Q4 2021 Capri Holdings Ltd Earnings Call
Greetings welcome to Capri Holdings Ltd fourth quarter 'twenty 'twenty, 1 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation at.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note. This conference is being recorded I will now turn the conference over to Jennifer Davis, Vice President of Investor Relations. Thank you you may begin.
Good morning, everyone and thank you for joining us on Capri Holdings Ltd fourth quarter fiscal 'twenty 'twenty 1 conference call with me. This morning are chairman and Chief Executive Officer, John Idol, and Chief Financial and Chief Operating Officer, Tom Edwards before we begin let me remind you that certain statements made on today's call may constitute forward 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 end in the company's SEC filings, which are available on the company's website investors should not assume that the statements made during this call will remain operative at a later time and the company undertakes no obligation to update.
Any information discussed on the call. In addition, certain financial information discussed today will be presented on a non-GAAP basis. These non-GAAP measures exclude certain costs associated with COVID-19 related charges of long lived asset impairment ERP implementation cost of Capri transformation cost of charitable donations and inventory step up adjustment.
Foreign currency effects restructuring and other charges.
Unless otherwise noted all financial information on today's call will be presented on a non-GAAP basis to view the corresponding GAAP measures and related reconciliation. Please view the earnings release posted on our website earlier today at Capri Holdings Dot Com before we begin I would like to note that we have accompanying slides posted to our website now I would like to turn the call.
Over to Mr. John Idol, Chairman and Chief Executive Officer.
Yeah.
Thank you Jennifer and good morning, everyone.
Looking back fiscal 2021 was a year like no other.
Over this time of the COVID-19 pandemic.
<unk> has had a profound effect on the entire world.
The unprecedented challenges tested our business and.
And industry in ways, we could never have imagined.
My thoughts go out to all of those affected by the virus and to everyone on the front lines.
Who worked tirelessly.
Helping combat this pandemic.
The entire kept pre team came together not only to successfully navigate these challenging times, but.
But also to position the company to emerge from this global crisis, even stronger.
I want to thank all of our employees around the world for the hard work and dedication they demonstrate every day to support each other and their communities.
It has been inspiring to see the entire organization rally together.
I'm incredibly proud of the team and what Capri Holdings has been able to accomplish during these unprecedented times.
Looking at fiscal 2021.
We were encouraged by the performance of all 3 of our luxury houses.
Revenue and earnings results significantly exceeded our original expectations.
Retail sales improved sequentially every quarter, while ecommerce sustained strong increases across all brands.
With gross growth rates accelerating even after stores began reopening.
Additionally in line with our goals to expand margins across all of our luxury houses.
Gross margin increased approximately 340 basis points in fiscal 2021.
Furthermore, we attracted nearly 9 million new consumers.
Across.
Our luxury houses.
As evidenced by the double digit increases in our customer database of over the last year.
Our success is a testament to the strength of our brands as well as the dedication resilience and agility of the entire Capri holdings team.
During the year, we reevaluated and refined Capri holdings strategic direction to ensure the company emerges from the pandemic stronger and more profitable.
For Versace and Jimmy Choo.
We reaffirmed our long term plans.
And are even more enthusiastic about the prospects of these luxury houses.
For Michael Kors, we Recalibrated, our plans to further elevate the brand positioning.
And deliver higher profit margins.
Which we have already begun to achieve.
With this strategic reset of our business, we believe Capri holdings is well positioned to achieve our goal to grow to $7 billion in revenue.
Looking forward.
As the world starts to recover from the pandemic, we are confident in our growth opportunities for Versace Jimmy.
Jimmy Choo and Michael Kors.
Consumer optimism is returning with the vaccine rollout progressing in many parts of the world.
While the pace of recovery is still dependent on the vaccinations progress.
We believe the luxury market will resume a steady growth trajectory and Capri holdings is well positioned to participate.
Now turning to the fourth quarter performance.
We were pleased revenue gross margin and earnings per share all significantly exceeded our expectations.
The company achieved these results despite greater than anticipated challenges in EMEA and Canada due to additional restrictions and store closures associated with Covid.
Total revenue in the fourth quarter was flat compared to prior year.
With strength in the retail channel in the Americas and Asia.
Offsetting the challenged environment in EMEA.
Additionally, gross margin expanded 280 basis points.
More than double our expectation.
With margin expansion across all 3 luxury houses.
Operating margin expanded 360 basis points.
As a result earnings per share of 38.
Were stronger than expected.
Looking at group revenue trends total sales for our retail channel increased 13%.
Significantly exceeding our expectations.
The better results were driven in part by robust e-commerce sales, which increased 80%.
And once again accelerated relative to the prior quarter.
E Commerce sales are benefiting from our increased use of data analytics to support more targeted and personalized marketing.
Additionally, store performance improved significantly quarter over quarter, driven by local client telling initiatives and improved traffic trends.
In the wholesale channel sales also improved sequentially.
By geography.
Asia remains the fastest recovering region.
With retail sales, increasing double digits versus prior year.
Once again revenue in the region increased across all 3 of our luxury houses driven primarily by strong growth in mainland, China, where sales increased triple digits.
In the Americas retail revenue also increased double digits, even though an average of 40% of our stores in Canada were closed during the quarter.
On the other hand in EMEA revenue trends remain negative.
As an average of 60% of our stores in the region were closed during the quarter.
Despite the increased restrictions and store closures in EMEA retail sales trends in the region improved sequentially driven by triple digit increases in E Commerce.
Now turning to fourth quarter performance by brand.
Starting with Versace.
We were pleased with the results, which were significantly ahead of our expectations.
Revenues increased 10% in the fourth quarter, demonstrating the strength of the brand and the success of our strategic growth initiatives.
Okay.
Sales in our retail channel increased double digits globally.
In the Americas, and Asia, we delivered double digit growth, which more than offset declines in EMEA.
E Commerce sales once again increased triple digits year over year.
We were encouraged with the performance of our spring collections, which are resonating with consumers.
We saw strength across categories, reflecting enthusiastic customer responses.
To the brand and product.
Women's accessories, and footwear are key strategic growth drivers.
These categories performed exceptionally well with sales nearly doubling prior year levels during the quarter.
We continued to see strong consumer response.
To virtuous.
As well as to the introduction of our new Lama <unk> of collection, which launched in February.
With virtuous and La Medusa, we now have 2 powerful highly recognizable brand pillars to grow accessories and footwear.
Yeah.
We will soon introduce a third pillar.
At the fall launch of our Lagreca signature pattern.
I Hope you were able to watch the Versace of fashion show in March where we debuted the new signature pattern, which combines.
Our iconic Greek key motif.
With the Versace logo.
We believe the introduction of the new low Greco signature pattern will significantly accelerate the trajectory of versace's revenues.
As it expands the brand's portfolio of recognizable iconic pillars.
Additionally, we saw strength across both women's and men's ready to wear.
Seasonal offerings incorporated.
The trust or de La Mer pattern.
Which was featured in the Versace spring 2021 runway show.
