Q2 2020 Earnings Call
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Good day, everyone and welcome to be Capri Holdings Limited second quarter 2020 Earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Jennifer Davis VP of IR Capri. Please go ahead.
Thank you Shannon good morning, everyone and thank you for joining US Uncomprehending limited second quarter fiscal 2020 conference call with me. This morning are 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.
Men, 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 does he see 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 items related to transaction transition and integration costs associated with the Jimmy Choo remember Saatchi acquisition restructuring a noncash impairment charges.
Otherwise noted all financial information on today's call will be presented on a non-GAAP basis, and all comparable store sales numbers will be presented on a constant currency basis.
View, the corresponding GAAP measures and related reconciliation. Please do the earnings release posted on our website earlier today, a copy holdings Dot com.
Now I would like to turn the call over to Mr. Dong Idol, Chairman and Chief Executive Officer.
Thank you Jennifer and good morning.
Capri Holdings has an a short period of time assembled an outstanding family.
Founder led fashion luxury houses.
The diversification of our portfolio as a key component for our long term growth strategy.
Now I'd like to update you on the progress, we're making developing our fashion luxury group.
Starting with Versace, we continue to execute against our five strategic growth pillars.
First we are building on versace's luxury runway momentum driven by Donna tell us fashion vision.
Second we are enhancing the brands powerful and iconic marketing.
Third we are rapidly increasing the brands global retail footprint toward our goal of 300 stores.
Fourth we were accelerating our e-commerce platform to improve our capabilities.
And fifth we're expanding our accessories and footwear businesses with compelling new collections, including our virtuous group featuring the recently introduced Baroque goes the signature logo.
Turning to Jimmy Choo, we continue to make progress on our strategic initiatives.
Starting with footwear innovation brand is seeing positive trends for active footwear, a key growth category.
Our strategy to expand accessories penetration remains on track with very encouraging results from new groups, including our recently introduced Varun JC signature collection.
Lastly, do our successful store expansion, we recently raised Jimmy Choo Global fleet retail go.
To 300 stores and are making significant progress towards our target.
Yeah, Michael Kors, we're extremely pleased to see an inflection point in our business with positive comparable store sales in the second quarter, reflecting improving trends in the Americas and continued growth internationally.
Our accessories category has seen a sequential improvement which indicates that our product innovation strategies are resonating with consumers.
We are successfully executing against the brands repositioning efforts to attract engage millennials and generation Z consumers.
Michael's optimistic design vision and energetic marketing.
Our renewed jet set vision, focusing on speed energy and optimism across product innovation brand engagement and customer experience is clearly exciting consumers.
Overall, we are committed to building on the many positive trends, we're seeing in our three fashion luxury houses.
We continued focus on execution and investment to support our growth plans, we're confident that Capri remains on track to grow revenue to $8 billion overtime.
Deliver multiple years of earnings growth.
Now turning to Capri Holdings second quarter results.
Revenues of $1.44 billion increased 15% year over year inline with our expectations.
This increase reflects the addition of Versace.
And growth from Jimmy Choo.
Partially offset by an anticipated decline from Michael Kors.
Revenue was also impacted by unfavorable foreign exchange translation.
And developments in Hong Kong during the quarter.
The situation in Hong Kong intensified and had a greater impact on our results than we originally anticipated.
Earnings per share were one dollar and 16 cents, which was below our expectations.
Our earnings were negatively impacted by higher than anticipated expenses in the quarter due to timing.
As well is greater than anticipated impact from developments at Hong Kong.
Looking at fiscal 2020, we are reiterating guidance for revenue of approximately $5.8 billion.
And earnings per share of approximately $4 in 95 cents.
For the remainder of the year, we continue to execute.
On our strategic initiatives that Versace, Jimmy Choo.
And plan to build on the better than expected comparable sales trends, we're seeing at Michael Kors.
Starting with the house Versace.
We were pleased with our second quarter results.
Revenues of $228 million.
Well ahead of our expectations, reflecting higher contributions from new stores and strong wholesale performance.
Comparable store sales were flat for the quarter.
For such a continued to deliver double digit comparable sales growth in the Americas.
And Yeah me a.
While we experienced declines in Asia.
As the region was affected by greater than anticipated challenge really challenges related to the situation in Hong Kong.
I'm consumer reaction in China to an incorrectly labeled product.
For Saatchi's continued momentum was driven by the positive response to Donna tell us fall collection.
Customers were particularly enthusiastic about our new seasonal offerings, which which featured vivid Bofors lost fuels and breaks use that a pit demise versace's rock and roll legacy.
In addition heritage offerings were well received across all lines building on the brands iconic codes.
Both men's and women's ready to wear as well as active footwear continued to be key drivers of growth.
In women's ready to wear.
New groups, incorporating updated house codes performed well in the quarter.
Led by a broad offering featuring variation of Versace is famous and highly recognizable safety.
And accessories, we were encouraged by the early response to the launch of the virtues handbag collection.
Which prominently displays the new Baroque go the logo on a bold symbol of the brands static heritage.
Turning to footwear growth in the fashion active category continued to drive performance led by our best selling chain reaction line.
We also recently introduced a new active group the squall to build on this momentum.
For the men's lines, new styles, featuring signature patterns silk and animal friends and a wide range of vibrant colors as well as highly refined tailoring offerings were well received.
In terms of brand awareness and engagement from Saatchi held a historic runway show during the quarter that was met with widespread acclaim and media coverage.
