Q3 2020 Earnings Call

HM.

Good day.

[music].

Turning to water Twentytwenty earnings Conference call today's conference is being recorded.

Hi.

The conference over to Jennifer Davis, VP of Investor Relations.

Please go ahead.

Good morning, everyone and thank you are joining us on Capri Holdings third quarter fiscal 2020 conference call with me. This morning are chairman and Chief Executive Officer, John Idle, Chief Financial and Chief Operating Officer, Tom Edward 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 then the company's SBC filings, which are available on the company's website.

Yes, it should not assume that the statements made during this call will remain operated 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.

Non-GAAP measures exclude certain onetime costs associated with the Jimmy Choo, when first actually acquisition restructuring and non cash impairment charges transformation clock ERP implementation costs.

Unless otherwise noted all financial information on today's call will be presented on a non-GAAP basic and all comparable store sales numbers will be presented on a constant currency basis could use a corresponding GAAP measures and related reconciliation preview the earnings release posted on our website earlier today, a copy holding dot com now I would like to turn the call over to Mike.

Sure John Idol, Chairman and Chief Executive Officer.

Thank you Jennifer and good morning.

We continue to be encouraged by the ongoing progress.

Pretty holdings as we execute the strategic initiatives for each of our founder led fashion luxury houses.

Well each brand is distinct has its own hurt your age they all have consistent philosophies on sacher leadership and luxury.

Our company is led by design visions of Donatella, Versace, Sandra choice and Michael Kors.

The resources and investments of our group.

Made tremendous progress in expanding accessories, I suppose for structure and Jimmy Choo.

In fact during the third quarter handbags inflected positively at both houses. So the first time since the repositioning of the category.

Michael Kors, our focus remains on rebalancing the brands to position it for growth.

Taken together, we remain confident that our three luxury houses physician Capri holdings to deliver multiple years of revenue and earnings growth.

Now looking at our third quarter results.

Who use that revenue and earnings per share exceeded our expectations.

Revenue of 1.57 billion increased 9% year over year.

This increase reflects the addition of Versace and growth from Jimmy Choo.

Partially offset by anticipated revenue declines that Michael Kors.

Earnings per share were one dollar unsexy success.

Before reviewing brand highlights for the third quarter.

I would like share some of our thoughts on the Corona virus global health emergency and its impact on our outlook for the fourth quarter.

The situation is very serious and dynamic.

Our thoughts and prayers go watch the people of China.

And all those affected by this virus globally.

Health and safety go our employees as a priority.

We continue to take the necessary precautions to ensure their wellbeing.

We can only hope for a speedy and positive resolution to this crisis.

Given the extraordinary appropriate efforts take him to contain the virus.

Our trading results in greater China, and certain other parts of the age or reason haven't been materially.

Currently approximately 100 is 50.

Our 225 stores in mainland China or closed.

Additionally for those stores remaining open both traffic and sales have been severely reduced.

Based on our current visibility into the situation in China, we are reducing revenue by approximately $100 million.

Earnings per share by 40 to 45 cents for the fourth quarter and full year.

This estimate could materially change if the severity of the virus worsens, including potential board broader impact.

On our business outside of China.

<unk> outbound travel and tourist traffic is further restricted from China into other countries.

In addition, we will not be providing brand comparable store sales guidance ranges for the fourth quarter due to the lower the normal forecast visibility.

No I would like to summarize our outlook for the year.

Prior to the situation in China, our earnings per share expectations were largely on track with our initial guidance for fiscal 2020.

We now anticipate fiscal 2020 revenue.

Of approximately 5.64 billion and earnings per share of approximately $4.45 to $4.50.

As previously stated fiscal 2020 isn't investment year to fund strategic initiatives in Versace, Jimmy Choo.

We are confident that the investments the company is making this year and synergies that we are now realizing.

Well provide accelerated revenue and operating margin expansion.

Now turning to third quarter performance by brands.

Starting with Versace, we were pleased with our third quarter results.

Revenue of 195 million was ahead of our expectations, reflecting better than expected comparable store sales.

Which increased mid single digits.

For such a delivered double digit comparable store sales growth in Americas, and Yeah me.

But continued to experience declines in Asia, primarily due to the ongoing challenges related to Hong Kong.

For such as continued momentum was driven by new collections that were infused with signature brand codes, such as our new Baroque goes be.

Medusa hardware and iconic Prince.

Taking from our extensive archives, we recently introduced a new House code, Johnny Versace's original handwritten signature.

This motifs was incorporated across several women's and men's ready to wear styles.

It is interpreted through embroidery, all of her friends and Crystal embellishments.

Both women's and men's ready to wear were key drivers of growth for the quarter.

Turning to accessories.

A key component of our growth strategy.

Sales increased significantly in the third quarter driven by the performance of our new virtuous collection with the bulk of the logo.

The versus handbag group remains the top performing collection and accessories.

And we have expanded the bulk of the across new categories, including belts, backpacks footwear and fashion jewelry as well as new handbags styles.

We're particularly encouraged that virtus.

