Q1 2021 Capri Holdings Ltd Earnings Call
[music].
Thank you for standing by this is the conference operator, welcome to the Capri Holdings Limited first quarter fiscal 2021 earnings conference call.
A reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions.
To join the question Q you May Press Star then one on your telephone keypad should do you need assistance. During the conference call you may signal operator by pressing star and zero I would now like to turn the conference over to Jennifer Davis, Vice President Investor Relations. Please go ahead.
Good morning, everyone and thank you for joining us on Capri, holding limited first quarter fiscal 2021 conference call.
With me this morning, our chairman and Chief Executive Officer, John Idle and Chief financial on Chief Operating Officer, Tom Eduardo.
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 FCC filings, which are available on the company's website.
Investors 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.
These non-GAAP measures exclude certain costs associated with cobot 19 related charges long lived up to asset impairment.
ERP implementation costs Capri transformation cost restructuring and other target.
That's otherwise noted all financial information on today's call will be presented on a non-GAAP base that the view of corresponding GAAP measures and related reconciliation. Please view the earnings release posted on our website earlier today at Capri Holdings Dot Com before we would be before we begin I would like to note that we have posted on our website buys that provide highlights for the quarter.
Now I would like to turn the call over to Mr., John Idol, Chairman and Chief Executive Officer.
Thank you Jennifer and good morning, everyone.
Today once again, we are joining you from our New York offices.
I'm, sorry, but there may be some like background noise due to construction in the built.
Before reviewing our first quarter results I would like to share some thoughts around the evolving covert 19 pandemic.
The situation remains very serious and dynamic.
As it continues to profoundly impact.
The entire world.
My thoughts and prayers go out to all those who have been affected by the virus.
And every one on the front lines, who worked tirelessly.
Helping combat this pandemic.
As we continue to reopened our stores around the globe.
The health and safety of our employees customers and communities remains a top priority.
I wanted aside our teams around the world for the hard work dedication and they continue to demonstrate every day to support each other.
And their communities during this unprecedented times.
Now turning to our first quarter results.
While our performance was significantly impacted by the covert 19 pandemic.
[noise] revenue and earnings exceeded our initial expectations.
We were particularly pleased with our robust ecommerce growth.
As revenue increased approximately 30% compared to the prior year.
And as our stores reopened revenue exceeded our original act expectations.
Similarly, our wholesale partners E commerce sites and reopens stores are performing above our expectations.
However, our wholesale partners please limit new orders during the quarter.
Due to the store closures.
Overall first quarter revenue in our retail channel declined approximately 60% while wholesale sales decreased approximately 85%.
Total revenue declined 66%.
With trends improving progressively each month.
Looking at gross profit.
We were pleased with our performance as margin expanded 400, an 80 basis points.
This improvement in park reflects our corporate initiatives to increase full price sell throughs and selectively raise prices generating higher a yours.
Additionally, gross margins benefited.
From a higher mix of retail sales versus wholesale sales.
Moving to operating expenses, we have taken decisive actions to reduce our expense base in fiscal 2021.
However, due to the de leveraged on lower revenue, we generated a net loss of 156 million.
Loss per share of one dollar and four cents in the first quarter.
Now turning to review of our sales trends by region.
First quarter revenue in Asia declined 41%.
We've made the most progress in this region driven by the strength in mainland China. We're stores have been opened the longest and sales are benefiting from domestic consumption.
First quarter revenue at Versace, Jimmy Choo was approximately flat to last year in mainland China.
Well, Michael Kors was below prior year.
Revenue in Hong Kong, Macau remains significantly below last year.
And the remainder of Asia outside of greater China.
The recovery is progressing at a slower pace as the virus impacted these areas later.
Wholesale shipments in the region declined 80%.
In EMEA <unk> first quarter revenue declined 66%.
Our stores in the region were close on average approximately 60% of the quarter.
We began reopening the fleet in May and 98% of stores were opened by the end of the quarter.
Wholesale shipments in the region declined 70%.
In the Americas first quarter revenue declined 76%.
Our stores in the region were closed on average approximately 80% of the quarter.
We began reopening our fleet in May.
We ended the first quarter with approximately 70% of stores open.
Wholesale shipments declined approximately 90%.
Additionally, all of our regions have been impacted as international travel that's virtually come to a standstill sense the outbreak of covert 19.
Tourism and travel related sales comprised the meaningful part of our business.
Tourist activity impacts our travel retail channel as well as many important flagship locations in major tourist destinations.
Now turning.
To first quarter performance by brand.
Starting with Versace sales of our new virtuous accessories collection with the Baroque Ob logo are encouraging.
The virtuous group remains a top performing.
Collection and accessories.
We have expanded the baroque ob across additional categories, including belt backpacks footwear as well as fashion jewelry.
Within ready to where we saw strong customer response to spring summer collection, which celebrated the twentyth anniversary of the jungle dress worn by Jennifer Lopez.
The collection featured statement jungle prints.
Complemented by innovative tie dyed designs.
Within footwear, we saw outperformance in our new virtuous styles, including sandals and fashion active.
Overall, we're pleased with the pace of the recovery up for softer.
In terms of brand awareness the customer engagement, we launched.
The very Versace challenge in May promoting our new iconic Baroque Ob logo.
The brand invited followers to share.
Pictures, a V shaped objects landscapes spaces or scenes from their everyday lives with the potential to have their submissions featured across our social platforms and web sites.
The challenge encouraged to social community to have fun and inspired creativity in mid July we launched part two of the very Versace challenge across our digital channels to drive further awareness of our Baroque Ob logo.
The second installment featured imagery of the Paris cheer Royal squad dress and a uniform a baroque go print pieces.
From the pre fall collection of 2020.
[noise] squad showcased our new virtuous accessories line, symbolizing the virtuous values of strength courage and virtue.
Additionally in June we launched Dv TV.