We also continue to expand our core lines that incorporate iconic house codes to increase sales and broadened versace's reach.
Another key indicator of strength of the Versace brand.
Is our very successful fragrance collection, which is 1 of the largest designer fragrance businesses in the world.
We were very pleased with the continued strength of our new Dylan turquoise and the refresh of our successful Dylan Blue fragrances as sales continue to exceed our expectations.
In terms of brand awareness and consumer engagement Versace's spring summer of 'twenty 'twenty, 1 campaign reflected donatella is underwater fantasy World Versace Oculus.
Starring Kendall Jenner, Hailey, Bieber and precious Lee the.
The modern Versace muses exhibit and empowered attitude that looks to the future with optimism and hope.
In addition in China Versace of launched a dedicated campaign featuring its new celebrity Ambassador Betty Lou.
The Chinese singer and actress has over 25 million followers on our social media accounts.
Also Versace debuted donatella as new collection during its fall winter 2021 fashion show in March which introduced our new low Greco signature pattern.
The virtual show was presented in a vertical maze inspired by our iconic graco motif.
And featured top fashion models, including Irina Shank.
<unk> and Bella Hadid among others.
The fashion show generated more than 20 million views on our own channels and Versace ranked the first per engagement among all Italian fashion brands.
These initiatives among others helped to drive a 22% year over year increase in Versace's Global database.
Overall versace's results.
<unk> to the strength of the brand and reinforce our confidence in the luxury houses long term growth potential.
For such a represents the largest growth opportunity for Capri holdings as we continue to believe revenue will increase.
To $2 billion.
Moving to Jimmy Choo results were also ahead of our expectations with revenue increasing 16%.
Sales at our retail channel increased in the high single digits globally.
In the Americas, and Asia, we delivered double digit growth, which more than offset declines in EMEA.
E Commerce sales improved sequentially and increased over 50% versus prior year.
We are encouraged with the performance of our spring collection, which encompasses 90 sheik and celebrates the notion of contradictory glamour.
Accessories sales showed strong growth driven by our signature JC version.
And continued success of the bond Bond group.
In footwear, new designs by Sandra Choi blurred the lines between shoes, and jewelry featuring styles of adorned with crystals and pearls.
As restrictions begin to ease in many parts of the world, we have seen trends improve in the dress footwear category.
And our casual offerings, we saw continued success.
Of Hawaii at.
And the Diamond sneaker franchises.
We also saw success with our Jimmy Choo Marine Sir.
Collaboration, which combined Jimmy choose feminine aesthetic with the futuristic vision.
And signature Crescent Moon print.
To create limited edition footwear.
In terms of brand awareness and consumer engagement Jimmy choose spring 2021 campaign is of modern owed to spring time in Paris.
The imagery captures model artist Sharon Alexi's vibrancy with key Parisian landmarks as backdrops.
Jimmy Choo also continued to drive localized marketing.
Our Asian brand Ambassador Chinese actress and singer of Victoria song presented the spring Summer collection to her 50 million plus followers on social media accounts.
In the first quarter alone the dedicated hash tag for Victoria song as Jimmy choose Asia Ambassador garnered 60 million reads.
Our luxurious product at engaging marketing helped contribute to a 13% year over year increase in Jimmy choose global consumer database.
Overall, we are encouraged by the progress, we're making towards our goal of growing revenue at Jimmy Choo.
2.1 billion.
Turning to Michael Kors, we are pleased with the pace of the recovery.
Revenue again improved sequentially in the fourth quarter declining, 4% as compared to last year.
Sales at our retail channel increased in the mid teens globally.
In the Americas, and Asia, we delivered double digit growth, which more than offset declines in EMEA.
E Commerce sales once again accelerated relative to the prior quarter and increased approximately 75% benefiting.
Benefiting from our increased use of data analytics to drive more targeted and personalized marketing.
Moving to product performance, we continue to increase signature penetrate.
Penetration across all categories by expanding our offering and developing new designs.
Overall signature represented approximately 35%.
Of the assortment across all categories compared to 28% last year.
Resulting in higher AUR and gross margins.
We believe signature can eventually grow to approximately 50%.
Of our overall product assortments.
Which will drive higher margins.
Accessories sales in our retail channel increased double digits globally at.
As consumers responded to fresh updates for.
For spring, including flashes of colour that energized.
Our iconix signature styles.
Sales of Totes and larger bags remained strong as we continued to build upon the assortment offering a variety of new shapes and functionalities.
Within footwear, we have seen a positive response.
2 new spring updates driven by signature shine and feminine details.
Turning to men's which remained our fastest growing category in the fourth quarter sales increased double digits, driven by signature and accessories.
I am excited to say that our watch sales were positive for the first quarter since 2016.
With retail sales up double digits.
We continue to see a resurgence in our traditional styles that are true to our DNA with bold sophisticated and distinctive designs.
During the quarter, we also launched Michael Kors newest fragrance gorgeous.
The launch was extremely successful, resulting in fragrance sales significantly exceeding our expectations.
The dedicated campaign stores model and actress Sarah Sampaio.
Who fully embodies the spirit of the fragrance, she radiate confidence optimism joy and strength.
With respect to brand awareness and consumer engagement.
Spring 2021 campaign reflects his love of travel and features supermodel Bella Hadid, the quintessential jet center as she Rediscovers iconic New York City sites.
In China for the lunar new year, Michael Kors launched a capsule collection featuring a luck selection of our most loved accessories, including the Soho shoulder bag exclusively offered and a new special edition Red.
And black tweet, our brand ambassadors Gao Union Leo Lorraina song and Wang Fei Fei continued to amplify Michael Kors jet set brand messaging to their more than 120 million social media followers.
I am also excited to talk about Michael Kors, 40th anniversary show.
That recently took place in April.
Michael celebrated his eternal optimism and love of New York with the theme opening night.
From the heart of Broadway the show immersed guests in the inspiration for this collection.
The idea of stepping out once the world opens up again.
The collection featured a selection of Michael as most iconic looks from different eras over the past 40 years.
Past and present supermodels, including Naomi Campbell.
Dana Christiansen, Caroline Murphy Ashley Graham <unk>.
<unk> Harlow and Bella Hadid, all paid tribute to Michael.
The show generated more than 34 million views on our own channels.
These marketing initiatives continue to underpin our brand pillars of speed energy and optimism.
This helped contribute to an 18% year over year increase in Michael Kors Global database.
Overall, we were encouraged by the sequential improvement in revenue trends and continued gross margin expansion at Michael Kors.
As a result, we remain confident in our ability to grow our revenue at Michael Kors, 2.4 billion.
In total Capri holdings fourth quarter, and full year results significantly exceeded our expectations demonstrating the strength of our brands and the resiliency of our teams across the globe.
During these unprecedented times, we have stayed focused.
On executing our strategic initiatives across all 3 luxury houses.
We believe Capri holdings will emerge a stronger and more profitable company.
And remain confident in the long term opportunities for each of our unique global luxury houses.
