Capri Holdings Limited

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Greetings and welcome to the Capri Holdings Limited second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A brief 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 your host, Jennifer Davis, Vice President of Investor Relations. Thank you, Ms. Davis. You may begin.

Good morning, everyone, and thank you for joining us on Capri Holding Limited second quarter fiscal 2022 conference call. With me this morning are Chairman and 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 to differ from those we accept. Those risks and uncertainties are described in today's press release and in the company's SEC filing, 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 impairment, 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.

now i would like to turn the call over to mr john idol chairman and chief executive officer thank you jennifer and good morning everyone looking at capri holdings momentum as the world continues to recover from the pandemic we are encouraged by the progress of all three of our luxury houses versace jimmy and michael kors are all resonating with consumers as evidenced by the 11 million new customers added across our databases over the last year. During this time, we have continued to see revenue growth and margin expansion above our expectations, reflecting the successful execution of our strategic growth initiatives. We are extremely optimistic about our future growth potential and believe the company is emerging from the pandemic stronger than ever. Capri Holdings' success is a testament to the strength of our brands, as well as the dedication, resilience, and agility of our entire team across the globe. Now turning to second quarter results. Capri Holdings' revenue, gross margin, operating margin, and earnings per share all exceeded our expectations. Total revenue in the quarter increased 17%, reflecting better than anticipated results at all three brands. E-commerce sales increased double digits, building upon significant gains achieved last year. Additionally, gross margin expanded 440 basis points, reflecting increases across all three of our luxury houses. Operating margin of 18.5% was significantly above our expectations. As a result, earnings per share of $1.53 was better than anticipated. Looking at group revenue trends by geography, revenue growth continued to exceed our expectations in the Americas and would have been even stronger if not for inventory constraints. Consumer demand for our brands was healthy and benefited from an increase in social gatherings. In EMEA, revenue trends were also above our expectations with growth across all houses. We saw strong momentum driven by robust domestic consumer demand as stores in the region reopened and vaccination rates increased significantly. In Asia, revenue was flat due to COVID-19-related restrictions in Japan, Southeast Asia, and Australia, as well as an increase in COVID cases in China, which resulted in new travel and other regional restrictions. However, revenue in mainland China increased during the quarter, even with greater restrictions. Now turning to second quarter performance by brands. Starting with Versace results significantly exceeded our expectations once again. Revenue increased 45%, demonstrating the strength of the brand and the success of our strategic growth plan. At the core of these strategies is the bold and fearless design vision of Donatello Versace. Her vision is based on Versace's iconic Italian heritage and unapologetic glamour. Versace has created three very powerful iconic pillars with Virtus, La Medusa, and the launch of our new La Greca signature pattern in September. La Greca is Donatello's modern interpretation of Versace's classic Greek key motif. which Gianni first introduced in 1988. The signature pattern illustrates Versace's rich history and the brand's ability to draw from the past to create innovative designs for the future. La Greca is off to a very strong start and is reflected across all product categories, including accessories, footwear, ready-to-wear, and jewelry. We continue to believe the signature pattern will accelerate the trajectory of Versace's revenue growth as our third iconic pillar. Women's accessories continued to perform well as retail sales increased strong double digits. With our three iconic pillars, we are confident in our ability to position Versace as a leading luxury leather house. We are making significant progress in our goal to expand accessories revenue to $1 billion over time. Looking at footwear, we are gaining authority as a women's footwear brand and have begun to build out our core offerings focused on our iconic coats. In the second quarter, women's footwear sales at retail increased double digits. additionally we saw strength in men's and women's ready to wear with retail sales up double digits versace's bold and fearless designs were positively received by consumers and we saw an especially strong response to the new legreca signature pattern when it launched in september we also continue to expand our core lines which incorporate iconic house codes to increase sales and broaden Versace's reach. Moving to brand awareness and consumer engagement. Versace's fall campaign featured global superstar Dua Lipa as she introduced the new LaGreca collection. The pop icon is the Versace brand with her impeccable style, fearless attitude, and universal appeal. Dua Lipa has over 125 million followers on her social media accounts. Additionally, Versace generated widespread acclaim and media coverage during Milan Fashion Week. First, Dua Lipa opened and closed the Versace Spring Summer 2022 show in her runway debut. The show generated over 41 million views globally. Then, in a momentous conclusion to Milan Fashion Week, Versace and Fendi, two iconic Italian fashion luxury houses, came together with a joint Fendacci show. The houses debuted a Versace collection designed by Fendi's artistic director, Kim Jones, followed by a Fendi collection designed by Donatella Versace. The swapping of design roles presented a unique moment in fashion. The Fendacci show generated over 17 million views globally. We believe this collection will generate significant revenue and increase brand awareness for both Fendi and Versace. As a result, Versace was the top engaged Italian fashion brand on social media during Milan Fashion Week. During the quarter, Versace continued to adorn the world's most famous celebrities. The Atelier's presence at the Met Gala was extensive, with Donatello addressing celebrities including Lil Nas X, Steph Curry, Maluma, and Channing Tatum. These powerful initiatives, among others, helped to drive a 26% increase year over year in Versace's global database. Overall, Versace's second quarter results speak to the strength of the brand and reinforce our confidence in the luxury house's long-term growth potential. Versace's revenue and margin are outpacing our expectations as the brand's momentum remains incredibly strong. We now have the key building blocks in place to realize the full potential of this amazing brand and are more optimistic than ever about Versace's future.

Moving to Jimmy Choo. Results were ahead of our expectations with revenues increasing 12% as we continued to execute against our strategic initiatives.

