Q2 2022 Capri Holdings Ltd Earnings Call
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Greetings and welcome to the Capri Holdings Limited second quarter 2022 earnings Conference call. At this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Jennifer Davis, Vice President of Investor Relations. Thank you Ms. Davies you may begin.
Okay.
Good morning, everyone and thank you for joining us on Capri Holdings limited second quarter fiscal 2022 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.
These risks and uncertainties are described in today's press release and 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 long lived asset impairment ERP implementation cost cut pre transformation costs 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 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.
Looking at Capri holdings momentum as.
As the World continues to recover from the pandemic. We are encouraged by the progress of all three of our luxury houses.
Versace, Jimmy Choo, and Michael Kors are all resonating with consumers as evidenced by the 11 million new customers added across our databases over the last year.
During this time, we have continued to see revenue growth and margin expansion above our expectations, reflecting the successful execution of our strategic growth initiatives.
We are extremely optimistic about our future growth potential and believe the company is emerging from the pandemic stronger than ever.
Capri Holdings success is a testament to the strength of our brands as well as the dedication resilience and agility of our entire team across the globe.
Now turning to second quarter results.
Capri Holdings revenue gross margin operating margin and earnings per share all exceeded our expectations.
Total revenue in the quarter increased 17%, reflecting better than anticipated results at all three brands.
E Commerce sales increased double digits building upon significant gains achieved last year.
Additionally, gross margin expanded 440 basis points, reflecting increases across all three of our luxury houses.
Operating margin of 18, 5% was significantly above our expectations.
As a result earnings per share of $1 53 was better than anticipated.
Looking at group revenue trends by geography.
Revenue growth continued to exceed our expectations in the Americas and would have been even stronger if not for inventory constraints.
Consumer demand for our brands was healthy and benefited from an increase in social gatherings.
In EMEA revenue trends were also above our expectations with growth across all houses.
We saw strong momentum driven by robust domestic consumer demand as stores in the region reopened and vaccination rates increased significantly.
In Asia revenue was flat due to COVID-19 related restrictions in Japan, Southeast Asia and Australia.
As well as an increase in Covid cases in China, which resulted in new travel and other regional restrictions.
However revenue in mainland China increased during the quarter, even with greater restrictions.
Now turning to second quarter performance by brand, starting with Versace results significantly exceeded our expectations once again.
Revenue increased 45% demonstrating the strength of the brand.
And the success of our strategic growth plan.
At the core of these strategies is the bold and Fearless design vision of Donatella Versace.
Her vision is based on versace's iconic Italian heritage and unapologetic glamour.
Versace has created three very powerful iconic pillars with Virtus.
La Medusa.
And the launch of our new La <unk> signature pattern in September.
La <unk> is donatella as modern interpretation of Versace's Classic Greek key motif, which Gianni first introduced in 1988.
The signature pattern illustrates versace's rich history, and the brand's ability to draw from the past to create innovative designs for the future.
La <unk> is off to a very strong start.
And is reflected across all product categories, including accessories footwear ready to wear and jewelry.
We continue to believe the signature pattern will accelerate the trajectory of Versace as revenue growth as our third iconic pillar.
Women's accessories continued to perform well as retail sales increased strong double digits.
With our three iconic pillars, we are confident in our ability to position versace as a leading luxury leather house.
We are making significant progress.
And our goal to expand accessories revenue to $1 billion over time.
Looking at footwear, we are gaining authority as a women's footwear brand and have begun to build out our core offerings focused on our iconic codes.
In the second quarter women's footwear sales at retail increased double digits.
Additionally, we saw strength in men's and women's ready to wear with retail sales up double digits.
Versace's bold and Fearless designs were positively received by consumers and we saw an especially strong response to the new la Greco signature pattern.
When it launched in September.
We also continued to expand our core lines, which incorporate iconic house codes to increase sales and.
And broadened versace's reach.
Moving to brand awareness and consumer engagement.
For such as fall campaign featured global Superstar duo Lipa.
She introduced the new look record collection.
The pop icon epitomize, the Versace brand with her impeccable style fearless attitude and Universal appeal.
<unk> has over 125 million followers on her social media accounts.
Additionally, versace generated widespread acclaim and media coverage during Milan fashion week.
First dual Lipa opened and closed the versace's spring Summer 2022 show and her runway W.
The show generated over 41 million views globally.
Then and then momentous conclusion to Milan fashion week, Versace, and Fendi, two iconic Italian fashion luxury houses came together with a joint fund Darci show.
But houses debuted a versace collection designed by <unk> artistic director Kim Jones, followed by Fendi collection designed by Donatella Versace.
The swapping of design roles presented a unique moment in fashion.
The fed Darci show generated over 17 million views globally.
We believe this collection will generate significant revenue and increased brand awareness for both fendi and Versace.
As a result, Versace was the top engaged and Italian fashion brand on social media during Milan fashion week.
During the quarter for such a continued to adorn the worlds most famous celebrities.
The <unk> presence at the met Gala was extensive with donatella dressing celebrities, including little Nasdaq's Star.
Steph Curry.
Illumina.
Channing Tatum.
These powerful initiatives among others helped to drive a 26% increase year over year in Versace's Global database.
Overall, versace's second quarter results speak to the strength of the brand and reinforce our confidence in the luxury houses long term growth potential.
Our Saatchi is revenue and margin are outpacing our expectations as the brand's momentum remains incredibly strong.
We now have the key building blocks in place to realize the full potential of this amazing brand.
Are more optimistic than ever about <unk> future.
Moving to Jimmy Choo.
Results were ahead of our expectations with revenues, increasing 12% as we continued to execute against our strategic initiatives.
At the core of these initiatives is the design vision of Sandra Choi.
Senders vision is inspired by Jimmy choose inherent glamour confidence and daring attitude.
We are successfully translating these brand codes into the foundation of Jimmy Choo is key product strategies focused on expanding accessories and growing both formal and casual footwear.
In accessories, we were pleased with the progress as second quarter revenue increased double digits.
Accessories sales were driven by continued focus on our three key hero handbag families.
Madeline and Bonbons.