A series this follows Donatella, she hand picks outfits for a few of her famous friends.
These initiatives resulted in a significant increase engagement and helped contribute to a 13% increase in Versace total social media following during the quarter, which grew to 39 million.
Moving to Jimmy Choo.
We're pleased by the performance of our expanded assortment of accessories with R.J.C. signature of Iran remaining our best selling collection.
And footwear as Frank fashion preferences are shifting towards more relaxed styles, we saw strong performance in sandals flat and active.
In fashion active customer response to our expense expanded assortment resulted in penetration nearly doubling for the quarter.
In terms of brand awareness and customer engagement, we launched our new pre fall 2020 AD campaign, featuring fashion icon Kate Moss.
In June Kate was featured in the latest installment of in my choose interview series.
Which highlights strong prominent women, who not only dare to stand out, but also in power others by sharing their insights learnings and experiences.
Okay from off a pit of mises this season's Bohemian glamour inspired collection as well as the modern and stylish Jimmy Choo customer.
Additionally, sender Troy held virtual shopping events with some of our top clients.
These activities helped contribute to a 6% increase and Jimmy choose global social media followers.
Which grew to over 17 million.
Turning to Michael Kors, we're pleased with the performance of our accessories classification.
This quarter signature penetration increased to over 35% compared to approximately 25% last year.
And generated higher a yours as well as gross margins.
In addition, we saw strong performance in large bags, such as totes and backpacks.
Which are also contributing to your increases.
Within footwear, we are seeing better performance and personnel styles, such as chic sandals and fashion Act.
In watches and jewelry, we saw an inflection over the past several months.
Watch sales are being driven by traditional styles that are true to our DNA with bold sophisticated.
And distinctive designs.
Finally, the men's business continues to grow as we focus on timeless essential with a modern edge.
Within men's accessories.
But then mens accessories continues to outperform our expectations.
Turning to brand engagement, Michael reinforce the theme of the model modern traveler as he continued to connect with fans on social media.
Taking them on a virtual.
Journey to some of his favorite travel destinations.
He shared photos and memories from his trips around the world.
Before the Corona virus pandemic, Michael inspired Bella had the to visit the city of New Orleans.
And last month relative to our Instagram followers on a virtual tour.
Our first trip to the city, where Michael sent her to his favorite spots.
Michaels and Bell is videos drove a significant increase engagement.
Our marketing initiatives continue to underpin our brand pillars of speed energy and optimism.
This helped contribute to a 6% increase in the brands global social media presence, which grew to nearly 49 million followers.
Our global database also continues to expand reaching nearly 45 million customers, an increase of 17% compared to last year.
Demonstrating the can still continued.
Strength and desirability of the Michael Kors Brent.
Despite the impact of the global pandemic, we were encouraged by the ongoing progress of Capri holdings as we execute against the strategic initiatives for each of our founder led fashion luxury houses.
Looking ahead, we remain focused on the initiatives that position, our global luxury group to achieve meaningful long term revenue and earnings growth.
Starting with Versace, we remain confident in our ability to increase revenue to 2 billion at a mid teens operating margin overtime by building on the luxury momentum driven by Donna tell us fashion vision.
Enhancing our powerful and iconic marketing.
Expanding accessories, and footwear penetration to 60% of revenue.
Accelerating our E commerce, an omnichannel development.
And increasing our global retail footprint to approximately 300 stores.
Similarly, a Jimmy Choo are confident in the Luxor, 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.
And achieve a mid teens operating margin over time.
By increasing penetration of our accessories collection, the 50% of revenue.
Expanding our luxury footwear collection.
Leveraging our E commerce, an omni channel capabilities.
And increasing our global retail footprint to approximately 300 stores.
Turning to Michael Kors.
Our goal is to return to revenue growth.
While also improving profitability.
The increase revenue we plan to.
Increased customer engagement building on Michael's global brand awareness.
Expand our signature offerings across all classifications.
Continue our strong ecommerce growth.
Double our revenue in Asia.
And expand our growing men's business.
Turning to profitability.
We are beginning to realize the benefits of certain initiatives designed to improve our operating margin over the next several years.
We expect to drive gross margin expansion.
Higher full price sell throughs strategic price increases and lower manufacturing costs.
We also will continue to reduce our cost structure as we streamline our organization to better align our expense base was anticipated revenue.
Additionally, we expect our fleet optimization program to improve overall profitability by closing underperforming stores.
In conclusion during these unprecedented times, we plan to continue to execute on our strategic growth initiatives and remain confident in the long term opportunities for each of our unique global luxury house.
The pre holdings has a portfolio of three iconic.
Founder led fashion luxury brands.
That have enduring value and a long history of successfully navigating challenging periods.
We will continue to carefully guide our business through the current retail environment.
While positioning the company to resume growth.
In fiscal 2020.
Now I'd like to turn the call over to Tom.
Thank you John and good morning, everyone.
Starting with first quarter results revenue of 451 million decreased 66% compared to last year.
The revenue declined was driven by our retail fleet enclosed for approximately 55% of the quarter and limited wholesale orders.
Across all brands revenue trends improved progressively each month throughout the first quarter.
Primarily due to deleverage on lower revenue, we generated a net loss of 156 million.
Resulting in a loss per share of one dollar enforce sets.
Looking at revenue performance by brand for such a revenue was 93 million.
55% decrease compared to prior year.
For Saatchi ended June with a global luxury fleet of 204 retail stores, a net increase of eight from prior year.
For Jimmy Choo revenue during the quarter was 51 million, a 68% decrease compared to prior year.
Jimmy Choo ended the quarter with a global fleet of 228 retail stores in net increase of 13 from prior year.
Turning to Michael Kors total revenue of 307 million declined 69% compared to last year.
Michael Kors ended the quarter with the global fleet of 822 retail stores, a net decrease of 31 from prior year.
