Capri Holdings Limited

Hello, and welcome to the Capri Holdings third quarter fiscal 2022 earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Jennifer Davis. Please go ahead.

Good morning, everyone, and thank you for joining us on Capri Holding Limited's third quarter fiscal 2022 conference call. With me this morning are Chairman and Chief Executive Officer John Eidel, Chief Executive Officer of Michael Kors, Josh Shulman, and Chief Financial and Chief Operating Officer Tom Edwards. Before we begin, let me remind you that certain statements made on today's call may constitute forward-looking statements. which are subject to risks and uncertainties that could cause actual results to differ from those we expect. Those risks and uncertainties are described in today's press release and in the company's SEC filings, which are available on the company's website. Investors should not assume that the statements made during this call will remain operative at a later time, and the company undertakes no obligation to update any information discussed on the call. In addition, certain financial information discussed today will be presented on a non-GAAP basis. These non-GAAP measures exclude certain costs associated with COVID-19 related charges, long-lived asset impairment, ERP implementation costs, the pre-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 to our website earlier today at capriholdings.com. Before we begin, we'd like to announce we will be holding an investor day after our fourth quarter fiscal 2022 earnings call to provide an update on our long-term outlook. Now, I would like to turn the call over to Mr. John Eidel, Chairman and Chief Executive Officer.

Thank you, Jennifer. Good morning, everyone. We continue to be encouraged by the ongoing momentum of Capri Holdings as we execute against our strategic growth initiatives. I'm extremely pleased with each of our fashion luxury houses robust holiday results. Sales trends significantly exceeded our expectations as consumers responded to compelling product offerings from Donatella Versace, Sandra Choi, and Michael Kors. Versace, Jimmy Choo, and Michael Kors continued to resonate with consumers as evidenced by the 11.5 million new consumers added across our databases over the last year. Capri Holdings' strong holiday results are a testament to the strength of our brands as well as the hard work and dedication of all our employees around the world. I am especially pleased that we were able to deliver these results while navigating the ongoing headwinds associated with the pandemic, including regional restrictions and supply chain challenges. Looking forward, as the world continues to recover from the impact of the global pandemic, we remain confident in our future growth potential. Now, Turning to third quarter results, we were pleased that revenue, operating margin, and earnings per share all exceeded our expectations. Total revenue increased 24%, reflecting better than anticipated results at all three brands. This represents a sequential acceleration relative to the second quarter on both a one and two year basis. Gross margin continued to expand even with greater than anticipated supply chain costs. Operating margin of 22.3% was above our expectations. As a result, earnings per share of $2.22 was better than anticipated. Looking at group revenue trends by geography. In the Americas, revenue growth continued to significantly exceed our expectations, increasing 26% and would have been even greater if not for inventory constraints. In EMEA, revenue increased 35%, also above our expectations with growth across all houses despite increased restrictions. in certain countries. The strong momentum in the region was driven by robust domestic consumer demand as international tourism has not yet recovered. In Asia, revenue increased 3%, reflecting improving trends in Japan, Korea, and Southeast Asia. This was partially offset by trends in mainland China where revenue declined due to store closings, travel restrictions, and select city lockdowns. Now turning to third quarter performance by brand. Starting with Versace, results significantly exceeded our expectations once again. Revenue increased 29%, demonstrating the momentum of the brand and the success of our strategic growth initiatives. We saw strength across all product categories as the brand emphasized the very Versace look by pairing the latest runway styles with luxurious accessories, footwear, and statement jewelry. Runway styles featured our new brand code, La Greca, which is off to a strong start. Our signature code anchored itself as a new pillar and accounted for 17% of sales across all product categories. Turning to accessories, which are a key component of our growth strategy, retail sales nearly doubled versus prior year. Importantly, we saw strength across all three of our pillars, La Medusa, La Greca, and Virtus. With the three iconic pillars now in place, we are making significant progress in our goal to expand accessories revenue to $1 billion over