Q4 2020 Capri Holdings Ltd Earnings Call
Ladies and gentlemen, your current drilling holes, which takes couple of holdings limited corporate school. We're currently breaching survival of additional closer so there should be starting shortly thank you for your patience if things continue to hold.
[music].
Good day and welcome to the got pretty Holdings limited fourth quarter fiscal year Twentytwenty Earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference. So what's your Jennifer Davis, Vice President of Vice President Investor Relations.
Please go ahead.
Good morning, everyone and thank you for joining us on Capri Holdings limited fourth quarter and full year fiscal 2020 conference call with me. This morning, our chairman and Chief Executive Officer, John Idle and Chief Financial Officer, and Chief Operating Officer, Tom Edwards.
Before we begin let me remind you that certain statements made on today's call may constitute forward looking statements, which are subject to risks and uncertainties that could cause actual results could differ from those we expect those risks and uncertainties are described in today's press release under the company's I see see filings, which are available on the company's website investors should not assume that the.
Great. That's made during the call well remain operative at a later time and the company undertakes no obligation to update any information discussed on the call.
In addition, certain financial information discussed today will be presented on a non-GAAP basis. These non-GAAP measures exclude certain costs associated with cobot 19, or later charger long lived asset impairments ERP implementation costs Capri transformation cost restructuring and other targets unless otherwise noted all financial.
I mentioned on today's call will be presented on a non-GAAP basis could use a corresponding GAAP measure unrelated reconciliation pleased to you the earnings release posted on our website earlier today at Capri Holdings Dot com.
Now I would like to turn the call over to Mr., John Idol, Chairman and Chief Executive Officer.
Thank you Jennifer.
Good morning, everyone.
New York Jordan you today for more recently reopened New York auctions.
I Hope you and your families are healthy and say.
I would like to take a moment to address the events that are impacting all about all of our lives today.
These are truly unprecedented to launch.
Our heartfelt condolences go after the families individuals and communities.
Back to body on just I'm tragic yes.
George Boyd re short books.
As well as the countless victims that have come before them.
Let's just demotic discrimination against the block community that has led us to this point just deplorable untenable.
I could prove holdings, we stand against racism discrimination and violence of any color.
We cannot change the past, that's an organization and as individuals we have an opportunity to positively impact the future.
I can free holdings, our diversity and inclusion council is diligently working on initiatives to foster greater quality for our employees and the communities that we serve.
We are committed to listening learning and taking the necessary auctions to support long term positive change for the black community.
Well, Weve foster and inclusive environment, where employees of diverse backgrounds are welcomed valued and celebrated.
There's more that we can do to increase diversity all levels inside our company.
We're working on significant initiatives to create changed within Capri Holdings.
Look forward to sharing our plans in the near future.
If we want to see change in our industry, we need to be the change in our industry.
As you all know the covert 19 pandemic has dramatically impacted the entire world.
My thoughts and prayers go out all those who have been affected by the bars.
Our hearts are with those who are working on the football rights to help worldcom doctors kinda back.
We thank them for their remarkable dedication to encourage.
Our companies it's founders at all I donated more than 3 million in support of Cobot 19 relief efforts globally.
Demonstrating Lee Capri holdings commitment.
Just supporting the frontline workers, who are risking their health.
To keep our community safe.
Additionally earlier this week Michael Kors.
Maybe 35 million dollar product donation to help provide relief to people in neat.
Well that's are pretty has long been a core value of the Michael Kors brand.
Our ongoing support various organizations that provide relief to those who needed most is a fundamental value for cookery holdings.
This is clearly the time for people to come together in every way and on every level.
Because we are all stronger in our United resolved.
I also want to thank our teams around the globe.
For the hard work and dedication.
They demonstrate every day during the pandemic.
It has been inspiring to see the entire Capri Holdings organization rallied together.
Our distribution center employees kept ecommerce facilities up and running well Sportsbook closed.
Our retail employer employees for eager to get back to work and have begun to reopen their stores.
And lastly, corporate employees have begun returning to our offices across the globe.
Now turning briefly to our full year financial results.
Entering fiscal 2020, we expected this to be an investment year to fund strategic initiatives and position our luxury houses for revenue and operating margin growth.
Prior to the impact of covert 19.
Earnings per share expectations were largely on track with our initial guidance for fiscal 2020.
For the full year, our results were significantly impacted by the Corona pandemic.
Revenue of 5.6 billion increased 6% year over year.
Earnings per share up $3, an 89 cents decreased 22 cents.
Versus last year that was further impacted by on anticipated valuation allowance for 44 cents per share.
Despite the pen down like we were pleased with our progress as we executed many of our strategic growth initiatives.
We continue to believe in the power of our three fashion luxury houses and the resilience of our company to navigate these extraordinary times.
We remain confident and optimistic about the future of could pretty holdings.
Looking at fiscal 2021.
As we manage through these unprecedented times, we're focused on five key areas first protecting the health and safety of our employees customers and communities.
Second reopening our business globally.
Sure deepening customer engagement.
For maintaining financial strength and.
Preparing for future growth in fiscal 2022 and beyond.
Starting with protecting their health and safety of our employees customers and communities.
Across the globe, we've implemented procedures for our stores distribution centers and corporate offices.
These include conduct conducting health screenings and temperature trucks.
Regarding employees with personal protective equipment.
Implementing increased cleaning <unk> sanitizing procedures.
Providing hand, sanitizers throughout our stores distribution centers and offices.
[noise] practicing social distancing, including re spacing for plans to maintain a safe six feet.
Limiting store capacity to allow for physical distancing.
Adding distancing markers inside and outside our stores is necessary.
Hosting signage encouraging customers to observe social dissonance guidelines.
And encouraging consumers to where a face covering while shopping.
Stores will have masks available for consumers, who do not have their own.
In terms of reopening our business, we have made the decision to begin a phased reopening of location by location basis.
While our stores are accommodating for new health and safety standards.
We will not let that take away from our luxurious static and an exceptional in store experience.
We are maintaining the highest standards of service.