The spring 2020 show celebrated the Twentyth anniversary of the legendary moment in fashion history, when the iconic jungle print dress worn by Jennifer Lopez helped inspire the creation of Google images search function.
To close the show, Jennifer Lopez surprised and delighted the audience and lit up social media once again by walking the runway wearing a reimagine version of the tropical print dress She war to the 2000 Grammys.
On the Red carpet versace's presence during the quarter was extensive.
It's really a dress superstar Taylor Swift, who opened the MTV Awards show wearing a custom until the a versace look.
For such it also dressed kyer Gerber Angelina Jolie, Kendall Jenner, Kylie Jenner, Gigi Hadid and to change among many others.
The brands media coverage was extensive during the quarter.
For Saatchi's Instagram followers grew to 20 million.
An increase of approximately 40% over the prior year.
For such a digital brand momentum is higher than that of its much larger luxury peers, giving us confidence in our ability to expand our product offering and retail footprint.
Overall, we are executing against our growth initiatives at Versace.
Including continuing our luxury fashion focus enhancing marketing, increasing the black brands global retail footprint.
Accelerating e-commerce , as well as expanding our accessories and footwear offerings.
We remain confident in our goal to accelerate growth and achieved 2 billion in revenue.
Moving to Jimmy Choo revenue increased 8% on a reported basis and 10% in constant currency.
In line with our expectations.
These results reflect new store openings and higher wholesale shipments.
Partially offset by a mid single digit decline in comparable store sales.
Comparable store sales were impacted by weaker performance in Hong Kong.
And a decline in Japan, as we lap a highly successful 10th anniversary campaign in the prior year.
Excluding Hong Kong, and Japan comparable store sales would've been flat.
In footwear, Jimmy Choo continued to deliver strong comparable store sales in the fashion active classification as Sandro choice exciting new designs resonated with consumers with consumers.
This performance was led by our best selling Diamond and rain sneakers.
Turning to our fashion offerings, several seasonal introductions showed strong performance, including Seto.
And asymmetric sling back with a modern kick heal and being a luxury meal with crystal and cross the detailing.
In accessories, we continue expand our new collections, introducing the first Varun JC signature group.
For rent is offered enriched autumn colors, including Bordeaux rust and dark Green and comes in several distinct silhouettes.
Initial customer response to this collection has been very positive.
Or enjoys the recently introduced Madeline and Helio groups and together these new collections have already delivered comparable sales growth in handbags in Americas EMEA.
And mainland China.
We're excited about the future prospects for building accessories momentum supported by these new introductions.
In terms of brand awareness and engagement Jimmy Choo supported the launch of Virgin collection.
With a broad marketing and social media campaign, featuring supermodel Coco Gerber.
It was also featured in our fall winter advertising campaign.
Hi, as offensive city transcends generations and is the perfect representation of the dynamic energy of the brand.
Jimmy Choo continued to dominate the red carpet celebrities such as Kate Hudson.
We all wish Oprah fell a deed.
Sienna Miller.
Victoria song Sean.
Camilla Cabello.
At Haulsey wearing our shoes and handbags.
During the quarter, Jimmy choose Instagram followers grew to 11 million an increase of over 20% versus last year.
Overall, we continue to drive footwear innovation accelerate accessories product development and expand the brands retail store fleet.
We remain confident in our long term ability to grow Jimmy choose revenue to $1 billion.
Turning to Michael Kors brand.
Second quarter revenue declined 4% on a reported basis and 3% on a constant currency basis in line with our expectations.
During the quarter, we were pleased with a return to comparable store sales growth.
Which increased in the low single digits.
And we're ahead of our expectations.
[noise] positive comparable store sales.
Reflects continued growth in Asia, and Europe , while trends improved to flat in the Americas, driven by sequential improvement in accessories performance.
In the wholesale channel.
Revenue at the point.
Upsale trended below our retail stores in part due to lower signature inventories.
Moving to our product performance and accessories, Michael Kors collection Bancroft group continues to be a top performer.
The recently introduced MK see monogram adds a luxury signature touch to several new collection offerings and has been well received.
In our Michael Michael Kors line, we relaunched two of our iconic handbag groups.
The Hamilton and Bedford, bringing back core elements of the Brett.
The new Hamilton has been modernize was sleeker proportions and updated functionality, while still offering a nod to the original version.
With an updated Hamilton lock and belting detail.
The Bedford legacy offers a sophisticated silhouette was a more casual softer luxury presence.
Both of these groups quickly became best sellers.
The recently introduced Cc and Manhattan collections also continued to poor form well globally as we build a core of strong differentiated collections.
Additionally, we launched an expanded travel collection during the quarter.
This builds on the Jetstep lifestyle, Michael Kors has become so well known for.
And now includes a full line of luggage and travel accessories.
Overall, our global accessories category delivered improved results in.
In second quarter led by the success of Michael Kors signature styles.
In our retail channel. We saw continued strong comparable sales growth in signature styles, driven by improved inventory position.
With penetration increasing to nearly 30% of retail sales in the quarter.
While we have reached our 30% goal, we now see potential to rapidly increase the mix to 40% due to the strong consumer response.
Additionally, we are actually increased signature inventory levels and our wholesale channel to take advantage of this strong selling trend.
Moving to footwear performance continues to be driven by fashion active which was led by the.
Org Irving Billy and Olympics sneakers.
Seasonal updates resonated with our customers, including new woven fabrics techniques metallic detailing and mix materials with hair cap highlights.
Signature continued to perform well across all classifications with our updated MK charm, helping propel the newly launched Lilly moccasin to become one of the most popular casual items.