Now looking at total company margin performance.
Gross margin expanded 480 basis points, 67.2%.
This predominantly reflects an increase in Michael Kors, driven by higher IMU ours and favorable channel mix.
Operating expense as a percentage of revenue was 100% compared to 48.3% last year due to de leverage from lower revenue.
Total company operating expense decreased 200 million.
Similarly, due to benefits from our cost reduction initiatives as well as lower variable store cost.
Total company operating margin of negative 32.6 compares to 14.1% last year, reflecting the significant deleverage on lower revenue.
Turning to our balance sheet, we ended the quarter with cash of 207 million and debt of 1.8 million, resulting in net debt of 1.6 billion.
Total liquidity at the ended the quarter was 1.1 billion.
Looking at inventory, we ended the quarter with 948 million down 7% compared to last year.
We expect inventory to sequentially declined throughout fiscal 2021, and the year approximately in line with our full year revenue decline.
Now turning to guidance.
We're not providing annual earnings 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 second quarter and the progression of the expected recovery throughout the year as well as provide some color around certain non operating items.
Following encouraged by the progression of the recovery so far we're planning our business assuming that revenue will rebuild gradually.
In China, we are experiencing more rapid recovery as luxury sales are benefiting from domestic demand.
In the balance of Asia as well as the Americas in EMEA, we expect the recovery to take longer across all geographies, we anticipate a slower recovery in tourist activity, which impacts our travel retail channel as well as many important flagship location in major tourist destinations.
Now looking at the second quarter, the vast majority of our stores have reopened.
Building on the positive momentum seen through the first quarter sales trends continue to improve in July.
In the wholesale channel. We also see performance at the point of sale continuing to improve which is resulting in increased shipments.
We anticipate total company second quarter revenue will decline approximately 40% compared to prior year with retail sales performance significantly better than wholesale.
In the third and fourth borders we anticipate all regions will continue to gradually improve as consumer confidence and the economy begins to recover.
We expect performance in the fourth quarter be better than the third quarter, but for both periods to remain below prior year levels.
Summing up our revenue outlook for fiscal 2021, we expect a gradual improvement in consumer shopping trends and anticipate a decline of approximately 35% for the year.
We expect company owned retail sales trends to be better with a slower recovery in wholesale shipments.
This outlook does not incorporate any significant store re closures or additional government lockdown.
Turning to gross profit, we anticipate gross profit margin expansion of approximately 150 basis points for the year with improvements across all quarters.
This performance primarily reflects the benefit of greater full price sell through selective price increases and manufacturing cost efficiencies.
Now turning to our expectations around certain non operating items.
The full year, we anticipate interest expense of approximately $60 million.
Our effective tax rate is expected to be approximately 15%.
And we forecast weighted average shares outstanding of approximately 154 million.
We anticipate and 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 that will not be enough to offset the considerable decline in revenue during the first half of the year.
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 are pleased with the progress of the recovery, thus far which is ahead of our internal projections. We remain focused on managing our business through these uncertain times will also executing against our long term strategic initiatives for each of our brands.
As we emerged from the pandemic pre holdings is well positioned to drive strong revenue and earnings growth in fiscal 2022.
Now I will open up the line for questions.
Thank you we will now begin the question and answer session to join a question Q you May Press Star then one on your telephone keypad, you'll hear a tone acknowledging your request. If you are using a speakerphone. Please pick up your hands that before pressing any please.
Your question. Please press Star then too we will pause for a moment as colors join the queue.
Our first question comes from Omar Saad of Evercore ISI. Please go ahead.
Thanks for taking my question good morning, Thanks for the update.
I'd really like to dive in a little bit further on the Michael Kors.
In a positive you are in gross underlying gross margin trends, John maybe you could talk about.
Some of the brand dynamics dynamic driving that and do you see opportunity here in this pandemic too.
Think about pricing and the promotion out promotional levels in your own channels and with your wholesale partners.
Taking this opportunity kind of reduce that on a go forward basis.
I think the demand environment could support that kind of ongoing positive you are and trend. Thanks.
Good morning, Omar and I Hope you in your family were all safe during this unprecedented time.
Let me first start out by telling you that.
As we've said in our prepared remarks, the majority of our initiatives that we started out.
With in our fiscal.
20 are really still in place today.
So we haven't changed a lot of our strategies.
Given the pandemic when I say that.
When we look across each of the groups we see.
Enormous growth opportunity and first starting with with Versace, where we clearly believe we have one of the most underdeveloped fluctuate houses in the world and we look at our.
Current revenue trend.
Pre cobot.
We feel that we were underdeveloped significantly and we've done we've said numerous times that we think thats a ultimately a 2 billion dollar opportunity, which means a little over a billion dollar growth for the company. So I think we remain very confident with that.
We see our ability we've taken really the first year year and a half of owning that company was and cleaning it up we've been.
Closing certain still unproductive stores, we closed out two lines, where we dropped over $100 million in revenues.
And we've finally gotten the company into position now where we can also start to expand margins and we're doing that through the through the.
Larger penetration of accessories.
And also really kind of refocusing some of our initiatives around lives size in the company. So we were doing that all those things heading into covered and we launched our new broker be logo, which along with our Medusa, We think gives us tremendous.
Opportunity to create engagement and brand loyalty.
As consumers.
Pre covert again, we're still very engaged with products.
Represented a brands.
Brands heritage or the symbol of that Brad We think we have that and then lastly, you can see by the by the again prepared remarks.
Our social media.
Base continues to grow very very rapidly and what we didn't say in her prepared remarks as our database grew 20% during the quarter. So again, we're engaging with the customer growing we're we're getting that company really position to have this mid teens operating margin, we feel quite good about the trajectory that were on for that.
And we can absolutely take market share as to.
The top of the pyramid is still growing very very quickly, although obviously being contract for the short term with Covance, we think thats still a very.