At the core of these initiatives is the design vision of Sandra Choi. Sandra's vision is inspired by Jimmy Choo getting these brand codes into the foundation of Jimmy Choo's key product strategies focused on expanding accessories and growing both formal and casual footwear. In accessories, we were pleased with the progress as second quarter revenue increased double digits. Accessory sales were driven by continued focus on our three key hero handbag families, Varenne, Madeline, and Bonbon, which were updated for fall with rich seasonal colors and lavish textiles. We have been seeing a return to glamour with evening bags performing very well. Footwear sales also increased double digits. in the quarter driven by a recovery in formal footwear styles as people are returning to work, attending events, and enjoying special occasions. Within and casual footwear, we have been seeing a shift to more embellished styles.

In terms of brand new bold autumn 2021 campaign, time to dare.

Haley is the embodiment of the modern glamour that defines Jimmy Choo. Spirit that is at the core of the brand's DNA. Haley has over 40 million followers on her social media accounts.

With the return of Jimmy Choo's presence on the red carpet was extensive.

A few of the many celebrities wearing Jimmy Choo during the quarter included Billie Eilish, Jennifer Lopez, Gigi Hadid, Hailey Bieber, Zach Braff, and Nick Cannon. Our glamorous product helped contribute to a 17% year-over-year increase in Jimmy Choo's global consumer database. Overall, Jimmy Choo's double-digit revenue growth in the second quarter reinforces our confidence in the luxury house's future growth potential. Now turning to Michael Kors. Results were also ahead of our expectations, with revenue increasing 11% as we continued to execute against our strategic initiatives. These initiatives are centered on Michael's optimistic design vision which is based on timeless fashion and jet-set glamour. Looking at Michael Kors' key product strategies, we are first, capitalizing on signature. Second, growing MKGO, our active collection. And third, expanding our men's business. We believe both MKGO and MENZ represent incremental revenue opportunities that will bring new customers to the brand. Now, let me discuss the continued progress we have been making with our initiatives. First, signature is a core growth strategy, and we plan to increase this classification to 50% across all product categories. Signature has become an important foundation and driving force behind revenue growth in every region globally. As we have been building out the signature classification, it has been generating higher AURs and gross margin expansion. In the quarter, overall signature presented 39% of the assortment compared to 32% last year and drove sales across all categories. In accessories, signature penetration was even greater. Accessories retail sales increased double digits globally as consumers responded to our iconic signature styles, energized by flashes of color and fresh updates for fall. Turning to MKGO. Consumers' reaction to the newest launch of MKGo has exceeded our expectations across all product categories. For the fall, the MKGo line features our signature MK print with pops of orange and logo taping. We are attracting new and younger consumers with the innovative product amplified by a powerful 360-degree communication strategy. We continue to believe that MKGO is an incremental $250 million revenue opportunity that is a true product extension, not cannibalizing our existing businesses. Looking at men's, second quarter retail sales increased double digits globally as we focus on timeless essentials with a modern edge. Accessory sales were strong, driven by signature. We continue to believe that men's represents an incremental million-dollar revenue opportunity. Now, turning to brand awareness and consumer engagement. For fall, we continued our highly successful The I Must Travel campaign featuring Bella Hadid. The campaign returned to New York with the speed, energy, and optimism of the city is always an inspiration for Michael. During New York Fashion Week, Michael Kors was one of the top engaged brands on social media. Following Michael's highly successful 40th anniversary show, the Spring Summer 2022 Fashion Show was his first live runway show since the pandemic began. Set in New York City's landmark Tavern on the Green in Central Park, The show highlighted Michael's fashion innovation, which reflected urban romance. The show generated over 23 million views across social media platforms. The brand's presence at the Met Gala was also extensive, with Michael dressing celebrities including Shawn Mendes, Camila Caballo, Kate Hudson, and Regina King. In China, We continued our extensive marketing initiatives, including the launch of Club Cores, an interactive brand experience that fuses fashion and music. Unfilled high-energy event was held at the Chengdu Open Air Music Park and featured festival attractions and live musical performances. The star-studded lineup included performances by several of China's top pop artists and Michael Kors' brand ambassador, Wang Feifei. To extend the experience across China, Michael Kors hosted Club Kors takeovers at nightclubs in Shanghai, Beijing, and downtown Chengdu, where guests were able to watch the concert livestream. Club Kors' livestream reached over 75 million viewers.

In addition, Club Coors took over Michael Coors' team with an interactive experience to tour the venue virtually.

We believe this helped fuel Michael Coors' most successful T-Mall Super Brand Day. These marketing initiatives continue to highlight our brand pillars of speed, energy, and optimism. This helped contribute to a 21% year-over-year increase in Michael Kors global database, demonstrating the continued strength and desirability of the brand. Overall, we are thrilled with Michael Kors brand momentum and strong margin performance in the second quarter. The strategies we put in place over the past two years have been generating higher consumer engagement as well as attracting new and younger consumers. Our Jet Set vision focused on speed, energy, and optimism across product innovation, brand engagement, and customer experience is clearly exciting consumers. Additionally, we are continuing to elevate the brand positioning at Michael Kors, which is driving higher profitability. The strong consumer demand for the brand supports are tremendous in total. Capri Holdings' second quarter results exceeded our expectations, demonstrating the power of our three luxury houses and the execution of our strategic initiatives. Consumer desire for Versace, Jimmy Choo, and Michael Kors remains strong and we continue to grow revenue as well as expand gross margins. Given this momentum, we are raising full-year revenue and earnings guidance, even with the ongoing supply chain and COVID-19-related challenges. Looking forward, based on the strength of our brands and the success of our strategic growth initiatives, we remain confident in the company's ability to deliver multiple years of revenue and earnings growth. Now, before turning the call over to Tom, I would like to take a moment to welcome Josh Schulman to Capri Holdings. I have had the pleasure of knowing Josh for many years. He is an outstanding leader with broad industry experience and a proven track record of successfully operating and growing global fashion luxury brands. We do not believe we could have found a better leader and are thrilled to have him join our team. Importantly, Josh's appointment is part of a thoughtful leadership succession plan. Over the next year, Josh will serve as CEO of the Michael Kors brand before transitioning to CEO of Capri Holdings in September 2022. At that time, I will assume the role of Executive Chairman. My focus will be on our company's long-term strategy, future potential luxury acquisitions, and providing overall leadership to the Board of Directors. The board and I are confident in Josh's unique abilities to guide Capri Holdings through our next phase of growth. In the two months since joining Capri Holdings, Josh has begun to engage with the Michael Kors teams across the globe. He is rapidly immersing himself in the business and learning all facets of the brand. We look forward to his participation on our next earnings call when he can share his thoughts on Michael Kors' future growth opportunities. Now, let me turn the call over to Tom.