Which were updated for fall with rich seasonal colors and lavish textiles.
We have been seeing a return to glamour with evening bags performing very well.
Footwear sales also increased double digits in the quarter driven by a recovery in formal footwear styles.
As people are returning to work.
Attending events.
And enjoying special locations.
Within formal and casual footwear.
We have been seeing a shift to more embellished styles.
In terms of brand awareness and consumer engagement. We are excited to feature Hailey Bieber as the face of Jimmy Choo Newbold Autumn 2021 campaign time to dare.
<unk> is the embodiment of the modern glamour that defines Jimmy Choo.
She perfectly encapsulates the alluring daring and confidence spirit.
That is at the core of the brand's DNA.
Hayley has over 40 million followers on her social media accounts.
With the return of in person events, Jimmy Choo presence on the Red carpet was extensive.
A few of the many celebrities wearing Jimmy Choo during the quarter included Billy Irish Jennifer Lopez, do Lipa, Gigi Hadid Hailey Bieber.
Zach Braff and Nick Cannon.
Our engaging marketing combined with glamorous product helped contribute to a 17% year over year increase in Jimmy Choo as global consumer database.
Overall, Jimmy choose double digit revenue growth in the second quarter reinforces our confidence in the luxury houses fuel.
Future growth potential.
Now turning to Michael Kors Rizza.
The results were also ahead of our expectations with revenue increasing 11% as we continued to execute against our strategic initiatives.
These initiatives are centered on Michael's optimistic design vision, which is based on timeless fashion and jet set glamor.
Looking at Michael Kors key product strategies, we are focused on three growth pillars.
First.
Capitalizing on signature.
Second <unk>.
Growing MK go our active collection and third expanding our men's business.
We believe both MK go and men's represent incremental revenue opportunities that will bring new customers to the brand.
Now let me discuss the continued progress we have been making with our initiatives.
First.
Signature as a core growth strategy and we plan to increase this classification to 50% across all product categories.
Signature has become an important foundation and driving force behind revenue growth in every region globally.
As we have been building out the signature classification, it has been generating higher AUR and gross margin expansion.
In the quarter.
Overall signature represented 39% of.
The assortment compared to 32% last year and drove sales across.
All categories.
In accessories signature penetration was even greater.
Accessories retail sales increased double digits globally as consumers responded to our iconic signature styles.
Energized by flashes of colour and fresh updates for fall.
Turning to MK go <unk>.
Consumers' reaction to the newest launch of MK go has exceeded our expectations across all product categories.
For the fall the MK go line features our signature MK print with Pops of Orange and logo taper.
We are attracting new and younger consumers with the innovative product amplified by a powerful 360 degree communication strategy.
We continue to believe that <unk> is an incremental $250 million revenue opportunity that is a true product extension not cannibalizing our existing businesses.
Looking at mens second quarter retail sales increased double digits globally, as we focus on timeless essentials with a modern edge.
Accessories sales were strong driven by signature.
We continue to believe that men's represents an incremental $300 million revenue opportunity.
Now turning to brand awareness and consumer engagement.
For fall, we continued our highly successful the I must travel campaign featuring Bella Hadid.
The campaign returned to New York, where the speed energy and optimism of the city is always an inspiration for Michael.
During New York Fashion week, Michael Kors was one of the top engaged brands on social media.
Following Michael's highly successful 40th anniversary show.
The spring Summer 2022 fashion show was his first live runway show since the pandemic began.
Set in New York City's landmark tavern on the Green in Central Park.
The show highlighted Michael's fashion innovation, which reflected urban romance.
The show generated over 23 million views across social media platforms.
The brand's presence at the met Gala was also extensive.
With Michael dressing celebrities, including Shawn Mendes.
<unk> bio.
Kate Hudson and Regina King.
In China, we continued our extensive marketing initiatives, including the launch of club cores.
An interactive brand experience that fuses fashion.
And music.
This fund build high energy event was held at the Chengdu Open Air music part.
And featured festival attractions and live musical performances.
The star studded lineup included performances by several of China's top pop artists and Michael Kors brand Ambassador Wang FIFA.
To extend the experience across China, Michael Kors hosted club cores takeovers at nightclubs in Shanghai, Beijing, and downtown Chengdu, where guests were able to watch the concert livestream.
Club cores livestream reached over 75 million viewers.
In addition club quarters took over Michael Kors Tmall flagship store.
With an interactive experience to tour the venue virtually.
We believe this helped fuel Michael Kors, most successful Tmall Super brand day ever.
These marketing initiatives continued to highlight our brand pillars of speed energy and optimism.
This helped contribute to a 21% year over year increase in Michael Kors Global database demonstrating.
Demonstrating the continued strength and desirability of the brand.
Overall, we are thrilled with Michael Kors brand momentum and.
Strong margin performance in the second quarter.
The strategies, we put in place over the past two years have been generating higher consumer engagement as well as attracting new and younger consumers.
Our jet set vision focused on speed energy and optimism across product innovation brand engagement and customer experience is clearly exciting consumers.
Additionally, we are continuing to elevate the brand positioning at Michael Kors.
Which is driving higher profitability.
The strong consumer demand for the brand supports our tremendous enthusiasm for Michael Kors future growth opportunities.
In total.
Capri Holdings second quarter results exceeded our expectations demonstrating the power of our three luxury houses.
And the execution of our strategic initiatives.
Consumer desire for Versace, Jimmy Choo, and Michael Kors remains strong.
And we continue to grow revenue as well as expand gross margins.
Given this momentum we are raising full year revenue and earnings guidance, even with the ongoing supply chain and COVID-19 related challenges.
Looking forward based on the strength of our brands and the success of our strategic growth initiatives. We remain confident in the company's ability to deliver multiple years of revenue and earnings growth.
Now before turning the call over to Tom I would like to take a moment to welcome Josh Schulman to Capri Holdings.
I've had the pleasure of knowing Josh for many years.
He is an outstanding leader with broad industry experience and a proven track record of successfully operating and growing global fashion luxury brands.
We do not believe we could have found a better leader and are thrilled to have him join our team.
