael Kors was one of the top performing accessories brands, as well as one of only three fashion brands to achieve sales of 100 million RMB. In the Americas, revenue declined in the low double digits compared to a decline in the mid-20s range in the second quarter. Moving to product performance. we are continuing to increase signature penetration across all categories by expanding our offering and developing new designs. Overall, signature represented approximately 35% of the assortment across all categories compared to 27% last year. In accessories, signature continues to perform well as consumers respond to newness, We delivered fresh updates throughout the holiday season, including patchwork, mixed materials, and a metallic update to our best-selling printed drive detail. All executions which give our classic logo a modern and sophisticated feel. Signature penetration increased to nearly 40% of accessory sales compared to 30% last year, resulting in higher AURs, and gross margins. Signature also performed well in footwear, where penetration grew to over 25% of sales. Within footwear, we saw strong performance in booties and fashion, active, driven by iconic branding elements and luxe logo details. Similarly, in women's ready-to-wear, signature logo styles were among the strongest performers. Turning to men's, one of our growth drivers for Michael Kors, third quarter sales increased driven by signature and accessories. In fact, within men's signature increased to 45% of sales compared to less than 30% last year. With respect to brand awareness and consumer engagement, Michael Kors upbeat high voltage holiday 2020 campaign centered on the question, what makes a star? and featured an all-star cast funded by supermodel Bella Hadid, Mayowa Nicholas, and Salman Diaz. In videos, the cast and crew shared their responses to the question posed by Michael Kors himself while on the set. The videos and still photography embodied the brand's signature glamour and optimism.

infused with the joy of the season.

The campaign also came to life through a special digital and in-store activation titled MK Edited By, the first in a series of global activations. MK Edited By Bella launched in early December in New York and centered around campaign star Bella Hadid's must-have picks for the holiday season. This was followed by regional activations in major cities worldwide, including Milan, Tokyo, and Shanghai. The concept featured additional MK edited byproduct curations by local influencers. 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 Michael Kors global database. Overall, we were encouraged by the sequential improvement in the revenue trends and significant gross margin expansion at Michael Kors. We remain confident in our ability to grow revenue while achieving operating margins of approximately 25% over time. This will be driven by our initiatives to increase prices and accessories reduce our product SKU count, and optimize our retail store fleet by closing unprofitable doors. In total, Capri Holdings' third quarter results exceeded our expectations. The sequential improvement in revenue despite increased store closures and restrictions demonstrate the strength of our brands and the resiliency of our teams across the globe. During these unprecedented times, we have stayed focused on executing our strategic initiatives across all three luxury houses. We believe Capri Holdings will emerge a stronger and more profitable company and remain confident in the long-term opportunities for each of our unique global luxury houses. Now, before turning the call over to Tom, I would like to take a moment to provide an update around the company's efforts to support diversity and inclusion. At Capri Holdings, we stand against racism and discrimination. We cannot change the past, but as an organization and as individuals, we have an opportunity to positively impact the future. Therefore, we are pleased to announce the creation of the Capri Holdings Foundation for the Advancement of Diversity in Fashion. We are donating $20 million to the foundation to foster and support programs designed to encourage diversity and inclusion in the fashion industry with a particular focus on underrepresented communities. Capri's role as a leading global fashion company is to set trends, inspire creativity, and represent the world around us. We aspire for fashion to be open to all and are doing our part to create a more inclusive industry. Now, let me turn the call over to Tom.