But the combined power of our 3 iconic founder led fashion.
<unk> fashion luxury brands Versace, Jimmy Choo, and Michael Kors Capri holdings is positioned to accelerate revenues.
To $7 billion and deliver multiple years of earnings growth.
Now, let me turn the call over to Tom.
Thank you John and good morning, everyone.
Starting with fourth quarter <unk>.
Revenue of $1.2 billion was flat to last year significantly exceeding our expectations.
Performance was driven by better than anticipated results across all brands and regions.
Net income was $59 million, resulting in diluted earnings per share of 38.
This was above our expectations, reflecting better than anticipated revenue and gross margin along with lower operating expenses.
Looking at revenue trends by channel total company retail sales increased 13%. These.
These results were driven in part by robust ecommerce sales, which increased approximately 80% and once again accelerated relative to the prior quarter.
Additionally, store performance improved significantly quarter over quarter, driven by local client telling initiatives and improved traffic trends.
In the wholesale channel revenue also improved sequentially.
By geography in Asia retail sales increased double digits versus prior year. Once again revenue in the region increased across all 3 of our luxury houses.
Given primarily by stronger growth in mainland, China, where sales were up over 100%.
In the Americas retail revenue increased double digits, despite store closures in Canada.
Conversely in EMEA retail revenue trends remained negative at an average of 60% of our stores were closed during the quarter.
Despite the increased restrictions and store closures in EMEA retail sales trends improved sequentially driven by triple digit increase in E Commerce.
Turning to revenue performance by brand Versace revenue was $235 million, representing a 10% increase to the prior year and above our expectations.
Global sales in our retail channel increased double digits with e-commerce sales once again, increasing triple digit.
Sales in Asia grew double digits, driven by strong double digit growth in mainland China.
The Americas was once again, the best performing region with revenue up strong double digits.
Trends in EMEA remained below prior year impacted by increased restrictions and store closures.
For such a ended March with a global luxury fleet of 210 retail stores, a net increase of 4 from prior year.
For Jimmy Choo revenue during the quarter increased 16% to 124 million also above expectations.
Retail sales in mainland China increased triple digits, resulting in double digit sales growth in the total Asia region.
In the Americas retail revenue increased in the low double digits.
While in EMEA trends remain negative, but improved sequentially, despite the increase restrictions and store closures.
Jimmy Choo ended the quarter with a global fleet of 227 retail stores, a net increase of 1 from prior year.
At Michael Kors total revenue of $838 million declined 4% compared to last year.
Overall retail sales increased in the mid teens significantly better than expectations.
E Commerce sales growth accelerated sequentially, increasing approximately 75%.
Retail revenue in mainland China increased triple digits, driving double digit retail sales growth in the total Asia region.
In the Americas retail revenue increased double digits.
In EMEA trends remain negative, but improved sequentially. Despite the increased restrictions and store closures.
For our global wholesale business sales at retail and shipments both improved sequentially. However, overall shipments remained below prior year.
Michael Kors ended the quarter with a global fleet of 820 retail stores, a net decrease of 19 from prior year.
Now looking at total company margin performance, we were pleased with gross margin expansion of 280 basis points, which was significantly above our expectations.
As John mentioned gross margins expanded across all 3 of our luxury houses.
This improvement primarily reflected increased full price sell throughs and select price increases at Jimmy Choo and Michael Kors.
These gains were partially offset by higher tariffs related to the exploration of the GSP trade program as well as increased transportation costs.
Operating expense as a percentage of revenue was 51, 5% compared to 52, 3% last year.
Total company operating expenses were modestly below prior year, reflecting our expense reduction initiatives, partially offset by higher foreign currency exchange rates and variable costs associated with increased retail revenue.
As a result total company operating margin expanded 360 basis points to 11, 9% compared to 8.3% in the prior year and was well ahead of our expectations.
Looking at operating margin by brand.
<unk> operating margin of 12, 3% was above our expectations and improved over 1000 basis points.
<unk>, both gross margin expansion and expense leverage.
Jimmy Choo operating margin of negative 14, 5% reflects expense deleverage, partially offset by gross margin expansion.
Michael Kors operating margin of 25% was above our expectations and expanded 460 basis points over prior year.
Collecting higher gross margin and lower operating expenses.
Our tax rate for the quarter was 59% driven primarily by mix of income across different tax jurisdictions.
Now turning to our balance sheet. We ended the year with cash of 232 million end debt of $1.3 billion.
<unk> and net debt of approximately $1.1 billion.
We paid down approximately $70 million of debt during the quarter and approximately $850 million during the year.
Total liquidity at the end of the year was $1.5 billion.
Given our strong cash flow generation, we are exiting our covenant waiver and 364 day credit facility ahead of schedule. Additionally, we are now reinstating our share repurchase authorization, which is $400 million of availability remaining.
Looking at inventory, we ended the quarter with $736 million down 11% compared to prior year.
We expect to build inventory to support sales growth over the year.
While we are seeing delays in receiving merchandise. The current situation is incorporated in our outlook for the year and we continue to work on initiatives to further mitigate transportation challenges.
Capital expenditures for the year were $111 million and were primarily spent on new store development renovations at <unk>.
And E Commerce enhancements.
Now turning to fiscal 2022 guidance.
While not our normal practice, we believe it is important to lay out our view of the quarterly progression of revenue and earnings throughout fiscal 2022.
We are doing this for 2 reasons first the COVID-19 pandemic has had a significant impact on both revenue and expense comparisons.
Our forecast incorporates our expectations for the pace of the recovery on revenue as we move through the year at.
As well as the amount and timing of expenses, such as marketing and reopening costs.
Second as previously discussed we have reset our business strategies and objectives, most notably we are planning for a smaller but more profitable Michael Kors business.
As a result, we believe the most appropriate benchmark to evaluate our progress against our revised objectives. As this forecast, which we believe will provide a more accurate reflection of the success of our initiatives.
For the full year, we forecast of Capri holdings revenue of approximately $5.1 billion.
This includes approximately $75 million associated with the 50, <unk> week and assumes for such a revenue of approximately $925 million to $975 million.
Jimmy Choo revenue of approximately 500 of $525 million.
And Michael Kors revenue of approximately 3.5% to $3.6 billion.
For the first quarter, we forecast revenue of approximately $1.1 billion. We expect continued growth in the Americas and Asia regions, Despite ongoing restrictions, including store closures in Canada, Japan and Southeast Asia.
In EMEA, we anticipate revenue will continue to be impacted by regional restrictions, including store closures.
Turning to the second quarter, we anticipate revenue of approximately $1.2 billion supported by reopening in EMEA, Canada, Japan and Southeast Asia.
As we look to the second half we are optimistic about a stronger recovery after vaccines of more widely distributed all of our luxury houses should benefit as people begin to feel more comfortable returning to more normalized routines.
In the third quarter, we expect revenue of approximately $1.4 billion end for the fourth quarter, we anticipate revenue of approximately $1.4 billion.