Importantly, Josh his appointment as part of a thoughtful leadership succession plan.
Over the next year, Josh will serve as CEO of the Michael Kors brand before transitioning to CEO of Capri Holdings in September 2022.
At that time, I will assume the role of executive Chairman.
My focus will be on our company's long term strategy.
Future potential luxury acquisitions.
And providing overall leadership to the board of directors.
The board and I are confident and Josh as unique abilities to guide Capri holdings through our next phase of growth.
In the two months since joining Capri holdings, Josh has begun to engage with the Michael Kors teams across the globe.
He is rapidly immersing himself in the business and learning all facets of the brand.
We look forward to his participation on our next earnings call. When he can share his thoughts on Michael Kors future growth opportunities.
Now, let me turn the call over to Tom.
Thank you John and good morning, everyone, starting with second quarter results.
Revenue of $1 3 billion increased 17% versus prior year exceeding our expectation.
Performance was driven by better than anticipated results across all three of our luxury houses.
Michael Kors revenue growth would have been even stronger if not for inventory constraints, which were driven by greater than anticipated supply chain delays and extended factory closure.
Net income was $235 million, resulting in diluted earnings per share of $1 53.
This was above our expectations, reflecting better than anticipated revenue gross margin and operating margin as well as a lower tax rate.
Looking at revenue by Channel total company retail sales increased approximately 20%.
These results were driven by robust e-commerce and store sales both of which increased double digits.
Wholesale also grew but at a lower rate.
By geography revenue remained strong and above our expectations in the Americas, and EMEA, increasing 20% and 25% respectively versus prior year.
In Asia revenue was approximately flat.
Continued restrictions in Japan, Southeast Asia, and Australia, as well as new travel and other regional restrictions in China. However.
However revenue in mainland China increased during the quarter, even with the greater restriction.
Turning to revenue performance by brand.
We're such a revenue was $282 million or 45% increase to prior year and above our expectations.
Global sales in our retail channel increased over 30% with strong double digit increases in both E Commerce and store sales.
By geography total revenue in the Americas increased approximately 80%.
Revenue in EMEA increased approximately 50% and revenue in Asia increased 4%.
We're such a ended September with a global luxury fleet of 211 retail stores, a net increase of 5% from prior year.
For Jimmy Choo revenue was $137 million, a 12% increase to prior year and above our expectations.
Global sales in our retail channel increased over 20% with double digit increases in both E Commerce and store sales.
Geography total revenue in the Americas increased 20% revenue in EMEA increased 15% and revenue in Asia was approximately flat.
Jimmy Choo ended the quarter with a global fleet of 237 retail stores, a net increase of 10 from prior year.
At Michael Kors total revenue was $881 million.
11% increase to last year and above our expectations.
Revenue growth would have been even greater if we had more product available to meet consumer demand.
We estimate inventory constraints at a mid single digit impact on Michael Kors second quarter growth rate.
Global sales in our retail channel increased in the mid teens with double digit increases in both E Commerce and store sales.
Wholesale revenue also increased over prior year, but at a lower rate.
By geography total Michael Kors revenue in the Americas increased 13% and revenue in EMEA increased 16%.
Revenue in Asia decreased 3%, reflecting the more extensive regional restrictions.
Michael Kors ended the quarter with a global fleet of 823 retail stores, a net decrease of 5% from prior year.
Now looking at total company margin performance.
Gross margin expanded 440 basis points to 67, 6% 390 basis points above our expectations.
We were pleased to achieve gross margin expansion across all three of our luxury houses.
This improvement primarily reflected increased full price sell throughs and select price increases at Jimmy Choo and Michael Kors.
Operating expense as a percent of revenue was 49, 1% compared to 46, 8% last year.
On an absolute basis operating expense increased approximately 23% or $119 million versus prior year.
This increase primarily reflected higher variable expenses reinvestments in our business and the unfavorable impact of foreign currency exchange rates as well as lapping prior year Covid related savings.
Resulting in net debt of approximately $900 million.
Total liquidity at the end of the quarter was $1 3 billion.
During the quarter, we repaid approximately $200 million of debt as well as repurchased approximately $100 million of shares.
Additionally, our board has authorized a new $1 billion share repurchase program.
This demonstrates the strength of our free cash flow generation and balance sheet.
<unk> additional capacity to return cash to shareholders over the longer term.
Looking at inventory, we ended the quarter with $866 million down 7% compared to prior year.
This is lower than we had expected given greater than anticipated supply chain delays and extended factory closures, which constrained our ability to deliver higher revenue.
Compared to our initial expectations transit times increased even more during the quarter.
In addition factory closures in Vietnam extended significantly longer than anticipated further impacting our inventory position.
While factories have reopened it will take some time before they returned to full capacity.
Going forward, we expect to build inventory to support sales growth over the remainder of the year.
Now turning to guidance.
Looking at full year fiscal 2022, we are pleased to be raising guidance based on the underlying strength of our business.
This updated guidance incorporates the greater than expected industry ride supply chain challenges, including factory closures and extended transportation delays.
These headwinds constrained revenue growth in the second quarter and are expected to continue for the near future.
In addition to delays we now expect the supply chain situation to result in nearly 200 basis points of higher expenses relative to our prior forecast in the back half of the year.
However, the success of our strategic initiatives is currently offsetting these headwinds therefore, enabling us to raise our revenue margin and earnings outlook.
For fiscal 'twenty, two we now forecast Capri holdings revenue of approximately $5 4 billion above our prior guidance of approximately $5 3 billion.
Reflecting the better than anticipated second quarter performance as well as an increase in our third quarter outlook.
Full year guidance assumes versace revenue of approximately one point over $6 billion.
Jimmy Choo revenue of approximately $575 million.
And Michael Kors revenue of approximately $3 billion $765 million.
For the year, we now expect approximately 250 basis points of gross margin expansion. This performance reflects greater than anticipated benefits from our ongoing strategic initiatives, including stronger full price sell throughs and selective price increases, which more than offset the higher than <unk>.
<unk> expected supply chain costs as well as the removal of remaining GSP savings.