Additionally, we have seen strong sales of emerging fall fashion, including Moto combat and hiking boots.
In women's ready to wear dressed sales were driven by exotic animal friends and logo details.
Trends highlighted.
Prominently in our fall AD campaign, featuring Bell Aidid.
Bestsellers included leopard print wrapped dresses and sweater dresses with MK logo trim.
We saw continued strong 'cause consumer response.
To fashion outerwear with best sellers, such as crop denim jacket.
With removable flow for collars and cuffs.
Hey, Leopard front down puffer and MK signature print stretch.
In our men's business, we remain strategically focused on expanding the accessories collection and continue to see strong consumer response.
Growth was led by backpacks, including the recently introduced Brooklyn's silhouette across fashion and sports executions.
Updated signature offerings also performed well.
In sportswear, we saw strength from our top selling Greenwich Paulo in fall colors as well as our MK go capsule collection, featuring technical Fagnant fabrics in sport inspired silhouettes.
Additionally, we have seen a strong response to our newly introduced sneaker collection.
His best sellers crafted with mixed materials of leather swayed and mesh.
While supporting our signature logo print.
In our watch category, we continue to innovate with our smart watches and are very excited about our next generation MK go watch, which retails at 295.
Our next generation Smartwatches feature new technology that gives iPhone users the ability to place and receive calls through any of our watches that have speakers.
While we continue to innovate and this classification the overall watch category remains challenged.
And with decline similar to prior quarters.
We remain focused on accelerating the distribution of our fine jewelry line to offset watched declines long term.
During the quarter, we saw sequential improvement in jewelry sales in our retail channel.
With respect to brand awareness and customer engagement, Michael Kors fashion innovation was highlighted in the spring Summer 2020 collection runway show, which drew inspiration from the 19 forties and celebrated America's unique role supporting diversity and inclusion as a melting pot for the world.
Michael Kors was the number one engage brand on social media in New York fashion week.
And for the first time, Michael Kors ranked number one every day during New York fashion week.
During the quarter, we also launched our Michael Michael Kors Fall campaign, featuring Supermodel Bella studied.
Amplified across digital print outdoor and in store Bella continues to drive engagement and traffic for the brand and broadening our customer reach.
Turning to China, we launched the she she capsule collection.
For Chinese Valentine day, featuring our new Michael Kors brand ambassadors.
Leo will.
Arena song.
Combined with a broad social media campaign and further expanding the brands exposure in China.
In Japan, we collaborated with artists.
Masa me.
Hi, good idea.
And launched a limited edition accessories collection that was available exclusively in Japan.
His illustrations were inspired by vintage heard you could street style.
Or featured on numerous iconic signature logo items.
Both disease initiatives drove strong sales results.
Michael dressed a wide array of celebrities during the quarter, including Jennifer Lopez, Nicole Kidman, Kate Hudson, Gigi Hadid and Billy Porter.
Among many others.
We continue to expand our global social media presence by approximately 10% to over 47 million followers and expanded our database by 25% to approximately 40 million customers.
Overall, we're very pleased that the Michael Kors Bran returned to comparable store sales growth during the quarter.
We saw significant inflection in our accessories sales driven by our signature fashion styles.
Our new fashion product initiatives and our renewed jet set marketing are helping to drive our growth.
In conclusion, we are pleased with the progress we are making developing our founder led fashion luxury houses.
Growth initiatives for our recent acquisitions Versace, Jimmy Choo are gaining traction.
For Michael Kors, a return to comparable store sales growth and our sequential improvement in accessories sales support our future returned to growth for the brand.
[noise] combined we believe the power of our three fashion luxury houses keep us on track to accelerate growth over the long term.
Now, let me turn the call over to Tom.
Thank you John .
Starting with second quarter results revenue of 1.44 billion increased 15% compared to last year inline with our expectations.
Revenue growth was driven by the addition of Versace and growth from Jimmy Choo, partially offset by anticipated lower revenue and Michael Kors.
Additionally, revenues were impacted by unfavorable foreign exchange translation as well as greater than anticipated impact from development in Hong Kong.
Net income was 177 million, resulting in diluted earnings per share of $1.16, which was below our expectations.
Our earnings were negatively impacted by higher than anticipated expenses in the quarter due to timing as well as greater than anticipated impact from development in Hong Kong.
Second quarter earnings per share included one cents of dilution from Versace.
Looking at revenue performance by brand Versace revenues were 228 million and comparable store sales were flat compared to prior year.
Total revenue was ahead of our expectations, reflecting higher contribution from new stores in greater wholesale shipments, partially offset by lower than anticipated comparable sales.
Comparable sales increased double digits in the Americas, and EMEA, but declined in Asia, primarily reflecting greater than anticipated challenges related to the situation in Hong Kong.
And consumer reaction in China to it incorrectly labeled product.
For such a ended the quarter with a global luxury fleet of 198 retail stores, a net increase to from prior quarter.
Turning to Jimmy Choo revenues during the quarter for 125 million and 8% increase compared to prior year.
On a constant currency basis total revenue increased 10% versus prior year.
These results were in line with our expectations, reflecting higher contribution from new stores in greater wholesale shipments offset by a mid single digit decline in comparable store sales.
Comparable store sales were impacted by significantly weaker than expected performance in Hong Kong and declines in Japan as we lap the highly successful 10th anniversary marketing campaign in product launch in the prior year.
Excluding Hong Kong, and Japan comparable store sales would have been flat.
