Capri Holdings Limited

Greetings. Welcome to Capri Holdings Limited third quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. In question and answer session, we'll follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note, this conference is being recorded. At this time, I'll now turn the conference over to Jennifer Davis, Vice President of Investor Relations. Jennifer Davis, you may now begin.

Good morning, everyone, and thank you for joining us on Capri Holdings Limited third quarter fiscal 23 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 expect. Those risks and uncertainties are described in today's press release and in the company's SEC filings, which are available on the company's website. Investors should not assume that these statements made during this call will remain operative at a later time and the company undertakes no obligation to update any information discussed on the call. Unless otherwise noted, all financial information on today's call will be presented on a non-GAAP basis. These non-GAAP measures exclude certain costs associated with COVID-19 related charges the impact of the war in Ukraine, ERP implementation costs, CAPRI transformation costs, impairment charges, restructuring, and other charges. To view the corresponding gap measures and related reconciliation, please view the earnings release posted to our website earlier today at capriholdings.com. Now, I would like to turn the call over to Mr. John Eidel, Chairman and Chief Executive Officer.

John? Thank you, Jennifer, and good morning, everyone. Overall, our performance in the third quarter was more challenging than we anticipated. However, many aspects of our business performed well. In particular, we were pleased with the continued growth in our own retail channel across all three of our luxury houses. This is a testament to the strength of our powerful, iconic brands Versace, Jimmy Choo, and Michael Kors. as well as the success of our strategic initiatives. However, we were disappointed with the performance of our global wholesale revenue in the quarter. Additionally, revenue in mainland China declined significantly due to the surge in COVID cases as the country reopened. Now, turning to third quarter performance in more detail. Revenue decreased 6% on a reported basis and 1% in constant currency. Total company retail sales increased mid-single digits globally in constant currency. New customer acquisition was a key driver of growth as we added more than 12 million new names to our database versus the prior year. This is the largest year-over-year increase in our history. The growth in our own retail channel, as well as our large and growing customer database, demonstrates the strength and desirability of our brands. However, sales in our wholesale channel declined approximately 20%, driven largely by Michael Kors. Operating margin of 16.9% was below prior year. This reflected the sales mix shift between retail and wholesale, as well as increased marketing expense to support growth and build longer-term brand equity. As a result, earnings per share of $1.84 were below our expectations. Now looking at third quarter group revenue trends by geography. In the Americas, revenue decreased 4% with mid-single-digit growth in retail, offset by significant declines in our wholesale channel. In EMEA, revenue decreased 2% on a reported basis, but increased 9% in constant currency. This was driven by strong retail revenue partially offset by weaker trends in wholesale. In Asia, revenue decreased 20% on a reported basis and 8% in constant currency. This reflects strong results in Japan and Southeast Asia, offset by a nearly 40% decline in mainland China. Moving to third quarter revenue trends by brand. Starting with Versace, revenue decreased 1% on a reported basis but increased 11% in constant currency compared to prior year. Excluding mainland China, revenue increased 21% in constant currency. We were pleased that revenue was better than anticipated and operating margin was in line with our expectations. Turning to product, starting with accessories, which are a key component of our growth strategy. Women's Accessories was the strongest performing category, with sales in our retail channel up over 40% versus prior year. We were pleased with the response to our Greca Goddess pillar, which is continuing to gain traction. With our three pillars, La Medusa, Virtuous, and Greca Goddess, we are making significant progress in our goal to position Versace as a leading luxury leather house. Another component of our growth strategy is to expand footwear. Versace continued to gain authority as a women's luxury footwear brand as we expanded our core offerings with the introduction of the Pinpoint Collection, a new range of statement pumps characterized by a curved metal stiletto heel. Men's and women's sneakers also performed well, driven by our Tri-Greca, La Greca, and Odessia styles. Moving to brand awareness and consumer engagement, Versace continued to deepen consumer desire through powerful storytelling. The holiday campaign was inspired by Versace's deep roots within the worlds of theater and the arts. Model Lily McMenemy embodied high Versace drama while highlighting holiday gift offerings. Our marketing initiatives continue to focus on Versace's Italian luxury heritage. This helped contribute to an over 40% increase year over year in Versace's global consumer database. Overall, we were pleased with the performance of Versace as we continue to execute our strategic Looking forward, we remain confident in the luxury house's long-term growth potential as we reinforce Versace's brand codes, significantly grow accessories and footwear, as well as renovate our store fleet. Moving to Jimmy Choo. Revenue decreased 6% on a reported basis, but increased 3% in constant currency compared to prior year. Excluding mainland China, revenue increased 10% in constant currency. While revenue was below our expectations, primarily impacted by China, operating margin was better than anticipated. Turning to product, starting with accessories, which are a key component of our GO strategy, women's accessories was the strongest performing category with sales in our retail channel up high single digits versus prior year. Seasonal updates to our iconic bonbon and varenne styles performed exceptionally well. Women's footwear sales grew driven by dress footwear styles as people engaged in social activities, enjoyed special occasions, and celebrated the holidays. Sneakers also performed well with positive consumer reaction to our new Diamond Maxi. During the third quarter, Jimmy Choo launched its successful capsule collaboration with Timberland. Sandra Choi partnered with New York native designer Chanel Campbell of Harlem's Fashion Row to reimagine Timberland's iconic yellow boot. The collection celebrated urban glamour