Our customers have come to expect from our luxury houses.
We're pleased with the performance of reopening thus far.
We've made the most progress in mainland China, we're stores have been open for several months now and volumes have been steadily building.
We expect revenue in our fiscal first quarter to be approximately flat to last year.
Versace.
And Jimmy Choo in this region.
Well, Michael Kors, we expect revenue could be below prior year levels.
Revenue in Hong Kong, Macau remain specific significantly below last year.
And the remainder of Asia outside of greater China recovery is progressing at a slower pace.
This is due to factors first in Japan, the retail store closure and reopening process occurred several months later than in China.
Therefore, Japan.
It's early in the recovery phase.
The second factor impacting Asia outside of China is the decline in tourism.
Air traffic in the region is down significantly since the outbreak of Kogan 19 due to travel restrictions.
Chinese tourism and travel retail comprise a meaningful portion of our luxury sales in the region.
In the Americas, and Yeah me, a where we began reopening our fleet in May.
We are encouraged by the performance thus far.
Revenue has ranged from 50% to 70% 75% of prior year levels since.
Scores of reopened.
Results have improved since the initial reopening with a gradual build.
Sales trends.
Overall, we're pleased with our progress with all regions tracking above our internal expectations.
While traffic at reopen stores, it's trending slightly better than we had originally anticipated.
Version is meaningfully higher than expected.
Additionally, we saw significant acceleration in our E commerce revenue growth.
In the first quarter.
Now turning to our next area of focus engaging customers.
We are fortunate to have three brands with loyal and passionate consumers.
Through our E Commerce site, social media channels and other digital communications, we are creating messaging that is exciting to our followers as we focused on keeping them highly engaged.
Got a television Saatchi, Sandra choice and Michael Kors, how powerful voices to communicate with fans.
While stores were closed they remain connected with our customers.
As for Saatchi done to tell it provided followers with moments of Joy and often uplifting memories as she shared treasured photographs.
And personal memories are time, she spent with her brother Johnny.
And with other iconic models actors and resistance.
In addition to data tells postings there such as share content through social media to help support motivate and aspire followers. During these difficult times generating overwhelmingly positive sentiment and results.
These initiatives resulted in a significant increase engagement and helped contribute to nearly 30% increase in versace's Instagram followers during the quarter, which grew to almost 22 million.
Jimmy Choo, we launched the choose sketch competition.
In April and May we invited followers to join seven choice and sure sketches of their ultimate fantasy shoot.
And the over 10000 entries received center selected hurt top 10 designs and from there are Instagram followers voted for their top five.
They will see their sketches brought to life as part of an upcoming capsule collection.
The success of the competition helped contribute to a 13% increase in Jimmy Choo Instagram followers during the quarter, which grew to over 11 million.
Michael Kors, Michael connected with fans as he embodied the brands attitude energy and optics.
Michael released 18 videos across Instagram, Facebook, Twitter and Kakao sharing stories and showing how we spend his time during corn team.
He urge followers, just stay safe strong patient and positive through these difficult times.
Additionally, Michael invited clients to join them and personalize virtual events, where he interacted with the person participants.
Michael also interacted with fans in China, where we experienced a very successful Super brand day on T Mall in April.
We launched MK my way with a collection of customizable bags sold exclusively on T Mall.
The launch was combined with an interactive digital queries that allow customers to engage with Michael.
We were thrilled with the results, which far exceeded our expectations.
I'm not one day alone, we had 1.3 million visitors to our site and generated over 2 million indefinitely.
During the quarter, Michael Kors Global social media presence increased by 8% to nearly 49 million followers.
Now I'd like to take a moment to acknowledge one of the most powerful assets in the company our incredible group of nearly 13000, Versace, Jimmy Choo, Michael Kors store associates worldwide.
While our stores were closed many associates.
Just on Clienteling and engaging with customers at home.
They were able to interact with clients through alternative channels, such as zoom face time, Whatsapp, we chat and why.
Now turning to our next area of focus financial strength.
The pre holdings liquidity remains strong.
We currently have approximately $1.1 billion in cash and availability under our revolving credit facility.
As the pandemic spread we took decisive actions to preserve our cash and maintain our financial flexibility.
This included resetting our cost base by $500 million.
We believe we have the financial resources to emerge a strong company.
And finally preparing for future growth in fiscal 2022 and beyond.
I'm proud to progress, we're making executing against our strategic initiatives.
The results, we are seeing reinforces our confidence in the future growth of Capri Holdings.
We have a portfolio of three exceptional luxury houses.
Versace with its 42 year heritage.
Michael Kors, which has with its 39 year heritage and Jimmy Choo with its 24 year heritage.
These brands have enduring value on a long history of successfully navigating challenging periods.
Given the history of our luxury houses I'm confident that we will successfully navigate these unprecedented times and emerge in a strong position.
Looking at each of our luxury house and starting with Versace.
We're confident in our ability to increase revenue to 2 billion.
At a mid teens operating margin over time.
First we plan to build on the luxury runway momentum driven by dawn to tell us fashion Division.
Second we will enhance the brands powerful and iconic marketing to expand engagement and build upon our large social media followers.
Third we expect to continue increasing the luxury houses global retail footprint from approximately 200 stores today.
To 300 overtime.
We believe physical stores will always play a vital role in a consumers experience with luxury brands.
As a reminder, versace store base is.
Underpenetrated relative to its luxury peers.
Fourth we intend to accelerate E commerce, and omni channel development.
And fifth we will continue its band for such as accessories and footwear business from approximately 35% of revenues today, just 60% over time.
We made significant progress in fiscal 2020 with the launch of our new iconic Baroque go the logo.
On the virtuous accessories like.
This logo is a key foundation.
For future growth opportunities across multiple product categories.
Similarly, a jimmy Choo, our confidence in the luxury houses long term growth potential has not changed.
We believe there's significant opportunity to grow revenue to 1 billion at achieving mid teens operating margin over taught.
First Jimmy Choo will continue to expand its luxury footwear collection.