Thank you, John, and good morning, everyone.

Starting with second quarter results, revenue of $1.3 billion increased 17% versus prior year, exceeding our expectations.

Performance was driven by better-than-anticipated results across all three of our luxury houses. Michael Kors' revenue growth would have been evens which were driven by greater-than-anticipated supply chain delays and extended factory closures. Net income was $235 million, resulting in diluted earnings per share of $1.53. This was above our expectations, reflecting better-than-anticipated revenue, gross margin, and operating margin, as well as a lower tax rate. Looking at revenue by channel, total company retail sales increased approximately 20%.

These results were driven by robust e-commerce and store sales, both of which increased double digits. Wholesale also grew, but at a lower rate.

By geography, revenue remained strong and above our expectations in the Americas and EMEA, increasing 20% and 25% respectively versus prior year. In Asia, revenue was approximately flat due to the continued restrictions and regional restrictions in China.

However, revenue in mainland China increased during the quarter, even with the greater restrictions.

Turning to revenue performance by brand, Versace revenue was $282 million, a 45% increase the prior year and above our expectations. Global sales in our retail channel increased over 30%, with strong double-digit increases in both e-commerce and store sales. By geography, total revenue in the Americas increased approximately 80%. Revenue in EMEA increased approximately 50%, and revenue in Asia increased 4%. Versace ended September with a global luxury fleet of 211 retail stores, a net increase of five from prior year. For Jimmy Choo, revenue was $137 million, a 12% increase to prior year and above our expectations. Global sales in our retail channel increased over 20%, with double-digit increases in both e-commerce and store sales. Jimmy Choo ended the quarter with a global fleet of 237 retail stores, a net increase of 10 from prior year. At Michael Kors, total revenue was $881 million, an 11% increase to last year and above our expectations. Revenue growth would have been even greater if we had more product available to meet consumer demand. We estimate inventory constraints had a mid-single-digit impact on Michael Kord's second quarter growth rate. Global sales in our retail channel increased in the mid-teens with double-digit increases in both e-commerce and store sales. Wholesale revenue also increased over prior year, but at a lower rate. By geography, total Michael Kors revenue in the Americas increased 13%, and revenue in Indonesia decreased 3%, reflecting the more extensive regional restrictions.

Michael Kors ended the quarter with a global fleet of 823 retail stores, a net decrease of five from prior year.

Now, looking at total company margin performance, gross margin expanded 440 basis points to 67.6%, 390 basis points above our expectations. We were pleased to achieve gross margin expansion across all three of our luxury houses. This improvement primarily reflected increased full-price sell-throughs and select price increases at Jimmy Choo and Michael Kors. Operating expense as a percent of revenue was 49.1%, compared to 46.8% last year. On an absolute basis, operating expense increased approximately 23%, or $119 million versus prior year. This increase primarily reflected higher variable expenses, reinvestments in our business, and the unfavorable impact of foreign currency exchange rates, as well as lapping prior year COVID-related savings. Total company operating margin of 18.5% was 550 basis points above our expectations, primarily driven by better-than-expected gross margin expansion as well as expense leverage on higher-than-anticipated revenue. All brand operating margins exceeded our expectations. At Versace, operating margin expanded 920 basis points to 19.5%. At Jimmy Choo, operating margin was 0.7%. And at Michael Kors, operating margin was 25%. Our tax rate for the quarter was 3.7% compared to 20% last year. The lower rate primarily reflected a discrete item associated with a COVID-related tax change in Italy. As a result, we were able to release a portion of our deferred tax liabilities in the country. Now, turning to our balance sheet and cash flow. We ended the quarter with cash of 234 million and debt of 1.1 billion, resulting in net debt of approximately 900 million.

Total liquidity at the end of the quarter was 1.3 billion.

During the quarter, we repaid approximately 200 million of debt, as well as repurchased approximately $100 million of shares. Additionally, our board has authorized a new $1 billion share repurchase program. This demonstrates the strength of our free cash flow generation and balance sheet, providing additional capacity to return cash to shareholders over the longer term. Looking at inventory, we ended the quarter with $866 million, down 7% compared to prior year.

This is lower than we had expected, giving greater than anticipated supply chain delays and extended factory closures, which constrained our ability to deliver higher revenue.