time. We are more confident than ever in our ability to position Versace as a leading luxury leather house. Footwear also performed well as we continued to build our core offering focused on our iconic brand codes. In the third quarter, women's footwear sales at retail increased strong double digits as we gain authority in women's luxury fashion footwear. Men's and women's sneakers also continued to perform well, with ongoing strength in tri-Greca and la-Greca styles, as well as a positive response to the new men's Greca labyrinth trainer featuring a chunky Greca pattern sole. Additionally, we saw strength in men's and women's ready-to-wear, with retail sales up double digits. We were especially pleased with the positive response to the new LaGreca signature pattern. We also continued to drive sales as we expand our core lines, which incorporate iconic house codes to broaden Versace's reach. Now turning to brand awareness and consumer engagement. In October, Versace launched two localized campaigns in Asia, as the brand increased its emphasis in the region. The first was in China, featuring our brand ambassador, Betty Wu. The Chinese singer and actress has over 25 million followers on her social media accounts. The second was in Japan, featuring Japanese model and actress Nana Sina. The 360-degree communications focused on the La Greca signature pattern with a vertical maze inspired by our iconic Greco motif as the backdrop. Additionally, during the quarter, Versace opened pop-up shops in key cities throughout China. The immersed pop-ups were designed to portray the iconic Greco motif and featured the new season's signature products. For holiday, in celebration of winter sport, the brand showcased bold styles with glamorous gift ideas. The campaign featured key house pillars La Medusa, La Greca, and Virtuous in very Versace fashion. This was Versace's top performing holiday campaign to date, generating tremendous engagement, new consumers, and strong revenues. These powerful initiatives, among others, helped to drive a 30% year-over-year increase in Versace's global database. Overall, Versace's third quarter results speak to the strength of the brand and reinforce our confidence in our ability to grow the house to at least $2 billion in revenue. With the launch of LaGreca, we now have the key building blocks in place to realize the full potential of this powerful brand. We are more optimistic than ever about Versace's future growth opportunity. Moving to Jimmy Choo, results were significantly ahead of our expectations, with revenue increasing 47% as we continued to execute against our strategic initiatives. Our overarching strategy is grounded in reinforcing the brand's glamorous DNA across everything we do. Jimmy Choo epitomizes glamour every day, anytime, and anywhere, from formal to casual, across accessories and folklore. In accessories, we were pleased with our progress as third quarter revenue increased strong double digits. Accessory sales were driven by the continued focus on our three key hero handbag families, Varenne, Madeline, and Bonbon. Evening bags with jeweled accents and standout embellishment also performed very well. Footwear sales increased double digits in the quarter, driven by a recovery in dress footwear styles as people engaged in social activities, enjoyed special occasions, and celebrated the holidays. Casual styles also performed well, from shearling slippers embellished with delicate pearls and crystals to combat boots with crystal embellishment. We continue to see growth in sneakers with positive consumer reaction to our new Memphis trainers. Now turning to brand awareness and consumer engagement. In October, Jimmy Choo launched an incredibly successful limited edition Chasing Stars collection in collaboration with New York-based artist Eric Hayes and curated by Japanese fashion icon Pogi. The collection fused East with West and high fashion with street culture, offering a modern interpretation of glamour. In addition to the unisex capsule of accessories, footwear, and apparel, the collaboration featured co-branded bare brick collectible figures. Pioneering the world of NFTs and collectibles, the capsule melded physical products with virtual. The NFTs and collectibles sold out within one hour of launching online. To bring these items to life, Jimmy Choo held store takeover events and launched pop-up shops in Asia. Numerous Chinese celebrities, including brand ambassador Victoria Song, attended events at the boutiques, generating social media excitement. Hosts by celebrity influencers and fashion accounts, helped the hashtag Jimmy Choo Eric Hayes gain over 65 million views. For a holiday, our consumer communication campaign once again featured Hailey Bieber, who is the embodiment of the modern glamour that defines Jimmy Choo. A continuation of the autumn Time to Dare campaign, Hailey Bieber is once again on top of the world, living the life she dares. The campaign transitioned from day to night celebrating the return of glamour as Haley shined