Thank you, John, and good morning, everyone. Starting with third quarter results, revenue of $1.3 billion decreased 17 percent compared to last year, a sequential improvement relative to the second quarter and above our expectations. Performance in the Americas and Asia regions was better than anticipated, partially offset by a more challenging environment in Europe. Net income was $250 million, resulting in diluted earnings per share of $1.65. This was above our expectations, primarily reflecting better-than-anticipated gross margin expansion. Looking at revenue trends by channels, Total company retail sales declined 10%, a sequential improvement relative to the 17% decline in the second quarter. The better results were driven in part by robust e-commerce sales, which increased 65% and once again accelerated relative to the prior quarter. Store performance also improved quarter over quarter, driven by local clienteling initiatives. In the wholesale channel, performance at point of sale also improved sequentially, but tracked lower than our own stores. Sell-ins continued to lag sell-throughs, and total company shipments declined at a rate similar to the second quarter, with improving trends in the Americas offset by decelerating trends in the EMEA region. Turning to revenue performance by brand, Versace revenue was $195 million, approximately flat compared to prior year, and above our expectations. Global sales in our retail channel increased low double digits, with e-commerce sales once again increasing triple digits. Sales in mainland China increased double digits, contributing to growth in the total Asia region. The Americas was once again the best performing region, with revenue up double digits. Trends in the EMEA region remained below prior year, impacted by increased store closures and restrictions. Versace ended December with a global luxury fleet of 217 retail stores, a net increase of nine from prior year. For Jimmy Choo, revenue during the quarter was $121 million, a 27% decrease compared to prior year. As John mentioned, this reflects the absence of holiday collections. Retail sales in mainland China increased double digits, while trends also improved in Japan, resulting in double-digit sales growth in the total Asia region. In the Americas and EMEA regions, retail revenue declined double digits, a significant deceleration versus second quarter trends, reflecting the lack of newness during the quarter, as well as increased store closures and restrictions. Wholesale revenue was also down significantly due to the absence of a holiday collection this year. Jimmy Choo ended the quarter with a global fleet of 231 retail stores, a net increase of eight from prior year. At Michael Kors, total revenue of $986 million declined 19% compared to last year. Overall retail sales improved sequentially, decreasing low double digits versus a low 20% decline in the second quarter. E-commerce sales growth accelerated, increasing approximately 70% compared to an approximate 40% increase last quarter. We were encouraged by the sequential improvement in trends in the Americas and Asia regions. Retail revenue in mainland China increased low double digits, driving overall sales growth in the total Asia region. In the Americas, retail revenue declined in the low double digits, a significant improvement relative to the second quarter. While in the EMEA region, trends decelerated due to increased store closures and restrictions. In wholesale, globally, 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 recovering at a slower pace than point of sale results. Michael Kors ended the quarter with a global fleet of 831 retail stores, a net decrease of 15 from prior year. Now, looking at total company margin performance, we were pleased with gross margin expansion of 520 basis points, which was well above our expectations. This improvement primarily reflects our corporate initiatives to increase full-price sell-throughs and selectively raise prices. Additionally, gross margins benefited from a higher mix of retail sales versus wholesale sales. Operating expense as a percent of revenue was 45%. compared to 42.6% last year. Total company operating expenses decreased approximately 80 million, or 12.5%. As a result, total company operating margin expanded 290 basis points to 19.7%, compared to 16.8% in the prior year, and was well ahead of our expectations. Looking at operating margin by brand. Versace's operating margin of 6.7% was above our expectations, reflecting both gross margin expansion and expense leverage. Jimmy Choo's operating margin of negative 6.6% reflects expense deleverage due to lower revenue given the absence of a holiday collection this year. Michael Kors' operating margin of 28.5% was above our expectations and expanded 470 basis points over prior year. reflecting significantly higher gross margin, partially offset by expense deleverage on lower sales. Turning to our balance sheet, we ended the quarter with cash of $229 million and debt of $1.4 billion, resulting in net debt of $1.2 billion. During the quarter, we paid down approximately $370 million of debt. These results reflect the strong cash flow generation potential of our business as we were able to deliver free cash flow of approximately $460 million year-to-date, which was ahead of our expectations. Total liquidity at the end of the quarter was $1.4 billion. Looking at inventory, we ended the quarter with $789 million, down 18% compared to prior year. This reflects the aggressive inventory reduction program we implemented at the beginning of the pandemic. 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 specific earnings guidance. However, I would like to share some thoughts around how we see our fiscal fourth quarter and full year 2021 progressing. We now anticipate lower revenue in the fourth quarter relative to our prior expectation due to the increased store closures and restrictions related to the resurgence in COVID cases. This primarily reflects trends in the EMEA region, but also includes measures being taken in parts of the Americas and Asia regions. Currently in the EMEA region, approximately 50% of our stores are closed compared to about 40% at the end of the third quarter. As a result, we now expect fourth quarter revenue to decline at a rate similar to the third quarter and full year fiscal 2021 revenue to decline approximately 30%. Despite the near-term slowdown in the pace of the global recovery, we remain very optimistic about the underlying health of our business. We believe these increased restrictions are temporary and look forward to a strong rebound as vaccines become more widely distributed across the globe. Turning to gross profit, we now anticipate gross margin expansion of approximately 300 basis points for the year. For the fourth quarter, we forecast approximately 100 basis points of improvement compared to prior year, driven by greater full-price sell-throughs and selective price increases. Our fourth quarter outlook also includes approximate 100 basis point impact from higher tariffs related to the expiration of the GSP trade program, as well as increased transportation costs globally. Moving to operating expenses. We now expect operating expenses to decline approximately $425 million in fiscal 2021. Turning to our expectations around certain non-operating items. For the full year, we estimate interest expense of approximately $45 million and foreign currency gains of approximately $20 million. Our effective tax rate is estimated to be approximately 20%, and we forecast weighted average shares outstanding of approximately 152 million. Taken together, we now expect to generate a slight loss per share in the fourth quarter. This outlook does not incorporate any significant additional store closures, extensions of closures, or new government restrictions beyond what we see today that could further impact traffic and sales trends. Now I would like to share some high-level thoughts around our expectations for fiscal 2022. We are very optimistic about the second half of the year and predict a strong recovery after vaccines are more widely distributed. All of our luxury houses should benefit as people begin to feel comfortable returning to more normalized routines. In terms of gross market, we anticipate 100 basis points of improvement in fiscal 2022 driven by price increases at Jimmy Choo and Michael Kors, as well as higher full price sell-throughs. It should be noted, as many of you know, that the GSP program terminated at the end of calendar 2020. If the trade program is not renewed, it would result in higher tariffs and a reduction of our planned margin expansion. Looking at operating expense, we see approximately 100 million of net savings flowing into fiscal 2022 from our cost reduction actions. This reflects our original 250 million in savings, partially offset by approximately 150 million of FX impact. Taken together, we expect higher gross margin in our expense reduction initiatives to generate meaningful operating margin expansion. By fiscal 2023, we continue to anticipate revenue and earnings per share will exceed pre-pandemic or fiscal 2020 levels. As the world emerges from the pandemic, we remain confident that our three luxury houses position Capri Holdings to deliver multiple years of revenue and earnings growth, as well as increased shareholder value. Now we will open up the line for questions. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question. One moment, please, while we poll for your Our first question comes from the line of Kimberly Greenberger with Morgan Stanley. Please proceed with your question.