Given the delay in approval of GSP, we've removed it from our fiscal 2022 forecast.
Turning to operating expenses, we continue to forecast operating expenses of approximately $2 6 billion.
As a result, we now expect our full year operating margin of approximately 18% above our prior guidance of 16%.
For Versace, we now anticipate an operating margin in the mid teens range.
For Jimmy Choo, we now expect a slightly negative operating margin.
And for Michael Kors, we continue to anticipate an operating margin in the mid 20% range.
Turning to our expectations around certain nonoperating items, we now anticipate net interest income of approximately $10 million and effective tax rate of approximately 17%.
And weighted average shares outstanding of $154 million.
As a result, we now expect to generate diluted earnings per share of approximately $5 30 for fiscal 'twenty two.
Turning to our third quarter guidance, we anticipate total company revenue of approximately 1.4 dollars 6 billion.
We forecast for such a revenue of approximately $235 million Jimmy.
Jimmy Choo revenue of approximately $145 million and Michael Kors revenue of approximately 1.8 billion.
We now anticipate our third quarter operating margin will be approximately 20%.
This reflects gross margin expansion with the benefits of our ongoing strategic initiatives more than offsetting approximately 200 basis points of higher supply chain costs relative to our prior forecast in the quarter.
Operating margin also includes incremental investments in marketing ecommerce and regional growth initiatives to support revenue growth.
For Versace, we anticipate an operating margin in the low double digit range as a reminder, for such a reports on a one month lag in their third quarter does not include December their single most profitable month in the year.
For Jimmy Choo, we expect an operating margin in the negative mid single digit range.
And for Michael Kors, we anticipate an operating margin in the high 20% range.
Turning to our expectations around certain nonoperating items, we forecast net interest income of approximately $4 million and effective tax rate of approximately 14%.
And weighted average shares outstanding of $154 million.
As a result, we expect diluted earnings per share of approximately <unk> dollars 65.
In conclusion, we are pleased with our second quarter results and the strong momentum of the business, particularly in the face of greater supply chain challenges.
This performance reflects the strength of our fashion luxury houses and the execution of our strategic initiatives.
As the world emerges from the pandemic, we remain confident that our three brands Versace, Jimmy Choo and Michael Kors.
<unk> Capri holdings to achieve meaningful long term revenue and earnings growth.
Now we will open up the line for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
May press Star two if you would like to remove your question from the queue.
The intense interest of time, we ask that you. Please limit yourself to one question and one follow up question. So that all may have a chance to participate for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from the line of Kimberly Greenberger with Morgan Stanley. Please proceed with your question.
Okay, great. Thank you so much.
Congratulations on the great momentum in your business and obviously as you indicated.
John and Tom the inventory constraint.
Particularly at the Michael Kors brand prevented I think even greater sales momentum I'm wondering if you can just talk to us about.
The ability to get back in stock and when do you think you'll have an opportunity.
To get sort of into an inventory position at the Michael Kors brand that you feel is a really good inventory in stock position.
Any.
Any worries or concerns as we head into the holiday season about.
Any particular categories or areas, where you feel like you wish you had a little bit more inventory.
Good morning, Kimberly and thank you.
For joining us on that question I'm going to apologize to everyone. On this call. Unfortunately, there is some construction going on in our Florida above us.
We're going to have a little bit of a COVID-19 situation, where we can't control some hammering I apologize.
Yes.
As it relates to inventory I'll divide it into two I'll talk about kind of the current situation holiday and then ill, let Tom take on the longer term perspective.
First off we were extremely pleased with what.
How are results turned out for the quarter across all three of the luxury houses.
And obviously in particular Versace was was really extraordinary.
And we continue to believe that the strategic initiatives that we put in place at Versace, Jimmy Choo and Michael Kors.
If you recall when the pandemic broke one of the first things. We said is we werent going to change what are our strategic initiatives. We're and in fact, we were going to continue to really focus on those as our guiding light. So I think thats proving to be.
Smart decision on our part and our executive teams around the world and I want to applaud them.
Because they are all really implementing.
The great results that were hover.
As it relates to inventory the biggest inventory issue is Michael Kors.
And it is global because the <unk>.
Supply chain issue is one that is quite challenging.
Predominantly with shipping product around the globe. So it is not just in North America issue, it's impacting us in all regions of the world.
And lets just first start with the timing piece of that that is.
As clearly added.
Somewhere between 45, and 60 days on two hour deliveries on a on a global basis.
Sometimes a little bit more than that.
And then of course, we had the issue with Vietnam, shutting down, which we did not anticipate.
In our in our planning, which we couldnt have.
And that has while it's getting office reopened its going to take time for these factories too.
Reach full capacity.
And then get back into.
A cadence that will really fill our supply chain needs. So I would say that we go into the third our fiscal third quarter calendar fourth quarter with lighter inventory than we would've liked to have had that.
That being said you can see by our forecasts.
<unk> raised our guidance.
And in that what.
What we're seeing is we're just selling through the products that we have the customer demand is absolutely outpacing what our what our inventory as well.
One of the if you can call it saving graces and I've talked about this.
Last two calls this week.
Took a position some time ago to reduce our promotional cadence regardless of what our competitors are doing around us.
And we've stuck to that and AUR or higher.
And at our conversions are higher and all of that is turning into higher revenues at higher gross margins, which is flowing right through to the bottom line.
I think we feel that we will definitely meet our expectations for the holiday season, I would say the consumer is quite strong.
Not just in North America, but in Europe, and even in Asia, where Asia. The bigger issue is just.
The kind of the starts and stops with Covid.
But are continuing to happen in that region. Although it does seem to be in Japan, which is one of our largest regions in Asia are starting to.
Kind of mitigate itself and hopefully we'll see a more normalized return over the balance of this quarter and certainly into our fourth quarter.
And so we're encouraged by what we think will begin to happen in Asia as we've seen in America and in.
And in EMEA.
As it relates to holiday, we will not be in the inventory position that we would have wanted to be and that being said we do have.
Inventory that we believe is going to really generate the revenues that we've forecasted.
And.
Meet.
The consumer demand that we're going to be able to service given the inventory levels we have.