With an emphasis on building a rapidly growing fashion active classification.
We plan to build on the successful introductions over the past year.
Second our strategy to increase the penetration of accessories remains on track with the successful launch of our new Madeline and Veyron handbag collections in fiscal 2020.
We will continue to expand the breadth of our offerings and grow the category to approximately 50% of revenue.
Third we still believe we have the opportunity to grow the store base to approximately 300 stores compared to 226 today.
As a reminder, Jimmy Choo store base is also underpenetrated relative to its luxury peers.
Turning to Michael Kors, we were pleased with the traction of our strategic initiatives in fiscal 2020.
Our global customer database expanded by approximately 20%, reaching 44 million customers demonstrating the continued strength and desirability of the Michael Kors brand.
We attracted a younger.
Customer expanded our signature Assortments and continued to grow apparel footwear and men's.
In fiscal 2021.
We plan to continue to build on our success first we are focusing on product innovation delivering fashion newness across all categories as well, it's expanding our successful signature offerings.
Second we are planning to expand our men's business as we remain strategically focused on this high growth category.
Prior to the pandemic, we were seeing strong performance, which we will build upon in fiscal 2021.
Sure Michael Kors has tremendous growth opportunity in Asia, primarily in China, where we believe we can double our revenue over time.
Given the increased well in the region as well as our expanded.
Brand recognition.
We believe we have significant opportunity to grow our digital business opening new stores and to increase productivity of existing stores.
Finally, the brand is increasing engagement by leveraging Michaels powerful voice and leading social media presence, while enhancing our 360 degree marketing efforts.
In conclusion.
We are confident and optimistic about the long term opportunities for Capri holdings for the following reasons first we have a portfolio of three iconic founder led fashion luxury houses with powerful global recognition.
Our incredible brands inspire passion and excitement in customers, who value imagination exceptional quality and design innovation.
Fashion luxury speak to deep seated desire for self expression and creativity and we have no doubt that will remain long after the global shutdown is behind us.
Second we are driving increased customer engagement and deepening our relationship.
With existing and new customers through many.
Communication channels.
Third our leading distribution network combines a world class digital experience with luxury retail locations and the most fashionable sought after shopping destinations around the world.
Fourth we continue to execute on our strategic initiatives, which position us to resume revenue growth and expanded operating margins.
And finally, we have a strong balance sheet and a history of robust free cash flow generation.
Therefore, we remain confident in the long term opportunities for our company and believes we believe we are poised to resume our growth trajectory in fiscal 2022.
Now, let me turn the call over to Tom.
Thank you John and good morning, everyone I.
I hope, you're all staying healthy and safe.
I'd like to start by discussing our fourth quarter and year end results.
The fourth quarter revenue of 1.2 billion decreased 11% compared to last year, reflecting the significant negative impact the cobot 19 and Dennis.
Net income of 16 million diluted earnings per share of 11 cents were negatively impacted by the lower revenue, resulting expense de leverage and a higher than anticipated tax rate.
We started the quarter with strong momentum prior to the outbreak of Corona virus, however, as the virus spread around the globe our results materially weekend.
January retail revenue was positive at Michael Kors in Versace.
In mainland China, we experienced double digit increases across all luxury houses.
Trends in the Americas EMEA were also strong, especially at Versace.
In February the vast majority of stores were closed in China and revenue declined 80% to 90% as a result.
Trend also weekend and other Asia countries as Chinese tourism in the region halted.
Throughout the month of February revenue in the Americas in EMEA was in line with our expectations.
In mid February 1st began to reopen in China and by the ended the quarter nearly all stores were back on line.
As retail locations resumed operations, we saw weekly improvements so from extremely low initial levels.
In contrast in mid March we closed all of our stores in the Americas in EMEA.
We ended the quarter approximately 70% of our global fleet was close.
Throughout the quarter our E commerce sites remain largely open and we were pleased with the growth we experienced in the channel.
Now turning to total company margin performance.
Gross margin was 60.7% an increase of 130 basis points over prior year. This primarily reflected gross margin expansion at Versace and Michael Kors.
Operating expense as a percent of revenue was 52.3% a 230 basis point increase over last year, largely due to de leverage from lower revenues.
Total company operating expense decreased 48 million due primarily to a reduction of 90 million in expenses predominantly at Michael Kors.
The lower expenses include the benefits from cost reduction efforts initiated earlier in the year as we had been rigorously managing our expense base prior to the pandemic.
Additionally, we realized positive contributions from our Michael Kors retail fleet optimization program.
As a result total company operating margin was 8.3% compared to 9.3% last year.
Our tax rate for the quarter was 84% compared to 11% in the prior year.
This increase reflects unanticipated noncash valuation allowances related to the use of net operating losses at Versace Jimmy Choo.
I know wells, where reevaluated due to the impact of the grown the virus on results at the brands.
The allowances amounted to 67 million negatively impacted earnings per share by 44 cents.
Now that we've completed the review of pre holdings adjusted non-GAAP results I would like to provide a brief overview of the charge is not included in our fourth quarter adjusted results.
The vast majority of these items were directly related to the impact of the cobot 19 endemic.
First we recorded 351 million in brand intangible and goodwill impairment charges associated with Jimmy Choo.
These charges are result of the expected near term reduction in revenue and earnings related to cope with 19, which will post hone the achievement of our longer term revenue and margin targets for the brand.
Second we realized a 137 million charge for store impairment, including 94 million for a reduction in right of use lease assets and 43 million or fixed assets.
Third was a 92 million increase in inventory reserves related to the impact of the grown virus pandemic.
Fourth we recorded an additional 25 million in reserves against receivables. He's reserves were primarily taken against certain wholesale partners that have been challenged by the current environment, including those that have filed for bankruptcy.
Finally, we recorded 30 million in expenses, primarily related to the winding down of our ERP implementation and transformation efforts.
Turning to the balance sheet total inventory was 827 million a decrease of 13% compared to last year.
We ended the quarter with approximately 900 million and liquidity.
No borrowings outstanding at the end of the quarter, where approximately 2.2 billion.