Great. Thank you so much. Really nice results this morning. John, you've obviously been able to learn a lot about pricing and inventory management and let's say price optimization over the last nine months. I mean, I don't know who would have expected such a silver lining and such a troubled period. But I'm wondering if maybe you can sort of step back and think about and just share with us your thoughts on what's been the sort of key unlock in your mind that has revealed the opportunity for price improvements and better full price selling across, it seems like, all of your channels and all of your brands. Is there a sort of key messages or key strategic pivot that you would expect to be able to continue post-pandemic?

Thanks. Good morning, Kimberly, and thank you for your question. Let me start by saying we think we had a very good quarter relative to the environment we're surrounded in. We exceeded our revenue expectations, our internal revenue expectations, and that was even with a fairly significant downturn in the EMEA region at the back half of the quarter. And I think what that shows us is the consumer engagement with all three of our luxury houses. You know, as you saw from our prepared remarks, The Versace Global database grew 18%. Jimmy Choo grew 15%. And Michael Kors grew 16%. So when you look at all those, and those are kind of very key indicators, you know, for us in terms of the health and the desirability of our luxury houses, all the things are pointing to very positive reception from the consumer. As you noted, you know, we've been raising prices in the Michael Kors in specific, which by the way, we started that again before the pandemic began. It's something that we have talked about in the last few calls that we believe that where we are competitively and the way the consumer views our brand, we had actually been undervaluing how this brand has been looked at. That went along with a very concerted effort around the the the reinvigorating of our signature products across our line and you know as we said in accessories it accounted for about 40 overall sales uh we saw numbers in our footwear and women's ready-to-wear areas growing very very dramatically and so consumers i i believe um see that you know michael and his design teams are really uh creating products that are desirable And then our marketing messages that are surrounding that, you know, either led by Bella Hadid or some of the storytelling that we've been doing is really resonating with the customer. So I feel in Michael Kors, this is something we started on about two years ago. And as we said in also previous calls, we'll be finished with most of that price reset by the fall of this year calendar, fall of this year. And we think we'll have additional gross margin expansion, which will lead to operating margin expansion in the Michael Kors brand. So we really feel good about the product. We feel good about the pricing strategy. And we feel great about what we're telling in terms of marketing stories. In terms of Versace, I think that, you know, we've been on a mission to reset Versace. the vision of the company. It's always going to be one way led, always going to be, you know, driven by Donatella's vision. And she obviously has had an incredible vision for a long time, like Michael and like Sandra. But what we're doing is we're building a more stable base in the company. It's something the company hasn't had for for many, many years. We now have the Baroque OB that we've talked about, and it's really resonating across multiple categories. We're starting to see some very nice traction on some of the new accessory groups that we've introduced. And now we have this very significant introduction that will happen in the February market. I'll leave that for you to all watch in the fashion show coming up in March. I think you'll be quite impressed with what we're going to do. And I believe that's going to change the trajectory of the company significantly over the next 24 months. And so, again, this is everything that we had been planning all pre-pandemic And lastly, as it relates to Jimmy Choo, we've introduced, you know, again, this company never had any kind of an identifiable icon. We've introduced the JC signature logo, which has been extremely well received by the consumer. We are coming out with additional line extensions around that. And most importantly is to develop the accessories business. Again, it's a little more difficult given where we are in the cycle of the pandemic and how consumers are really engaging with more classic products, if I can say that. And again, we haven't had that history in Jimmy Choo of having that strength in accessories, although we're going to build on that. And then, of course, we've been disintermediated to some degree with the dress footwear business, and we're really pushing hard on on our active and our more casual classifications, which are getting excellent traction. So we've got probably the most amount of work to do there. There's a few more things that are hitting us. But I think what you see is our ability to stay focused on our strategies that were really being set in place before the pandemic started. And the consumer is resonating. One thing we know is that we have three incredible luxury names with Michael Kors, Versace, and Jimmy Choo. Just when you say those names, they're powerful, they're important, and they resonate with consumers. So we'll come out of this very dark moment, and I think we will actually be stronger across all three of these brands because we stay focused. We didn't really try to lose any of our brand values or our vision for the future. And I think the consumer is enjoying all the products that are being designed by Michael, by Donatella, and by Sandra and their wonderful design team. So I compliment them all on this call. So thank you. And just lastly, on inventory management, I think that's always been something we've done well as a company. And You know, we suffered some significant pain at Jimmy Choo. We made a decision very early on in the pandemic to cancel the holiday collection. You know, hindsight's 20-20. That was probably too severe of a move, but it was something we could do quickly and and keep our inventories in line. We did also lose revenue in particular in North America with Michael Kors. We also made a similar decision. We canceled most of our boots and booties. That had a fairly big impact on us. And we ran out of quite a few styles and signature during the holiday season. So we could have done more business in Michael Kors in North America. And quite frankly, as we're getting replenished right now, I can't tell you it's going to hold forever, but Michael Kors in North America is positive comp store sales right now, which is really quite extraordinary given where we are in the continued impact that the pandemic is having. So again, we're very pleased with the performance of all the brands really led by product and also the marketing messages that are associated with the stories that we're telling. So thank you, Kimberly.