Jimmy Choo ended the quarter with a global fleet of 216 retail stores, a net increase of 12 from prior year.
Turning to Michael Kors total revenue of 1.1 billion was inline with our expectation and declined 4% compared to last year on a reported basis and 3% when a constant currency basis.
Compared to prior year revenue performance was driven by an increase in comparable store sales in the low single digits, which was ahead of our expectations.
Offset by unfavorable foreign currency translation and anticipated lower wholesale shipments.
Comparable sales reflected continued growth in Asia in India, and an improvement in the Americas to flat driven by a sequential improvement in accessories.
The headwind from Raich watches in the quarter was approximately 130 basis points.
And global E Commerce benefited comparable sales by 220 basis points.
Michael Kors ended the quarter with a global fleet of 850 retail stores, a net decrease of four compared to prior year.
Now turning to total company margin performance.
Gross margin was 61% approximately flat compared to prior year.
This primarily reflects a lower Michael Kors brand gross margin, which was in line with our expectation, partially offset by a benefit from the inclusion of Versace.
Total company operating expense increased 129 million compared to prior year increase reflected $139 million of expense related to the addition of Versace.
We also incurred 12 million up unanticipated expenses related to timing.
As a percentage of revenue operating expense increased 320 basis points to 47%, reflecting the addition of Versace.
Total company operating margin of 14.0% was below our expectations due to higher expenses.
This compares to 17.4% last year, reflecting the addition of the Versace business and anticipated lower operating margin for Michael Kors.
For Saatchi's operating margin of 6.1% was in line with our expectations.
Jimmy choose operating margin was negative 8.1% during the quarter compared to last year's margin of negative 6.3% in line with our expectations.
Michael Kors operating margin of 20.4% declined 140 basis points versus the prior year.
Reflecting anticipated lower gross margin and higher than expected SGN, a due to timing.
Let me channel perspective, retail operating margins expanded in the quarter driven by stronger accessories performance.
Operating margins declined in wholesale primarily as a result of de leverage on lower revenue.
Our tax rate for the quarter was 10% compared to 8.6% in the prior year, primarily reflecting lapping the benefit related to employee equity compensation recorded in the prior year quarter.
Turning to our balance sheet, we ended the quarter with <unk> hundred 79 million in cash and cash equivalents and 2.4 billion of debt.
We ended the quarter with inventory of 1.1 billion compared to 768 million last year with the increase primarily reflecting the addition of versace inventory of 185 million.
Jimmy Choo inventory increased 15% compared to the prior year, reflecting inventory to support our growing accessories category and new store expansion.
Michael Kors inventory increased 16% lapping an 11% decline in the prior year and reflected an increase in signature and core accessories products as we build these classifications to higher mix levels.
Over the next few quarters, we expect smaller increases, but continue to anticipate inventory will be above prior year.
Now I would like to turn to our guidance for.
For full year fiscal 2024 to pre holdings, we are reiterating our expectation for revenue of approximately 5.8 billion, including improved comparable sales performance for Michael Kors retail offset by a greater than anticipated impact from developments in Hong Kong.
We now anticipate an operating margin of approximately 15.0%, primarily reflecting lower operating income.
Income from Hong Kong, which is one of our highest margin regions.
We now expect Hong Kong will represent approximately 1.5% of group revenue in fiscal 2020 compared to prior expectation of 2.5%.
We expect interest expense of 15 to 25 million, an effective tax rate of approximately 11% and weighted average shares outstanding of 153 million.
We continue to forecast diluted earnings per share of approximately $4, a 95 cents, reflecting a lower operating income in Hong Kong offset by the benefit of a lower tax rate.
Guidance continues to include for such a dilution of approximately 20 cents.
Now turning to capital allocation capital expenditures are now forecast at approximately 275 million.
And we continue to expect to repay approximately 500 million of debt during the fiscal year.
Turning to third quarter guidance, we expect total company revenue of approximately 1.53 billion a mid single digit increase from prior year.
We forecast for such a revenue of approximately 180 million and comparable sales to be flat for the quarter.
For Jimmy Choo, we expect revenue of approximately 165 million and comparable sales to be flat for the quarter.
For Michael Kors, we expect revenue of slightly below 1.2 billion and comparable sales growth in the low single digit range for the quarter.
Our third quarter operating margin is expected to be approximately 17.5% for.
For Versace, we expect these slightly negative operating margin, reflecting seasonality and increased investments to support our growth initiatives.
Jimmy Choo, we expect a positive operating margin in line with normal seasonality.
Michael Kors brand operating margin is expected to be lower than prior year.
Consistent with our second quarter performance in Q3, we expect retail margin expansion and lower margins in wholesale due to de leverage.
Interest expense is expected to be approximately 5 million.
Our effective tax rate is expected to be approximately 8%, we forecast weighted average shares outstanding of 153 million, resulting in diluted earnings per share in the range of $1.55 to $1.60, including Versace dilution of approximately 15 cents.
For the fourth quarter, we forecast earnings per share to be double the prior year, driven primarily by approximately 500 basis points of operating margin expansion for Capri.
Reflecting higher operating margins across all three brands.
For such a will benefit from an additional month in the quarter December which is their single most profitable month of the year.
For Jimmy Choo, we anticipate operating margin will inflect as we realize the benefits of our strategic investments.
Lastly, at Michael Kors, we anticipate a significant increase in operating margin driven by comparable store sales growth as well as cost reductions from our fleet optimization program.