It's driving increased client acquisition with more than 60% of purchase is coming from new customers.

In terms of brand awareness and customer engagement, our holiday marketing marketing campaign reflected a rich narrative reminiscent of the Jackie columns novel.

The brand employed a 360 degree marketing program across social media and email to drive traffic to a dedicated holiday section on Versace Dot com.

It's helped contribute to a 30% increase in the such as Instagram followers during the quarter, which grew 21 million.

Once again, a number of high profile celebrities were dressed in versace throughout the quarter, including Jennifer Lopez, Angelina Jolie couldn't quite bashing, Selena Gomez Chadwick Bozeman, and Michael Jordan.

Additionally, numerous celebrities like Miley Cyrus Gigi Hadid Bianca show from.

We spotted out.

And about carrying the virtues bag.

Reflecting the power of the Versace brand Donna tell it created a worldwide sensation by dressing Jennifer Lopez in Versace, Chile, a during her first Super Bowl performance.

[noise] Sunday night.

With over 100 million viewers. This event showcase for such a at the forefront of its rock and roll heritage.

Overall, we are excited about our continued progress executing against for such as growth initiatives I remain confident in our ability to grow Versace to 2 billion in revenue.

Moving to Jimmy Choo revenue increased 2% on both the reported and constant currency basis in line with our expectations.

Comparable store sales were flat.

Which was also in line with our expectations.

We were pleased to see positive comparable store sales performance in the Americas, which increased high single digits.

And he EMEA, which grew low single digits.

Similar to last quarter trends in Asia were impacted by Hong Kong, well mainland China continued to grow double digits.

In footwear, Jimmy Choo continued to deliver strong comparable store sales growth in fashion active cost classification.

Driven by the introduction of Hawaii, and exciting new seeker, which builds on the existing strength of diamond and rain.

In women's accessories. The continued expansion of our new collections led to positive global comparable store sales growth for the first time since we repositioned the category.

Sales were driven by our JC signature varying group.

And the continued positive performance of modeling.

In November we continued our in might choose interview series, which highlight strong prominent women, who not only dare to stand out but also in power others by sharing their insights learnings and experiences.

Rosie Huntington Whitely was featured in the second installment of the series wearing designs from our crews 2020 collection.

In conjunction with the campaign, we launched Instagram shopping to tags for the first time.

And saw above average sell throughs on the shoes rule Rosy war and her posts.

Jimmy Choo continued to dominate the red carpet was celebrities such as the Duchess of Cambridge beyond say, we on a constant will.

Dual Lipa Haley Bieber genotypes and Billy Porter.

During the quarter, Jimmy choose Instagram followers grew to 11 million an increase of nearly 20% over last year.

Finally, I'd like to take a moment to congratulate sender choice for her induction into the illustrious footwear News Hall of Fame in recognition of her outstanding achievements building Jimmy Choo into one of the most prominent luxury brands in the world.

Overall, we're pleased with the progress transforming Jimmy Choo, probably predominantly fashion luxury footwear brand into a more balanced luxury house with accessories, becoming a significant part of the company's revenue.

Our goal is to grow accessories for approximately 20% to 50% of Jimmy choose revenue overtime.

We remain confident in our long term ability to grow Jimmy choose revenues to 1 billion.

Turning to Michael Kors third quarter revenues declined 5% on both the reported and constant currency basis.

Total revenue was inline with our expectations.

Retail revenue was below our expectations with comparable store sales declining in the low single digits.

Our third quarter comparable store sales reflect low single digit growth in Asia.

Flat results in Europe.

And a low single digit decline in the Americas, we're stores were impacted by lower than anticipated traffic during the month of December.

Additionally, we saw a greater than expected decline in watches, which negatively impacted total comparable store sales by approximately 200 basis points.

Excluding the impact of watched declines comparable store sales would've been flat.

In the wholesale channel revenue was ahead of our expectations as we saw better products sell throughs and are building inventory to prior year levels with our department store partners.

[music].

Moving to our product performance in accessories signature continues to drive sales around the globe.

As customers responded positively to both our core assortment and new animation.

Penetration of signature in the retail channel was approximately 30% in the third quarter similar to the second quarter.

In wholesale [laughter] penetration increased to nearly 30% as well.

Long term, we anticipate signature will reach approximately 40% penetration, which would drive higher revenues and more consistent sell throughs.

Moving to footwear trends remain strong in the third quarter performance, driven by booties and fashion active.

Heritage Booties with iconic charm and lock branding what customer favorites.

Active remains one of our fastest growing categories and footwear, we continue to be leaders in design and innovation in this classification.

In women's ready to wear positive trends continued with particularly strong customer response to fashion outerwear.

In men's we also saw.

We also continued to see positive comparable store sales that remain enthusiastic about our opportunity to expand the accessories collection.

Growth in the third quarter was led by backpacks and small leather goods.

Our signature collections.

Our driving performance and now account for 40% of sales.

Additionally, customers responded positively to our new.

Introduction of the Sneaker collection.

In our watch category trends further decelerated in the third quarter.