Thank you.

Thank you. Our next questions come from the line of Ike Barachow with Wells Fargo. Please proceed with your question.

Hey, good morning. Congrats on a good solid quarter. It's John. I wanted you to elaborate on something you said. During the remarks on CORS, I think you mentioned planning to get the brand operating margin back to approximately 25%. I believe last year you talked more about a range of 20% to 25% as a target. Has something changed to give you a bit more confidence in the brand's profit outlook? Just kind of curious if you could elaborate a little bit.

Sure. And, you know, as you know, historically the brand's been around 20%. And so I think, you know, as we – move closer into our visibility for next year. And again, you saw extraordinary gross margin expansion during the quarter. And as Tom said in his remarks, a great deal of that is actually led by full price selling. And again, led by these product initiatives and the consumer response. So, we have consumers engaging, product selling through certain categories we're actually I mean, it's not a good thing to say you run out of things, but sometimes it is a good thing. So we're really getting a very, very strong response from our consumers. So I think we have a little bit more confidence in our ability to reach those targets. And, again, as I mentioned, as we work through our fleet optimization program, We will be reducing stores. And again, we still plan on closing well over 100 stores. And that's just going to really help improve the overall operating margin as we do that. It's still going to take us 18 to 24 months to do that. But many of our leases are coming off naturally. And, you know, we'll renew those stores where we are profitable and those stores where we're not, we won't because it doesn't make sense for us to do that. And so I think we have a bit more confidence. I do want to put a caveat, which, you know, Tom mentioned in his remarks, and that is that there's the GSP program, which we are hopeful gets renewed. But if not, that could have some headwinds for us on the gross margin side. But I think in general, we see optimism around what is happening in the Michael Kors brand and the way we're growing it relative to our expectations has given us a strong point of view on that. Thank you, Mike. Thanks, Sean.

Thank you. Our next question comes from the line of Matthew Boss with JP Morgan. Please proceed with your question.

Great, thanks. John, maybe near term, can you speak to recent revenue trends in the Americas post-holiday, partially driving the reduction in the fourth quarter top-line plan that you cited, and then multi-year on your target for revenues to exceed pre-pandemic by fiscal 23? How do you see the relative pace of recovery by region and by brand playing out?