Additionally, we've flown merchandise here knowing that there was that <unk>.
As I said between 45 to 60 days.
And so we've got inventory.
Inventory here in the right places.
In the right holiday gifting categories in particular.
So I think we feel good about that and of course.
As such in Jimmy Choo have been less affected.
By this.
For a variety of reasons. So we feel that we're in a very good inventory position with both of those brands.
And so we're looking forward to a very robust holiday season really with the backdrop that the consumer is healthy that the consumer is out and engaging in social activities.
And we think that theyre going to be looking forward to really strong gift, giving and enjoying parties with with their families. Let me now turn it over to Tom to talk about the little bit longer term situation as it relates to supply chain.
Sure. So as we look at the longer term Kimberly we do expect these delays to continue.
Fiscal 2023, so we don't believe there is a short term issue, but longer term. We do believe the situation will begin to normalize in the meantime, we are working on a number of initiatives and John mentioned, some around holiday and hearing some product over but also other initiatives to help mitigate the situation in terms of.
How and where we produce ocean shipping methods and strategic contracting with our carriers as we look at the rest of this year, we do expect to be building inventory.
For Michael Kors in the group overall as we work through the situation that we don't believe the factories will continue to be an immediate issue. They have reopened and are building capacity, but we do believe the extended delays will continue and as we said in the prepared remarks. This is a 200 basis point impact.
Versus our prior expectations in the back half and it's really the power of our three brands that is allowing us to offset this as is <unk>.
Great consumer desire and we have the continued ability to offset these costs with pricing increases.
I said on the last note.
Kimberly as you know we started to raise prices about two years ago in particular in Michael Kors and just recently started in Jimmy Choo.
And that was something we were doing regardless of the supply chain situation. So we've been able to mitigate costs just because that was a strategy that we had and I've said in previous calls we're going to continue to do that Michael Kors is going to become more expensive.
And we think thats the right positioning for our brand.
And that will be a strategy, regardless of whether there was a supply chain issue or not.
Okay. Thank you very much Kimberly.
Thank you so much.
Thank you. Our next question comes from the line of Mike Ike <unk> with Wells Fargo. Please proceed with your question.
Hey, John and Tom Congrats and Joshua they're welcome.
I guess John.
Good question to ask I guess, but I think four months ago.
Give us some building blocks for for next year I believe you were at $5 9 billion and a <unk> margin.
You're already well above that 16, and a half on a much lower base of revenue. So I know, you're probably not going to want to get into specifics on next year, but can you kind of walk us through how do we think about the business from here or should there be a step down in margin or are you kind of creating a new base for the overall business as you guys continue to outperform.
Good morning, and thanks for the question.
I think it's too early for us to really be talking about our fiscal 2023.
Projections, obviously, we are exceeding.
Exceeding our fiscal 2022.
Projections and forecasts.
Which gives us obviously again a.
Uh huh.
A real foundation to continue to build upon where.
Where we are today I think the one area, we feel comfortable in talking about and we've said it on previous calls is we do believe our gross margins will expand approximately 100% over.
What Tom gave for our annual guidance. So we feel comfortable in saying that that is an objective that this company feels that we will achieve again I just think it's early to be talking about where we will land in revenues.
And and.
Even more importantly operating margin because.
As I said in the last few calls we're going to continue to invest in particular in marketing and other initiatives in the company.
Which will drive revenues and if we drive revenues and we have.
Substantial operating profits that will drive EPS, and we think that in particular, Versace and Jimmy Choo have a long long way to go in terms of their growth. So we don't want to Underfund those businesses and then additionally, Michael Kors clearly the.
<unk> is engaging with our brand when you look at the database growth of 21%.
Really showing that.
We are attracting a new customer a younger customer.
And we are engaging with with with existing and lapsed customers on at a rate that we've never seen before so we want to invest with Michael Kors as well.
So I think again, it's a little early for us to be discussing that but clearly we are doing better than we had anticipated and we think that that bodes well for for a setup for.
For our fiscal 2023.
Thank you Alan Thanks.
Oh, I'm, sorry, I want to make sure I was clear it was gross margin of 100 basis points increase.
I apologize I might have said the wrong thing gross margin 100 basis point increase.
Thank you I.
Thank you. Our next question comes from the line of Omar Saad with Evercore. Please proceed with your question.
Thanks, Good morning, I'll add my congratulations great results.
Maybe you guys could talk a little bit more detail about how the E com and digital business has trended in some of your key priorities there and initiatives.
And how you expect that to progress as the stores continue to reopen.
And the role that digital and E. Com will play for your brands and then also maybe if you could give us an update on watches I'd appreciate it. Thanks.
Thank you Omar.
It's been quite interesting is even as we've opened our <unk>.
Stores, our E com business continues to to grow.
And it's shown sequential improvement which is really.
Not exactly what we thought would've happened.
Which is.
Sighting and again I think this is just coming from us.
Really building our database.
And acquiring new consumers, who are who are who are new to the brand.
Many of those are younger consumers and there are more digitally native.
That being said.
We're seeing store traffic sequentially improve.
It's getting better every single week.
As people are returning to shopping.
As a as a.
As a way to have fun and a way to.
B social.
As a matter of fact, Josh and I were in Roosevelt field shopping mall yesterday at 12 o'clock in the afternoon or we couldn't believe how many people. We're in we're in the mall, which was quite exciting.
To see and and and I think we feel confident that stores will continue to return.
As a as a very important core part of our business.
And with our digital.
Tactics, our marketing tactics are.
The ability to communicate with our existing customers and.
Our lapsed customers I think we feel very strongly that the dataset that the.
E Commerce business, we will continue to grow at a very very fast rate and again, you've seen that across all three of our brands.
And we're.
Absolutely focused on that we believe it's not only a revenue opportunity for the company, but we think it's one of the single most important parts of our marketing.
How we're communicating to our consumers digitally.
Both of those are consumers, we want to acquire as well as consumers that.
With us today.
As it relates to watches again.
Very pleased the watch business continues to grow it's not growing at the same exact rate it was.
When we saw that huge kind of jump during during COVID-19.