Despite continued innovation the decline was greater than anticipated.

This reflects continued decreases in fashion watches and the greater impact of competition from tech driven companies in the smartwatch market.

This category will likely remain challenged and have a continued impact on north American retail comparable store sales as well as future licensing income.

We remain focused on accelerating the distribution of our fine jewelry line to help mitigate pressure from the continued decline in watches.

During the third quarter, Julie comparable store sales increased double digits.

Turning to brand engagement, we continued to be pleased with our Bella deep campaigns.

Our holiday marketing reflected the speed energy and optimism of our Brad with Bella in our M.K. go see in ski capsule.

And travelling in style with our jet set girls signature accessories.

Once again, Michael dressed a wide array of celebrities during the quarter, including Lupita Neon go.

Olivia Wild Daisy Ridley Reese Witherspoon.

And Sir sure Ronan.

Got a young young and Chris Lee among others.

Moving to customer experience, our global database continues to expand reaching approximately 42 million customers an increase of over 20% compared to last year.

Demonstrating the continued strength and desirability of the Michael Kors brand.

We're especially excited about the growth of our VIP database, which now has 2.7 million customers enrolled well above our expectations.

During the quarter, Michael Kors Instagram followers grew to 16 million, an increase of nearly 20% versus last year.

We remain focused on deepening our connection with our customers and driving excitement and desire for the Michael Kors Brad.

Overall, we are committed to delivering improvement in the Michael Kors business and ultimately returning to longer term growth through the continued execution against our three strategic pillars of product innovation brand engagement and customer experience.

In conclusion, our results reflect continued progress at Capri Holdings.

The growth initiatives for our recent acquisitions Versace, Jimmy Choo continue to gain traction.

And we remain on the right path just stabilized trends at Michael Kors.

While the situation in China is very concerning we continue to believe that the long term opportunity in the Asia region.

We'll be a pillar for our future growth.

The power of our three fashion luxury houses position us to achieve meaningful meaningful long term revenue and earnings growth.

Now, let me turn the call over to Tom.

Thank you John.

Starting with our third quarter results revenue of 1.57 billion increased 9% compared to last year ahead of our expectations.

Revenue growth year over year was driven by the addition of Versace and growth from Jimmy Choo, partially offset by anticipated lower revenue and Michael Kors.

Net income was 253 million, resulting in diluted earnings per share of $1.66, which was above our expectations.

Third quarter earnings per share included 13 cents dilution from Versace.

Looking at sales performance by brand for such a revenue was 195 million and comparable store sales increased in the mid single digits. Total revenue was ahead of our expectations, reflecting better than anticipated comparable sales.

We continued to see double digit comparable sales increases in the Americas and EMEA, while Asia declined as trends in Hong Kong worse.

Versace ended the quarter with a global luxury fleet of 208 retail stores, a net increase of 10 from prior quarter.

Turning to Jimmy Choo revenue during the quarter was 165 million.

2% increase compared to prior year on both the reported and constant currency basis and inline with expectations.

Comparable store sales were flat as anticipated with continued growth in the Americas, EMEA and mainland China.

Jimmy Choo ended the quarter with a global fleet of 223 retail stores, a net increase of 17 from prior year.

Turning to Michael Kors total revenue of 1.2 billion was above our expectations and declined 5% compared to last year on both they reported and constant currency basis.

Revenue performance was driven by better than anticipated wholesale results.

As John said, we worked with our wholesale partners to bring inventory in earlier to help drive better sell throughs.

This was partially offset by lower than expected comparable store sales.

In the retail channel comparable sales declined in the low single digits, reflecting a greater than anticipated decline in watches and lower than anticipated traffic in North America in December.

The headwind from Roches in the quarter was approximately 200 basis points.

Global ecommerce revenue benefit at comparable sales by 180 basis points.

Michael Kors ended the quarter with a global fleet of 846 retail stores, a net decrease of 24 compared to prior year.

Now turning to total company margin performance.

Gross margin was 59.5% down approximately 130 basis points compared to prior year. This primarily reflects the lower Michael Kors brand gross margin predominantly due to increased promotional activity in North America, partially offset by a benefit from the inclusion of Versace.

Total company operating expense increased 112 million compared to prior year.

The increase reflected 146 million of expenses related to the addition of Versace as a percentage of revenue operating expense increased 380 basis points to 42.6%, reflecting the addition of versace, partially offset by lower expenses at Michael Kors.

Total company operating margin of 16.8% compared to 22% last year, primarily driven by the addition of their versace business and lower operating margin and Michael Kors.

For such case operating margin of negative, 5.1% reflected normal seasonality and increased investment to support growth initiatives.

Jimmy choose operating margin of 5.5% compared to 9.9% last year.

Michael Kors operating margin of 23.8% declined 130 basis points versus prior year, reflecting lower gross margin, partially offset by lower expenses.

From a channel perspective, once again retail operating margins expanded in the quarter well wholesale margins declined.

Our tax rate for the quarter was 4.5% compared to 14.5% in the prior year, primarily reflecting the resolution of uncertain tax positions.