Now moving to actions, we've taken to reduce operating expenses and maintain a strong liquidity position.
First we are lowering our operating expenses by approximately 500 million for the fiscal year.
We anticipate at least half of these savings will carry forward into future years.
After rigorously evaluating all expenditures the following actions have been implemented.
We significantly reduced all non essential discretionary spending, including decreasing marketing spending delaying or canceling select new store openings, reducing external third party services and pausing non critical systems implementations.
We also implemented compensation reductions for our board and employees. Additionally, John idle, Michael Kors, Donatella, Versace, and Sandra choice each voluntarily elected to forego their salary for fiscal 2021.
We streamlined our organization and have reduced our corporate workforce globally to better align our expense weight based with anticipated revenue.
Additionally, we are in the process of reviewing all retail locations and assessing store profitability in order to further streamline our operations and improve the overall profitability of our retail fleet.
As a result of this assessment, we may decide to close up 270 stores over the next two years, most of which would be Michael Kors.
We could incur up to 75 million in restructuring charges over that same period final details will be provided as we complete the plant.
Turning to working capital, we expect to realize the cash flow benefit of approximately 400 million through rigorous inventory management in light of the global store closures and anticipated lower demand in fiscal 2021.
We diligently manage inventory purchases by reducing or canceling commitments redeploying inventory and consolidating upcoming seasons.
Additionally, by extending payment terms with our vendors and suppliers, we're further managing our working capital.
Next we are reducing capital expenditures by approximately 150 million in fiscal 2021.
This includes deferring certain investments such as non critical systems implementations as well as select store openings and renovations, we expect fiscal 2021 capital expenditures to be approximately 130 million.
Finally to improve our financial flexibility and liquidity position, we amended our revolving credit and term loan facility to waive compliance with the leverage ratio covenant through our first quarter of physical 2022.
The Amendment also had security the facility and apply the minimum liquidity covenant for the duration of the waiver period.
Thereafter, the leverage ratio covenant under the facility will again apply the ratio will increase from 3.75 to 4.0.
We also entered into a new 230 million 364 day revolving credit facility.
With this additional funding the company currently has approximately 1.1 billion of liquidity.
We expect to end the first quarter with total borrowings outstanding of approximately 1.8 billion compared to approximately 2.2 billion at the end of the fourth quarter.
Given the actions we have implemented we believe Capri holdings is well positioned to manage through this period of uncertainty with ample financial flexibility.
Now turning to guidance.
We're not providing full year 2021 guidance at this time due to the lack of visibility surrounding the pandemic macroeconomic fundamentals and tourism. However, I would like to share some thoughts around our expectations for the fiscal first quarter and the progression of the expected recovery through the year.
As we have begun to open stores across all regions. The recovery is slow, but steady the weekly improvements in traffic and revenue are promising.
But we were encouraged by the progression of the recovery. So far we're planning our business assuming that revenue will build gradually.
We expect the recovery take longer in the Americas, and India relative to China, where luxury sales are benefiting from domestic demand due to travel restrictions.
We also anticipate a slower recovery in travel retail due to the longer timeframe for tourist activity to rebound.
We anticipate the first quarter of fiscal 2021 will be the low point in terms of revenue and earnings.
During the first quarter, our stores were closed on average for nearly 55% of the quarter.
This compares to the fourth quarter when our fleet was closed for an average of approximately 10% of the quarter.
Well our store revenue was down substantially to prior year given the closures. We were pleased with our robust ecommerce trends, where first quarter revenue growth accelerated to a strong double digit increase compared to prior year.
Similar to the company's directly operated stores the majority of our Department store partners locations in the Americas EMEA closed in mid March.
Stores began to gradually reopened in mid May and the majority are currently open.
Reopen store performance at the point of sale is in line with our company owned stores. However, our partner Someplace limited replenishment orders during the quarter. Therefore, the company has not had a meaningful level wholesale shipment.
Additionally, travel retail which is included in the company's wholesale channel continues to be impacted by the significant decline in tourism.
Given the impact of store closures through the quarter the gradual recovery in revenue as stores reopened and low wholesale shipments, we expect first quarter fiscal 2021 revenues to decline approximately 70%.
Due to the lower revenue and resulting de leverage we anticipated significant loss per share in the first quarter.
Looking at the second quarter of fiscal 2021, we anticipate nearly all of our stores will be opened by the end of the quarter.
Today, almost 90% of our global retail fleet is open.
In the Americas, 70% of stores are open well in EMEA and Asia approximately 98% of stores are currently open.
We expect to see gradual sequential improvements in revenue performance in the Americas, EMEA, but anticipate both regions will remain well below prior year.
We also expect revenue in the Asia region will continue to from crew, but remain below the second quarter last year.
In the wholesale channel, we anticipate shipments will begin to improve during the second quarter.
In the third quarter fiscal 2021, we anticipate all regions will continue to gradually improve as consumer confidence and the economy begins to recover but remained below the same period of of last year.
We expect a slower recovery in tourist activity, which impacts our travel retail channel as well as many important flagship locations in major tourist destinations.
In the fourth quarter of fiscal 2021, we expect revenue to remain below the same period of last year in the Americas, EMEA and Asia, excluding greater China, largely due to a slow recovery in tourist activity.
In greater China, we believe revenue could increase year over year supported by growing domestic demand.
Summing up our outlook for the full fiscal year 2021, we expect a gradual recovery the stores reopened and consumers shopping patterns returned to normal.
We anticipate an earnings per share loss in the first half of fiscal 2021, given the reduction in revenue and resulting de leverage.
Well, we have made significant cost reductions, we do not expect they will be enough to offset the considerable decline in first half revenue.
In the second half of fiscal 2021, we expect the company will return to generating positive earnings per share as revenue trends gradually improve.
In conclusion.
We have taken strong actions to reduce cost manage cash and streamline our organization, we have ample liquidity and flexibility and believe we will emerge from the cobot 19 endemic a strong company.