First of all, good morning, Matt. Matt, the caution that we gave in our prepared remarks was not actually directed towards North America. As I just said a moment ago, again, I can't tell you that it's going to hold true, but For the moment, the Michael Kors brand, as an example, in North America is showing actually positive comp results, which is quite extraordinary given where we are right now. Again, I don't know if that'll remain true for the balance of the season. So North America has actually, for actually all three brands, for Versace and And Jimmy Choo, we've seen a very healthy January. Again, can't tell you what February and March are going to look like, but so far we're off to a good start. In Europe, as I think we indicated, we have more stores closed in this quarter than we had last quarter. I assume everyone on this call is reading the press announcements as they come out. We anticipate most of the government restrictions which in some cases have accelerated in places like France, to remain in place through the balance of the quarter, even though many say they will lift them in the early part of March. I think we're less optimistic. As you know, the vaccine rollout has been quite slow across continental Europe. And so we think that that's going to really have an impact. And we actually believe that will have stay true through most of the first half of calendar 2021. So we believe EMU results will be a drag and a headwind for the company. And in Asia, there's a slight bit of concern, as I again, I assume you are reading or hearing from other people. There has been some small resurgence of the virus in China, and the government has not required, but requested more limited travel during the upcoming Chinese New Year. We don't know what that means. So we're just a little more cautious. Again, business will be still strong in the region, whether it will have the same level of intensity given the cautious nature of the way that they are approaching the situation is something that gives us just a little bit of pause. We don't think it's any kind of a long-term trend. So as we look at the future, we think, again, that the first quarter of next year will be a bit bumpy. Again, it's all going to depend on how quickly the rollout happens and the vaccines, and you all probably know as much as we do in terms of how that's happening. We believe North America will have, or the United States in particular, will have the fastest rollout of the vaccine ultimately. And we're encouraged, as Tom said in his remarks, we think the calendar back half of this year, particularly starting in September, October, November, there could be a very strong rebound as people return to a a a different type of normal um and so we're most encouraged about north america and mainland china in particular and we think there could be some very continued positive trajectory in both of those marketplaces we're quite unsure about the back half of the year in in emea region And that'll just depend on how the vaccine gets rolled out. And in terms of the brands, I would say, you know, I'll start again with Michael Kors. We're really pleased with what Michael and the design teams are delivering in terms of product innovation and how our marketing teams are developing storytelling around that. So we feel very positive. We also believe that that the department store businesses will start to return and maybe not quite catch up to where we are, but we think there's going to be a more solid development of that, so that should help impact our wholesale businesses, which, you know, even though they're significantly reduced from where they were, are still important to the company. And we also believe that there will be some recovery in the department store business in Europe, which as you probably know is, for all intents and purposes, almost closed in many cases. So that's quite difficult for us and for our partners there. And so we see, you know, we're very encouraged about that. We're super excited about what we think can happen for Versace in terms of what we're going to show. here in March and how that's going to really resonate with the consumer. And then Jimmy Choo, it's going to take us a little bit longer, given, again, we need people to feel a bit more comfortable with going to restaurants and to events and things like that. And so we think the recovery on that will be a little bit slower. And we're much more optimistic in fiscal year 2023 with Jimmy Choo Although we do believe Jimmy Choo will be profitable for the company next year, which is a very positive thing for us and encouraged by that. Thank you, Matt.

Thank you. Our next question comes from the line of Omar Saeed of Evercore ISI. Please proceed with your question.

Good morning. Thanks for all the information. The updated margin targets for Jimmy Choo and Versace are really impressive, actually, coming off of where we stand now. You know, is the key driver there or the key factor the return in sales and being able to leverage sales? Are there other key drivers that we should think about, you know, looking at that magnitude of the margin improvement we'll see over the next couple of years? That's really what my quote question centers around. Thanks, John.

Sure. Omar, this is Tom here. Thanks for the question. There are a couple of different things that are driving the increase in expansion and margin for Jimmy Choo and Versace. And the first is a gross margin. So at Jimmy Choo, we're looking to increase pricing selectively and believe we have an opportunity to do that compared to our luxury peers. And for both brands, we're looking at increased full price sell through. And finally, across both accessories, there's a key focus for Jimmy Choo and Versace already made a significant headway in creating collections and logos and signatures to build on. And we'll be expanding those over the next several years. So we do believe that gross margin is an opportunity across both brands. And the second piece is leverage. We'll be seeing leverage at both the store level and at the SG&A level for corporate as we've significantly made investments in the businesses after buying them and had cost reductions coming into the year due to COVID. So we'll be building off of that as we quickly lever and grow revenue over the next couple of years for those businesses. And as we mentioned earlier, the 15% or mid-teens margin goals for the brands compared to other luxury peers and actually very favorably and below. So for Versace, we're looking at getting to that level in FY23. I'm looking at double digits for Jimmy Choo in FY23 and opportunity for Versace, since we won't be at the $2 billion in sales level, to even go beyond that. Thanks. Got it.

Thanks, Tom. And also, let me add, Omar, let me add one other thing, too. You heard my level of excitement about what we're going to be showing in March and what that's going to do. As you heard me say, I believe it's going to significantly change the trajectory of the Versace business, which we're already pleased with. As we build out a base for this company, which the company really over its history hasn't had, compared to our other luxury peers, that will improve the profitability dramatically of Versace, because we're doing this today primarily on ready-to-wear, which, as you know, has higher markdown rates and, you know, has you clear that inventory, whereas accessories and, in particular, in footwear area core items have the possibility for greater longevity and really creating a margin story for us there. So it's not going to necessarily for such a big gross margin story, but it will be an operating margin story because sell-throughs will be up and that maintained profitability will be better. And you saw what's happening at Michael Kors by us doing that. um and and and we're going to be applying those same principles and and also to jimmy chu uh as well over time so i think we understand the formula um and i think we have the the the we're resolute in our in our vision to uh implement those strategies even during these very difficult times thank you omar great

Thank you. Our next question comes from the line of Michael Bonetti with CreditSweeps. Please proceed with your question.

