Capri Holdings Limited

Ladies and gentlemen, greetings and welcome to CAPRI Holdings Limited Second Quarter Fiscal 2026 Financial Results Conference Call. At this time, all participants are in the 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 and 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. Please go ahead.

Good morning, everyone, and thank you for joining us on Capri Holdings Limited second quarter fiscal 26 conference call. With me this morning are Chairman and Chief Executive Officer John Idle and Interim Chief Financial Officer Raj Mehta. 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 statements made during this call will remain operative at a later time and the company undertakes no obligation to update any information discussed on today's 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 impairment charges, Capri transformation costs, restructuring and other charges, store renovation program costs, and transaction-related costs. To view the corresponding GATT measures and related reconciliation, please review our latest earnings release posted to our website earlier today at capriholdings.com. Additionally, the company has classified the results of operations and cash flows of its Versace business as discontinued operations. Unless otherwise noted, all information on today's call relates only to continuing operations. Now, I would like to turn the call over to Mr. John Idle, Chairman and Chief Executive Officer. John.

Thank you, Jennifer. And good morning, everyone. With the Versace sale expected to close in our fiscal third quarter, we are now fully focused on the growth of our two iconic brands, Michael Kors and Jimmy Choo. We plan to use the proceeds of the sale to repay the majority of our debt, substantially strengthening our balance sheet and providing greater financial flexibility to both invest in growth as well as return capital to our shareholders in the future. As we stated in our press release earlier today, given our planned reduction in debt levels and the signs of stabilization across our business, our board of directors has authorized a new $1 billion share repurchase program, which the company expects to begin implementing in fiscal 27. Now turning to our fashion luxury houses, we continue to advance our strategic initiatives across Michael Kors and Jimmy Choo to unlock their full potential. We are encouraged by the early signs of recovery at our fashion luxury houses and remain optimistic about the direction of the business. However, we recognize that it will take more time for the full effect to be reflected in our results. Despite the dynamic global macroeconomic environment, we are on track to stabilize our business this year while establishing a solid foundation for a return to growth in fiscal 27. Now, turning to second quarter results. We are encouraged with the continued sequential improvement in trends, which resulted in revenue, gross margin, and operating income exceeding our expectations. However, our results were negatively impacted by 20 cents per share versus our original guidance due to a higher than anticipated effective tax rate related to our valuation allowance position. Looking at results in more detail, total company revenue decreased two and a half percent versus last year to $856 million on a reported basis. At Michael Kors, second quarter revenue decreased 2% on a reported basis compared to prior year. In our own retail channel, year-over-year trends were consistent with the first quarter, while wholesale trends improved sequentially, turning positive primarily due to shipment timing. In our retail channel, we continue to see signs of momentum. with a sequential improvement in trends in our full price channel across all regions. In fact, comps in our full price channel turned positive in the second quarter, demonstrating that our strategies are beginning to take hold. Consumers are responding to our modern Jet Set lifestyle marketing, standout styles, and updated pricing architecture. In the outlet channel, Revenue was impacted by our strategy to improve our quality of sales through reduced promotional activity. Additionally, the outlet channel assortment continues to reflect the previous product strategies, which emphasized core and basic styles. More modern on-trend styles will be introduced in our third quarter with a more substantial update planned for the fourth quarter. Now, looking at total Michael Kors retail sales by region. In the Americas, revenue was negatively impacted by our quality of sales initiative in our outlet channel, which we believe is an important step to strengthen brand health and increase AURs over time. In Europe, trends remain strong. with year-over-year increases consistent with the first quarter. In Asia, trends were also similar to the first quarter, though we saw a modest sequential improvement in China. Now looking at wholesale, revenue at point of sale, while still negative, saw a meaningful sequential improvement in trends. Turning to brand awareness and consumer engagement. We continue to reinforce Michael Kors modern jet set lifestyle positioning with our brand vision of traveling the world in style. Through our Hotel Stories franchise, we are bringing the joy of travel and the discovery of new destinations to our consumers each season. For fall, we traveled to Rome with