Compared to our initial expectations, transit times increased even more during the quarter. In addition, factory closures in Vietnam extended significantly longer than anticipated, further impacting our inventory position. While factories have reopened, it will take some time before they return to full capacity. Going forward, we expect to build inventory to support sales growth over the remainder of the year. Now, turning to guidance. Looking at full year fiscal 2022, we are pleased to be raising guidance based on the underlying strength of our business. This updated guidance incorporates the greater than expected industry-wide supply chain challenges, including factory closures and extended transportation delays. These headwinds constrain revenue growth in the second quarter and are expected to continue for the near future. In addition to delays, we now expect the supply chain situation to result in nearly 200 basis points of higher expenses relative to our prior forecast in the back half of the year. However, the success of our strategic initiatives is currently offsetting these headwinds, therefore enabling us to raise our revenue, margin, and earnings outlook. For fiscal 22, we now forecast a pre-holdings revenue of approximately $5.4 billion, above our prior guidance of approximately $5.3 billion, reflecting the better-than-anticipated second quarter performance, as well as an increase in our third quarter outlook. Full year guidance assumes Versace revenue of approximately $1.06 billion, Jimmy Choo revenue of approximately $575 million, and Michael Kors revenue of approximately $3,765,000. The basis points of gross margin expansion. This reflects greater than anticipated benefits from our ongoing strategic initiatives, including stronger full price sell-throughs and select price increases. which more than offset the higher than previously expected supply chain costs, as well as the removal of remaining GSP savings. Given the delay in approval of GSP, we have removed it from our fiscal 2022 forecast. Turning to operating expenses, we continue to forecast operating expenses of approximately $2.6 billion. As a result, we now expect a full-year operating margin of approximately 18% above our prior guidance of 16%. For Versace, we now anticipate an operating margin in the mid-teens range. For Jimmy Choo, we now expect a slightly negative operating margin. And for Michael Kors, we continue to anticipate an operating margin in the mid-20% range. Turning to our expectations around certain non-operating items, we now anticipate net interest income of approximately 10 million, an effective tax rate of approximately 17%, and weighted average shares outstanding of 154 million. As a result, we now expect to generate diluted earnings per share of approximately $5.30 per fiscal year. We forecast Versace revenue of approximately 235 million, Jimmy Choo revenue of approximately $145 million, and Michael Kors revenue of approximately $1.08 billion. We now anticipate our third quarter operating margin will be approximately 20%. This reflects gross margin expansion with the benefits of our ongoing strategic initiatives more than offsetting approximately 200 basis points of higher supply chain costs relative to our prior forecast in the quarter. Operating margin also includes incremental investment in marketing, e-commerce, and regional growth initiatives to support revenue growth. For Versace, we anticipate an operating margin in the low double-digit range. As a reminder, Versace reports in a one-month lag, and their third quarter does not include December, their single most profitable month in the year. For Jimmy Choo, we expect an operating margin in the negative mid-single-digit range. And for Michael Kors, we anticipate an operating margin in the high 20% range. Turning to our expectations around certain non-operating items, we forecast net interest income of approximately $4 million, an effective tax rate of approximately 14%, and weighted average shares outstanding of $154 million. As a result, we expect diluted earnings per share of approximately $1.65. In conclusion, we are pleased with our second quarter results and the strong momentum of the business, particularly in the face of greater supply chain challenges. This performance reflects the strength of our fashion luxury houses and the execution of our strategic initiatives. As the world emerges from the pandemic, we remain confident that our three brands, Versace, Jimmy Choo, and Michael Kors, position Capri Holdings to achieve meaningful long-term revenue and earnings growth. 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. In the interest of time, we ask that you please limit yourself to one question and one follow-up question so that all may have a chance to participate. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Kimberly Greenberger with Morgan Stanley. Please proceed with your question.

Okay, great. Thank you so much. Congratulations on the great momentum in your business. And obviously, as you indicated, John and Tom, the inventory constraints, particularly at the Michael Kors brand, prevented, I think, even greater sales momentum. I'm wondering if you can just talk to us about the ability to get back in stock, and when do you think you'll have an opportunity to get sort of into an inventory position at the Michael Kors brand that you feel is a really good inventory and stock position? And any... Any worries or concerns as we head into the holiday season about any particular categories or areas where you feel like you wish you had a little bit more inventory?

Good morning, Kimberly, and thank you for joining us on that question. I'm going to apologize to everyone on this call. Unfortunately, there is some construction going on on the floor above us, so we're going to have a little bit of a COVID situation where we can't control some hammering. I apologize. As it relates to inventory, I'll divide it into two. I'll talk about kind of the current situation, holiday, and then I'll let Tom take on the longer-term perspective. First off, we're extremely pleased with how our results turned out for the quarter across all three of the luxury houses. And obviously, in particular, Versace was really extraordinary. And we continue to believe that the strategic initiatives that we put in place at Versace, Jimmy Choo, and Michael Kors, if you recall, when the pandemic broke, one of the first things we said is we weren't going to change what our strategic initiatives were. And in fact, we were going to continue to really focus on those as our guiding lights. So I think that's proving to be a smart decision on our part and our executive teams around the world, and I want to applaud them because they are all really implementing the great results that we're having. As it relates to inventory, the biggest inventory issue is Michael Kors, and it is global because the The supply chain issue is one that's quite challenging, dominantly with shipping product around the globe. So it is not just a North America issue. It's impacting us in all regions of the world.

And let's just first start with a tie-on to our delivery on a global basis. sometimes a little bit more than that.

And then, of course, we had the issue with Vietnam shutting down, which we did not anticipate in our planning, which we couldn't have. And that has, while Vietnam has reopened, it's going to take time for these factories to reach full capacity and then get back into a a cadence that will really fill our supply chain needs.

So I would say that we go into the fiscal third quarter, calendar fourth quarter, with lighter inventory than we would have liked to have had.