Looking ahead, we believe our expectations for sequential improvement in results in the third and fourth quarters physician Capri for improved performance in fiscal 2021, we remain focused on executing against our strategic initiatives to continue to improve underlying performance for each of our global fashion luxury houses.
And believe these efforts will continue to position our global luxury group to achieve meaningful long term revenue and accelerated earnings growth.
Now I will open the line up for questions.
Thank you, ladies and gentlemen, sick all fair question. Please do so by pressing star one under touched on telephone. If you are using a speaker phone. Please make sure that your mute function is turned off to lie your signal to reach our equipment. In addition, please limit yourself to one question I'm sure everyone has an opportunity to ask a question again.
To signal for question. Please press star one at this time.
And our first question will come from Randy Konik of Jefferies.
Yeah. Thanks, a lot and good morning, everybody. So I guess, Tom I want to ask you couple of questions I was very helpful detail, both you and John .
Just on the watch had when you said 130 basis points, if I recall last quarter.
The watch headwind I believe was 200 basis points. So that 70 basis point reduction in headwind should we assume that kind of trajectory going forward on a sequential basis, just trying to get a sense of when that headwind or starts to absolutely subsides and the watch category and then second.
You know you gave us some really good perspective.
On cores margins by channel distribution. It sounds like you know very nice inflection in the retail channel operating margin that's going to continue going forward just curious how much since that's come down a lot over the years and you're now starting to comp positive and we assume the watch headwinds.
As to abate, how much more room or expansion do we think we can kind of get towards with the retail side of the sense within cores and then on the wholesale should we expect the the reduction in operating margins in that channel to start to kind of flattened out.
As we get into next calendar year.
Thanks.
Hi, Randy Good morning, it's John idle I'm going to take the first part of the question on regarding watches and Tom will discuss the margins in the second part.
First off we were extremely pleased in the quarter to see the Michael Kors retail business globally return to a low single digit growth, which was ahead of our expectations.
And as we've mentioned in our prepared remarks.
Our international business, both in Asia, and in Europe sub sub very very healthy growth for us, which has been a continuation of what we've seen.
But what was most exciting is that the Americas returned to a flat comp.
And and really that was driven by the sequential improvement in our accessories.
And again, even further led by our signature initiatives.
Which is something that we think told you.
Few years ago, we kind of made a mistake, we had pulled back from that classification and really had had tried to make that less meaningful to our assortments and that was wrong.
And so Weve course corrected and in our own retail we've seen some very strong selling the.
We're extremely pleased with and we're seeing that resonate across other products beyond accessories as well.
So that's really would kind of drove drove the positive for Michael Kors and and again, even even more importantly, we saw that in the face of headwinds for both FX and and for what you saw in.
In Hong Kong.
What the watches continue to decelerate now again, it's becoming a unfortunately every quarter is smaller percent of our overall business.
It's still meaningful.
But it is continuing to two in effect shrink.
I don't think we can sit here and tell you whether.
We think the deceleration in a quarter will be 100 basis points or 200 basis points, that's really driven more by consumer demand.
And there's no question that the that the.
In particular, the Apple watch.
Has has really taken a significant piece of market share.
Globally from the fashion watch business and and we actually don't see that subsiding. So it's going to be very hard for us to forecast what that delta is on a quarter to quarter basis. We are really excited about is what we're seeing happening in our accessories. We all.
Also saw sequential traffic.
Improvement across the globe and that really again, that's telling us that the brand is resonating we talked about our initiatives around are kind of our new jet set image.
In our marketing and teams are.
Public relation teams are doing a fantastic job.
Talked about Michael's leadership in design and I think you are really starting to see that resonating. So super proud of what Theyre doing there and I also want to put a very big call out to I think we've got one of the best teams out in the retail field and I think there they're really making this happen for us So and then top that off with.
You know improvement in traffic.
We're we're feeling quite good about that and and see opportunity for for that to continue to grow I'll turn it over to Tom to talk about the margins.
Randy So from a margin perspective, I think we had previously discussed Michael Kors as being stable over time, when we had provided a little longer term guidance and what we're seeing now is extremely encouraging as we look forward and see what is happening in the quarter because as I mentioned, the retail operating margins already started to inflect.
And to be positive and expand in Q2, we expect that to continue into Q3 and beyond and that's really supported by the growth in accessories.
An improvement in accessories, a longer term, it's a retail operating margins are also supported by our growth in Asia, which is a higher margin a region for us and of course the store fleet.
Optimization that we're going through where we noted that we were closing 50 stores. This year unprofitable stores and opening a profitable stores. So that will help us. In addition, we're going to be generating cost savings and ultimately synergies across our portfolio. So that will support both retail.
And wholesale.
On the wholesale side, what we believe will help longer term and near term will be improving the signature mix in that channel, which will be doing as quickly as possible through the next through this quarter and holiday season and beyond.
And as that business begins to stabilize de leverage will also moderate so we do believe that this sets up Michael Kors brand, a very nicely for Q4 expansion in margin.
Thank you Randy.
Very helpful. Thank you.
And ladies and gentlemen, as a reminder, please limit yourself to one question and our next question will come from Erinn Murphy with Piper Jaffray.
Great. Thanks, Good morning to you all John I guess my question is on the first BACE business.
How but im just break out what you thought between Hong Kong versus mainland China in the quarter and then how are you planning that region for the balance at the year and then specifically in the mainland now that you've removed that mislabeled product are you seeing any signs of improvement. Thanks.
Good morning, Aaron Thanks, So versace.