and the eclecticism of New York's dynamic community. This exciting collaboration generated over 50 million impressions across social media, as well as strong product sell-throughs. Now turning to brand awareness and consumer engagement. For holiday, our campaign celebrated the playful energy of the party season in London's Claridge's Hotel, where Jimmy Choo designed the 2022 Christmas tree. The unveiling of the Jimmy Choo tree was attended by celebrities and friends of the house, including Iris Law, Sienna Miller, and Daisy Lowe. Posts by attendees generated approximately 7 million impressions across social media. Our marketing initiatives continued to underpin our focus on glamour. This helped contribute to a 20% year-over-year increase in Jimmy Choo's global consumer database. Overall, we were pleased with the progress at Jimmy Choo as we continued to execute on our strategic initiatives. Looking forward, we remain confident in the luxury house's long-term growth potential as we reinforce Jimmy Choo's brand codes significantly grow accessories, and expand our casual footwear offer. Now, turning to Michael Kors. Revenue decreased 7% on a reported basis and 4% in constant currency compared to prior year. We were pleased with the continued growth in our own retail channel with constant currency sales up low single digits despite greater declines in mainland China. However, we were disappointed with Michael Kors wholesale, which declined approximately 25% during the quarter. Operating margin was below prior year due to the sales mix shift between retail and wholesale, as well as increased marketing expenses in our retail channel. To provide some additional color around wholesale, revenue at POS declined in the mid-teens, as sales lagged trends in our own retail channel. We had anticipated a sequential improvement at POS during the holiday shopping season, but that did not materialize. Therefore, we shipped less into the channel as we did not want to end up with excess inventory, which would result in additional markdowns. As you know, we have been elevating the Michael Kors brand and product. We believe our elevation strategy is working well, particularly in our own retail channel. We continue to believe that elevating Michael Kors is the right strategy for the brand. Now turning to product. In accessories, sales in our own retail channel increased low single digits globally. Consumers responded positively to core iconic collections featuring Michael Kors signature and hardware. We drove newness and excitement in signature with seasonal updates featuring metallic logo prints. As a result, signature represented approximately 55% of accessory sales during the quarter. Looking at footwear, we continue to believe we can significantly expand Michael Kors footwear to drive incremental revenue. Footwear sales in our retail channel increased low double digits as we delivered exciting fashion featuring iconic hardware branding elements and signature detailing. Men's remains one of the strongest performing categories in retail, and we remain enthusiastic about our opportunity to expand the accessories collection. Men's third quarter retail sales increased strong double digits globally, led by signature product. In December, Michael Kors collaborated with Italian luxury sportswear brand Alessi for a second time to create a sporty and glamorous ski capsule collection. The collaboration created energy and excitement, generating approximately 140 million impressions on social media, as well as solid sell-throughs. Now, turning to brand awareness and consumer engagement. For Holiday, our consumer communication embodied Michael Kors' signature glamour and optimism, infused with the joy of the season. Bella Hadid captured the Jet Set chic glamour of Michael's designs for the season's festivities. Additionally, in Asia, we amplified the campaign with renowned Chinese model, Hekong. Our marketing initiatives continue to underpin our Jet Set storytelling. This helped contribute to a 17% year-over-year increase in Michael Kors global consumer database. demonstrating the strength and desirability of the brand. Overall, we were disappointed with the performance of Michael Kors in the third quarter. Given lower wholesale revenue, we recognize the need to reset our operating expense structure. We are beginning to take measures to better align operating expenses with the change in revenue by channel. Looking forward, we remain focused on our long-term growth initiatives to elevate the Michael Kors brand and reinforce our Jet Set codes. We anticipate future growth driven by our own retail channel where we can leverage our brand momentum and personalized connections with consumers to drive revenue growth. Now looking ahead to the fourth quarter for Capri Holdings. we expect continued momentum in our own retail channel driven by each of our brand's strategic initiatives. However, in the wholesale channel, we now anticipate an even greater sequential decline relative to the third quarter. Due to weakness in our wholesale POS performance during the third quarter, which has continued into the fourth quarter, we are further reducing shipments into this channel. Now, turning to fiscal 24 for Capri Holdings. We anticipate total revenue and earnings growth in the mid single digits. In our own retail channel, we anticipate solid growth driven by our strategic initiatives, clienteling, and personalized strategies, as well as a recovery in China as the country reopens. In the wholesale channel, we expect revenue to decline in the mid-teens with trends normalizing in the back half of the fiscal year. Looking forward, we remain focused on executing our strategic initiatives to drive sustainable future growth. Our three powerful, iconic brands have enduring value and strong brand equity. We remain confident in our ability to achieve our long-term revenue and operating margin targets over time due to the resilience of the luxury industry, the strength of our portfolio, and the talented group of employees executing our strategic initiatives. Before turning the call over to Tom, I would like to welcome Cedric Wilmot as our new Chief Executive Officer of Michael Kors. Cedric has proven himself to be a versatile leader within our luxury fashion group, as president of Michael Kors EMEA for over 13 years, as well as the interim CEO of Versace for the last year, and the COO of Versace currently. The board, Michael, and I are confident that Cedric's leadership will help to further accelerate Michael Kors' strategic initiatives and brand momentum. Importantly, Cedric's appointment ensures that we have three experienced and talented CEOs at each of our luxury fashion houses. I am confident that we now have the right management team in place to execute our long-term strategic initiatives. Now, let me turn the call over to Tom.