Now, let me talk about the remainder of the full year P&L.
Starting with gross margin for fiscal 2022, we continue to see underlying strength in our ability to expand gross margins through higher full price sell throughs select price increases at Jimmy Choo, and Michael Kors as well as increased penetration of accessories at Versace and Jimmy Choo.
As I previously noted we are experiencing higher transportation costs. As a result, we now anticipate approximately 50 basis points of gross margin expansion year over year.
Moving to operating expenses, we now expect operating expenses of approximately $2.6 billion is.
This includes the benefits of our COVID-19 related cost reduction initiatives.
It also reflects higher variable expenses related to increased revenue additional.
Reinvestment in our business to accelerate growth in particular marketing.
As well as the impact of foreign currency exchange rates.
Taken together, we anticipate Capri holdings operating margin of approximately 14%, reflecting year over year operating margin improvement across all brands.
As such we anticipate operating margin in the low double digit range for.
For Jimmy Choo, we expect operating margin in the negative mid single digit range due to continued expense deleverage.
For Michael Kors, we anticipate operating margin in the low 20% range.
Turning to our expectations around certain non operating items for fiscal 2022, we estimate net interest expense of approximately $20 million are.
Our effective tax rate is estimated to be approximately 15%.
And we forecast weighted average shares outstanding of approximately $156 million.
As a result for fiscal 2022, we expect to generate earnings per share of approximately $3.70 to $3.80.
Turning to capital expenditures, we anticipate spending approximately $200 million in fiscal 2022, which includes store openings and remodels as well as expenditures, including investments in our digital platforms.
Now I would like to discuss our non-GAAP charge expectations for fiscal 2022.
We anticipate transformation expenses of approximately $20 million.
Implementation costs for SAP of approximately $30 million.
And restructuring charges of approximately $70 million related to our fleet optimization program.
Turning to our first quarter guidance as I said earlier, we expect revenue of approximately $1.1 billion.
This assumes we're such a revenue of approximately $220 million, Jimmy Choo revenue of approximately $110 million in Michael Kors revenue of approximately $770 million for gross profit. We expect continued margin expansion in our retail channel.
For the quarter this improvement will be offset by higher wholesale penetration as shipments normalized.
We expect wholesale penetration to nearly double to approximately 25% in the first quarter.
Therefore, we anticipate total company gross margin contraction of approximately of 100 basis points in the first quarter compared to last year.
Turning to operating expenses, we expect first quarter operating expenses to increase approximately $150 million year over year.
This reflects the significant increase in revenue relative to last year, which is generating higher variable expenses.
Additionally, it reflects reinvestments in our business as sales recover as well as the impact of foreign currency exchange rates.
Taken together, we anticipate first quarter operating margin of approximately 12%.
For Versace, we anticipate operating margin in the high single digit range for.
For Jimmy Choo, we expect operating margin in the negative low to mid teens range for.
For Michael Kors, we anticipate operating margin in the low 20% range.
Now looking at certain non operating items.
For the first quarter of fiscal 2022, we estimate net interest expense of approximately $5 million on.
Our effective tax rate is estimated to be approximately 9%.
And we assume weighted average shares outstanding of approximately of $155 million.
As a result, we anticipate first quarter earnings per share of approximately 75.
Now I would like to share our expectations around our quarterly earnings per share assumptions for the remainder of the year.
Again, while this is not our normal practice, we thought it would be helpful to lay out our view of the quarterly earnings progression through fiscal 2022 based on the impact of the COVID-19, pandemic and the reset of our business strategies and objectives for.
For the second quarter, we anticipate earnings per share in the range of 70 to 75.
For the third quarter, we expect earnings per share in the range of $1.65 to $1.70.
And for the fourth quarter, we forecast earnings per share in the range of 55 to 60.
Please note this guidance does not incorporate any additional store closures or new government restrictions that could further impact of our business.
In summary, we believe the progression of our initiatives throughout fiscal 2022 physicians Capri to deliver on its long term goals as we look beyond fiscal 2023, we continue to anticipate revenue and earnings per share will exceed pre pandemic levels.
In conclusion, we are pleased with the trajectory of our business, reflecting the strength of our fashion luxury houses and the execution of our strategies Versace's results speak to the power of the brand and reinforce our confidence in the luxury houses long term potential versace represents the largest growth opportunity for Capri holdings as we continue to believe ret.
<unk> will increase to 2 billion, while operating margins expand to at least the mid teens longer term.
At Jimmy Choo, we are encouraged by the progress we are making toward our goal of growing revenue to 1 billion, while expanding operating margins to the mid teens longer term.
At Michael Kors, we are encouraged by the sequential improvement in revenue trends and continued gross margin expansion longer term, we remain confident in our ability to position Michael Kors as a smaller more profitable business with revenue of $4 billion and operating margins of approximately 25%.
Taken together, we believe Capri holdings is well positioned to generate $7 billion in revenue with Versace, and Jimmy Choo combined accounting for approximately 40% of revenue and approximately 1 third of total company earnings.
As the world emerges from the pandemic, we remain confident that our 3 luxury houses position Capri holdings to deliver multiple years of revenue and earnings growth as well as increased shareholder value.
We look forward to sharing more of our future outlook with you at our upcoming Investor Day on June 29.
Now we will open up the lines for questions.
Thank you if you would like to ask a question. Please press star 1 on your telephone keypad at <unk>.
Information tone will indicate your line is on the question queue. You May press star 2 if he would like to remove your question from the queue and sort of participants using speaker equipment. It may be necessary to pick up of your handset before pressing the star of he is we ask that you. Please limit yourself to 1 question.
Our first question is from.
Omar Saad with Evercore ISI. Please proceed.
Good morning, Thanks for taking my question and great job on the quarter.
Pretty exciting stuff I guess I'll use my 1 question to ask about.
How sticky is at some of these margin gains are that you guys are generating especially around the Kors brand I think it's up 400 bps gross margin of 400 bps versus kind of pre pandemic.
Less promo has more pricing power and I'm wondering if we should think about longer term as supply and demand normalize do you think some of that promotion of holiday will go away.
I'm, sorry could return and <unk>.
Or should we think about kors, it's kind of like a smaller a little bit smaller leaner more profitable brands steadier grower.
In terms of the long term algorithm. Thanks.
Thank you Omar and good morning, I'll take part of it and I'll, let Tom take part of it as well.
To begin with I think we're extraordinarily pleased with what happened in the quarter for all 3 of our luxury houses and really the margin expansion we saw.
Which was which was I think.
Really important because we've been focused on reducing the SKU counts across all 3 of the companies.
And really.
Putting a laser focus on on full price sell throughs.
And that's gone up right across the group and so I think we're seeing of the impact of that also I just might add that.
The performance of accessories at for Saatchi is really extraordinary end far.
Ahead of what we had where we had expected to be at this point in time.
And when you look at the brand.
About a 10% increase of the quarter and remember 2 years ago, we dropped almost $150 million.
We bought the company from at.