Now turning to our balance sheet, we ended the quarter with 237 million in cash and cash equivalents and 2.1 billion of debt during the quarter, we repaid approximately 300 million of debt and year to date have already paid down 500 million, reflecting the strong cash flows of the business.

Additionally, we repurchased 2.7 million shares of stock were 100 million and have 400 million of availability remaining on our share repurchase authorization.

We ended the quarter with inventory of 960 million compared to 765 million last year with the increase reflecting the addition of Versace inventory of 187 million.

Jimmy Choo inventory increased 13% compared to the prior year to support our growing accessories category and new store expansion.

Michael Kors inventory decreased 2% and is now more in line with sales trends.

Now turning to guidance.

As John stated primarily as a result for the situation in China, we have revised our full year expectations for Capri Holdings. We now expect revenue approximately 5.65 billion by brand, we expect Versace revenue of approximately 840 million.

Jimmy Choo revenue of approximately 580 million and Michael Kors revenue of approximately 4.2 billion.

Revenue changes for all brands reflect the situation in China, the developments in Hong Kong and unfavorable foreign exchange translation. In addition, Michael Kors was impacted by lower sales in North America.

We now anticipate an operating margin of approximately 13.7%.

We expect interest expense of 15 to 20 million, an effective tax rate of approximately 9.5% and weighted average shares outstanding of 152 million.

As a result, we now expect diluted earnings per share of approximately $4.45 to $4 in 50 cents, including an estimate for the situation in China related to the current the virus of 40 to 45 cents.

For some perspective on the impact of the situation approximately 150 of our tuning 25 stores in mainland China are currently close.

Locations that remain open have reduced operating hours and are experiencing significant traffic declines as a result revenues are being significantly impacted.

For the consideration of the situation in China Asia would have represented approximately 25% of total Capri revenue in our fourth quarter and China makes up more than half of our business in that region.

Our current estimate for the impacted the situation in China could materially change if the severity of the virus worsen, including potential broader impact on our business outside of China, if travel and tourist traffic. It's further restricted.

We currently source less than 10% of our Michael Kors product in China, our forecast could also be negatively impacted by disruptions of our supply chain.

As John noted earlier, we hope free speedy and positive resolution of this challenging situation.

Boston players go out to the people of China and anyone affected by this fire.

For the fourth quarter, we now expect total company revenue of approximately 1.3 billion. This assumes versace revenue of approximately 210 million and Jimmy Choo revenue of approximately 130 million, we expect Michael Kors revenue of approximately 950 million, which includes the impact of the earlier wholesale shipments real.

Lies in the third quarter.

Our fourth quarter operating margin is expected to be approximately 9% for Versace, we expect an expansion in operating margin, reflecting the benefit from an additional month in the quarter December which is the brand single most profitable month of the year.

For Jimmy Choo, we expect operating margin to improve from prior year as we begin to leverage expenses and normalized strategic investments made over the past two years.

Michael Kors brand operating margin now is expected to be below prior year due to the Corona vires impact.

We expect net interest expense to be approximately zero and our effective tax rate to be approximately 70%. We forecast weighted average shares outstanding of 152 million, resulting in diluted earnings per share in the range of approximately 68 to 73 cents.

Now we'd like to talk briefly about fiscal 2021, we've made tremendous progress on our transformation initiatives that delivers synergies across our business.

We are starting to see some savings come to fruition and now anticipate approximately 100 million in synergy and cost savings in fiscal 2021, as we build out corporate shared services, great operational centers of excellence and leverage common systems to accelerate business initiatives.

We look forward to sharing more details about fiscal 2021 on our yearend earnings call.

Looking ahead, we remain focused on executing against our strategic initiatives for each of our brands and realizing the benefit of our multi brand portfolio.

But the confident these efforts position us to drive long term revenue and earnings growth.

Now, we'll open up the line for questions.

Thank you.

If you would like to ask questions the signal by pressing star on your telephone keypad.

Using a speakerphone. Please make sure your mute function is turned off to an out of your signal to reach our equipment. Please limit yourself to one question and then reenter the queue again that is there and then one to ask a question. We can pause for just a moment to whatever everybody the opportunity to signal.

[noise] and we will take our first question from Randy Konik of Jefferies. Please go ahead. Your line is open.

Yeah. Thanks, a lot guys I guess question for Tom.

Classifications.

Could you give us some perspective on just how big the watch category is today for Sun themselves. Just so we had some frame of reference of where it is now.

I guess second.

Can you give us some you've done a nice job of stabilizing improving the retail margins in.

Hey, Michael Kors wholesale margins.

On a little bit.

Some perspectives on when we should see.

And how we should see a wholesale.

Thomas margin starts to stabilize what are the levers.

And the timing and then I guess last week, you gave us some good really interesting perspective on synergies coming through I think you said 100 million in fiscal 2021.

Just give us some perspective of how you think those synergies do they more than offset.

Some of the issues going on in a in China, and Asia region, or just how should we be thinking about those synergies offsetting or or partially offsetting.