With a combined power of our three iconic founder led fashion brand Versace, Jimmy Choo and Michael Kors, we remain confident in our ability to return to revenue and earnings growth in the future.
And now I would like to open up the line for Q and <unk>.
Thank you.
Ladies and gentlemen, if you wish to ask a question at this time the signal by pressing star one on your telephone keypad. Please make sure Im assumption is switched off till obvious signal to reach equipment. If you wish to count. So you everquest. Please.
Star too.
It is star one to ask a question.
Hi, My first question comes from Matthew Boss from JP Morgan. Please go ahead.
Great. Thanks, John maybe as we think about as a result of the crisis or following the crisis any material changes that you're planning for across your U.S. wholesale distribution or maybe how do you see the brands ability to remapped distribution as we think about expansion opportunities that could possibly offset the impact.
Of the accelerating department store closures that we're seeing.
Good morning, Matt. Thank you for that so the question and I Hope you and your family are safe.
You know by the interesting thing during.
Pandemic, we us department stores have a very large percentage of their business in ecommerce.
And we actually have probably even a larger percentage of our business at each one of the retailers in North America.
Any commerce. So if you look at Neiman Marcus or Sox or.
Macy's Dillards et cetera, we're we're we're very large player on not a part of the of the distribution and the good news is we saw significant acceleration.
And at a couple of our Department store partners, we were actually a if not be best performing brand one of the best performing brands across all the families of businesses that we were we were part of so that was very encouraging to me in terms of how.
Our brand responded.
During when stores are actually close.
And let me kind of identify something for you Tom said that we anticipate that our revenues will be down approximately 70% in the first quarter. Our store performance is actually better than that so you're aware, both our stores and the department stores. The greater percentage of that decline is because there were really very low.
Little or no wholesale shipments so that's kind of impact so just to give you some color.
We're actually doing a better than that in terms of actual retail performance.
But of course, our online component is seeing very very strong double digit growth.
Across all channels with US Department store channel our own channel.
The stores that are going to close that had been announced once again. These are not going to be significant volume doors for us.
So we will lose some of that volume and it's it's really if it will have a minor impact on our on our overall velocity, but I don't think that's going to be a significant number for us and so so we view our opportunity to resumed growth in 2022.
With our Department store partners, not only in North America, but obviously in Europe, we have a sizable business with in the Harrods and the Galeries Lafayette smaller or reopening as we speak they tend to not have is larger than E commerce a penetration.
But but it's growing.
So I think where we'll lose some in store closures will make up some in our E commerce.
Growth with them and I think we're also one of the best companies in the industry is that both our own platforms, a particular in Michael Kors and and Jimmy Choo, We're working very hard and Versace and I think we're we're starting to make some pretty significant progress there.
As well so we've always believed in the E commerce platform and channel and and as part of our Omni channel experience and as you know over the last really seven years. We've spent heavily on platform on on a lot of distribution centers on our store for.
Ladies.
So we think that we can continue to capitalize on not even when we lose stores in markets. So.
Well, yes, there's going to be some impact I don't think we feel that at the moment to be a severe number for us in I really have to talk about fiscal 2022, because 2021, we just don't know when.
We'll be back to a more normalized rate, we're assuming as Tom indicated before really in fiscal 2022.
Thank you bye that's great. That's great color, maybe just as a follow up what's your comfort with the composition of channel inventory for the Michael Kors brand today, and how would you characterize the current promotional landscape across handbags, maybe relative to the backdrop that we saw pretty pandemic.
Sure, Matt I'd like to talk about all three of our business I think they're all important so so when the pandemic started to.
Become apparent.
And actually coated in China, we made a very significant move quickly.
We actually either canceled production going into that region of the world and or re shifted it to other parts of the world.
And and to some degree that's actually holding us back a little bit right now in China because were.
Oddly enough or slightly low on inventory there because how quickly we moved.
So so and.
In terms of of the balance of the World. We took the same approach across all three businesses.
We really reduced our inventories.
In fall and holiday Arse, our summer inventories, we have we have because we didn't ship a lot about to our own stores into our department store partners. We were re purpose thing that for a spring season next year.
And I think that's going to be falling because as you know.
Great fashion and there's some really.
Amazing product in there and so we'll we'll get the benefit of not having to buy the merchandise and then market down.
Which really leads to the third part which is markdowns are actually surprisingly.
Much lower at this point.
I think we're seeing that across the industry.
Many of the of the passion companies, including ourselves really decided that the worst thing we could it possibly done is to have giant promotions. During this period of time of course now a promotional activity is fairly heavy because it's july when when it when it was historically more typical to be in this time so.
So I really applaud the industry for being a little bit more.
Consistent about how to view.
What inventories we do have because again were planned down pretty significantly inventory of the back half of the year.
Because we did not want to have loads of inventory to mark down. So we really feel but the quality of what we have is quite good.
And we think that we'll be able to keep an appropriate pacing.
Just had one other thing for color for every one of the call.
Again, interestingly enough the handbag business has been the strongest business through co. Good.
And that's really across all three of our company is it's quite interesting.
In particular larger bags were seeing a total business backpacks.
Larger handbags coming back and even some money pieces. So so really quite a quite an interesting shift you ours are going up.
So so there is a there's definitely a shift in consumer behavior. That's a good one for us quite frankly.
Second most strongest business was watches.
Online and that's obviously more of a Michael Kors issue for us and less Versace Jimmy true.
So we're very pleased with that.
And then and then of course, our footwear in particular are active business active has been very strong there's no no secret to that and some of our casual footwear business, whether that's flip flops for flats or.
Some more casual items and in particular.
There is absolute stress on the on the dress.
Component of the business.
Not a lot of occasion.
Were being sold at footwear et cetera, and then in the women's ready to wear business, it's been either active clothing or more light dressing.
Thats really been but active but I would say ready to wear has been probably the weakest performing.
All of the businesses for us.
In the company through the through the two through the period of of end to end of quarter.
Four and pretty much through first quarter. Thank you bye.
Paul let use from Citi. Please go ahead.