Fast growth area for for the industry long term secondly, with Jimmy Choo.
Again, we think that as we rebalanced that company from being predominantly just a footwear company twod accessories, and footwear house, we have opportunity to to improve the operating margin. There again as we said in our prepared remarks.
20% again.
Our database grew 20% during the quarter, which is really phenomenal and I'll talk more about that later.
And then and then we are taking price increases in that line and you're going to see that happened. This fall season, we actually think Jimmy Choo historically has underpriced. Its product we are a luxury brand and we've had a history of always being a little bit the underdog and we've taken a new position on that we think thats.
Also be reflected in our gross margins and ultimately our operating margins so feel really good about that.
And the direction, we're heading in and as we talked about paired remarks.
We pivoted very quickly to the new casual is luxury always had a very big sneaker business, but we did traditionally did not we've talked about that before and Jimmy Choo you can see we've made really incredible strides in that and if you looked at one of our slides today.
Touch went to our press release, you got Kate Moss wearing our new Hawaii trainer and that trainer is just on fire for the company. So again lots of strength, there and we're making some manufacturing efficiencies that we're putting in place with our new factor that we purchased.
About nine months ago, so thats going to start really showing up at our in our on our gross and operating margins.
And then Michael Kors.
We've started down a path some time ago really led first by as you recall.
Personally said that was mistake that I made have not really pushing our signature.
Products and in fact, we had pulled back on them that was a very strategic incorrect decision on my part.
We have subsequently corrected that we told you on previous calls that we would get the.
Signature business up significantly we've done that 35% of the business.
During the quarter in our particular accessories area was was driven by.
The signature and we could have done more it would just we're actually in certain cases running out of inventory.
Customers, absolutely responding to that it's far out pacing inventory levels that we own.
In that in that product category that says a lot about what she or he is we're selling men's product wants from the company and from the brand and Michael and our marketing teams have been fantastic and really coming up with great stories around that obviously led with bill a deed.
And thats been resonating with our customers. So thats one area of you are better full price selling and we're seeing that in the in the signature areas because we take less markdowns in that area. Secondly, we are absolutely.
Strategically raising prices in Michael Kors, we've been doing that for probably three quarters now.
You'll see it again happening, we're going to be moving prices up and Michael Kors.
Once again, we've taken a little bit of the position in the marketplace that we were always a little bit of the underdog. We've been doing that for I think about 16 or 17 years, we're taking a different position we are.
The most if not the most important American fashion luxury brand in the world.
And we're going to price our products Accordingly, and we've seen no resistance when we've been taking prices up so far.
And again it that also always depends on whether you have the right product or not.
We've also been getting some manufacturing efficiencies our partners have been terrific, we haven't changed our quality at all that been really.
Great about working with us on on different things that are going on in the marketplaces.
We've been reaping the benefits of that.
Also want to thank on this call our part or manufacturers, who during the pandemic, we actually didnt cancel most of our fall orders cancelled very limited amounts, we really put more the cancellations and holiday we're flowing that product through.
Through holiday the fall product and there were actually repurchasing some of our spring product in the upcoming spring. So our inventories are excellent position.
Which will also mean, there will be less markdowns for us and as Tom talked about gross margin expansion.
A lot of that is going to come from the fact that we don't have to close out as much merchandise.
As we move through the next few quarters. So all in all I think.
Those trends that we were leaning into and of course as Michael Kors better full price selling by by really.
Being a little bit more restrictive in the amount of new fashion that we introduce.
Has helped us as well so we haven't really changed any of our strategy is going into the pandemic.
The exclusion of our ecommerce, which as you can see I think we had us.
Really strong performance up 30% during the quarter actually slightly over that and by the way for the lots of July were significantly higher than that so the trend is not decelerating the trend is accelerating.
I think one of the other interesting points in this.
Is that we generated more new customers new customers during the last four five months than we have historically.
So we saw more new customers coming to the.
Basically all of our luxury houses during this period of time and that was with less marketing. So they were searching us out they wanted our products on our brands and Michael Kors saw the highest percentage.
So I think these are also really good indicators. So if you if you hear me sounding positive during probably one of the most bleak periods of time in our industry. It's because.
A lot of the strategies that we put in place they are working and we decided as a management team not to change those strategies during this.
Very difficult time, and I think that's been a strategic win for us.
And again, one last thing I just want to say before we take next question is that we've got an excellent management team in this company, they're very seasoned.
Both here at Michael Kors at for such a and Jimmy Choo some of the best in the industry and these teams have been able to nimble we work through the issues.
While not taking their eye off of the strategy.
Of where these companies in these houses are going to go we will get through this there's even a question. We've got Versace has got a 42 year history. Jimmy Choo has got a 24 your history Microcor Scott a 39. Your history. These are not brands that are going to fade away. These are brands that are going to grow they're going to get stronger.
And we will as long as we stay focused on our on our strategies, we will get through this and we'll come out. The other end there will be one of the winners in my opinion. So thank you Omar.
Our next question comes from Erinn Murphy of Piper Sandler. Please go ahead.
Great. Thanks, Good morning, I guess my question is around the recovery that you're seeing and hearing the America looks if I'm looking at your slides John It looks like the America, because a lot deeper other recovery versus maybe other region. So if you could just speak a bit more about what you're seeing in men in certain states as we've seen case count rising have you seen.
Your regional differences in the month of July Thank you.
Thank you good morning earn and I hope wherever you are you're safe.
And your family.
So Aaron I think when you look at that chart that we sent out which we hope is is enlightening helps give you all some some view on what's happening and I and I feel for many of the at the analyst who were on this call because we're living this day to day, you're getting the information a little bit later than what what's happening lives. So we appreciate your.
Need as much information and for our investors as possible. So we're trying to be as transparent and share with you what we see.
So I would go around the globe and I would start with Asia.
Again, we've said that China is seeing the fastest recovery.