Some issues consuming in Asia. Thanks, guys.

Sure. Thank you Randy and I'm, just thinking the watch category. It is still a significant part of our business in North America and represents a good portion of our retail business. We don't share this specific number but from its its height and the teams are high teens other penetrate.

It should it has declined but it's still significant enough, whereas you can see it's a 200 basis points impact minutes in a quarter for us and has hit that number in the past.

Well.

With regard to synergies and the impact I think we're really pleased with how the company is coming together and our teams are executing against their transformation initiatives to create a global services and global capabilities.

We're going to provide a lot more information on that when we provide our full year guidance.

On fiscal 2021, but clearly that's something we're very excited about and I will tell you more.

Good morning, Randy It's John.

I'd like to take the margin piece.

[music].

We're as you recall for Q4 for US was kind of the the moment, where we were beginning to see operating margin expansion or forecasting that for really all of our brands and and we just as Tom said in his earlier prepared remarks or your.

To continue to see that Versace, Jimmy Choo even.

With with the situation in China.

Michael Kors is gonna be impacted by that book, but what we're seeing is our retail operating margins are expanding.

Which actually happened in the third quarter.

And that's a result of of our our fleet optimization program and also some other things that we're doing we're getting a better sell throughs in certain categories.

And then and then secondly, the wholesale margins have been under pressure and that's really a result of de leverage given the size of that business is shrinking, but we were encouraged about during the quarter as I said in my prepared remarks, we saw an inflection with our department store partners in North America.

Uh huh.

As we started to really get inventory in a we worked closely with them to actually move inventories in a bit earlier in the we had an originally anticipated.

And that worked.

We're not quite up to two l. why a levels with our partners, but we're getting very very close.

And we're seeing our signature initiatives work in that channel as which is what we wanted to see happened.

So I think we felt really good about what happened in Q, our Q3 retailer Q4.

In our categories. So that was that was really a good sign. So you know you've heard us say in our prepared remarks that we feel like we're we're getting a doing the right things in terms of.

Rebalancing, the Michael Kors brand and heading into right direction, I believe you're going to see that show up in margin.

Operating margin next year, and we look for operating margin expansion across all the brands brands next year with the exclusion of the situation in China, which obviously, we're gonna have to take into.

Into our view, especially in Q1.

Of next year, but but feel very good about all the initiatives, we're making on product development.

And on on the cost of goods and how that's going to show up in our gross margins and then as Tom indicated you're going to hear some of that synergies that we're getting a across the group and you're going to see that showing up and operating margin. So thank you very much for for your questions point ready.

No.

Thank you will know take our next question from Simeon Siegel of BMO capital. Please go ahead. Your line is open.

Hi, good morning, guys.

Hey, John in light of the additional Macy store closures can you contextualize, how you're thinking about your business there may be across their fleet versus E. Com and then thinking about how you see the revenue opportunity in the Americas, specifically for Versace Anshu. Thanks.

Good morning Simeon.

So so we all learned about the Macy's closures here unless a 24 hours.

<unk> from what we understand or let me back up one second summit.

We're very pleased with the progress that we're making with with Macy's with of the Michael Kors. Brad We saw that we had a very could oh holiday season with them and so I want to.

Thank them for their partnership and I said most of our Department store partners. We saw some we saw some good results.

And and when we look at Macy's or the majority of our business is done obviously ecommerce being our business because store today and then.

Really the top few hundred doors that that represents the majority of our business again, we're very proud to being in all the Macy's stores and the fleet because we think they're great partner and doing a terrific job I don't think that these doors that they've announced from what we are.

Understand are gonna be material to our business. It will have a small impact, but we don't think it's going to be anything significant.

And then and then of course you know we're we're we're looking to see our trend across all of our Department store partners continue through.

Our Q4, and then on through the next fiscal fiscal year.

So secondly in terms of of the Americas, and and Versace, Jimmy Choo, We've seen excellent results Versace has been strong all the way through since the day, we bought the business here really showing double digit growth and and I'm really excited what we're doing that.

Without having the percentage of penetration of accessories, and even though we're very proud of the fact that we that we inflected and im comped up double digit by the way positive in for such accessories.

As a percentage it still has so much more opportunity to grow so I think we're feeling great about that and if he gets a chance with versace, you'll see a number of stores. We started the renovation program. We told you we bought the company will love it almost every store globally.

And those stores are really outperforming the chain the fleet.

So so excellent results are there for us.

And we're seeing the same thing as we said in in Europe, and then in terms of Jimmy Choo, Jimmy Choo had a very could a holiday season in North America, Jimmy was a more mature business other than Versace is in North America, but historically, when but one of our largest businesses in the company.

But we just had a very very good holiday season.

And and Super pleased to see the accessories category, which I actually had its as largest inflection here in North America and driven by the by the new.

J.C. Verizon collection.

So we've got two groups that are working very very nicely as you go into our stores.

I think you'll see the stores, probably feel closer to 30 plus percent accessories and the way we've positioned it and the same and and as in Versace or the majority of the customers that were getting on the accessories are actually new customers. So we're very very pleased with the customer acquisition and how that category is developing for us. So.