Hey, Thanks, guys, you took 137 million dollar store impairment charge, because this quarter I'm wondering if you could break that down by banner and or geography, and just maybe.
Talking about how how does that tie into the I think you said there was a potential 175 million and potential restructurings tied to future store closings, maybe could you talk about that and then just second on the $500 million of operating expense savings, where do you find that how much came from each brand if you could break that down thanks.
Hi, Paul Thanks to your question.
On the store impairment charges. It was across all three brands and really due to co bid on as we assessed that profitability of those stores over the next few years, obviously, they are impacted and I'd just say here looking at the brands or take at normal distribution across the brands I don't think will show the specifics on that but as we look forward.
To the retail fleet optimization program, where we just completed one where Michael Kors closed approximately 140 stores generating savings that we've seen run through the DNA line in the business throughout this year and we're not taking a broader look across all businesses.
It really optimized fleet.
We still plan to grow Jimmy Choo and Versace.
But we will come back with a little more detail as we finalize that plan and what I had mentioned in the prepared remarks was approximately 75 million charge over that timeframe for exiting those stores.
Which at a net basis of course, we will pay back as we reduce expenses overtime.
In terms of the savings you had mentioned for the 500 million, it's across all the businesses and corporate our largest cost base of course in Michael Kors and corporate so the largest amount would be there.
But weve looked again across all the businesses and taking action to really be set our cost base for this timeframe and at least 50% of these savings will continue to flow going forward. We'll re look at some of the other areas of savings that will continue to invest back in the business.
As a business comes back.
Since in areas of marketing.
And.
Paul Good morning.
I Hope you in your family are safe I would I would add further to that we believe that in.
Michael Kors in particular.
Because of the size and the rapid growth of our E. Commerce platform, we're really servicing our customer from an omni standpoint, but also he and she are definitely shopping more online even before code. You can also see that we ended with another 20% increase in our.
Customer database, so we keep giving that relevant point because.
That's really showing we're building more customers and obviously, we're getting that information and were doing business with them.
And it's.
Becoming quite an ecosystem for us, which we which we really like.
And so I think you can kind of think about.
650 stores two to 700 stores from Michael Kors over the long term and and there's no question that those bottom stores are they're no longer profitable for us.
So therefore, we are closing stores that are less profitable and if you. Unfortunately would have seen and sort of did see but in Q4, we're really starting to see benefits of that fleet optimization program, which we had been talking about some two years ago and and so that's that's you know our mindset hasn't changed.
And you know coven may have accelerated a little bit, but not a lot I mean, it's really our mindset is to have a smaller store fleet for Michael Kors be more focused on digital growth for the for the brand.
And also increased operating margins, even with code we ended up with a north of a 20% operating margin in Michael Kors and quite frankly, we think we can grow that.
Relatively decently.
Because we're going to get rid of a lot of these lower smaller stores that are that are actually creating a loss for us number one and number two.
We are starting to generate.
Better profitability in our E commerce business, while it's still below our our full price, but our or our store business.
It is it is definitely improving and I'm also might add that it for such a and a Jimmy Choo E Commerce is actually equal and profitability to to our store network.
So we see a we see it kind of a a little bit of a turning point for us in terms of that profitability metrics and I think we've talked to you in the past, saying that that has actually gone against us and again, we're not fully where we want to be but we're definitely making some significant progress and we think that will impact our profitability.
Long term and our goal for for Michael Kors is to actually improve profitability.
The last thing I, just want to point out about.
You saw we improved gross margin during the quarter I think we told you we were going to be raising prices, which we did do we told you we were going to be reducing some of our cost, which we did do and we also had mentioned that we would be slightly less promotional which we did do and all that starting to come into the gross margin in the company and it's been a long time since which.
Matt Directionally happened for Us. So again, you know in my prepared remarks, I said to you that we're feeling.
Quite encouraged about a number of the strategic initiatives that we were putting in place and we're seeing that happened. So a lot of what you heard me talk about wasn't wholly different than what you heard us talk about in previous calls and that's because we believe we're still on the right path.
We think that the customer journey will be slightly different because obviously she is going to probably be less than stores over the next few years until we get a vaccine until people feel more comfortable shopping outdoors et cetera. So we're going to be ready for that we're also taking a very.
Deep and thorough approach to Clienteling.
Which we think is going to become a sizable business for for our company. We're already seeing the initial results of that.
And we think we can take that a lot farther so retail is going to look different than change and we're gonna be agile and be able to.
You there to be able to too.
Fulfilled the customers desires, where they are and I think we've got three incredible brands to be able to do that with.
Thank you Paul.
Thank you in order to low to no more people to ask their questions will be on we tend to ask you to limits the number of questions to one in Q.
Kimberly written Greenberger from Morgan Stanley. Please go ahead.
Great. Thank you so much good morning, [noise] John I'm wondering if you can just reflect upon the strategies you shared with us here over the past year and.
As we consider life during cultivate inputs co bits are any of this strategies or several of the strategies that you are putting in place. If this co video experience sort of sharpen your focus on any particular strategies and.
Does it cause you you know by contrast to maybe ease up on pursuing at least in the short term.
Some of the initiatives that you've talked about I'm, just wondering how you think about where to focus the organization energy.
Given the changed environment that we find ourselves then thank so much.
Thank you good morning, Kimberly and again I Hope you and your family are safe.
Yeah, that's an excellent question Kimberly and as you can imagine ourselves and every other company that's in the.
Consumer price world is going through that.
Same kind of strategic review, so I would say the following number number one.
Right at the top of the list you have to reset your cost base because the world has changed and I think Tom indicated the number of things that we're doing to restructure the cost base and the company.
Let's have some unfortunate consequences in terms of lay offs and salary reductions and other things.
But we we've done it and we think it's the right thing because we have to get through this its very difficult period of time secondly, we've slowed down initiatives that might have been nice to have and might have.
You are shown.
Benefits for the company over a longer period of time, but right now probably don't have to happen tomorrow and one of those was S&P, we certainly slowed that down we're going to resume the implementation of that hopefully beginning next year, but that can take time and we certainly are a company that is able to to operate quite efficiently.