We're versace, Jimmy Choo are doing quite well there.
Michael Kors, a little less so and I just want to address that and thats really because when the pandemic broke.
In January we very very rapidly moved that inventory that was in route to China.
To EMEA and to the Americas Hindsight's 2020 that was probably not the best decision.
Given the recovery bounced back pretty quickly in China. So were lean on inventory in that region that inventories, arriving basically as we speak.
So we needed more fresh new merchandise and that's an interesting trend that we're seeing both in China, EMEA and the United States customers really responding more than ever to newness, it's quite interesting, it's a little less about what's on sale and a whole lot more about what's new and fresh and what's going to excite me. So.
It's a really fun time from that standpoint to be out marketing and storytelling and again you know we are we're companies that really project and image and a story around what were what we're trying to talk about whether that's in product or around the various.
Lifestyles of each of our three brands.
So so where we're seeing the positives in China, obviously very difficult in Hong Kong, Macau and those are significant businesses for us and most luxury companies.
So it's very painful what's happening there.
And in Japan, as many of you have read and heard.
There is a kind of a resurgence happening.
And so there are offices have re closed in China certain stores are starting to close again. So we're seeing some some difficulty there. So I think we're starting to see some bouncing around in that region and as you probably have read in Australia. Melbourne has has a lock down going on so I'd say well.
China is encouraging.
Balance of the region is slowly recovering and here in this region, we're seeing a very big impact on on the Asian tourist traveling.
Where we are many places are very important to us.
With the with the traveling tourist and that basically as I said in my prepared remarks has come to a standstill.
I'll move to EMEA next I'd say, that's where we're seeing the slowest recovery.
And really this the reason for that is because as tourist travel.
And again, we're at the peak season of were tourists would be coming to London, Paris, Milan, and Florence in Barcelona, and all these very important cities, where we do see huge volume.
And obviously, that's not going to happen this year so.
We continued to be cautious about what's happening in Europe.
And on the other hand, our sales associates, who once again I want to give an enormous shout out to.
They are the people who get up everyday of the weak there heroes opening these stores working with clients and in some cases are very very nervous about what's happening, but theyre putting.
There there their company and and the brands first and they're really making their customers happy and while being safe at the same point in time.
Theres a lot of work being done with.
Clienteling virtually.
With our customers and and also really creating bespoke experiences.
Where we consent hold wardrobes to people's homes, and let them pick and choose and and live with the close for a day or two and then we'll have been brought back to us. So so we see probably a little bit more of that happening in Europe.
And there's been some very very good response to that.
North America, the rebound is happening as you pointed out quicker.
I'll actually start with our Department store partners our.
Those are leased with our products.
Are doing quite well and we've had a few weeks.
At that at some of our partners were actually beating last year, which is quite interesting.
That's being driven by the by the.
Jeff and reach of there.
Digital operations. So we've always I mentioned it in the last call. We've always had a very high penetration.
Online with our Department store partners, and we're seeing incredible results with that.
Also I might add the that's been similar in Europe, where we've seen some real extraordinary sales results on that and so.
The limited closures that we've had in North America, which have been predominantly in California.
Really havent had tremendous impact on on the recovery numbers for for US we are seeing sporadic.
Closures due to covert cases that have happened inside of our stores.
And again, we're putting that our employee safety first we will close we will clean the stores, we'll make sure that whatever employees have contracted coated.
Quarantined and so.
I'd say that that is happening, but not skewing the business tremendously the biggest issue for us in North America in Europe, and even in Asia is foot traffic into the stores foot traffic is generally down in the 50% range.
And so it's difficult.
The.
Transaction levels are much higher.
The conversion levels are significantly higher for those people who are coming in but clearly there is less traffic, we're seeing the traffic build week by week.
But it's slow.
And what I would lastly say is that.
All three regions.
Ecommerce results for us are really quite extraordinary and as I said earlier actually even building.
So our I'm so proud of our teams we've made investments in this company as I mentioned previously we started this journey of being digitally led.
Any channel focused.
And really.
Really engaging with our customer.
That way we've been doing this for five or six years. So it's not like all of a sudden today everything has changed for us.
We've got a lot more spotlight on it a lot more emphasis on it.
We've got a huge database that I've talked about and Michael Kors 45 million people. So our ecosystem is quite large and we can we can really build upon that we have some quite lofty goals for versace, and Jimmy Choo to increase the size of that ecosystem.
As we do that we can do a lot more targeted marketing and the results and the ROE as off of that are really extraordinary so.
This is going to take time for us to work our way out of it.
But we feel like we're positioned the right way given our asset allocation towards.
Ecommerce and omni and clearly North America has the largest percentage of that for us.
Both in our own.
Channels as well as our department store partners.
Thank you are.
Our next question comes from Matthew Boss of Jpmorgan. Please go ahead.
Great. Thanks, So maybe on the wholesale front relative to the 85% global decline in the first quarter, how best to think about the progression of wholesale shipments in the second quarter versus the back half of the year and larger picture John maybe how do you think about the opportunity to emerge from the pandemic with a stronger hole.
Sale distribution footprint overall.
I'm going to take the second part and then I'll turn it over to Tom for that.
For the first part progression.
As I've said to you on many calls.
We are very proud and we believe deeply in our partnerships.
With our department and specialty store partners and travel retail partners around around the world.
So when you look at our wholesale penetration, which last year round about a third of our business that 30% so sorry.
For the total corporation.
That number will come down.
This year and next year not necessarily by some unique design, but as you know you see bankruptcies that are happening you see door closures that are happening.
And so thats going to two to limit that we also believe that the travel retail business I will probably take at least two years to recover and again I'm not telling you anything that you Im sure you haven't heard or listening to it.
So we think that that number will become a less relevant number to the company although extremely profitable.
We value those partnerships and we think that our customer.