Thank you for your question is playing summit.

Thanks Best of luck for the rest of year.

Thank you.

No take our next question from Erinn Murphy of pipe Chris on there.

Great. Thanks, good morning.

I just had a clarification for you first just on the guidance.

Yeah.

850 million and I know.

That was the primary driver.

With that North America.

And just kind of expound on that and then on Corona virus.

I mean that sort of corridor in the fourth quarter.

Business conditions today continue.

The quarter and then I know, it's small but how are you just that's something that potential supply chain disruptions.

Yeah.

Sure the 150 million.

Approximately 850 million.

It is a couple things number one its approximately 100 million of of what we see in Asia and I'll come back to that.

Second.

Secondly, there is a bit of a shift because as we mentioned earlier that we.

Beat our revenue expectations during the quarter and the majority of that's coming from a wholesale shipments.

Matt turned out to be a very good thing for us because that turned into two better performance in our and our wholesale partners. So that's really a shift and obviously will will not get bought back in Q4. So that kind of gives you a a feeling of both of the 150 million.

The Corona virus the way that we've approached this the guidance is that we believe that we've taken the current trends that are happening today, a we've assumed that nothing gets better through the end of of the B the end of March.

And I think that's a very.

Oh prudent way to to view at I. I, we don't see anything that indicates that that will.

Change.

And in fact, we've already had one change overnight where were we will not close stores in Macau for a few weeks along with the casinos et cetera. So.

Things continue to evolve, but this is our best.

<unk>.

Understanding given the visibility that we have today and as we said in our prepared remarks, and it's in our press release.

If we see additional curtailment of of of travel or whether that being the tour groups. As you know I'm trying to had had had.

Decided not to have the conducted towards groups, leaving which which we think it was a very smart thing and we took the the Chinese governments doing a great job to try to protect their own people and other countries.

That has impact outside of China.

In particular in places like Korea, and Japan, and Malaysia, and Singapore, Obviously, Hong Kong and.

Macau.

So we factored some of that into this number if it gets you to materially worse on the that number could could get could get worse.

But we wanted to frame it up to give every one of the idea of what we think it is today.

How we hope we see the situation.

That's helpful then with regard to.

Yes, sorry.

You had mentioned a supply chain.

As I noted in his prepared remarks, we have less than 10% of products Michael Kors produced in China for for the remainder of our activity were really actively working to manage inventory flows and make sure inventories position in the right places and also that manage future production. So there's a lot of effort around all of that.

In that area at the teams are focused on yeah. There, let me add one further saying I think all of US, we'll know more or next week or two obviously there are many many cities in China that remain closed until next week or and then we'll start to see resuming a factory openings resuming of of certain.

The places are not shipping.

So there's a lot of movement that will happen in the country next week.

So so currently we don't think it will have a again a material impact today, but if if multiple factories don't open up for whatever the reason is or there's disruption freight movement on that could again further impact our our forecast. We just don't know sitting here today looks like.

Me.

Okay, and then just a follow up on the logo business for Michael Kors I didn't hear you talk about it in the script and I know that's been a strategic.

On your part.

Penetration, how did not perform versus non logo in the quarter. Thank you.

Sure. So are we actually did comment about it in this in our prepared remarks. So so the signature businesses, we refer to it was about 30% of our retail or revenues during the quarter and about 30% of our wholesale so we saw significant inflection in the wholesale versus the second.

Quarter.

Which was a very good thing, which is what we wanted to have happened.

And again, our department store partners are really working closely with us to build out that category, but the second thing that's great for us is that that it as a category that we.

Don't need to to be as Promotionally active in because it's more consistent.

And it it has longer life and duration. So it's the category with the highest sell throughs and the company today.

And also the performance is being driven without having to take the level of promotional activities that we normally do when we're moving fashion through the quarters or through the seasonal activity. So again, we're super pleased and we also have a goal to get that from its current 30% level.

At the 40% level and we certainly have the inventory flowing in the spring season to do that you'll see that probably happened a little later in the in the.

Quarter Slash.

In the first quartile of next year, but we're well on track to achieve that we think that's also going to how to further impact on on our gross margin, which will fall down to the operating margin expansion because of the better sell throughs less promotional activity on that product and where the customers responding. Thank you.

Thank you.

Please limit yourself to one question and then reenter the queue.

We'll take our next question from Matthew Boss of JP Morgan. Please go ahead.

Hi, good morning, Grace money, I'm from or not but I'm looking at the Michael Kors fun.

Do you attribute that lower than expected traffic in North America to December.

Thank you Grace and good morning, Grace, we actually were doing extremely well up until the first week of December.

And then we saw a traffic slow and and Oh I I can't tell you whether it was one week less or whatnot. We obviously then saw very quick surge I'm right towards the end of the holiday season.

And so what we made the decision during that period of time was to end the quarter with our inventories cleaner and so in Tom's prepared remark, we took additional markdowns.

To being a really good inventory position, which I think you saw from our from our statements inventories down about 2%.