I want to start out by saying that the integration is going very very smoothly. I think you saw the integration that we had with Jimmy Choo when went very smoothly I, we're seeing the same exact thing in Versace.
I also want to remind everyone that you know we have have been in the process and are almost through.
Shutting down two of the lines in the company one was called collection and the other one was called versus and that result that was almost a $100 million in revenue.
We are exiting.
In order to focus on the Versace collection, which we think is the right way to position this company from a luxury standpoint.
I also want to add that that the new store renovations that we have seen we talked about that on the last call are really performing a very high double digit rates. After we renovate these stores.
So we're extremely pleased and we have an intent.
To renovate most of the store fleet globally over the next few years to really position the brand for a more modernized looking and Donatella is has been really.
Leading that not only with the design vision, but also product innovation and really giving some some incredible stories for our associates inside the the stores to really work within and again I have to give a big call. After this we have a are incredibly talented group of people inside of our stores.
Who are the working very very strong and clienteling and engaging with our customers.
And.
So we've seen double digit growth in North America double digit growth in EMEA and in Asia. Unfortunately, there was first the situation.
That started to happen in Hong Kong.
Which as we said before I don't think any of us thought would reach the levels, but it has reached today.
And so that has has had a material impact on on the Versace business.
In Hong Kong, and then secondly, there was a t. shirt that was mislabeled and we publicly apologized for that including Donatella, making a public apology.
And and apologizing to the to the Chinese citizens, which I think was the right thing for us to do.
We initially saw a negative consumer reaction to two that product and what and on the mainland. It represented to people I think we're slowly seeing that subside.
So we've got a very cautious view of how we're planning.
The greater China business in in total of four Versace for the balance of the year I think we're going to see recovery from the T. shirt situation.
More in the fourth quarter and probably the first quarter of next year.
But we've taken a very very conservative point of view across the whole company for Hong Kong, while we hope that situation gets resolved.
We don't see any end in sight, we don't know what that means so in Tom's prepared remarks, you talk to you about for the for the company. We're taking our position that that was 2.5% of revenues going down to one of the half percent. So that's a significant revenue decline that we're going to make up in some other areas of the company.
In particular with Michael Kors with its better comp store performance. So you know, there's always going to be some ebbs and flows as we go through the years and building the various brands.
This situation with Versace is unfortunate, but I think we feel very confident in the fact that the consumer continues to engage with us and the brand just continues to get more and more powerful.
So I think if we if we remain focused on our initiatives.
I think we'll see some very strong results and and I also make might say, we just reopened oh are.
Flagship in Chengdu.
And the results are double digit growth from that so again that I think it goes to show that if we're doing the right thing staying focused on on the consumer and their experience with the brand that will continue to to be able to grow and meet our long term targets.
I also want to just.
Give a quick mention too.
[noise] Donatella as I think I mentioned to you on last call worked very very quickly in developing the new Baroque of the logo.
And that is in our stores right now and of course, you've seen it on Instagram and you saw what it meant for us in our fashion show and that is really starting to gain some traction. So so we're very encouraged by what we see.
Quite frankly, I didn't even think we'd be at this point that quickly with with that that product, but again, that's a big call out to our versace team and to what Donatella. Thank you are thinking.
Thank you.
Our next question will come from Matthew boss of Jpmorgan.
Thanks, and congrats on the returned to positive Thompson and Michael Kors.
John I guess, maybe I guess, maybe larger picture are you seeing any improvement in the in the overall North America accessible luxury handbag category, maybe if we were thinking about customer traffic tourism and promotional levels or do you fully attribute this accessories and inflection to more companies.
Specific product and and marketing execution on on your side.
So Matthew I would I would answer that a two ways number one.
We see that North American consumer as relatively healthy.
And.
Quite frankly over the last.
Two years I'd say, we had two things that happened to US one is completely self inflicted and that was.
Removal of the MK charm from product that was walking away from our signature categories that was certain design issues, where we probably could have been in a better leadership position have to say we have a a team in here a new team.
Working side by side with Michael and it's kind of.
Very exciting what's happening here of the product looks spectacular the consumers resonating with it.
And we talked about.
In a certain new new products, we have three or four core groups that are that are starting to really resonate in the line. That's been a while since we've had that type of level of assortment happening. So I put the first category again to self inflicted and when you do work more on on our design leadership.
And Michael has really has really led the way in the path for us on that it's been sensational and and the second thing I would say is we needed to refresh our marketing campaigns.
And again, Michael really took that as a as a vision and has been just sensational and we've obviously been leaving that with Bella Hadid, and and our whole new vision of what jet set means and it's more modern vision. So I think those two things are leading to.
To better consumer response for us.
And I put that amongst the backdrop of the of the American consumer. We think is healthy that being said you know you still continue to have the issue of store traffic.
We saw an inflection in this quarter, we're where we saw traffic change. That's obviously, we think being driven by product and and by our marketing initiatives.
But but it's still challenging in the in the sense that you know our ecommerce business continues to grow much much more rapidly than any other quote channel.
For us a Tom mentioned before that that we're going to see an inflection in Q4.
From from our fleet optimization program, we're getting pretty close to the end.
That initiative you know we told you again two years ago, we were going to close a lot of stores that had become unprofitable and that was really a result of our ecommerce growth.
So we're going to start to see some of the benefits of that also we're ending up in North America in some of the better malls, where the traffic is healthier.
Versus some of the malls, where they're not as healthy.
So I think we're feeling good about the way the store fleet looks the way the 'cause American consumer looks and the way that our product and marketing are looking and you know.