From its revenue base to really cleaned it up at said it is at.
As of luxury company, where we eliminated 2 of the lines. So that whole strategy is working in place.
We're also seeing at.
At Jimmy Choo, the power of our of of 2 things happening again, reducing our our Skus, we are seeing better full price sell through in the in the.
In the dress shoe business, which is returning and our on our active business in particular, the our Hawaii and diamond platforms are having great sell throughs. So some really good things happening there again, that's helping to improve margin and then at Michael Kors Theres, a number of things going on again.
S. SKU reduction is part of the story.
Sure.
Clearly the price increases that we've taken and we will take more I think we talked about that on our previous calls more will happen on.
This fall season, and we will probably take more even further and.
In spring of 2022.
Our feeling is as we've stated a number of times, we want the Michael Kors brand.
To be.
Higher positioning from a luxury standpoint, we want to reduce the amount of promotional activity on the way. We do that is to really curtail the amount of supply.
And then the biggest part of the story is quite frankly, our focus on our signature business and the designs that Michael and his team have been putting forth on our marketing campaigns. We are resonating with the customer there is no question what's happening.
That kind of of the cool and interesting thing that we found is this new customer who in many cases is Z or early.
Sure.
The latter part of the of the millennial.
The Michael Kors brand is new to them and that's what's so exciting and we find that in the watch business to and we've talked about our first quarter of seeing watch.
Comps up.
And for many years and this is because at the new customer finding our brands. So we're super excited.
That that we can we can see that happening. So I do believe that this is going to be to use your term sticky and I think we're going to see continued expanded gross margin.
At at Michael Kors, really again based around price increases that we're going to take again, we talked I think.
We talked about signature across the total group this time, where normally we only talked about it and accessories at.
What you're finding is a more total number.
And we're seeing that this could really be 50% across the entire all categories of business in the company. So that's quite exciting and that gives us.
Better better full price sell throughs and more sustained product lifecycle, which is another very important thing.
As we look at profitability solid Tom talk to the actual numbers and so im sure and thanks again Omar so at.
As John noted, we did exceed expectations all of this year and it was really through fundamental actions and initiatives of the business is taking and more importantly, there are initiatives that are going to continue and expand upon in fiscal 'twenty 2 and into 'twenty..3 so we forecast at 50 basis points of expansion for margin in 'twenty, 2 and that <unk>.
<unk> all of these initiatives.
Plus a little headwinds related to transportation costs.
And particularly in Q1, the wholesale mix, but as you look at the quarterly progression, which we provided you can see we will be getting stronger as we move through the year as these initiatives take hold and we move past the wholesale of normalization and then for fiscal 'twenty..3 we continue to expect 100 basis points of expansion.
So when we look at the total company will be expanding and then when you look at Michael Kors in particular will be on a path to the 25% margins, which of operating margins, which is of well ahead of where we are have been historically.
And Omar I'll, just add 1 last point as well in terms of of Kpis. When you look at the fact that we've been raising prices and Michael Kors of really theres been less promotional merchandise available. Our inventories are down there is less of the customer defined.
And remember that's more of of North America.
Situation. When you go outside of North America, we don't have that.
Our cadence in the business, we follow a much similar cadence to the luxury industry.
We grew our database, 18% in the last quarter and that means 2 things at the customer is responding to our marketing and Michaels phenomenal designs and it also means that the price increases are not stopping that customer on from crossing the line and purchasing products. So thanks, a lot for that question Omar.
Great color. Thank you.
Our next question is from Kimberly Greenberger with Morgan Stanley. Please proceed.
Okay, great. Thanks, so much.
Really really nice numbers here in fourth quarter.
Thank you so much for the rundown John It sounds like just in answer to <unk> question that you might be sort of rethinking your view on long term margins.
Given maybe the higher margin rates that you guys are delivering right here with the ongoing opportunity. So I'm just wondering on my end.
At reading you correctly.
Do you think that longer term operating margins.
Both in aggregate and by brand could in fact be higher than the targets you established several years ago and if you could just if Tom can you just help us understand how margins change over time.
Through international growth.
E Commerce growth. Thank you so much.
Kimberly Great question.
Morning.
Sure.
I would answer that in 2 ways first off I think you saw on our press release today, we've announced at Investor Day.
We're going to lay out some of those longer term strategic.
Goals.
And some more detailed timing around them.
Again, we don't have.
Crystal clear vision as you can only imagine we're still coming out of the pandemic and.
The business in greater China has been the lead the business in North America has had strong growth, especially this last quarter and I might add.
Continuing on into this quarter.
And 1 of the things we're really pleased about is the department store business in North America is quite strong.
So we're really pleased to see that and again this is on significantly reduced inventories.
The sell throughs of turn the margins, it's all really in a great place.
I might add you will still see depressed wholesale numbers.
2 reasons number 1 Europe is not back by any stretch of imagination were.
We're going to be well into into latter part of of of Q3, I think until we see something get healthier there.
And that is I wanted to talk about that I'm talking about calendar Q3, and then hopefully into calendar Q4, as the vaccines get rolled out there and.
And you'll get more borders opened and then lastly, while I think we've all been reading about the return of domestic air travel and we're all excited about how many people are going to travel. This weekend from at from an international duty free business that we've talked about which as of the third component of our wholesale business.
That's still has basically shut down.
We think that will return in 'twenty 2 so that's going to be a nice addition for us when that business does come back because we will basically have been out of that business for all intensive purposes for 2 years on.
Besides a duty free business, it's been strong in China, but again that can offset what we were doing.
So answering your question about long term margins I think we feel very good about the targets that we set for Michael Kors I think this.
Closer to a 25% range over a period of time and that hopefully won't take too long.
Definitely within our window, we see at.
And we feel great about that.
Now moving to Versace.
Clearly the mid teens operating margin that we've given is our let's call that our first step.
Over time as we get.
2.2 more sizable volumes.
We have loftier goals from that I think.
We've said that to you all on the past again, we don't want to get in front of ourselves because.
We're going to make investments for such a is doing really well right now.
As I said.
A moment ago, we are.
Pleasantly supply surprised at how quickly our accessories business.
And quite frankly, our footwear business as well, but our accessories business is growing we've got the 2 strong pillars, we've got <unk>, which is off to adjusted.
A really phenomenal stop start.
Virtuous of very very strong group for us and now we have low Greco coming and that's going to take time, even though we have a tremendous amount of confidence in that new collection on pillar for us it's going to take time, but if those things work.
I think we have goals.
That would be substantially.
Substantially higher than what we what we've presented to date youre not going to probably see us change off of that today, we need to get that leverage we need to get that volume.
But we are without question on the right truck the truck track of the consumer is absolutely responding to us.
And again remember Michael Kors and.
Versace when you look at the volumes today incorporate at Jimmy Choo.
We've got a big hole in terms of Europe, not being turned on for all intensive purposes that business is still not back end, yes, we've had sequential improvement because of the.
The digital part of the business, but our stores are not really.
Producing today.