And then really setting us up to being a clean position for spring season, and and so we can't tell you what that was but we certainly did not see that.

In other regions of the World It was more of a north American isolated.

Situation for us in Michael Kors.

Thank you Chris.

Thank you will know take our next question from Ike Boruchow of Wells Fargo. Please go ahead.

Hey, Thanks for taking my question.

I guess and John first question for you talked about the watch business being incrementally sounds like you're incrementally disappointed by that I, just just curious outside of China and Asia Kinda. Other that's got its own issues, but maybe just focusing on the Americas in Europe because of that incremental pressure from watches should we not assume that MK comps in those regions can.

Get can state can get back to or stay in the positive and then just to the inventory question before me.

Given you went to.

MK inventory looks really really clean relative to the last six months, what's the visibility on gross margins for MKS, just kind of going forward. Thanks.

Right.

Let's first look good morning, like and thank you for the question in Ah. So in Europe, we've been Comping positive the were flat because this quarter, but before that we were comping positively in Europe, and and again, we see that.

As being one of the most healthy regions in the world for Us.

So so I think we view that as being a continuing to happen you know he watches are very there's a very big surge during the our third quarter or a retailer fourth quarter.

And and and so it's a disproportionate the amount of velocity that it represents during the quarter. So we were we were very disappointed.

In the quarter, we did not think we would drop close to that much in watches or so so and I would tell you I think I think it was you sought in our prepared remarks, but we have an even greater a decline in our in our.

Our tech watches than we had anticipated.

Really the customer have voted for those companies that are that are more in the tech Oh.

Wearable business than we necessarily our and it's very difficult for us to compete against them in particular, where they have a ecosystem that is linked to many other products with the consumer. So we're trying we're trying hard but it's a it's definitely a an uphill battle.

So I think that the watch declines will continue to impact a north American comps on all the way through next year.

I think it's less of a percentage of the Europe business and it's.

A diminished not a de minimis, but it's very very small percentage of the of the business in Asia.

In watches compared favorably to what North America and to a lesser degree, but Europe or that being said we are working very very hard you heard us talk about our men's business, we're pretty happy with what's happening with mens and and and mens accessories in particular, and where we get to Q4 to give you guidance I think.

To start to begin to give you a little more of a picture on what men's represents in terms of revenues because it's it's becoming a much more significant if some very good growth plans for that category next year, you know women's ready to wear women's footwear has already been offsetting some of the declines that we've had in the watch business and.

Again.

We're seeing that the accessories business start to start to stabilize were not exactly where we want to be but we're getting much much closer.

So I think that.

Again, you know not getting too far in front of ourselves, but we definitely look for stable business for for Michael Kors.

<unk> for next year, and and even even with watches declining if we get all of our strategies in the right place, we should be able to.

Look at a minimum flat comps and hopefully something.

It's positive for that area.

And in terms of the inventory as you said you know we ended up very very clean and and I think that sets us up we were already anticipating for quite frankly, a very nice inflection in Q4 for us in the Michael Kors, our gross margins, which obviously would slow down.

Operating margin.

I think that doesn't necessarily changes for us because we're all those product positioning is replaced the bigger issue from Austin operating margin were Tom said in his prepared remarks that will be operating margin will be declining a for Michael Kors. In Q4 is the fact that most of of the revenues for Michael Kors and the decline that we've talked.

About are coming from Asia that is our highest margin business for the company. So that's just kind of how the direct impact on to our overall operating margin.

Thank you like.

Thank you.

We'll now take our next question from Jason.

Yes.

Great. Thanks, so much kinda my first question spot for Saatchi.

Maybe provide a little bit more context around the performance in Asia. I think you know going back a few months ago. There's the issue of T shirt and impact of the business are you continuing to see.

Packed from that or is that you know changed.

And then secondly, just how you're thinking about managing costs, China, given what's happening with <unk> virus art is there is there an ability to sort of.

Managed down the cost and then you know theoretically if the business where to bounce back next year. The virus goes way next year is normal year.

How much of the costs would you be able to lever up you know if you had a nice bounce back in sales or how many natural inflation would there be caution Asia.

Going forward.

Okay, I'm going to probably Celtic, the Versace, and Oh, well take a little bit of the magic costs, and then turn it over to Tom So as I said earlier.

We couldn't be any happier than what's happening at for such as Donatella and her design vision and her marketing prowess are working exactly the way that we had envisioned when we.

Acquired the company and and really built about out together I have to take my hat off to a Jonathan eckard and what he's doing with the management team they're implementing.

Our collective strategic initiatives and the customers absolutely responding to what we were what we're working on.

So I think I think we really feel that for such areas on the right track.

We did have a situation in China.

Were there was it was unfortunately.

A misunderstanding about where product with labeled.

And that absolutely.

Created.

Hey.

Difficult result of our performance in mainland China.

Our that has been really subsiding, a and then again, we've recently, we had a wonderful Chinese celebrity where our products including allow.

And performance and so I think that will over time, we're we're working very very hard to make sure that the people trying to understand that we respect the when trying to policy and and believe in their sovereignty. So I don't think that's gonna be an issue for us.