Without having that that entire structure in place.
We are not holding back and this is where I would say you where our focus is on any consumer facing.
Initiatives, where that's anything related to our ecommerce platform to our our clienteling platforms to our omni channel platforms. We think that that is going to continue to be critical I think the shopping window is going to be shortened.
And he or she wants that they're going to want it extremely quickly even quicker than they wanted it before.
So we have to be prepared to do that.
Got some really neat initiatives going on.
One of them is something that's happening right now in the Hamptons, where Jimmy Choo is going to bring store to you.
We're doing we're testing that as a as a concept for us and we think it's going to be quite interesting for us to be able to arrive at your home.
The van and there is the entire assortment for you obviously about the entire but a more limited version and we can service you inside the house.
One of our very talented sales associates in a more one on one clienteling.
I think we've got to be flexible we've got to be.
Able to allocate resources to.
Some of the new initiatives that we're taking place.
The second thing is in terms of the value of the brand and looking at Versace, where we think it's the largest dollar volume.
Growth up proposition for this company, we still firmly believe in our $2 billion.
Growth objective.
And again heavily driven.
Off of our accessories business, you look at our four or five big competitors in that business and I won't name them, but you can figure out who they are.
They're all either at 10 billion or north of it and then there's another swath of them that are in the $2 billion category. So we're very comfortable that given the strength and the power Versace and all the cleanup work that we've we've just gone through which is what we were planning on doing anyway. Now we have a brand that is very very clean ever brand that's got something.
It's really going to be quite desirable in the new the.
Logo, we're going to continue to push that we have are already have our medusa logo, which is quite popular in particular in Asia and in Europe.
And then we've made some merchandising changes there that we think are going to really drive that business. So I think we're very comfortable with that.
In terms of a change or a or an issue or concern we're definitely concerned about the dress shoe business at Jimmy Choo.
You heard me speak about it.
Just a minute ago and that's really the dress shoe business in general is under pressure.
So we're gonna have to move a little faster on our casual initiatives at Jimmy Choo, and we were kind of headed down that path before but now we're gonna have to go faster.
And then lastly.
Michael Kors pick we feel really good about where we've got the brand position right now from a from the communication with the customer from where are we are product as looking right now from how the consumers responding to us I think the area there we're going to obviously.
Trim back is on our store fleet program, we're where we think that that's quite frankly, a drag on the profitability today.
So I think that you know focused areas on on capital are really going to be more about the front facing initiatives to our consumer.
We're going to continue to keep our foot on the accelerant accessories business as you heard it's our best performing business across the group.
We're going to probably have to be a little bit more nimble in terms of of the way people are dressing and how that's going to look going forward.
And then the last thing is we'll just take.
Our bigger internal corporate initiatives and probably have to slow those down.
Just a little bit to be able to make sure that we maintain our cash flow.
Thank you Kimberly.
Omar Saad Evercore is buying please go ahead.
Thanks for taking my question Hope you all are well.
One really quick question follow up on Versace on the numbers are obviously, great I know this noncomparable factors last year, you did you close until partway through the quarter partway through the quarter than this year, obviously, the shutdown in China or such as higher exposure and then North America, maybe you could help us understand what the underlying in one Q at least four.
At least what the underlying growth rate as Ben.
What was for there was such a brand and then John please more inch and insight on the comments around handbags larger handbags higher AIU ours. What do you think is driving that it could be a really important trend given the opposite has been a more of a factor the last few years. Thanks.
In terms of Versace, we were.
Having to actually we started the quarter quite strong.
And and.
In January a just as a note inc. In comp.
Pretty much it was up 8.5%. So we were we were you know the business was actually trending quite quite well.
And we had had been trending I'm actually nicely in China, and as I said to you before since the reopening China is precisely has has shown very strong development. There almost immediately since we reopened the doors. There. So very pleased with that I'm also pleased with the fact that.
Over the last.
Three or four weeks in North America since we re open the doors for Versace surfaces is very strong here.
So I think the work that we've been doing is quite good again remember on I.
We set out to close down 150 million plus of business at for Saatchi had had four lines previously one called for such a collection and one called called versus versus and Weve been cleaning out all that merchandise and getting rid of it. So this is really where we're starting to be clean that was really at the beginning of this spring.
During season, so so I think to see the kind of results that we were getting I was very encouraging and also the.
The logo that we have on our virtuous bag and some of our footwear and some of the belts. We were selling et cetera is also trending extremely well for us and you can watch what we're doing on Instagram and our email pacing.
So so we feel that what we put in place for Versace is definitely taking hold.
We're also in the middle of renovating all the stores as you know globally and we're going to continue to do that that's.
To Kimberly's question one of the things we did not stop during this.
Situation is really the renovation for such a stores. We kept that is a very high priority for us I will be opening Paris in the spring, we're gonna open London in the spring a news new stores there.
And so so we've we've continued our we believe in the future and making investments luxury takes time, if you don't all the sudden just.
Flip a switch and it does it runs up.
But the initial results from the from the direction that we've taken seems to be seems to be working so knock on wood and I think the other thing you're going to see at for such a not even with the pandemic.
His margin expansion, that's something we feel very good about what we're doing in terms of of really restructuring and this is not doing anything to the quality products, we were operating and really much more.
Efficient in our manufacturing capabilities there.
I also want to give a tiny shot up before I go to my courseware for what's going to happen also at Jimmy Choo, even though we've got some challenges with the dress shoe business, we know that.
We are going to make some margin.
Advances there as well I was purchased our new factory in Florence, that's up and running under our direction now that's going to definitely had some benefit there and as we are growing out the sneakers slashed trainer business and some of the casual.
We're getting a lot better at that manufacturing those products. So again, we'll see some margin expansion there and the group has also seen some very nice leverage over leather purchases et cetera, where versace, Jimmy Choo and Michael Kors quite frankly are collaborating together. So I think you're going to continue to see our us make progress on on cost of goods.