That being said, you can see by our forecasts, we've raised our guidance. And what we're seeing is we're just selling through The products that we have, the customer demand is absolutely outpacing what our inventory is. One of the, if you can call it saving graces, and I talked about this in the last two calls, is we took a position some time ago to reduce our promotional cadence, regardless of what our competitors are doing around us. uh stuck to that and and aur's are higher uh and and our conversions are higher and and all of that is turning into higher revenues at higher gross margins which is flowing right through to the bottom line so i think we feel uh that we will we you know meet our our expectations for the holiday season i would say the consumer is quite strong uh not just in north america but in europe and and Even in Asia, where in Asia the bigger issue is just that are continuing to happen in that region, although it does seem to be in Japan, which is one of our largest regions in Asia, starting to kind of mitigate itself and hopefully we'll see a more normalized return over the balance of this quarter and certainly into our fourth quarter. And so we're encouraged by what we think will begin to happen in Asia. as we've seen in America and in the EMEA. So as it relates to holiday, we will not be in the inventory position that we would have wanted to be in. That being said, we do have inventory that we believe is going to really generate the revenues that we've forecasted and meet the consumer demand that we're going to be able to service given the inventory levels we have. Additionally, we've flown merchandise here, you know, knowing that there was that delay, as I said, between 45 and 60 days. And so we've got inventory here in the right places, in the right holiday gifting categories in particular. So I think we feel good about that. And, of course, Versace and Jimmy Choo have been less affected by this for a variety of reasons. So we feel that we're in a very good inventory position with both of those brands. And so we're looking forward to a very robust holiday season, really with the backdrop that the consumer is healthy, that the consumer is out and engaging in social activities. And we think that they're going to be looking forward to really strong gift-giving and enjoying parties with their families. Let me now turn it over to Tom to talk about the little bit longer-term situation as it relates to supply chain.

Sure. So as we look at the longer term, Kimberly, we do expect these delays to continue into fiscal 2023. We don't believe they're a short-term issue, but longer term, we do believe the situation will begin to normalize. In the meantime, we are working on a number of initiatives, and John mentioned some around holiday and airing some product over, but also other initiatives to help mitigate the situation in terms of how and where we produce ocean shipping methods and and strategic contracting with our carriers. As we look at the rest of this year, we do expect to be building inventory for Michael Kors and the group overall as we work through this situation. We don't believe the factories will continue to be an immediate issue. They have reopened and are building capacity, but we do believe the extended delays will continue. Setting the prepared remarks, this is a 200 basis point impact versus our prior expectations in the back half, and it's really the power of our three brands that is allowing us to offset this. So it's great consumer desire, and we have the continued ability to offset these costs with pricing increases.

Yes, and on that last note, Kimberly, as you know, we started to raise prices about two years ago, in particular in Michael Kors and just recently started in Jimmy Choo. And that was something we were doing regardless of the supply chain situation. So we've been able to mitigate costs just because that was a strategy that we had. And I've said in previous calls, we're going to continue to do that. Michael Kors is going to become more expensive, and we think that's the right positioning for our brands and that will be a strategy regardless of whether there was a supply chain issue or not. Okay, thank you very much, Kimberly.

Thank you so much.

Thank you. Our next question comes from the line of Ike Borochow with Wells Fargo. Please proceed with your question.

Hey, John and Tom, congrats, and Josh, if you're there, welcome. I guess, John, it's a It's a good question to ask, I guess. But I think four months ago, you gave us some building blocks for next year. I believe you were $5.9 billion and a 16.5 margin. You're already well above that, the 16.5, on a much lower base of revenue. So I know you're probably not going to want to get into specifics on next year, but can you kind of walk us through, you know, how do we think about the business from here? Should there be a step down in margin, or are you kind of creating a new base for the overall business as you guys continue to outperform? Good morning, and thanks for the question, Mike. I think it's too early for us to really be talking about our fiscal 2023 projections. Obviously, we are exceeding our fiscal 2022 projections and forecasts, which gives us, obviously, again, an opportunity a real foundation to continue to build upon where we are today. I think the one area we feel comfortable in talking about, and we've said it on previous calls, is we do believe our gross margins will expand approximately 100% over what Tom gave for our annual guidance. So we feel comfortable in saying that that is an objective that this company feels that we will achieve. Again, I just think it's early to be talking about where we will land in revenues and, more importantly, operating margin, because, as I said in the last few calls, we're going to continue to invest in particular in marketing and other initiatives in the company, which will drive revenues. And if we drive revenues and we have substantial operating profits, that will drive EPS revenues. And we think that, in particular, Versace and Jimmy Choo have a long, long way to go in terms of their growth. So we don't want to underfund those businesses. And then, additionally, you know, Michael Kors, clearly the consumer is engaging with our brand. When you look at the database growth of 21%, that's really showing that we are attracting a new customer, a younger customer, and we're engaging with existing lap customers at a rate that we've never seen before. So we want to invest with Michael Kors as well. So I think, again, it's a little early for us to be discussing that, but, you know, clearly we are doing better than we had anticipated. We think that that bodes well for a setup for our fiscal 2023. Thank you, Ali. Thanks. Oh, I'm sorry. I just want to make sure I was clear. It was gross margin of 100 basis points increase. I apologize. I might have said the wrong thing. Gross margin, 100 basis point increase. Thank you, Ali.

Thank you. Our next question comes from the line of Omar Saad with Everett. Proceed with your question.

Thanks. Good morning. I'll add my congratulations. Great results. Maybe you guys could talk a little bit more detail about how the e-com and digital business has trended, some of your key priorities there and initiatives, and how you expect that to progress as the stores continue to reopen and the role that the digital and e-com will play for your brands. And then also maybe if you could give us an update on watches. I'd appreciate it. Thanks.

Certainly.

Thank you, Omar.