Going back to Randy's question, you know in terms of a headwind we can't we don't know when the watch situations going to going to go to.
Kind of turn around and that I don't think is actually a consumer driven issue. That's a we've been disintermediated by a competitor.
And that's been extraordinarily painful for us over the last couple of years, but that category is getting a little smaller and going to become somewhat less less relevant over the next few years, that's that's a shame, but and what we're going to keep trying.
We're going to augment that with in particular, our accessories category. So.
Thank you very much for that question.
Our next question will come from all my sense of Evercore ISI.
Good morning, Thanks for taking my question I'm, John I wanted to ask a follow up on Versace, you know I'm trying to understand how big of the impact is Hong Kong versus.
The t. shirt it looks like when you guys you're talking about I think 180 million is the forecast for Threeq, you and we look at the run rate.
And one Q in Twoq, you, you know well over 200 million.
And presumably threeq given the high DTC present is normally would be a big quarter for for the brand. So maybe you guys could help US understand you know kind of bridge those gaps and what the underlying effective as of the Hong Kong versus the T. shirt on that kind of plan for Versace over the next couple of quarters. Thanks.
Yeah, I'm I'll take part of that and then I'll turn it over to Tom as well. So so again that I wanted to be very clear that Hong Kong for the company for the group was was has had a far more a material impact than we had ever thought in particular.
I said last call I Didnt think it would have a material impact that in fact now here. We are sitting on this call thing that is having an immaterial impact.
So so.
We are seeing revenue decline across all three brands in the region.
North of 50%.
So so that is that is incredibly a painful for us.
The.
And obviously, that's going to have an impact on on Versace in in the region.
The you know, we're not going to wait the difference between the two separate issues.
But I also want to Wanna mention that the month of December actually is sitting in the month of in in Q4, which traditionally would be a very large quarter.
For Versace, so some of that is waiting on what you're seeing in the in the revenues.
We're still pretty close to our to our original objectives for the brand for the year.
Again, we can't determine to Aarons question earlier, when we will return to to a positive.
Comp in the region in China as it relates to in mainland China as it relates to the T. shirt issue, but we definitely see if it's starting to.
Subside and again is that one quarter to quarter three quarters I don't think we can measure that today.
I think we're confident we will see that return and as I said as we're starting we're just starting our renovation program.
In in China, and one of the for stores that we renovated we're seeing very strong double digit comps comp store growth from that so I think I think we're feeling that that will overtime mitigate and I'll turn it over the top sure I'll just add a little color commentary in addition to December and the overall China.
Impact the at Hong Kong or mainland China for for such a in Q3 and also some FX headwinds that we will continue in Q3 through Q4 for where that business and then versus prior year for the company as a whole.
As John mentioned earlier, we had exited versus in collection, which were large wholesale businesses that set shipped a lot in those quarters. So we'll be building that up with the luxury line overtime with the Versace.
Thanks, Thank you all.
Our next question will come from Michael Binetti of Credit Suisse.
Hey, guys. Congrats on returning the of course friend to a positive comps, it's nice to see.
So just want to ask you.
You've talked you commented on this little bit, but you beat your plan on core same store sales. The sales total sales were a little below so wholesale was a mess you made some comments there.
How are you thinking about the wholesale channel, particularly in North America, and when you think that can start to mirror the returned to growth you're seeing on the retail side I know for a few quarters now you said you're.
And you said in the common say you're trying to action.
Celebrated signature into that wholesale channel I feel like you've been trying to get that up to speed for a while now <unk> is there anything regulating your your speed into that channel and how do you. How do you look at wholesale channel North America when it can.
Try to pivot to growth and help contribute a little bit more to the brand.
Thank you Mike on the morning.
I'll give you some color on on on the north on the on the global wholesale channel and then we'll look at the North American et cetera, So on the global channel.
There there's been some some obvious issues with department stores around the world.
Whether there has been closures, whether there's been bankruptcies that have created disruption.
So theres been a there's been a fair amount of disruption in the channel itself.
That we're feeling on on a global basis.
Also remember some of our impact.
That you're hearing about in Hong Kong, we will also feeling the wholesale channel because we are.
Partners in that in that area in particular, who were in the duty free retail market. So they're gonna be impacted by by this as well.
In terms of the so you want to go on a global scale that channel is not particularly healthy on a north American scale, you know our partners. When you look at our business inside of there whether it's men's wear footwear and women's ready to wear those businesses are rather relatively healthy. So so it's been.
Two categories, it's been our accessories business and then of course, the watch business. The watch business, we don't ship from a wholesale standpoint, but our accessories business, we have and as I said earlier.
Weve self inflicted many of the issues that have happened in our accessories business. We're starting to see the same thing happen in the wholesale channel that we saw in in our retail business in particular.
Over the last 60 days.
We are starting to see an inflection.
In that channel, where we are the declines are beginning to slow and we are seeing our full price business, expanding and growing and that's being absolutely driven by signature. So the same thing that we're doing in our own channels, where we moved much quicker.
We are now doing in our in our wholesale.
Channel in North America, I think we said in our prepared remarks last quarter or in the queue and I that we thought that would be really you'd see more of an inflection of that in Q4. So we've got the inventory heading into that channel in this quarter and we're going to start to see.
We believe some change in in the results there. So so I'd say, while the channel itself in North America is not as healthy as it used to be you know, it's still it's still an opportunity for us to get back to stable and <unk> that was what our original goal was at the beginning of this.
Here, we were not able to achieved that goal as you know and that will be once again our goal for next year is to stabilize.