In terms of the accessories business that Michael Kors as I said before you ours are up again I can't say, that's going to stay forever, but for sure they're up right now and it's been driven by totes backpacks, and some larger handbags, which is quite interesting for us.
The initiatives that we set out on last year, which was to grow our signature business to a higher percentage that had previously been has been a absolute home run for the company. Our signature business continues to be the best performing classification continues to sales outpaced stock and again you know if if business continues.
As to run at the rate that it is right now which is above our internal projections, we might actually have a little bit of an issue of not having enough stock hopefully, we'll be able scrambling and get that fill then but.
But so so I think we're we're seeing that as as a true benefit and interestingly enough, while we've been less promotional.
The customer didn't react as net negatively as we thought.
We've seen she's coming into shopping.
And I'm not saying she is not still looking for for value, but it's just spend a little bit less of the tone of the consumer experience that we've been having inside of our stores and online.
Thank you Omar.
[noise] Lorraine Hutchinson from Bank of America. Please go ahead.
Thanks, Good morning, I, just wanted to focus on Jimmy Choo for a minute you mentioned that the dress shoe business is obviously under pressure near term, but as you look out over the longer term do you think the casual plus accessories will be able to offset any pressure you may see over an extended period of time projections.
Good morning, Lorraine and thank you.
So that's an excellent question and also I want to.
I just wish that you in your family are safe.
In summary, we saw this coming a little bit beforehand to b to b.
Quite transparent.
You know that you know the casualization and in particular, the sneaker business has been has been growing and even more so at the luxury level.
So we had been probably behind the a fall.
We introduced a new sneaker called Hawaii, and its rapidly become either the second or third best selling shoe in the company you can see it online many iterations of it coming.
We have other new sneakers that are coming behind this.
We probably were also behind on the slide category and and so we're building that up and we needed to do that regardless.
Where we think we're going to be able to pick up some of the decline in in the pump business.
Is really in items like we have something called the kind of boot and so you can see that the plane weather, but you can also see with diamonds on it which is very Jimmy Choo.
You can see a new collaboration that we're doing with timberland on an overall swarovski Crystal book, that's going to be.
Cost of $3000 or $3500. So so we can sell very expensive things and Jimmy Choo, we found that that we our customer.
The Diamond Sneaker as you know it was very big success for us our customer actions wants that from us. So I think you're going to see 80 Wars go up and Jimmy Choo in footwear, because we're going to be introducing more luxury fashion at higher prices.
And more unique things and that will be everything obviously from our from our dress footwear, but really also targeted at a lot of fun things that are in the casual boot booty and he and the flat area. If you look at our our new mule that's in the in the recent campaign with Kate Moss.
That's come out of the gates flying for Us and we're really proud of how that's happening. So I think our first initiative has to be that we've got to shift what we're doing in our own footwear business and I applaud. The design teams on the merchant teams for what they're doing and as I said in my prepared remarks. The Haemek business is also good start a and I would say, it's a pretty much in line with what we.
We had had anticipated I think we were more pleased that we have two groups. We have our Madeline, which is our C. R C and cross at Crystal and then we have the new J.C. logo and burren.
Which also appears on on footwear, and we're selling about 20% to 30% of our footwear styles, where that is included on the style.
In that in the logo so that means people are embracing it people want it.
So I think this.
There's no question, there's going to be a bit of a pause on the Jimmy to growth because of the impact of of the.
Okay.
Of the dress footwear business and hence the reason why we took the write down as well.
Just because we think that is going to take a little bit of a term for us and then we'll see growth again.
Going forward, but we still feel very very comfortable that we will be able to reach our billion dollar goal for the company.
Thank you we will now take over next question from Jay sole from CBS. Please go ahead.
Great. Thanks, so much for taking my question, Tom So give us some color on how you see gross margin trending.
As we go through as we've gone through Q1 is that we didn't get into Q2. Thank you.
Hi, Jay Thank you for that and hope you and your family are well in terms of gross margin trending I think I'd go back to our comments related to inventory and managing inventory through the year. This so it's John was discussing really spent a lot of time, we planning and re purposing inventory. So that we have what we believe is the right amount.
Throughout the year, so expect to see.
A little more consistent trends in that and in Q4 of course in gross margin was up across the group and across to Michael Kors and Versace, which we were very pleased with.
Got it and then maybe also given the change in the balance sheet over the last week can you just remind us of what the key maturity dates are going forward and what the amounts are associated with those dates.
Jay we just have a very minor amount due in October.
Around 50 million and then going beyond that we don't have any maturities for several years, so really about three years out and right now I feel with the changes we have we have very strong flexibility the billion one in liquidity, which has been consistent now.
Raised from the 900 million that we had all the way back in April the changes to the credit agreement provides further flexibility.
For the situation and we believe it positions us well to move through.
This year and emerge into a point, where we will again begin paying down debt as we've done in the past the very regular and material basis.
Jay I think that's a very.
Important poised to Tom just noted we ended the quarter with 1.8 billion in that.
And we may even be able to pay down a little more during the year, we're not exactly sure about that but we think.
2022, we're going to be able to resume some very significant debt repayment.
And put this company into a very even stronger.
Financial position, so we're not going to be active in any acquisitions, we're going to continue to focus on the on the acquisitions, but we did over the last few years, we typically provide enormous growth opportunity for us.
We have the balance sheet to be able to do that and I think we're going to come out of this as one of the strong on a companies both from a brand and positioning standpoint, as well as from a balance sheet standpoint.
I want to thank you all for taking the time for joining US today once again I want to wish that you and your family's stay healthy and safe during this very difficult a moment in history.
We all believes that this will eventually pass.
But in the meantime, I think it is our most important responsibility to respect one another.
To to wear masks, just keep your social distancing.
And to help us get through this very difficult crisis.
We believe that we have three incredible.
Founder led brands that are going to position us for growth in the future and we look forward to updating you on our first quarter results in a few weeks. Thank you very much and have a good day.
Thank you that will conclude todays conference call. Thank you for your participation you may now disconnect.