You know, what's been quite interesting is even as we've opened our stores, our e-com business continues to grow, and it's shown sequential improvement, which is really not exactly what we thought would have happened, which is exciting. And, again, I think this is just coming from us really building our database and acquiring new consumers who are new to the brand. Many of those are younger consumers and they're more digitally native. That being said, we're seeing store traffic sequentially improve. It's getting better every single week as people are returning to shopping as a as a way to have fun and a way to be social. As a matter of fact, Josh and I were in Roosevelt Field shopping mall yesterday at 12 o'clock in the afternoon, and we couldn't believe how many people were in the mall, which was quite exciting to see. And I think we feel confident that stores will continue to return as a very important core part of our business. And with our digital tactics, our marketing tactics, our ability to communicate with our existing customers and our lapsed customers, I think we feel very strongly that the e-commerce business will continue to grow at a very, very fast rate. And again, you've seen that across all three of our brands. And we're We're absolutely focused on that. We believe it's not only a revenue opportunity for the company, but we think it's one of the single most important parts of our marketing is how we're communicating to our consumers digitally. Both those are consumers we want to acquire as well as consumers that we have with us today. As it relates to watches, again, we're very pleased. The watch business continues to grow. It's not growing at the same exact rate it was when we saw that huge kind of jump during COVID, but it's still growing very nicely. And we see, again, many new customers coming into the store that have never owned a Michael Kors watch before. Our business has gotten also very strong in our department store channels with watches as well. So it's a category that we're pleased is returning to growth.

And in terms of investments in digital and e-commerce, Omar, we're making significant investments in digital analytics and expanding our capabilities across our brands and the company as well. And looking at the e-commerce platforms, also looking at common state-of-the-art platforms and new tools and capabilities across all three of our brands. Of course, this extends into Omni, where we've spoken about clienteling before. and the expansion of Versace's Omni capabilities, for instance. So this is a very, very key focus area for the company.

Thank you, Omar. Thanks, Tom. Thanks, John.

Thank you. As a reminder, ladies and gentlemen, please limit yourself to one question. Our next question comes from the line of Oliver Chen with Callen & Company. Please proceed with your question.

Hi. The MicroCore signature print execution has been very innovative. What do you see happening there? And as you think about price increases, how would you balance just offering the consumer strong value against where you see opportunity? I would also love a quick update on Versace men's and handbag penetration. You've made a lot of good strides there as well. Thank you.

Thank you, Oller. As it relates to our price increases at Michael Kors, as I've said to you, previous calls, we were underpriced as it relates to our brand on a global basis. So we are rectifying that situation, and we may end up being higher than competitors over time because we think that Michael Kors is led by the man. He is is a a luxury runway designer uh we are carried in the finest stores in the world we are carried we're located in the finest locations in the world and we think that our uh brand needs to move more into the luxury space so for us value is created not only just in in the price product relationship but also in how the brand is perceived and how we create the brand engagement with consumers. So again, I think you will continue to see us move in that direction. And I've said that we will raise prices all through the balance of next calendar year. We'll see how the consumer responds to that. And if we see good response, then we'll carry on with that philosophy on a go-forward basis. So Michael Kors is clearly going to continue to move into the luxury category. Signature, as we've said, we want it to be about 50%. of the total business inside of the company. We're on a perfect trajectory to get there. That gives us an opportunity to create higher AURs because we take less markdowns in those areas. It's reduced the amount of fashion flow that we've had into the stores. We still create fashion around signature, but it's just not at the same pace that we were doing previously. We obviously shrunk the line sizes during COVID, and that seems to have been no issue. as it relates to the consumer's desirability for our product. And so we see that going on very steadily going forward. And then in terms of Versace men's, obviously it's a huge part of the Versace business, and in fact the largest part of the Versace business when we bought the company. I think we've done an amazing job. I have to thank the entire team there for their initiatives, of course, led by Donatella. We are starting to become a larger women's business than we are a men's business, and that's only natural. That's where the company should be versus where it was historically. In terms of leather goods, we're much further along in terms of our development. We now have three very strong pillars with La Greca, Virtuous, and La Medusa. We did not think that we would be sitting here at this moment in time saying that we had three very strong accessories offerings for the consumer and that they would be responding in the way that they are. In fact, in some of the cases at Versace, we also ran low on merchandise, and that was just sellout being much quicker than we had anticipated. So we think that that really bodes well for our ability over the long term to have Versace led as a leather goods house and reach a billion dollars of its revenues in leather goods. Thank you, Oliver. Best regards.

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

Great. Congrats on the nice print. Thanks, Beth. Maybe, John, as we think about potential structural changes post-pandemic, a couple things. I guess any change you're expecting in the overall growth for TAM, for handbags and accessories, do you see any constraints to a full recovery of your travel business over time? And then, Tom, if we tried our best to isolate the higher penetration of e-commerce, which I know is higher margin, is there any way to think about this piece alone, what you think this structure really adds to the company's margin profile post-pandemic?

Matt, first off, thank you for your compliment under the nice print. Your question about handbag and accessory, we couldn't really hear you.

Yeah, so a couple things that I was focused on. Is there any change you're expecting for the growth rate of handbags and accessories or the overall TAM exiting the pandemic? And then the second part was, is there anything preventing a full recovery, in your opinion, of the travel business over time?

Right. Okay, so in handbags and accessories, I think we saw it right through the pandemic, in particular the luxury goods industry. a part of handbag and accessories, which I believe all three of our brands are in. uh has grown i mean that market continues to grow yes there was a small setback when all stores were closed etc but this this category continues to be uh a representation i think for the consumer of their fashion style um and and and the way that they want to express themselves so we saw that that did not really uh change uh except you know during the real hard lockdown periods So we don't see that there is going to be a change in trajectory. We think on a global basis, again, accessories will grow somewhere in the 6%, 7% range change by marketplace. So we feel very comfortable with the handbag and accessories luxury market growth. And I would add, I think we're all surprised at how strong the growth has been in North America. And it's not just us. All of our competitors, European and America, have shown those same types of results. So it really bodes well, we think, for the future. As it relates to travel, I would say there's two parts to the answer to that question. First is the tourists coming to markets. We are beginning to annualize in a sense that they did not really – there was some small return to Europe this year where it's a very high penetration. There's been no return to Japan and Korea, which were typically higher penetration markets. So that, in a sense, is behind us, and we are not forecasting for any type of a strong return in that tourist market. We do have some tourists that we believe will be returning to the U.S. market shortly when the borders are open, and we think that will be a positive for us. So in our forecast, we don't see tremendous movement our trajectory, at least in next fiscal year. The second answer to that question is we, as I think I told you previously, very substantial business in travel retail. That would be airports and duty-free shopping, et cetera. And again, while there has been a very strong resurgence in that business inside of China, which was unfortunately slowed during July and August during some of the some of the issues that China faced. We also are not forecasting for that business to recover in our fiscal 23. We think that's going to be further out, more into our fiscal 24. We would look for strong recovery in global travel and tourist travel and how that would impact not only our own stores, but travel retail, and then, of course, big key department stores in Europe where those are substantial businesses for us, which will be a very big uptick for us in that period of time.