Absolutely shops at whether its neimans sex, Bloomingdale's, Macy's, dillards, or galeries, Lafayette, harrods, or Harvey nichols or or or.
The buying cough whatever the places are these are beautiful stores with amazing sales associates in them.
And they have great.
Relationships with their their loyal customers. So we continue to remain engaged with that channel and want to see that channel ultimately recover although we know it's going to be smaller for us for just a host of reasons.
And the last thing I'll say that I'll turn it over to Tom is that while you've seen this decline which was quite precipitous given the.
Outbreak of the pandemic, we actually went to our department store partners.
We laid out we told them here's what we think is going to happen for the next four quarters.
We want to actually not ship you merchandise because we think it would be bad for the brand obviously, everyone was worried about cash in time.
And we took the position that we think we've got a better way of working our way out of it I don't think we were the only when doing that but but but I think what we did turned out to be quite smart.
And we're seeing that pay off for us as as the department stores as I said to you before actually recovering very nicely for at least the ones that we do business with today and remember they're down to only a handful of of people that we do business with today.
And the recovery seems to be quite quite good.
So we'll start to see that recover over the next few quarters, but I'll, let Tom talk about.
Sure Thanks, Matt and just to build on what John was saying, we had seen good Pos trends and positive on the E com side for our wholesale partners. So that has been very encouraging that said, they replenishments and new orders.
Have been on the lag from our own retail business and what we expect coming out of Q1 is that it will recover it will recover through the year. However, it will be slightly paced behind our own retail.
Shipments and recovery throughout the year and that as John mentioned looked at it maybe a little smaller longer term.
We have had a few door closures with bankruptcies, but in large part those are small and not really a major impact to our to our business.
Thank you Matt.
Our next question comes from Alex Waldis of Goldman Sachs. Please go ahead.
Good morning. Thanks, so much for taking the question here My question is on.
And how youre thinking about.
Longer.
John You mentioned in your comments.
So the same store rollout.
And the opportunity to see.
Jimmy Choo.
How has the benefit can be associated acceleration almost right changed how youre thinking about.
Oh, yes anything on that structure.
Segments going forward.
Cross across the three Bob.
First off good morning, I Hope you and your family or are Safe Secondly, I think we couldn't hear the first part of the question. If you could just repeat that.
My apologies.
I wanted to ask about how the acceleration in comments during this.
Has changed how youre thinking about in the present physical retail business.
I believe the thoughts on store opportunities antigen changes last year. So.
Similar.
I guess I'm wondering why that is and how you think you definitely Andy that touches both probably them directly from us.
Hey, Jeff.
Sure Okay. So so.
Alex as I've said before.
The absolutely the pandemic has accelerated our our ecommerce revenues.
To increase the penetration of that to our total business. The great news is sometime ago, we built our.
Minimum that Michael Kors, a strategy to have 1 billion dollar ecommerce business that we didnt think that would happen overnight and it's still not going to happen overnight, but weve built warehouses, we built.
Platforms et cetera to be able to handle that type of business. So we feel very comfortable that we're in a position to be able to grow that as fast as we possibly can.
And what's happened is some of our integration.
Transformation is starting to take place a Jimmy Choo for example, there moving into our Holland warehouse and in Europe, and we're looking at other initiatives, where we have.
The ability to to help the other divisions.
Able to take advantage of this rapid growth in E commerce.
Secondly, weve.
Really for the past two years.
But on a very strong initiative you hear us talk about it regularly we're going to grow that database.
And our ecosystem.
We're pushing as hard as we possibly can on that because we know that's got tremendous value to us what we are able to do with current customers new customers lab customers.
When it's when you're dealing with in particular, the fact that traffic is down and we don't know when thats going to recover or what rate is going to recover.
One thing we can do is we can talk to our customers that we have their names.
They're engaging with US and then of course, you see the social media following growing that's not growing because they don't like us that's growing because they want to be part of of the experience of each and want to everyone of our brand. So we're excited about that.
I think that when you look at Versace, Jimmy Choo, we know both of those brands are underdeveloped.
And having 300 stores globally in our opinion is not overstored and even in light of the pandemic. We don't think that Thats a stretch for either one of the brands many of our competitors have significantly more.
Between 400, and as many as 500 stores in the luxury category. We don't think we need to go that far we think that again digital connection with our customer clienteling with our customer with a lot of ways of creating additional experiences and we can hit our growth targets without.
Going beyond what where we are today so.
We will be very careful and monitor that on the Michael Kors side, we've already started a.
A program, where we would have been.
Really optimizing our fleet.
And I have to say I'm quite proud of that I think when you look at us versus our competitors.
Clearly said that we're going to close approximately 150, Michael Kors stores over the next two years. In addition from our current 880 stores that that's going to start to put us in a really good position in terms of having stores that are predominantly profitable.
And stores that can grow and we're going to focus on on making those stores more productive and we're doing that for such a.
Jimmy Choo, and Michael Kors, and so I think that.
Again this is a journey that we had been on before the pandemic.
Could that accelerate a little bit.
After whatever we see happens over the next 12 months, maybe I don't know.
But I think we feel really good about where the Michael Kors stores are there on the best luxury streets in the world there on the best shopping centers in the World sitting next to many of our.
Very powerful luxury partners.
So I think our distribution.
Is lined up with where we want it to be.
Other thing I just might add.
We are we have been for quite some time were omni capable, but can ship from store.
And so we've been doing a lot of that or that helped us significantly during the pandemic a stores came online the utilization of inventory. So we still view our ability to do that as a competitive advantage speed and service for for our consumer.
So again I think that.
When we get closer.
To that 650 to 700 level in stores I think that will be a good place for us.
And.
And feel good about our ecommerce capabilities sitting on top of that.
Thank you Alex.
Our next question comes from Kimberly Greenberger of Morgan Stanley. Please go ahead.