But it's still growing very nicely.
And we see again.
Many new customers coming into the store have never owned a Michael Kors watch before.
Our business has gotten also very strong in our department store channels.
With watches as well so.
So it's a category that we.
We're pleased is returning to growth.
And in terms of investments in digital and ecommerce Omar we're making significant investments in digital analytics and expanding our capabilities across our brands and the company.
As well and looking at the E. Commerce platforms also looking at common state of the art platforms, and new tools and capabilities across all three of our brands of course this extends into omni where we've spoken about client telling before and the expansion of versace's omni capabilities for instance, so this is a very.
Very key focus area for the company.
Thank you all thanks, Tom Thanks, John.
Thank you as a reminder, ladies and gentlemen, please limit yourself to one question. Our next question comes from the line of Oliver Chen with Cowen and company. Please proceed with your question.
Hi, the Michael Kors signature print execution has been very innovative what do you see happening there and as you think about price increases you know how how we view our balance sheets offering the consumer a strong value against where you see opportunity.
I'd also love a quick update on Versace, mens and handbag penetration you've made a lot of good strides there as well thank you.
Thank you.
As it relates to our price increases at Michael Kors as I've said to you.
Previous calls.
We were.
Under.
Price as it relates to our brand on a global basis.
So we are we are rectifying that situation.
And and.
We may end up being higher than competitors.
Over time, because we think that Michael Kors is led by the demand or he is.
A luxury runway designer.
We are carried in the finest stores in the world where carrier.
Located in the finest locations in the world.
And we think that our <unk>.
Brand needs to move more into the luxury space.
So for us value is created.
Not only just in the price product relationship, but also in how the brand is perceived and how we create the brand engagement with consumers. So again I think you can.
You will continue to see us move in that direction.
And I've said that we will raise prices all through the balance of next calendar year.
See how how the consumer response to that and if we see good response, then we'll carry on with that.
Philosophy on a go forward basis, So Michael Kors is clearly going to continue to move into the luxury category signature as we've said we want it to be about 50%.
Of the total.
Our business inside of the company were on a perfect trajectory to get there that gives us an opportunity to create higher.
<unk>, because we take less markdowns in those areas, it's reduced the amount of fashion blow that we've had into the stores, we still create fashion around signature, but it's just not at the same pace that we were doing previously we obviously shrunk the line sizes during COVID-19 and that seems to have been no issue.
As it relates to the consumers.
Desirability for our product.
And so we see that going on very steadily going forward.
And then and then in terms of Versace mens obviously, it's a huge part of the <unk> business and in fact, it was the largest part of the our such a business when we bought the company.
Think we've done an amazing job by the entire.
The entire team there for their initiatives of course led by Donatella.
We are starting to become a larger women's business than we are our men's business and that's only natural that's where the company should be.
Versus where it was historically.
In terms of leather goods, where exactly.
We're much further along in terms of our development. We now have three very strong pillars with la <unk> a virtuous.
In <unk>, we did not think that we would be sitting here at this moment in time, saying that we have three very.
Strong accessories offerings.
The consumer and that they would be responding in the way they are.
In fact in some of the cases that for such a we also ran low on merchandise and that was just sellout much.
Much quicker than we had anticipated.
So so we think that that really bodes well for our ability over the long term to have versace led as a leather goods house.
Reached $1 billion of its revenues in leather goods. Thank you Oliver.
Best regards.
Thank you. Our next question comes from the line of Matthew Boss with Jpmorgan. Please proceed with your question.
Great Congrats on a nice print.
Thanks, Matt.
Maybe John as we think about potential structural changes post pandemic, a couple of things I guess.
Any change you're expecting and the overall growth or Tam for handbags and accessories.
Do you see any constraints to a full recovery of your travel business over time, and then Tom If we tried our best to isolate the higher penetration of E Commerce, which I know, it's higher margin is there any way to think about ASP piece alone and what you think disruption really adds to the company's margin profile post pandemic.
Okay.
Matt.
First off thank you for your compliment under the nice print.
What what is your question about handbag and accessory.
Couldn't really hear you.
Yes, so couple of things.
I was focused on is there any change you're expecting for the growth rate of handbags and accessories or the overall Tam.
Sitting in the pandemic and then the second part was is there anything preventing a full recovery in your opinion of the travel business over time right.
Right, Okay. So in handbags and accessories I think we saw right through the pandemic.
And particularly the luxury goods are part of our handbag and accessories.
Which I believe all three of our brands are in.
Has grown I mean that market continues to grow yes, there was a small setback when all stores were closed et cetera, but this category continues to be.
Our representation I think for the consumer of their fashion style.
And the way that they want to express themselves. So we saw that that did not really change except during the real hard lockdown periods.
So we don't believe that there is going to be a change in trajectory. We think on a global basis again accessories will go grow somewhere in the 6% to 7% range and that will change by by marketplace. So we feel very comfortable with the handbag and accessories.
<unk> market growth.
And I would add I think we're all surprised at how strong the growth has been in North America, and it's not just us all of our competitors Euro.
European in America have shown those same types of results. So so really bodes well, we think for the future as it relates to travel.
I'd say theres two parts to the answer to that question.
First is the.
The tourists coming to markets.
We are beginning to.
Annualize that in a sense that they did not really there was some small returned to Europe. This year, where it's a very high penetration there has been no return to two.
To Japan, and Korea, which were typically higher penetration markets. So that in the sense is behind us and we are not forecasting for any type of a strong return in that tourist market.
Do have some tourists that we believe will be returning to the U S market.
Shortly.
When the borders are open and we think that will be a positive for us. So in our forecast, we don't see tremendous movement changing our trajectory at least in next fiscal year. The second answer to that question is we as I think I told you previously had a very substantial business in <unk>.
Retail that would be airports and duty free shopping et cetera, and again, while there has been a very strong resurgence in that business inside of China.
Which was unfortunately slowed during July and August during some of the.
So some of the issues that China faced.
We also are not forecasting for that business to recover in our fiscal 'twenty three we think that is.
Going to be further out.