With regard to the e-commerce question, Matt, if you look at history, we've now doubled e-commerce penetration. It's about 13% pre-COVID, and it's now in the mid-20s expected for this year. And as we noted at Investor Day, we expect that to continue to grow into the mid-30% range as a percent of our retail sales. So when we look at it, Jimmy Choo and Versace's margins have always been very positive and strong compared to retail stores and e-commerce, just as a function of their luxury pricing and positioning. Michael Kors has seen really a sea change over this last couple of years. As the penetration has increased and revenues increased, e-commerce margins have moved to above store-level margins. And we would expect... that this to be one of the supports for our gross margin expansion over time. As John mentioned, we would expect continued expansion, 100 basis points next year. And when we look at the components, it's continued full-price sell-throughs, building out our accessories businesses at Jimichu and Versace, growing in Asia, which is structurally higher margin, and, of course, this e-commerce piece. So I view it in that context of supporting the overall corporate goal. Thank you, Bob.

Thank you. Our next question comes from the line of Paul Lohuis with Citi. Please proceed with your question.

Hey, thanks, guys. I'm curious if you can talk about that gross margin upside, which brands are the largest increase, and what were the biggest surprises to you and the drivers of that upside? And then, just second, curious how your wholesale partners are thinking about the spring season from a unit perspective, and what are you going to be able to deliver to them, just given the supply chain constraints relative to what they would like to order? And are you seeing cancellations, you know, given the 45- to 60-day delays? Thanks, Guy.

Why don't I take the wholesale part first, and then I'll turn the gross margin over to Tom. Our wholesale partners around the globe are experiencing very strong sell-throughs, sell-throughs that date back, I'd say seven or eight years ago. So really strong sell-throughs. And it's in accessories, it's in footwear, it's in women's ready-to-wear. So we cannot get enough merchandise to our partners, unfortunately, at this moment. There's been no cancellations. Everyone understands what the situation is. and will basically be taking any of the merchandise as it arrives. We did fly, as I said earlier, most of our seasonal holiday gifting businesses here. So anything that was very seasonal-oriented, we wanted to make sure it was here for the stores because it obviously becomes more obsolete if it's not here during the holiday period of time. So we feel good about that. We are going to – be in a better position in Q3, Q4. Our Q4 as an inventory relates, as Tom said, you will start to see inventory build. So we have kind of tactically mapped out what is happening with this delay, and it's really more of a transit delay than anything. There was a piece in Vietnam, but most of this is a transit delay. And so we've got a lot of that put into our projections. And I would say that, like ourselves, our wholesale partners are planning the businesses up. We're having a great fall season. and therefore people are super optimistic about what is in front of us, in particular for next year. And again, I think that first and foremost comes to incredible product that Michael and that Donatella and Sandra are really putting together with the design teams. I think our marketing campaigns have been extraordinary. You know, if you look at whether it's Dua Lipa at Versace or Hailey Bieber at Jimmy Choo or Bella Hadid at Michael Kors. I mean, we've got powerful influencers who are associated with our brands, who want to be part of our family, and are really helping us communicate that message around the globe. And you look at the incredible events that we're doing with all of our brands in China. and how our brands are resonating there, and growth opportunity. I want to remind everyone on this call, we need to double our business in China with all of our brands. We are under-penetrated by 50% to all of our competitors. So we have huge upside for ourselves there. So I think the way we look at the situation is it's quite optimistic. And I believe our partners are looking at it in the same vein.

And with regard to the second quarter gross margin, all three brands exceeded our expectations, Paul, and they exceeded them in a meaningful way. So we were really pleased to see every house perform quite well.

And if you look at the themes across it, the first and foremost is full price sell-through across all businesses.

is driving great results. Michael Kors and Jimmy Chu, we have the pricing benefit. And then Versace, we're seeing continued traction in accessories as that category, which is quite important for the future, continues to expand. They're doing a great job there. John mentioned signature at Michael Kors, which also expanded, and that's also supporting the full price sell-through for that brand. So in general, all three were well ahead of expectations. Thank you, Paul. Thank you, guys. Good luck.

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

Great. Thanks, guys. Congrats on really great results. John, congrats on the succession planning and honestly all that you've built here. And if you're listening, congrats, Josh. Looking forward to having you back at the party. I'm sure you missed us all. I'm curious if you have any updated views on what you think the industry level promotional cadence will look like into next year. I know we have all the constraints right now.

But just to kind of echo your thoughts around holding price points, if and when others start promoting again, I would be curious to hear your view of the broader industry level.

And then, Tom, if I can just ask any thoughts on the timing of the new share repurchase, just given what seems to be a cheap valuation and ongoing clear path and visibility for you guys. Thanks a lot.

Thank you, Stephen. Appreciate those kind remarks, but not a topic we spend a lot of time on in this company any longer, and maybe that's naive. But first off, Versace, Jimmy Choo, that's not a conversation. We are pretty strict around what we do there. And as it relates to microcores,

where a substantial part of the microcourse business is done outside of the United States, both in Europe and in Asia.

Again, those are not conversations that are really relevant.