Michael Bonetti, CreditSweeps.com Hey, guys. Thanks for all the detail today. Tom, would you mind clarifying what your the language on the operating expense plan for fiscal 22 in dollars, please?

Sure, Michael, happy to. So for fiscal 22, our next fiscal year, we see 100 million of savings flowing through from our savings initiatives this year. As you know, we had originally provided a target of 250, and the underlying drivers of that were headcount reduction of 20% and other cost savings. All those things remain in place. We do see, though, a weaker dollar creating an FX headwind, which will make SG&A higher as a result. So there's 150 offset to that. So we see 100 million flowing in, and that's off of a base of a pre-COVID base, so FY20. That's how to think about that. Now, we're continuing to work on managing expenses, and as John noted, we continue to execute our store closure and fleet optimization plan, and that is also contributing to these savings and something that could further drive savings in the future.

Okay. Thanks for that clarification. Very helpful.

And then I guess, could you – I'm curious on the supply chain, any complexities you're seeing today on the West Coast ports, given some of the California restrictions we've seen, or how do you see the freight outlook as we think about margins in the near term, please? Sure. So we have seen delays in some capacity constraints on transportation due to COVID. We noted it in the prepared remarks in Q4 as an offset to some of the great results coming through on AUR and margin for the business. And we are seeing some delays in receiving merchandise, so it will have some impact. And we have been and our teams have been doing a fantastic job planning to mitigate this and managing through it. So costs have increased for vessel and freight. But the impact is included in our guidance remarks. We anticipate it will continue into the beginning of next year, but that it eventually will normalize as, again, the world comes back to a more normal situation as the vaccines are more widely distributed. So we believe it's a short-term situation.

Okay. Thank you very much for the help. Appreciate it.

Thank you. Our next question comes from the line of Jay Sol with UBS. Please proceed with your question.

Great. Thank you so much. I just want to ask about the GSP trade deal. Could you sort of elaborate on what the impact is and what the prospects are for that deal getting renewed? And is the impact going to be retroactive if the deal is not renewed?

So, Jay, the GSP program, as you know, provides low or no tariffs for certain countries for importing into the U.S., And it expired at the end of the year. In the past, it has been renewed and it has been renewed retroactively to the beginning of the year. But as we all know, there are a lot of different priorities right now for Congress. and we can't predict if and when it would be renewed. The impact to us is a little too early to tell because it does depend on where we source our goods from, and we do have the ability to change that sourcing and shift production. So as we get through the quarter and into the new year and talk to you in the May-June timeframe, I think we'll have a lot better visibility on the impact for the year, but we would, of course, work to mitigate it if it is not renewed. Got it. Okay. Thank you so much. Thank you. Our next question comes from the line of Aaron Murphy with Piper Sandler. Please proceed with your question.

Great. Thanks. Good morning. I guess my question is around China. Within China, can you share a little bit more about what you're seeing in Henan Island? And then bigger picture, how do you think about the recovery of global travel retail within your framework of getting back to pre-pandemic or exceeding pre-pandemic levels for both sales and EPS by 23? Thank you.

Good morning, Erin. Thank you for your question. Erin, obviously, as you know from us and from our other contemporaries in the industry, China has been the strongest region. And that's been fueled by the fact that the traveling Chinese tourist is not necessarily traveling outside the country. We see the unfortunate effects of that in Europe in particular. We see the effects of that in Hong Kong and in Macau, which still are in very, very difficult shape in terms of performance. So the China business remains quite strong. And as I said earlier, even with the government, encouraging people not to travel as broadly as they normally would during this upcoming Chinese New Year. We still think it will generally be a very solid performance, maybe not quite as strong as we had all anticipated, but still a solid performance. As I'm sure you've heard, Hainan Island is on fire. It's been extraordinary, the results there. Travel has continued, and we're all, again, we're no different than anyone else. The performance remains phenomenal. So we're enjoying the benefits of what is happening there with the consumer visiting that location. That's probably the only tourist location that we can talk about globally that is seeing a strong performance. We do not believe, and we've said this in previous calls, we don't believe the travel retail business comes back until our fiscal 2023. And to put that more calendarized, that's calendar 2022. And we really don't think that comes back until kind of May on in calendar 2022. So that's in our projections when things come back. And as you know, this is going to depend on First and foremost, will countries allow people to travel across into their borders? And will there be a quarantine requirement or not? As long as quarantine requirements remain in place, I think most people are going to be uncomfortable because they can't take the time to do that. And question is, will countries even, certain countries don't even allow you to travel in regardless of quarantine? So we don't think that the vaccine is fully distributed in enough of a broad-based way to create that type of more comfortable cross-border traffic well into calendar next year. And as we've said to you before on these calls, when you think of wholesale for our company, Yes, North America and North American department stores is a part of that business. It is not the business. The second largest piece of it is the European department store and specialty store business. And that's for all three of our luxury houses. And that, for all intents and purposes, is we don't believe. We think there's going to be some recovery to that at the tail end of this year, but not as robust as we're going to see here in North America and France. and following on to the current success in China. And then the other part for us, the third part of wholesale, is travel retail, which is significant. And now we'll be lapping the loss of that business, I would say, come April or so. Probably that was the last time we were really shipping some of those people. And as I said, we don't think we will see that return until calendar time. April, May of 22 is kind of our best estimate sitting here today.