English actress and singer Sookie Waterhouse, actor Logan Lerman and our new global brand ambassador, Chinese actor and singer, JCT. The campaign highlights falls must-have looks, including new interpretations of our iconic Nolita, Leila, and Hamilton groups set against the timeless backdrop of Rome's historical landmarks. During the second quarter, we amplified our storytelling through local activations and immersive experiences. We also continue to enhance our social media strategy by broadening our presence across a wider range of platforms and deepening partnerships with influencers. This is enabling us to connect with consumers through authentic, relevant voices in fashion and is reigniting brand desirability. According to our consumer insights, we have continued to see a further increase in brand affinity. Additionally, Michael Kors iconic runway shows cast a powerful halo over the brand, reinforcing our leadership in fashion luxury. The spring summer 2026 runway show in September drew a notable audience of celebrities, and a powerful network of global influencers. Supported by a strong social media amplification, Michael Kors generated 5.5 billion impressions globally and was the second most engaged fashion brand during New York Fashion Week. These activities contributed to a 9% year-over-year increase in Michael Kors global consumer database. With our advanced data analytics capabilities, we are leveraging the strength of our extensive consumer database, which now exceeds 90 million, to create deeper or personal connections with consumers. Now turning to product. Guided by Michael's creative vision and enhanced by data analytics, we are delivering exciting on-trend fashion with standout style. Additionally, we have refined our pricing architecture to better align with historical levels and are seeing encouraging results from this strategy. In accessories, consumers continue to respond positively to new introductions that celebrate our iconic brand codes and aligned with our new strategic pricing architecture. For fall 2025, we introduced new accessories groups including the Hamilton Modern, a reinterpretation of the brand's iconic 2009 It bag, along with exciting updates to our successful Layla and Nolita styles. These groups are experiencing strong full-price sell-throughs, driving growth in accessories in the full-price channel. In footwear, trends improve sequentially in our full-price channel. We saw strong performance in new fashion boots while casual footwear gained momentum. Consumers responded positively to new sneaker styles that represent modern trend right evolutions of proven historical best sellers as we blend timeless appeal with modern style. Looking at ready-to-wear, revenue and our own retail channel increased driven by the strong consumer response to seasonal styles that captured Michael's effortless glamour. The fall assortment balanced trend-right designs and timeless wardrobe staples with dresses and outerwear performing exceptionally well. Turning to men's, revenue in our own retail channel was approximately flat. Men's sportswear styles performed well as we continue to focus on timeless essentials with a modern edge. Next, I'd like to review our store renovation plan, where we are redefining our luxury retail experience with a warm residential design. Our stores remain a cornerstone of our brand and a key driver of our sales recovery, playing a pivotal role in enhancing the client experience, and revitalizing growth. Over the next three years, we plan to renovate approximately 50% of our store fleet and key department store locations as part of our ongoing investment in brand elevation and retail excellence. We recently reopened our London and New York flagship locations. Michael Kors' signature jet set lifestyle is evident throughout these stores, transporting consumers to the featured destination of the season and further enhancing the immersive shopping experience. At the heart of our New York flagship store is our new Jet Set Lounge, the brand's first in-store cafe. The lounge embodies a new dimension of the brand's lifestyle experience and is the first of a planned rollout to flagship stores around the world, including Paris, Beijing, Tokyo, and Las Vegas. We believe that our store renovation plan will further strengthen the brand's desirability and drive higher sales productivity. Early results are encouraging. with locations showing significant increases in traffic and sales versus last year. We look forward to sharing our progress and results with you in the future. Looking ahead, Michael Kors is a powerful fashion luxury brand with a 44-year heritage that continues to resonate with consumers. We are building on this foundation by delivering exciting, on-trend fashion with standout styles. Combined with advanced data analytics and consumer insights, we believe we have the right strategies underway to return the brand to growth. Now moving to Jimmy Choo. Second quarter revenue decreased 6% on a reported basis compared to prior year. Retail sales improved sequentially, declining low single digits. Wholesale revenue declined mid-teens due to shipment timing that negatively impacted the second quarter. Looking at trends in our own retail channel, while still negative, second quarter improved sequentially, driven by comp growth in our full price channel.