Obviously.

China is a bigger portion of the versace business than any of our three brands.

So that's going to be painful as we go through.

And I'm going to save the next six months.

Because we believe the next two or three months, it's going to take two to really get.

The virus contained it will go away and will be dealt with and then they'll be a rebound period, so our thoughts or Q1, or we'll probably see not the level of of of what we're seeing today in terms of store closures and and reduced traffic and shopping malls, but they'll definitely being impact on Q1.

For all of our brands.

But versace feeling it largest because of its penetration of overall sales, but it doesn't it doesn't.

Give us pause for one minute about the acquisition itself at about the potential of what this is going to do for our overall group by being able to add a billion dollars with this brand I think we're we're super positive about how how that's going to impact us long term and as I said earlier, we actually.

We think that operating margins are going to expand at all of our brands for next year ex this corona wireless fiber situation, which we will get through the China will so we'll return and it will be a it very key pillar of our of our growth.

And in terms of managing the cost I will turn out over time.

Sure. Thanks, Jay for costs were actively managing costs, but in the short term as you can imagine from the very rapid developments here.

The cost that are not a lot that are variable that we could adjust in the short term. However that said, where there is a possibility oh and the fact that there's many store closed and less traffic for items like marketing and other short term events, we're certainly actively managing and.

Reducing those costs.

However, as John mentioned right now what we're seeing is the hundred million flow through more at the gross margin level, which is the highest in the company across all of our regions. Thus the impact up for the business.

To the extent and ultimately when this recovers we would expect that margin to come back as well and will again be managing cost in the meantime, I don't know that there's any specific inflationary impacts that would be considering during this timeframe I really just to support for the business.

We get back.

In the market after the virus so works through.

Thank you Jack.

Thank you.

Thank you looked at even though take or.

Last question from Oliver Chen of Cowen and co. Please go ahead.

Hi, This is John on for all of her today. Thanks for taking my question, Chris just elaborate on the traffic trends for Mac acquired by channel how their full price performance its outlet.

And I'm just quick thoughts on the handbags, how did the category profile for all and how you're managing annualized in light of T. hands free Chen. Thank you very much.

Sure. Good morning. Thank you for the question of in terms of of channels up just broadly speak obviously, the full price channel.

Has seen for the last almost three years a decline in traffic.

Although that's beginning to mitigate.

Clearly what you've seen is our online business is growing at every single market by the way, including China. We had excellent results at 11 11 and over the.

Holidays, or we've we've gone on to.

T mall in a great partnership and we're one of the best performing brands in the luxury provision, which was very exciting for us. So again I think that's part of the natural migration of where consumers are shopping today.

The outlet malls have absolute.

Slight traffic declines and again, if it were not the only one who have commented are seeing the and part of that is because of E. Commerce again, a certain customers, who would typically shop and an outlet store like buy something on sale on our on our on our full price channel.

So I think that's just part of the natural migration and you see that a bit more in North America, where in Europe and Asia, that's not exactly the case.

So I think we're you know we're positioned very well as Weve mentioned many times, we started our digital and E. Commerce journey more than five years ago. We spent a significant amount of money on platforms distribution centers were also bringing the Jimmy Choo is pretty good at it we're going to bring versace up to.

To the group level Oh, we're as Tom mentioned, we're going to make further investments and synergies.

We will moving certain of the groups together in warehouses or you'll see that happened very rapidly next year in North America in Europe.

And in Asia as well. So we're we're we're really using the synergies not only from a financial standpoint, but also to improve our capabilities as an example for such it would begin to.

Be able to.

Have a more omni approach.

To their capabilities.

From a from a store and online channel. So so I think we feel.

Very good about our ability to to move that forward and in terms of performance of accessories as I've said to a we're we're we're feeling very good about what's happening we're moving the the inflection or right direction. We have a number of groups that are that are actually turning into a very strong performers, where we did not have that at this.

Time last year and signature is well on its way, we're we're going to get to the 40% level, which again is going to give us much better operating margins much more consistent sell throughs. So I think we feel good about that and then I want to add not just in light of course, we feel great about what's happening in versace with accessories.

I I think it's actually quicker than we had anticipated and I think that shows the power of the brand and what what Donatella has been able to achieve with our new.

Welcome to the logo and then what appeared to me and Senator choice have done at at.

Jimmy Choo, I'm really getting us into the into the the logo and signature business.

Is starting to to really.

Hey, grip and not only in the accessories, but also that JC logo.

On our footwear and in particular boots. This holiday season performed really well. So I think all of our teams across the world are are developing a very strong product and put us an excellent position for for next year.

And on that note I'd, just like to conclude by saying Thank you for joining us this morning.

We are feeling very good about capri's opportunity for long term revenue and operating.

Income and earnings per share growth.

And you know this was the investment year for the company as we had said and I think you're going to see the fruits of our initiatives.

Really come forward, but next year and we're excited to tell you more about that at our upcoming earnings call. Thank you for joining us today.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

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