Thank you, Erin. Thank you very much.

Thank you. Our next question comes from the line of Simeon Siegel with BMO Capital Markets. Please proceed with your questions.

Thanks. Good morning, everyone, and congrats on the ongoing progress. John, e-com strength is obviously fantastic. What are the e-com penetrations by brand now? And did you note any regional discrepancies that are worth calling out? I guess I'm just wondering about performance given the greater store restrictions. And then just Tom, really encouraging to see the ongoing and material debt paydowns. Any help on thinking about or quantifying how much you expect to pay down over the next year? Thanks, guys.

Good morning, Simeon. So e-comm obviously has been the shining star, and I'm so proud of everyone in our organization. Michael Kors, as you know, we've made significant investments into our e-comm capabilities, whether those are platform, whether those are distribution capabilities, whether those are store order fulfillment capabilities. and even the way our sales associates are using it to engage with clients and the results we're seeing from that is really just extraordinary how that has helped to have this growth level that you've seen come quarter after quarter. And we've been able to ship and deliver, which is important for the consumer, obviously. We don't break out penetrations by brand or by region or anything like that. I've given you some thoughts around where we think that will be in the future. But clearly, North America has the strongest growth across the brands, and which is incredible as we're doing that on already very significant levels. Europe is becoming the highest penetration, but that doesn't make any difference right now. That's just because stores are closed. So we can't look at that today, although it is growing very, very fast and reaching in many cases close to North America kind of growth rates, which is good to see. It's good to see that we're able to transition consumers to that channel. And then lastly, I would say both China and and Japan, which for the past many, many years, it was not a significant business for us, although we were engaged in it. It's becoming a very important business for us in the regions. And of course, we made commentary about our great success in China on Tmall. uh and in particular um how how successful we've been with the michael kors brand uh and so i think you know we view the the the online capability and quite frankly our omni capability as being a great strength across the group and we look to continue to further uh invest around uh again platform enhancement, in particular, also around analytics and how we're going to continue to use this great success we've had in growing our database and then using that to our advantage across each one of our luxury houses to engage with our customers, both new and old, where we need to re-engage with lapsed customers, et cetera. So I think that, and lastly, let me just say that we're having the same type of conversations or relationships with our wholesale partners. Those could be pure play, or they could be department stores who have an e-commerce capability, and we're growing those relationships. businesses exponentially as well. So I think that, you know, obviously e-commerce is here to stay. It's a big part of our future. And we believe it's one of our core competencies and a great strength of the group. I'll let Tom answer the second part of the conversation.

Thanks. So related to debt, I'll start, Simeon. We're really pleased with the cash flow generation of the company. In the quarter, generated free cash flow of $370 million and $460 million year-to-date in a COVID year, paying down debt of $370 in the quarter and nearly $800 million year-to-date. So we ended the quarter with $1.2 million in net debt. And our leverage ratio is below three. So we're feeling comfortable with the progress. As we look to the future, we do feel strongly about the cash flow generation potential of the company. And we would first invest in the business. Second, continue to repay debt. So that is a focus. But as we're emerging from the pandemic, we will reevaluate sending cash back to shareholders. And in the past, we have been able to implement share repurchase as well as pay down debt. So that's something we would certainly reevaluate. So I believe right now we're in a very strong liquidity position and balance sheet position, and it positions us well for the future.

Thanks a lot, guys. Best of luck for the rest of the year, and congrats again.

Thank you. Our next question comes from the line of Paul Trussell with Deutsche Bank. Please proceed with your questions.

Good morning and very solid results. John, you spoke to signature penetration nicely higher year over year and footwear and handbags. Do you see that penetration continuing to go higher or do you feel like you're now at the right levels currently? And I'd also be curious. to hear what you're seeing from a ready-to-wear and watches standpoint at Coors. And then, Tom, just on the margin front, could you maybe just speak to some of the key items for us to really keep in mind as we think about 4Q and how it's differentiated from what you experienced in 3Q? Thank you.