Again, we're very hopeful that by calendar third quarter calendar fourth quarter back, but when you get a full year of that under your belt, that's going to create some very nice leverage for the company.
And then lastly, Jimmy Choo.
It's going to take us a little more time than we probably had originally thought.
In particular because of what happened during the pandemic with the dress footwear business being being really hurt badly.
But I think that again, we're talking about mid mid teens.
And that will be rely on also on us getting our accessories business developed and again, we're in early days with that.
And I think we've said in the past going to take us a little longer with Jimmy Choo than we probably had hoped for 2 years ago, but still very very confident we've got the right pieces in place and we should be able to deliver on our on our objectives.
And Tim really there were 2 other items you'd asked about on international E Commerce on how they impact our margins longer term. They are actually both positives for our margins and would support additional growth and expansion. When we look at international and I'm speaking about Asia in particular at grew this year to over 20% of our total revenue.
And all 3 of our brands are growing and performing well in the region and that is a region that structurally has higher margins historically and we anticipate that to continue in the future. So as we increase our penetration in Asia and China in particular that will help the overall company margin base.
Second item is e-commerce and now for all 3 brands are E. Commerce margins are positive for Jimmy Choo and Versace. They always were in line with or better than stores and now for Michael Kors with the growth that we saw this year and the leverage that we've seen in E. Commerce, our margins are at or above store level.
So as we increase penetration and by the way e-commerce penetration about doubled in fiscal 'twenty, 1 and we'll be growing off of much larger base.
As we move forward that will also be accretive to margins, we will be making investments to help support that growth across the business. That's part of our Capex plans and we're real excited about it.
And I might add lastly.
On the part about greater China in particular, our competitors.
Across the group are running in the in the.
Almost of $1 billion 2 to.
$2.5 billion, just in greater China in terms of revenues.
So you think about the opportunity we have and those are on single branded basis.
And think about the opportunities that we have 4 of them.
For such a end Michael Kors, probably.
More able to get into those types of of ranges at Jimmy Choo of little less so but still lot of opportunity.
There's a very big runway of growth for this company with our brands.
Very much Kimberly great color. Thank you so much.
Our next question is from Ike <unk> with Wells Fargo. Please proceed.
Hey, everyone. Let me, let me add my congrats.
Just wanted to dig into the gross margin real quick.
I guess on the outlook can you talk about especially on the near term the pressures youre seeing on supply chain and fulfillment just any detail there would be kind of interesting to hear.
And then maybe Tom on GSP just to be clear are you assuming at GSP is not renewed.
In your guidance and then if you are you arent if youre not.
What would the benefit be if something retroactively does go through at some point this year. Thank you.
Thanks, Ken with regard to supply chain and fulfillment.
We are seeing delays as I noted and costs are higher we are seeing challenges for instance, just getting container space in their port delays.
<unk> out of Asia in particular, and then more delays in long beach in La <unk>.
However, as I noted, we have built that into our forecast and we have incorporated at the higher costs of our teams are doing an amazing job working to mitigate that both what they have done an additional plans that we're putting in place.
So we do anticipate it will continue.
Ultimately normalize, but it's incorporated in our forecast right now.
With regard to GSP.
We do assume that ultimately it will be renewed and there was actually some legislation put forward in the sentence Senate that was introduced to start that process.
But overall when you look at the GM impact I think you have to look at the total puts and takes as to where this would fall. If for instance at we're not done it's really too early to tell the impact of GSP. Since we don't know of the timing and the form of renewal and as John mentioned and I also noted we have a number of.
Their actual base business initiatives full price sell through and increasing signature of our pricing activities at.
As well as other items like Asia growth in E Commerce.
We've over delivered on in the past so with all the puts and takes I think it's a little too early to talk about the overall impact of net impact.
To our gross margins right now, we're very comfortable with the 50% at 50 basis point increase this year at 100 next.
Got it thank you Ike.
Our next question is from Matthew Boss with Jpmorgan. Please proceed.
Thanks, and congrats on on the improvement.
No.
Maybe John.
A little bit larger picture, but I know, we've talked about it at length in the past.
As we exit the pandemic.
Hopefully sooner than later.
I guess, how would you reframe the relative growth rates and opportunity as we think about first the accessible luxury market at Michael Kors operate then and then second maybe trends in the forward looking view that you have on core luxury that would be more versace and Jimmy Choo on a go forward basis.
Thank you and good morning, Matt.
So Matt a couple of things number 1.
In terms of the growth trajectory, we've really.
Reevaluated and refined our vision for this company and I think thats been a.
Quite a seminal.
<unk> for us is to say profitability.
Profitability is going to be 1 of the things that is absolutely critical in terms of growth.
And also gross margin expansion and full price sell through so as we did that and looked at that strategy, we thought that our business initiatives around could somebody.
Mute their phone by the way because as of <unk> noise.
So we really look around our business strategies and how we could execute against those in light of our goals.
And I think we came away, saying Versace for sure. We're on the right track. We know we're doing the company is really.
I think been cleaned up and more importantly has a very clear product strategy envision and that's resonating with the consumer so.
We're looking for a 32% increase in growth.
<unk> this year and by the way again, that's really without having Europe.
Lucky if Europe is.
In a healthy place by the second half of our fiscal year.
And again I'm not trying to be negative I'm, just trying to say, it's just takes time.
On remember Europe doesn't have the same levels of stimulus being provided as North America does so again, we're just cautious about what we see happening there.
Jimmy Choo I think we feel much more comfortable today with re openings and how we see the world moving forward on that business with our.
<unk> $500 million to $525 million as of 23% growth year on year, which is again at very healthy increase and getting us back to historic levels, and then Michael Kors, where we've reset the business.
And in that particular case, we think we're going to of a healthier business. We think it's going to be of business that will be a very consumer led.
And not lead around again in North America promotional activity.
Don't take that same posture outside of North America, and Europe and.
And in Asia. So we think we're going to have a much healthier business and thats going to be at 21% growth again not back to its historic levels.
But we think thats the right thing to do.
From a straw.
Structure standpoint, and the consumer seems to be responding resonating with those strategy.
As it relates to the market and I know, Matt you and Ive talked about this offline, we don't really view the.
I guess you refer to it as the accessible luxury market or whatnot.
Is dramatically different from the luxury market in terms of the accessories business I would say it is more on the ready to wear.
Worlds and to a lesser degree in the footwear worlds, but in particular on accessories, we see consumers cross shopping with what you would consider the more pure play of luxury brands and us as well and what you saw during the pandemic is of both markets growing very very nicely at.
And of course, we saw tremendous growth in our fourth quarter.
As we pointed out in our own retail channel.
Sure.
Revenues were up double digit and accessories and also revenues of climbing above <unk> levels in the department store.
World as well and you've heard on the top tourist stores talk about the category. So the category in general.
We think is growing not only in North America, but clearly is growing very rapidly.
In China in particular, it's a little hard to tell where things are in Japan, and southeast Asia. Because again, there is still some are coming out of lockdown and Im sure you understand that in Japan.