Great. Thank you so much and I just want to say especial. Thank you for the very helpful slides I thought they really added to the presentation today and I just wanted to start with his slides if I could it looks like North America is really nicely accelerating.
And June if I'm eyeballing, it correctly look to be down about 50%.
Or so with July really materially better at sort of a down 20% might started reading those slides correctly.
And then it looks like here in July global.
Sales trends are sort of running down around 25%. So I'm just trying to contrast, what looks like we're seeing in the slides with the second quarter outlook for revenue to decline about 40% is that differential.
Just simply what's happening in the wholesale channel.
That that would be super helpful. And then the fleet rationalization that you talked about is really encouraging.
I'm wondering if the cause of co visiting all of the sort of unique external circumstances out there.
Is it easier to close stores prior to lease expiration.
Because of the circumstances and have you.
Are you still targeting the same 150 stores for closures today that you were thinking about pre co bed or has cove. It actually changed perhaps the 150 stores that are on that list. Thank you so much.
Hi, Kimberly and so starting with the first question on the Q2. It is really our wholesale mix as we mentioned in Q1 retail was significantly better than in the wholesale trend so while Pos at the wholesale channel.
Yes, performing we think that the reorders and new orders.
We'll continue to lag that and that ultimately it will normalize but that it will still have an impact certainly in Q2.
And I'd say that that also we will have an impact in this case in a positive sense on our margins as you saw in Q1, we had gross margin increase.
And expansion and about half that was channel mix about half of that was the initiatives around you are that we discussed so as wholesale continues to normalize we'll see that benefit reduce however, our initiatives or going strong and they'll continue to drive that 150 basis point margin.
An expansion through the remainder of the year.
And Kimberly let me add one last thing to that as well I don't mean, this disrespectfully, but I think a lot of times people think a bus and our wholesale distribution as just North America. So it's there seems to be up a lot of focus rightfully. So on our north American wholesale distribution, but remember weve fairly large wholesale distribution in Europe, which is department store.
Specialty store and then we have we have a very big travel retail business. In this company. So if you go backwards and start with travel retail we don't know when thats going to recover so that for all intensive purposes zero today and will probably remain a zero for quite some time.
So that's that's going to hurt our wholesale.
Shipments.
Secondly, the specialty store business in Europe is very slow to recover they will not be taking any new orders in.
I would assume until really September again these are small.
Family owned businesses that are really struggling through this pandemic.
And that's also a sizable business for us it's actually the greater part of the business in in Europe is specialty store versus department stores.
And the department stores in Europe or are really struggling on the recovery because remember that the key ones that I mentioned earlier, there flagships account for significant amounts of their revenue.
So so until again travel retail comes back they're going to be impacted.
Oddly enough oddly enough that the North American Department stores are the best equipped right now because they have very robust ecommerce businesses.
And so where we have seen.
Difficult situations in major flagships at our Department store business in North America, we're actually getting.
Offsetting lift as I told you is few weeks, where we've actually comped over last year, because the ecommerce business so strong.
And so well developed for that channel. So again, when you think about wholesale for US. Please think about those three areas North America wholesale Europe wholesale which is broken into two specialty and department store and then lastly travel retail that you need to keep that in full context. So.
So even if north America wholesale recovers, we're going to be much slower with the other two pieces.
And Thats why the progression of company owned retail is going to outpace wholesale I think for the majority of the year.
And that will have impact on margin that'll have impact on some of our sales recovery.
As well.
In terms of the store count I think we gave you in the last call was between 150 in 170 stores, we're going to close there'll be a handful of Versace, Jimmy Choo stores that were going to close and reopened in different locations et cetera, but of the approximately 150.
Core stores.
We are good partners with our with our our landlords and I want to thank them. All on this call because I would say almost without exception every single one has helped us partner through this through this difficult periods of time and that says a lot about them and that says a lot about us.
And our relationships together.
And again I want to say, thank you to them.
For their helped during this we're going to honor our leases until their terminated.
And we really are looking very carefully.
Store closures based upon profitability.
Unfortunately, when ecommerce took off.
Six seven years ago, it impacted our our because our stores and as consumers behavior has changed.
They just came into the stores.
Lift often and therefore, we had at one point in time were almost our entire fleet was profitable worldwide and Michael Kors Thats not the case today and so.
Many of our leases are coming to termination.
And you're going to see that the impact of losing those lower stores, which are.
Quite a drag on the on the on the profitability.
Start to go away and we think that's a very positive thing.
I might remind everybody on this call that Michael Kors.
Did have a very significant operating margin last year slightly north of 20%. So Michael Kors is still at very profitable business and we actually think.
We can not get back to our peak periods, but we think we can make that significantly.
Better number.
And then than what it was last year, obviously that won't happen in the current fiscal year.
But we are planning for 2022 clearly to be a smaller business.
For.
Many reasons, whether its wholesale closures, whether that's store traffic being down, but we think we can hit some very significant profitability levels, given our ability to reduce costs to be in line with what our revenues are plus the strategic initiatives that we're putting in place that will increase gross margin and increased productivity and exist.
In stores will be in place and additionally, youre going to see the Jimmy choose on the Versace isn't all resumed growth and Michael Kors is going to how different mix and we think ultimately reserve resumed growth as well so.
We feel we feel quite good about that but we don't think coated is going to change our mind on where the stores are given what we think will happen next year. We think Thats. We think we'll end up with the right mix.
Thank you Caroline.
Thank you I think we'll take the next question.
Our next question comes from Michael Binetti of Credit Suisse. Please go ahead.
Hey, guys. Thanks for all the detail today, I guess I'll just follow up on a couple of the earlier questions when.
You've obviously given us some good color for third quarter and fourth quarters, we look out a little bit here, but maybe maybe some thoughts on how the initial.