in accessories and footwear that were created to make a statement. Our engaging marketing combined with glamorous product helped contribute to a 23% year-over-year increase in Jimmy Choo's global consumer database. Overall, Jimmy Choo's strong revenue growth and operating margin expansion in the third quarter reinforces our confidence in the luxury house's future growth potential. We are encouraged by the progress we are making towards our goal of growing revenue at Jimmy Choo to $1 billion over time. Now, turning to Michael Kors, results were also ahead of our expectations, with revenues increasing 20% as we continue to elevate our product and our brand. During the quarter, global AURs increased in the high teens versus prior year. Signature remains a core growth strategy, and we continue to believe penetration will eventually grow to approximately 50% of our overall product assortments, which will drive higher AURs and margins. In the quarter, Overall signature represented 41% of the assortment compared to 35% last year. In accessories, signature penetration was even greater. Accessory sales in our retail channel increased double digits globally as consumers responded to fresh updates for holiday, including new novelty signature techniques, such as a pleated and color pop diagonal logo, Key collections for the season included the Carly Satchel, Greenwich Crossbody, Soho Shoulder, and Hamilton Legacy Satchel. Chain-linked details, logo taping, and high-shine studs infused the collection with a modern meets classic Coors appeal. Moving to footwear, we saw strong performance in boots and booties. featuring iconic branding elements and signature detail. Fashion active also continued to perform well, driven by seasonal updates featuring signature color combinations. Similarly, in women's ready-to-wear, signature logo styles were among the top performers. We also saw a strong consumer response to fashion outerwear. men's remains one of the strongest performing categories in retail and we remain enthusiastic about our opportunity to expand the accessories collection growth in the third quarter was led by signature product with gifting backpacks small leather goods and outerwear performing exceptionally well now turning to brand awareness and consumer engagement in october michael kors partnered with the James Bond film franchise to launch the brand's first global collaboration in partnership with the film, No Time to Die. For the debut of the collaboration capsule collection, we hosted a series of global getaways in glamorous destinations around the world. Action-packed trips to Miami, Florida, Reykjavik, Iceland, and Hainan Island in China Each showcased their own Bond-inspired highlights. Additionally, guests at each destination took part in a spirited TikTok challenge to emerge from the water in 007 style. Globally, the TikTok Bond hashtag challenge went viral, boasting 7.4 billion video views. and 1.5 million user-generated videos. The trip to Hainan Island for our Bond collaboration included prominent guests such as Chinese brand ambassador Wang Feifei and 15 other key influencers. Combined, these influencers had over 65 million followers across their social media platforms. For holiday, our consumer communication embodied Michael Kors' signature glamour and optimism infused with the joy of the season. The campaign captured the jet-set chic and easy glamour of Bella Hadid and friends as they journeyed to New York City to spend the holidays and ring in the new year together. Our marketing initiatives continue to underpin our jet-set brand pillars of speed, energy, and optimism. This helped contribute to a 20% year-over-year increase in Michael Kors' global database, demonstrating the continued strength and desirability of the Michael Kors brand. Finally, I'd like to take a moment to congratulate Michael for winning the InStyle Designer of the Year Award, which celebrated the notable achievements he has had through the course of his impressive 40-year-long career. Overall, we are extremely optimistic about the future growth of Michael Kors. The strategies we put in place prior to the pandemic have been generating strong consumer demand as well as attracting new and younger consumers. Additionally, we are driving higher profitability as we continue to elevate the brand positioning. In total, Capri Holdings' third quarter results exceeded our expectations with a sequential improvement in revenue trends despite the pandemic and further supply chain pressures. Our performance demonstrates the strength of our brands, the execution of our strategic initiatives, and the hard work and dedication of our teams across the globe. The power of our three iconic founder-led fashion luxury houses position Capri Holdings to accelerate revenue and deliver multiple years of earnings growth. Now I'd like to turn the call over to Josh Schulman, the CEO of Michael Kors and future CEO of Capri Holdings. I'm delighted to have Josh joining us on his first quarterly earnings call with Capri Holdings.