More into our fiscal 'twenty four we would look for a strong recovery in global travel.
And tourist travel and how that would impact not only our own stores, but travel retail and then of course Big key Department stores.
In Europe, where those are substantial businesses for us.
Which will which will be a very nice uptick for us.
In that period of time.
With regard to the E. Commerce question, Amit if you look at history. We've now doubled our E. Commerce penetration is about 13% pre COVID-19 and it's now in the mid Twenty's expected for this year and as we noted at Investor Day, we expect that to continue to grow into the mid 30.
<unk> range as a percent of our retail sales. So when we look at it Jimmy Choo and Versace is margins have always been very positive and strong compared to retail stores and e-commerce.
Just as.
A function of their luxury pricing and positioning Michael Kors has seen really a sea change over this last couple of years as the penetration has increased in revenues increased.
E Commerce margins have moved to above store level margins.
And we would expect then that this to be one of the supports for our gross margin expansion over time as John mentioned, we would expect continued expansion.
100 basis points next year and when we look at the components. It's continued full price sell throughs building out our accessories businesses at Jimmy Choo, and Versace growing in Asia, which has structurally higher margin and of course. This E. Commerce piece, So I would view it in that context of supporting.
The overall corporate goal.
Thank you Bob.
Thank you. Our next question comes from the line of Paul lift.
<unk> with Citi. Please proceed with your question.
Hey, Thanks, guys.
Curious if you can talk about that gross margin upside, which brand saw the largest increase in what were the biggest surprises to you.
The drivers of that of that upside and then just second I'm curious how your wholesale partners are thinking about the spring season from a unit perspective, and what are you going to be able to deliver to them just given the supply chain constraints relative to what they would love what they would like to order.
Are you seeing cancellations and given the 45 to 60 day delays thanks guys.
Why don't I take the wholesale part first and then I'll turn the gross margin over to Tom.
The.
The wholesale our wholesale partners around the globe are experiencing very strong sell throughs.
Sell throughs that that date back I'd say seven or eight years ago, So really strong sell throughs and it's in accessories, and footwear and women's ready to wear.
So so we cannot get enough merchandise to our partners. Unfortunately at this moment.
There's been no cancellations.
One understands what the situation is.
And we will basically is taking any of the merchandise as it arrives we did fly as I said earlier most of our seasonal holiday gifting.
<unk> is here so anything that was very seasonal oriented we wanted to make sure. It was here for the stores because obviously it becomes more obsolete if it's not here during the holiday period of time.
So we feel good about that we are going to.
Sure.
Be in a better position in Q3 I'm.
I am sorry, Q4, or Q4 is in inventory relates as Tom said, you will start to see inventory build.
So we have kind of tactically mapped out.
What is happening with this delay and it's really more of a transit delays.
Thing.
There was the piece in Vietnam, but most of this is a transit Deloitte and so we've got a lot of that or put into our projections.
And I would say that like ourselves.
Our wholesale partners are planning the businesses up we've had a great we're having a great fall season.
Therefore people are super optimistic about what.
As in front of us.
Particular for next year, and again I think that.
First and foremost comes to incredible product.
That Michael.
That donatella and Sandra are really putting together with the design teams that took our marketing campaigns have been extraordinary if you look at whether it's dual leap at Versace or Hailey Bieber at Jimmy Choo Bella Hadid at Michael Kors, I mean, we've got powerful.
Influencers, who are associated with our brands, who want to be part of our family and a <unk>.
Really helping us communicate that message around the globe.
When you look at the incredible events that we're doing with all of our brands in China, and how our brands are resonating there and the growth opportunity on.
I want to remind everyone on this call we need to double our business in China with all of our brands, we are underpenetrated by 50%.
To all of our competitors. So we have huge upside for ourselves there.
I think.
The way we look at the situation is.
It's quite optimistic and.
And I believe our partners are looking at it in the same thing.
And with regard to the second quarter gross margin of all three brands exceeded our expectations, Paul and they exceeded them in a meaningful way. So we were really pleased to see how <unk> performed quite well and.
If you look at the themes across at the first and foremost is full price sell through across all businesses is driving great results at Michael Kors and Jimmy Choo, we have the pricing benefit.
And then Versace, we're seeing continued traction and accessories as that category, which is quite important for the future continues to expand and theyre doing a great job there John mentioned signature at Michael Kors, which also expand it and Thats also supporting the full price sell through for that brand.
In general all three we're well ahead of expectations.
Thank you Paul Thank you guys. Good luck.
Thank you. Our next question comes from the line of Simon Siegel with BMO capital. Please proceed with your question.
Great. Thanks, guys. Congrats on really gotten great results John Congrats on the succession planning and honestly all that you've built here and if you're listening congrats Josh looking forward to having you back at party sure you missed it all.
John.
You've alluded to this we've spoken about it on past calls, but just curious to hear if you have any updated views on what you think the industry level promotional cadence will look like into next year I know, we have all the constraints right now, but just to kind of echo your thoughts around holding price points, if and when others start promoting again it would be curious to hear your view of the broader industry level.
Then Tom if I could just ask any thoughts on the timing of the new share repurchase just given what seems to be a cheap valuation and ongoing clear path and visibility for you guys. Thanks a lot.
Thank you Steven.
I appreciate those kind remarks about the company.
So I mean.
The promotional.
<unk>.
I continue to say that that is not a topic, we spend a lot of time on in this company any longer and maybe thats naive but.
First off Versace, Jimmy Choo, that's not a conversation it's.
We are.
Pretty strict around what we do there and.
And then as it relates to Michael Kors.
We're a substantial.
A substantial part of the Michael Kors business is done outside of the United States, both in Europe and.
And in Asia again, those are not conversations that are there that are.
Really relevant.
As it relates to North America. It is relevant and we've just made the decision that we're just not going to be as promotional in that.
It means that we.
We want to make more money and we've shown that we've shown that we make more money on lower sales.
Then we did on having higher sales and trying to chase.
Other other our own selves or other competitors whichever one you want to call. It. So we've made the decision prices are going higher we're going to have less promotional activities and we're going to let the consumer respond to that we're also operating on much lower inventory levels, you will see inventories.