Conversations are going for orders in the wholesale channel, particularly in the U.S. as you look to spring 21, which is just from talking to the retailers when they feel like they can lift their eyes, a little bit and maybe go back on offense, but I'd love to hear what what your initial conversations are for them as they look to how they're going to set their floors.
And then I guess, if I put the pieces together here Tom It sounds like you think.
Wholesale revenues are going to lag Pos through at least through this fiscal year.
Maybe you could speak too when you think those actually come back into alignment I know, there's a lot of moving parts, but is it far into 22 or how would you how would you describe that thanks.
Good morning, Michael and I Hope you and your family are safe.
And thank you got to say that them and Kimberly So both of you felt was safe as well.
So so department stores look the initial conversations we're having are actually at once again encouraging we have been one of the best performing brands. During Kogut, we were told that by our.
North American Department store partners, it's a little less so in Europe because of they have much smaller ecommerce businesses. So it's been a little harder to too.
To have.
To understand what that with the customer reaction has been to our brand until the stores reopened although we're seeing some relatively reasonable results since stores reopened.
So I think.
Our our field our numbers that we're getting from from the stores.
Have been have been quite.
In line and actually slightly better than where we had internally budgeted for and I might add thats, particularly in accessories and footwear, a little less so for ready to wear ready to wear has been the I think I mentioned that previously has been.
The softest category.
For us.
And we're doing some things to mitigate that obviously, we've been a company.
For both for such a and for four.
Michael Kors, where we've been.
Very a campus.
Focused on more of a polished image.
And there's clearly a big market that can be tap in a more more casual but also something that excites people for what their new lifestyle is and so we're making some adjustments to our assortments on that and we think that you'll see that more in the first half of next year.
So so again, we havent seen anything that's that's told us.
Anything that's concerning given what our projections are and again our Pos.
Sell throughs are we're being again toll we're one of the best and as I said to you.
They are running at our performance rates and in some cases better.
So so we're feeling pretty good about about what.
Again, I want to copy yet all of this if obviously theres a resurgence theres a heavy second or third wave of this obviously, that's going to impact everything that we possibly could be discussing today.
But if we continue at this.
Slow pace of recovery.
I think we're feeling confident about working with our partners right now.
And in terms of the revenue normalizing and how it.
Really relates to retail I think it's dependent upon the overall economy and the Covance situation itself normalizing I think at that point you'd see more similar trends, but for wholesale as John mentioned, we would expect on a percent of business basis. It will be smaller going forward and what we're going to continue evaluate.
Is the health of the U.S specialty retailers and the overall footprint of travel retail in a post the co bid or normalized environment. We believe in the us where with is very strong.
Wholesalers and department stores, So we feel very good about that situation.
Thank you and we'll take one last question.
Our final question comes from Jay sole of UBI, Yes. Please go ahead.
Great. Thanks, so much for taking the question.
Challenges.
Yes.
But the margin.
Opportunity you see to get back to 15% margins, how correlated is the margin trajectory to the sales trajectory. So if we look out in fiscal 2003 in the businesses.
Four and half billion versus maybe five hepatitis better scenario, how much would that change the opportunity for the company to get back to a mid teens margin.
Jay first off a good morning on it and I Hope you and your family are safe.
Very difficult time, thanks, Jay I look there's no question that that.
Volume.
Or higher revenues will definitely create leverage operating leverage for us to get back to the mid teens operating margin for the company.
We have very distinct goals.
We see something north of 20% and less of 25% for operating margins for Michael Kors. We've stated that we see mid teens operating margins for four Versace, Jimmy Choo I think you've heard my.
Positive commentary around that we think we've got some really good initiatives that we were heading in that direction anyway.
So so I think we're comfortable that we will get there again there are certain components that are that are have to come together as you well know we've got to get a vaccine got to see foot traffic return to to brick and mortar because as as important as E commerce isn't and on.
The sales and we're certainly very well positioned with that as a company and our organization.
Where we do have a slight weakness in versace, we're fixing that.
We need we need when you brick and mortar to work I mean, the as an industry. We all need its work and we believe it will come back.
It will be probably a little different than what it was before more E commerce revenues versus as much.
Store revenues, but theres even today.
It's a bigger percentage of our business.
So so as that happens and as travel retail recovers.
I think we'll be able to reach those objectives.
And im not going to comment on the kind of numbers that you mentioned the only thing I can tell you is that.
We believe will be somewhat smaller next year from our pre coated levels, but that being the case.
Remember Versace is very underpenetrated in the luxury market.
Jimmy Choo, which had grown every year of its 24 years and existence, except for last year are given what happened.
We believe that company also is underdeveloped and we believe that Michael Kors.
Well, we'll be setting off of a lower base will begin to recovery of growth as well. So again when you look at three companies Versace with a 42 year history, Jimmy Choo with a 24 year history, Michael Kors with a 39 year history and these are all highly recognized names around the globe as well as as be lumped with grow.
Following social media growing databases.
And I think excellent management teams.
I think we're feeling quite positive about how our company is going to get through this this very difficult time and I might just conclude with one last thing we ended the quarter with the with.
The 1 billion one in.
That liquidity.
Our debt is coming down.
And we think will come down over the next couple of years. So we're not a very leveraged company.
And we're going to have the resources and the cash flow to be able to continue to build on what we need to do.
So so I think that gives us great confidence.
And we'll continue to navigate through this difficult period, making sure that our employee safety.
His comes first and our cup customer safety and I would like to conclude by thanking our entire worldwide.
Employee population they get up everyday they are working very hard whether it be remotely whether it be in our stores or whether it be in our warehouses to really service the end consumer to build value for our shareholder and without them. We wouldn't have the great company that we have today. So I want to end by thanking them and then lastly, I want to.
Thank everyone for joining us today, and we look forward to updating you on our second quarter results. Later this year. Thank you all have a good day and stay safe.
This concludes today's conference call you may disconnect your lines, thanks for participating and have a pleasant day.
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