Good morning, Paul. Thank you for your question. First off, at Michael Kors, the strategy that we set upon two years ago to take a highly identifiable classification of our accessories business and make it much more strategically important than we had for some time before that has been a huge win for the company. And, again, I think the consumer is resonating around that product and what it stands for and what it means to them. And, again, it's led by Michael and our design teams, and what a great job they're doing. That's the first thing. And to be penetrated at 40%, we wouldn't be uncomfortable if that got to 50%. I don't think that's something. You know, many of our luxury competitors are in the 70s, So I would say we would be happy to see that continue to move up, and we think that also provides additional opportunity for margin expansion because it's a product that suffers less markdowns and we get more consistency in terms of a base. As I mentioned, we're very pleased with what's happening in our footwear business around our signature products. and in women's ready-to-wear, which is quite extraordinary. Our women's ready-to-wear business has been the most difficult business in the company. We've talked about it previously. A large part of our business was in dresses, and that classification has been significantly impacted. We've been making up with outerwear, and actually some of our active collections. We'll be talking to you about some major announcements that we have around that. in the coming quarters so so you know we we know that this is a shift and we don't think the shift is permanent actually when we talk about a rebound we think that actually women's ready to wear will be one of the classifications that gets a very strong rebound come the fall latter part of this year's season when people are feeling more comfortable maybe socially gathering and and wanting to get dressed up again. It's going to come back. It's not a matter of if. It's just a matter of when. So we feel great about that. And I have to tell you, the watch business continues to get better. In fact, the last few reports I've been reading, especially in North America, we've, for the first time, I think, in four-plus years, have comped up in watches over the past few weeks now. So, again, I don't want to say that that's any kind of an indicator. I may get on the call, our next earnings call, and tell you something completely different. But we had a very nice holiday season in watches, both in our own company and the wholesale distribution level. And there definitely seems to be a little bit of a turn in that business. I wouldn't call it a dramatic turn, but it's definitely a place where, we're not seeing those huge declines that we were suffering previously. And as I said, we just over the last few weeks had some very nice results to report. I also might add that hopefully, and it will be two early days, but we won't be talking to you probably until this time next year, but hopefully we'll be talking about those penetration levels. We won't be quite that high at Versace and ultimately Jimmy Choo. So as we develop a more consistent business around an iconic logo, in the case of Versace, we have the Baroque OB. And also, I might add, we've had the Medusa, so I don't want to take anything away from what has been historically the company's historic, iconic symbol. which has been – continues to perform for us. But we'll have the Barocco V, and now we'll have a more signature pattern that we're quite confident that Donatello will make it very exciting and recognized by our highly engaged consumers and new consumers. And so I think those are going to also add to profitability and engagement for Donatello. uh jibichu and versace and you know again to reiterate what we've said those two brands um ultimately will account for 40 of this company's revenue and and a third of the company's profits so it's it's going to be quite exciting to to see that story unfold tom will turn on you

Thanks. And, Paul, related to margins in Q4, we continue to anticipate, as we noted in the prepared remarks, that gross margin would expand about 100 basis points. And that's really driven by just a continuation of the benefits of higher AUR, better full-price sell-throughs across the businesses, and partially offset by some of the GSP benefits. and supply chain costs in the quarter, but feel confident that that will continue. And then those underlying drivers continue into next year with the additional benefits of pricing and accessories growth across different parts of the business. From an SG&A perspective, we noted that $425 million of savings would occur in the year, and that's really up from our prior forecasts. driven by lower costs and great expense control in Q3. In Q4, we are seeing impact from the weaker dollar and the FX impact on SG&A. So that will probably create a little deleverage on that line. Importantly, as we look forward, we will still get the net $100 million of savings flowing into FY22 from all those initiatives.

Thank you for the comment.

I want to thank I want to thank everyone for joining us today, and thank you for staying on a little bit longer with us. I just want to, in closing, tell you that we remain very encouraged about the future of Capri Holdings and our three very prominent brands, Versace, Jimmy Choo, and Michael Kors, and the ability to grow all three of those in the future. I'd like to just make one last comment, and I'm also very proud of our announcement that came yesterday about the formation of the Capri Holdings Foundation for the Advancement of Diversity in Fashion. Like we are in the industry, we consider ourselves to be leaders and visionaries, and we think this is a great step forward for our industry to be able to support those in underserved communities, underrepresented, I'm sorry, communities, And we think that we are going to need to do even more to foster our involvement in the ability to create opportunities. So we're very proud of the organization and its commitment to diversity and inclusion. Thank you all. Stay safe and have a great day.

Thank you for your participation today. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.