That our revenues in that channel and we believe we've got a a a path to do that in particular, given the response that we're seeing from the consumer with our product.
Thank you Michael.
And our next question will come from Kimberly Greenberger of Morgan Stanley .
Great. Thank you so much Jim I just wanted to follow up on that last question. So it sounds like you are starting to see some improving North America wholesale traction and I'm wondering.
His dad sufficient to.
Get the wholesale margin to stabilize or do you require some additional cost cutting efforts. There is there anything else any other action you might be able to take to help sort of stabilized at wholesale margin that feels like it's a that drag there and I just wanted to follow up on the store closure discussion.
John You said, you're getting towards the end of the store closure programs cores I'm wondering if you're expecting any additional closures and in 2021 fiscal 21, and then for Saatchi I think you mentioned you're expecting to remodeled the global fleet for Versace over the next few years.
How many.
The existing stores would you expect to be repositioning during that remodel processed meat, meaning moving to a different location as oppose to remodel the in place. Thank you.
Thank you Kevin.
On the wholesale side I I want to be clear again, we do not see the wholesale business stabilizing this year and so we will continue to see revenue declines in Q3, and Q4 and as we said Q3 will be the largest during the year revenue decline, we said that in our last quarter, we still believe that to be the case.
We do think that the inflection that we're seeing with better performance.
And hopefully we see that continue through Q4 will begin to set us up for a better year next year and hopefully a stable stabilized.
Business in that channel in North America.
The I don't I don't think we can comment to whether that will be the inflection point that we'll be able to create leverage.
Or not in that channel I think as Tom said earlier.
We're very pleased we're starting to make progress on on operating margin expansion in retail.
And and really the offset to that has been has been the wholesale margin.
At a point in time retail being larger than wholesale that inflection will help.
To potentially drive operating margin expansion for Michael Kors, we're not ready to tell you when that would happen, but that's obviously, where we're trying to head.
In terms of the cores a store closure program as I said the majority of that will be done by the end of this year, we'll still have more stores that will close next year it'll be it'll be small and that will be more or less augmented are offset by our store openings that were Uh huh that were that we continue to do in Asia and.
Particular.
But but what we're going to see is the fruits of a full year of the store closure program that will help help our operating margin next year and in terms of cost reduction and that's something we're very focused on in the company.
Because obviously our revenues have declined so we need to get the cost base more in line with where the revenues. We're in we're starting to make some some very good progress with that.
As it relates to Versace, you know were there's a handful of stores that were actually moving but most of those stores that were renovating were renovating in place.
Obviously that will create some noise.
Because when you renovate a store you take it out of the.
Sometimes out of the comp base, sometimes your ticket out of out of service for a period of time.
So that's going to create some noise as we go through that process over the next two years, but I think the takeaway is the results of what we're seeing.
And then of course, you know we're gonna open approximately 100 stores in Versace over the next.
Couple of years, and we're we're doing really well we've got major cities that were we'll be announcing probably on the next call.
We've we've.
Needed additional either additional district distribution in or cities that we worked in that we're able to now be able to action.
So the team there is working really quickly.
On that and just lastly on I might Wanna mention Jimmy Choo, when we acquired that company. The leadership. There in particular appeared any had already renovated most of the stores. So we really acquired a company that that does not have to go through that renovation process and we're really.
Because they're on more of new store openings.
In that group.
Just one additional comment on Versace, so year to date, we've opened up Kimberly 24, new stores and the closures are really because the net doesn't appear to be as high the closures are really related to exiting the versus line and closing those retail locations.
Thank you Kimberly great. Thank you both.
Hi, My final question will come from Oliver Chen of Cowen and company [noise].
Hi, Thank you for taking all questions John on for Oliver on provide more color on the pace of getting to that 40% signature penetration rate in retail and how you're thinking about the right level and in it you probably got penny chain wholesale side as well. Thank you so much.
Yes, well I I.
We're very comfortable were going to reach that 40% rate.
Probably in Q4 is somewhere between Q4 in and in Q1 of next year. So, we're really positioned and our own stores to get there and the inventory will be there to be able to do that so and.
I I would also tell you it might not stop at that level. When you look at our luxury a European competitors they run much higher penetrations than that in there in their assortments.
Again quite frankly, we've been behind a self inflected, but we're feeling like we're making up some real progress.
Again, I want to give a uh huh.
Big acknowledgment to Michael and our does our design team, who just doing a spectacular job, but the product right now.
And our leadership of about division as well.
And I think that as I said, it'll take a little longer in the wholesale a channel I think we would be closer to Q4.
When we saw that maybe a little drifting into Q1, but but.
Our our own stores, we're going to be there probably 90 days at least a quicker.
Then we will see in the wholesale channel.
Thank you for that question I'd like to just close on on saying that we're very pleased with the.
Results on the initiatives that we've put in place at for such a a Jimmy Choo and at Michael Kors, a and in particular.
For such a and it Jimmy Choo.
We are starting to make significant progress in our accessories initiatives and as you know those are are very important to our long term success.
We believe that the portfolio of of fashion luxury houses that we've assembled our some of the best in the world and that they will give us the opportunity to continue to accelerate our revenues and as we move into fiscal 2021.
We think that we will see a lot of initiatives.
Bear fruit that will give us an opportunity to expand our our earnings per share growth on a on a multi year basis. Thank you all for joining the call today and look forward to speaking to you soon.
That does conclude today's teleconference. Thank you all for your participation you may now disconnect.