There is still very very little of vaccine that has been distributed.
And in Europe, again, we can't tell until until the.
The travel retail business comes back et cetera, but we're assuming growth there as well. So we think we're in a category of business that is going to grow just naturally and once again, we think all 3 of our luxury houses will benefit from that but we're not trying to chase. The revenue we're trying to do at very.
Methodically design and marketing driven again Donatella has done an amazing job with these new accessories.
That forms and pillars that we've launched a Sandra is doing a terrific job and we've got some new hires that we've made at Jimmy Choo, which we think is going to really improve our accessories product and then Michael.
My hats off to him and everything that he did during the last 2 years to really make signature and new shapes.
<unk> have a customer desirability and thats really what we.
We think shows the health of the business. So we think we're on a book growing market. We think we've got 3.
Really excellent excellent luxury houses to be able to grow at.
And someone asked me do you think will take market share I think the market is going to grow 567%.
So whether we take market share.
We're just getting part of the market growth.
I think thats.
In case of each of the brands will be looked at slightly differently, but there's plenty of opportunity for us to execute against our initiatives.
Based on what's happening in the luxury accessories market.
Great color best of luck.
Our next question is from Erinn Murphy with Piper Sandler. Please proceed.
Great. Thanks, good morning.
John My question for you on Versace, the logo product that you recently unveiled back at the end of March can you talk about what distribution will look like this fall and then into next spring and then Tom If I can just follow up on the gross margin what is embedded in the outlook for any raw material cost price increases that you're seeing thanks. So much.
Good morning on thank you Erinn.
Yes.
<unk>, which is what you saw in the show in March I Hope you all got excited about that.
Again, I take my hat off to Donatella and the design team on.
Under the leadership of our CEO, Jonathan Aykroyd and this was this was a very important moment for the company the company while.
While we've had our iconic Medusa emblem.
It really is not a full signature logo strategy.
And the company has never really had this in its history.
And also what is so exciting about what's happening at Versace, when you think about Italian luxury goods companies, you typically think about leather goods.
On this company, while it's been in the business never used it as its lead obviously, we were always about runway and fashion in ready to wear and the customer has just absolutely accepted our entry into this market.
And as I said much quicker than we had anticipated or maybe even dreamed of.
And again, we're not even fully put our foot on the accelerator, we're just kind of.
Mapping this very tight and strategically so the distribution for low Greco will be obviously, our own digital channels our own.
Retail stores and then Ltd.
All of our of our Department store luxury partners again, we're going to go slow. This takes time. This is not going to just all of a sudden hit in <unk>.
Huge takeoff.
I really am pleased about is we know and this is in 2 years, we have 3 pillars, we have lot of Medusa.
And coming Lagreca and honestly, we don't need anymore, we've got what we need and now we can build upon this with our marketing strategies our storytelling.
And I think.
Yes.
At Versace can tell a story that I don't know who can and.
And we're still really excited about how thats going to look at the last thing you should know 4 of Versace on the same thing really holds true at Jimmy Choo.
We have some of the best store locations on the worlds, where about 40 plus percent renovated in the stores, we will hopefully be maybe 60 ish by the end of the year and then over the next couple of years was of 100% renovate fleet and as we do more business in the stores they either go from.
Our low level of profitability to very significant levels of profitability or some stores might have been losing money that will become profitable. So youll see quite a quite of bit of of a step change.
With Versace in its own retail.
Network, So again, thats, what youre going to see happen.
And thats it.
What I mentioned earlier to Kimberly.
Aspirations as as we see those step change happen we think.
We're not exactly sure 100% what volume levels, but there is opportunity to go above even our stated goals on on operating margin turned over time and day errand with regard to raw material costs, we have seen increases in raw material costs and input costs.
And specifically whether for instance that is embedded in our outlook for our gross margin levels and 50 basis points increase for the year as well as the progression through the year. So if you looked at the puts and takes that takes the transportation and then the input costs in wholesale in the beginning of the year overall.
Because it would be more than offset by the positive full price sell through our pricing actions and growing the accessories business among among other activities.
So that's how we see at laying out and then progression wise the first half a little more impacted in particular Q1 by the wholesale mix is at.
At normalizes, and we get into the second half than the benefits and the strength of those initiatives kind of shine through are there of the whole time, but thats when youll see them picking up in terms of gross margin expansion.
Thank you Eric Thank you.
Our next question is from Paul <unk> with Citigroup. Please proceed.
Hey, Thanks, guys.
On the Michael Kors brand within North America, just curious what your assumptions are for this year on the wholesale side what percentage of that brand sales are going to be U S Department stores and have been at compare to pre pandemic levels.
And also just curious if you could talk about performance of urban stores malls versus outlet. Thanks Scott.
Thank you Paul.
So Paul as I've.
I think I pointed out over the last 2 years. So we've tried to make it very specific.
Point of this that we look at the wholesale business at Michael Kors in 3 buckets, we look at the North American Department store business, which I'll talk to on a moment, we look at the at the European business, which is a combination of both.
Department stores and specialty stores and by the way Theres also some regional licenses some of which we don't even talk about it in there which could be our licenses in Russia or the middle East et cetera, all reside in that in that category and then lastly is the travel retail business, which is of.
Was a sizeable wholesale business for us.
So let me go back and start from the beginning of the North American business will probably be more dominant of the wholesale business really because of these other 2 categories Europe, our EMEA and.
Travel retail is.
We've talked about is really been shut down.
So when you when you look at our next fiscal year those businesses will be back in place our fiscal year 2023, and so and so the the north American wholesale business will be less weighted.
The total than it is today.
But in North America as we've said what we did was we reduced the amount of sell in of product to really push up the sell through end to reduce the markdowns.
And I have to tell you our partners here in North America have been really thrilled with the strategy other onboard with the strategy there and they are really executing on the strategy.
And.
If anything right now, we're a little lean on inventory.
Sell throughs are so high and some of these stores and that's of great place to be right now.
So again, North American Michael Kors wholesale will be more heavily weighted than it has been in the future only because of these other 2 marketplaces are or suffer of the continued to suffer but we do expect as I said before.
Really in the fourth quarter of this year Europe to be back.
Probably to 80 plus percent of its of its normalized volume rates.
But we are expecting second quarter and third quarter to still be very sluggish.
And kind of bouncing around and we do not expect the wholesale business to return and travel retail until I'm going to call at calendar 2022, and Thats, where youre going to see a lot more international flights being accepted at airports and it will just flow a lot of lot easier.
There's going to be a very nice rebound.
As a results of that.
In terms of of of.
The regional stores versus the metropolitan or the big cities.
It is still the larger cities in North America, and Europe have not returned.
Seeing some some small return.
But they are they're not anywhere close.
Close to where they were before.
Conversely.
Some of the regional or suburban mall locations and I'll have to only speak to the U S. Because Europe is only recently reopening.
Is showing very strong sides and in many cases of.
Our showing even even increases.