Rise over the next two quarters.
More of that just as a preview is going to be in some of our core products, where if we get them here earlier, we don't have to worry about this delay issue and it will substantially reduce our cost.
Over time, so we might hold a little more inventory in particular on basic product.
We're just running reorder businesses.
And let that flow through as this.
Supply chain issue kind of works itself out over what we think will be a six to 12 month period of time, when I say that really starting from January 1st. So we think it's going to take most of next year.
That to work itself out and we've got some ideas on how to mitigate those costs some of that will be holding a little higher inventory, but really on core replenishment.
Items, so in our mind, we're going to stick to our guns on what we said and we've already seen other people starting to promote much more aggressively than we are and that's okay. If they do that's going to be their strategy and we wish them well, but we're not going to start.
Start to go down that path, we know where that leads and that leads to typically lower gross margins and trying to sell too many units in trying to chase too much business and that usually.
It's something that long term doesn't.
And the way that you wanted to so.
Our perspective is stay stay focused on the path that we have.
But going down and we think we'll get the rewards from that with the consumer.
And with regard to timing of share repurchases I'd, just like to put a little context of our overall capital allocation policy and.
The strength of our balance sheet and free cash flow, which is the reason we put in the new $1 billion share repurchase program.
Matter of fact year to date generating free cash flow of about $350 million.
Our first priority remains paying down debt in the quarter, we paid down $200 million and we will continue to.
To do so to further strengthen our balance sheet, we do plan to return cash to shareholders in the form of share repurchase we think thats important we now have the broader capacity to do that over the longer term, but will also be active in the near term.
And finally luxury acquisitions are the list.
Priority, whereas things come up for luxury European acquisitions, we will look at these and that would be another use of cash in the future and another reason to strengthen our balance sheet. So Q2 is a great example of this balance where we paid down $200 million of debt and also repurchased $100 million of shares.
Yeah.
Thank you Simon.
Perfect guys. Thanks, a lot congrats again and best of luck for holiday.
Okay.
Thank you our last our final question for today will come from the line of Erinn Murphy with Piper Sandler. Please proceed with your question.
Great. Thank you good morning, and thanks for Sneaking me in my question John is around Versace I have a two part question first I mean, you've hit your long term margin target for Versace, just in the first half of this year, but if I kind of pencil out the guidance. It implies that the back half EBIT margins go down to the low teens. So just curious.
What's driving that forecast, maybe that's fair about.
Tom.
And then secondly, any update to the search process around jonathan's replacement at Versace. Thank you so much.
Yeah, I'll take Delta Caf and half I'll take the Jonathan.
Jonathan piece first off we want to thank Jonathan for all of his efforts.
Prior to us acquiring the company he did an outstanding.
Ending job trying to reach.
<unk> reset the company and then the great thing about us acquiring versace as we clean the house and I think we told you we walked away from $150 million worth of multiple other lines that were in the company to shut them down we have spent hundreds of millions of dollars in refitting rebuilding.
Opening new stores.
We believe in luxury I told everyone. When we bought our Sochi. This takes time.
But if you invest properly and you believe in the future of luxury the returns are really spectacular.
And you can look at some of our competitors and how those returns have turned out and how the revenues.
Are looking overtime, so I think we've really positioned versace.
To be set up for four.
Uh huh.
At minimum hitting our $2 billion goals and to hit our long term margin targets.
And we will absolutely find a new leader.
It is going to be one of the most sought after positions in the in the luxury industry.
So I have no concerns about that.
It will probably take us north of six months. So we have someone into that role jonathan's with us until March.
And.
In the meantime, I'll be working closely with Jonathan and the management team.
To continue to achieve our strategic objectives and by the way we have an outstanding management team.
At Versace, so so I'm really proud of the teams that are out for Saatchi at Jimmy Choo and Michael Kors I think can all three companies we have some of the best executives.
Not only in our corporate offices, but in our store locations. They are just really.
Great people and dedicated and Super enthusiastic.
In terms of the margin targets I'm going let Tom speak to that but.
Just know we're super pleased gross margins are coming in a little higher than we had anticipated some of that is mix between how we're how we're driving the accessories business.
Versus ready to wear and even though it may not have a higher initial markup when you get through the sell through after markdowns et cetera.
It's a terrific business and so we're doing better than we had anticipated.
And as well as our E Commerce business is really outstanding at Versace. So some of those things are really helping us.
To drive the business, but we're going to continue to invest we're not going to step back and.
And think that we have completed our mission our mission.
Is still a long road in front of us to get to $2 billion and you have to spend money to do that and you have to believe in the development of.
<unk> of marketing product and retail stores and Youre in your e-commerce platforms to be able to reach those types of targets. So we will continue to invest in for such but let me, let Tom talk specifically about the third and fourth quarter sure. When we look at the back half Erinn in third and fourth quarter first I just wanted to point out we expect margin.
Expansion in both Q3 and Q4 versus prior year. So Versace is still building and expanding margin and for the year. We've raised our forecast and now expect a mid teens operating margin. So as John mentioned, we're very pleased with the progress of Versace.
When we look at the quarters, just kind of walking through it now Q3 is a seasonally lower operating margin quarter for Versace. It does not include December which is the most profitable month of the year for the brand because of our lagged reporting.
And it's also the lowest absolute sales quarter, so we're seeing deleverage.
For both Q3 and Q4, we're also increasing our investments in brand growth.
Ramping up of stores to be fully opened versus the prior year. So we have full store costs and we're also lapping some COVID-19 related savings that we were able to achieve.
And garner last year.
On both payroll and rent. So those are some of the puts and takes but really we're still growing versus prior year very pleased with that trajectory and pace and very pleased with the overall brand.
Physician.
Thank you very much Aaron I'd like to thank everyone for joining us today I'm, sorry, we ran over a little bit.
Hopefully you heard some interesting information about Capri holdings, and how we intend on continuing our growth trajectory.
And again very excited about having Josh joined the team.
And he'll be with us on our next call and be talking about the continued success of the Michael Kors brand. Thank you, everyone and have a great day.
This does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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