As it relates to North America, it is relevant to make more money, and we've shown that.

We've shown that we make more money on lower sales than we did on having higher sales and to chase our own selves or other competitors, whichever one you want to call it. So we've made the decision. Prices are going higher. We're going to have less promotional activities, and we're going to let the consumer respond to that. We're also operating on much lower inventory levels. You will see inventories rise over the next two quarters, and more of that, just as a preview, is going to be in some of our core products. where if we get them here earlier, we don't have to worry about this delay issue and it will substantially reduce our costs over time. So we might hold a little more inventory in particular on basic product where we're just running reorder businesses And let that flow through as this supply chain issue kind of works itself out for what we think will be a six to 12 month period of time. When I say that, really starting from January 1st. So we think it's going to take most of next year for that to work itself out. and we've got some ideas on how to mitigate those costs. Some of that will be holding a little higher inventory, but really on core replenishment items. So in our mind, we're going to stick to our guns on what we said, and we've already seen other people starting to promote much more aggressively than we are, and that's okay. And if they do, that's going to be their strategy and the We wish them well, but we're not going to start to go down that path. We know where that leads, and that leads to typically lower gross margins and trying to sell too many units and trying to chase too much business, and that usually is something that long-term doesn't end the way that you want it to. So our perspective is, Stay focused on the path that we have been going down, and we think we'll get the rewards from that with the consumer.

And with regard to timing of share repurchase, I'd just like to put a little context of our overall capital allocation policy and the strength of our balance sheet and free cash flow, which is the reason we put in the new billion-dollar share repurchase program. As a matter of fact, year-to-date generating free cash flow is about $350 million. So our first priority remains paying down debt. In the quarter, we paid down $200 million, and we'll continue to do so to further strengthen our balance sheet. We do plan to return cash to shareholders in the form of share repurchase. We think that's important. We now have the broader capacity to do that over the longer term, but we'll also be active in the nearer term. And finally, luxury acquisitions are the last priority, where as things come up for luxury European acquisitions, we will look at these, and that would be another use of cash or balance sheet. So Q2 is a great example of this balance, where we paid down $200 million of debt and also repurchased $100 million of shares.

Thank you, Simon. Perfect, guys. Thanks a lot. Congrats again. The best of luck for holiday. Thank you.

Thank you. Our last, our final question for today will come from the line of Aaron Murphy with Piper Sandler. Please proceed with your question.

Great. Thank you. Good morning and thanks for speaking me in my question. John is around Versace. I have a two part question first. I mean, you put your long term margin target for Versace just in the first half of this year. But if I kind of pencil out the guidance, it implies that the back half EBIT margins go down to the low teens. So just curious what's driving that forecast. Maybe that's for both you as well as Tom. And then secondly, any updates to the search process around Jonathan's replacement at Versace? Thank you so much.

I'll take it. That's half and half. I'll take the Jonathan piece. First off, we want to thank Jonathan for all of his efforts. Prior to us acquiring the company, he did an outstanding job trying to house.

And I think we told you we walked away from $150 million worth of multiple other lines that were in the company, just shut them down.

We have spent hundreds of millions of dollars in refitting, rebuilding, opening new stores.

We believe in luxury.

I told everyone when we bought Versace, this takes time. But if you invest properly and you believe in the future of luxury, the returns are really spectacular. look at some of our competitors and how those returns have turned out and how the revenues are looking over time. So I think we've really positioned Versace to be set up for, at minimum, hitting our $2 billion goals and to hit our long-term margin targets. And we will absolutely find a new leader. It is going to be one of the most sought after positions in the luxury industry. We take us north of six months till we have someone into that role. Jonathan's with us until March.

And in the meantime, I'll be working

closely with Jonathan and the management team to continue to achieve our strategic objectives. And by the way, we have an outstanding management team at Versace. So I'm really proud of the teams that are at Versace, at Jimmy Choo, and at Michael Kors. I think in all three companies, we have some of the best executives, not only in our corporate offices, but in our store locations. They're just really great people and dedicated and super enthusiastic. In terms of the margin targets, I'm going to let Tom speak to that, but just know we're super pleased. Of course, margins are coming in a little higher than we had anticipated. Some of that's a mix between, you know, how we're driving the accessories business versus ready-to-wear. And even though it may not have been what we had anticipated, and as well as our e-commerce business is really outstanding at Versace. So some of those things are really helping us drive the business, but we're going to continue to invest. We're not going to step back and think that we have completed our mission. is still a long road in front of us to get to $2 billion, and you have to spend money to do that, and you have to believe in the development of marketing product and retail stores and your e-commerce platforms to be able to reach those types of targets. So we will continue to invest in Versace, but let me let Tom talk specifically about the third and fourth quarter.

I expect margin expansion in Versace, both Q3 and Q4 versus prior year.

So Versace is still building and expanding forecast and now expect the mid-teens to be pleased with the progress of Versace.

When you look at the quarters, just kind of walking through it, Q3 is a seasonally lower operating margin quarter for Versace.

It does does not include December, which is the most profitable month of the year for the brand because of our lagged reporting.

And it's also the lowest absolute sales quarter, so we're seeing the leverage. For both Q3 and Q4, we're also increasing our investments in brand growth. We're ramping up stores to be fully open versus the prior year, so we have full store costs. And we're also lapping some COVID-related savings that we were able to achieve and garner this year, on both payroll and rent. So those are some of the puts and takes, but really we're still growing versus prior year. Very pleased with that trajectory and pace and very pleased with the overall brand position.

Thank you very much, Erin. I'd like to thank everyone for joining us today. I'm sorry we ran over a little bit, but hopefully you heard some interesting information about Capri Holdings and how we intend on continuing on our next call and be talking about the continued success of the Michael Kors brand. Thank you, everyone, and have a great day.

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