Back to 2019 levels. So we're quite excited and pleased about that.
So when we're seeing traffic really improve every single week. The mall traffic is getting better and better every single week again, we're still not at back to pre pandemic levels.
You can see the consumer is getting more comfortable in shopping I might add 1 of those thing too you will definitely see across the group because the retail store of trend is improving.
There will be some deceleration in terms of the of the e-commerce up raw percentages and Thats really.
It's coming off of a much bigger base given what's happened over the past 18 months and be people shopping in stores and that's kind of exciting for us to see people coming back out and getting excited about being in there so still going to see very nice increases in e-commerce.
But there won't be quite that dramatic levels that we've seen over the past just given the fact that stores are reopening and consumers are shopping.
Thanks, a lot Paul that's helpful. John Thanks.
Our next question is from Jay sole with UBS. Please proceed.
Great. Thank you. So much my question is just on the balance sheet and free cash flow. John If you could just sort of elaborate what your priorities are for the free cash the company is going to generate this year and if M&A is something thats rising in terms of the priorities that would be super helpful. Thank you.
Okay. Thank you I'm going to let Tom answer that just before he does I want to make sure everyone knows as Youre looking at Youre.
On developing your thoughts around our company we at.
Intend to spend into this year.
So our objective is to really.
Engage with our consumer.
And get them back into stores stores are critical that we see them return to 2 ultimately pre pandemic levels.
And so we will be using our <unk>.
Syed.
In many cases to spend into great marketing initiatives and in particular.
Something like for such a win.
If we see lagreca happening, we're going to spend into it and we're going to really develop that communication with our consumer. So please make sure you keep that in your mind and we think Thats the right thing for us to do continue to build brand equity.
And in certain cases, and certain regions of the world, where we are underdeveloped and Asia would be that in particular, we want to try to.
Ride the wave <unk> take market share and we think to do that we will need to spend into those activities.
Sure Jay when you look at the free cash flow. This year is of little over half of $1 billion.
Pretty close to where we were pre COVID-19 at over 600. So we're really pleased with how the business performed based on all of the different initiatives, we put in place and as we look forward I think that the operating income being up at guidance levels over 60% of that's really going to help build back up our cash flow.
<unk> and just the testament to the fundamental strength of the businesses as John mentioned, we will be investing this year in really 2 areas of little higher capital expenditures as we renovate stores and build out, particularly in Asia and also investing in inventory to support the higher sales growth, but feel like we're very much on the path to continue to generate strong free.
Cash flow.
From an allocation perspective.
We'll be investing in the business and this includes areas like digital will be paying down debt. We have paid down significant amounts of this year $850 million, but we will continue to do that and further strengthen our balance sheet and that does give us capacity in the future of to return cash to shareholders.
Our balance sheet is very strong with leverage of under 3.3 times at this point and at some point in the future. We may look at additional acquisitions, but we're really focused on our business right now.
Got it thank you so much.
Our next question is from Dana Telsey with Telsey Advisory Group. Please proceed.
Good morning, everyone of nice to see the progress as you talked about the digital margins in the retail margin 1 of the opportunities and where do you see the digital margin getting to given that it is surpassing retail margins and is there any difference by region or by brand. Thank you.
Good morning, Dana and thank you for that question.
Look at.
R R.
Digital business is exciting.
We're using data analytics to support more targeted and personalized marketing and we're really seeing all 3 of our brands excel under this strategy.
It's great to see the teams get together and talk about what's happening in each 1 of the business units and share learnings. So we find our expertise growing every day in this area.
I wanted to also make sure everyone knows that we really believe in an omni experience and we think that at.
As exciting as the growth is in digital and E Commerce, and we want that and we're going to make sure that we continue to power of that.
We're going to be equally as focused on stores.
<unk> will still be the predominant part of our of our.
Business and we think also that we're seeing consumers.
Moving between stores moving between online and requiring a new thing from US, which is which is in home experience on our client telling initiatives that you've heard us talk about over the past few calls has really been extraordinary by all 3 of the groups.
We're helping people by having an in home experience, whether that's virtually whether that's something that we're sending the product to the consumer at.
We're seeing excellent results from that so so we view our our initiatives to be very omni based and our data analytics to be very omni based.
That being said there.
There is clearly huge opportunity for us to continue to grow.
Our digital pieces of the business and what we're excited about I'll just give you a good example of that is at Michael Kors, We have something called MK go of.
It really kind of of more sporty side of the business.
And that business is running at at triple digit growth rates.
And that's predominantly being driven by online only almost I mean, there are some ltd representation of this in.
In the stores, but what we see is the opportunity to build out other categories.
That that really haven't been.
Distorted on a retail basis at Versace, our underwear business is significant predominantly driven by online activity. So there is other areas inside the company, where we're going to be able to take categories and we'll talk to you more about some initiatives that we have.
With Jimmy Choo coming up that are really exciting where we can build businesses that we might not be able to actually housing of our stores or the traffic as it related to those categories in our stores and that can expand both revenues and margin.
Many of those businesses again.
Case of MK go for Michael Kors.
The business that we're going to run more as an annual product offering and then not even to have the seasonal markdowns and the majority of that business. It's very high margin business for us, it's engaging with the consumer at a part of their wardrobe that they're excited about and it's in addition to our very dominant active footwear business. So.
We see these opportunities as well as our existing whether it's in Michael Kors, our accessories, our watch of our.
Footwear ready to wear those are existing businesses that will both have in retail, but there's a real opportunity to drive other things online and the reason why we also like this is again it takes away the positioning that you only have to rely sometimes on promotional activity to generate revenues and we don't want to be in that business. That's a business that.
We think long term doesn't really help.
The health of the of the brands. So we will have a piece of that but we'll certainly have other activities that will drive additional revenues at high profit margins I'll, let Tom speak to the on.
On the part of your question sure and when you ask about upside Dana I think there is upside we saw at this year just by building scale for instance, at Michael Kors and the impacts at had on the e-commerce margins being very very positive. So as we continue to grow the size of the absolute size of that business I think that that will certainly help.
So we're going to be making investments in our digital platforms and continue to expand our analytics capabilities.
<unk> will help.
To help improve our returns as we are investing in that business to generate sales. So that's also on efficiency I think we can apply against all 3 of our brands.
Finally, when you look across the businesses just due to the price points of Jimmy Choo and Versace.
Higher structural ecommerce margins at Michael Kors, but again that Michael Kors businesses.
Improving rapidly.
Thank you Dana I'd like to take this time to thank everyone for joining us. This morning, I know this was a little longer than normal, but it is our year end call and I think we also wanted to take the time to really provide.
Some some more detailed guidance, it's not our normal practice, but we felt that given the fact that we had.
Reevaluated and refine capris.
Strategic direction, and we've got a little better insight into how that flows that it was important to share that information with you at.
And we look forward to giving you further updates in calls ahead and of course, we will hopefully see and talk to most of you at the upcoming Investor day. Thank you very much and nice speaking with you all.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Okay.
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